1-800-FLOWERS.COM
Annual Report 2002

Plain-text annual report

For All Of Life’s Celebrations 2002 Annual Report About 1-800-FLOWERS.COM® With one of the most recognized brands in gift retailing, 1-800-FLOWERS.COM 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® (1-800-356-9377) 24 hours a day; or by visiting one of its Company-operated or franchised stores.The Company’s gift product line is extended by the merchandise sold under its collection of brands, including home décor and garden merchandise under Plow & Hearth® (phone: 1-800-627-1712 and web: www.plowandhearth.com), premium popcorn and other food gifts under The Popcorn Factory® (phone: 1-800-541-2676 and web: www.thepopcornfactory.com), gourmet food products under GreatFood.com® (www.greatfood.com), and children’s gifts under HearthSong® (www.hearthsong.com) and Magic Cabin Dolls® (www.magiccabindolls.com). The Company’s Class A common stock is listed on the NASDAQ National Market (ticker symbol “FLWS”). Our Mission Statement “1-800-FLOWERS.COM will be the leading provider of thoughtful gifts, helping our customers connect with the important people in their lives. We will continue to build on the trusted relationships with our customers by providing them with ease of access, tasteful and appropriate gifts, and superior service.” Special Note Regarding Forward-Looking Statements A number of statements contained in this report, other than statements of historical fact, are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995.These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the appli- cable statements.These risks and uncertainties include, but are not limited to: the Company’s ability to achieve solid, cost efficient growth; its ability to maintain and enhance its online shopping web sites to attract customers; its ability to successfully introduce new products and product categories; its ability to maintain and enhance profit margins for its various products; its ability to provide timely fulfillment of cus- tomer orders; its ability to cost effectively acquire and retain customers; its ability to continue growing revenues; its ability to compete against existing and new competi- tors; its ability to manage expenses associated with necessary general and adminis- trative and technology investments; its ability to cost efficiently manage inventories; its ability to improve its bottom line results and build long-term shareholder value; its ability to leverage its operating infrastructure; its ability to achieve its stated results guidance for fiscal 2003, and general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s prod- ucts. For a more detailed description of these and other risk factors, please refer to the Company’s SEC filings including the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.The Company expressly disclaims any intent or obligation to update any of the forward looking statements made in this report or in any of its SEC filings except as may be otherwise stated by the Company. Table Of Contents Financial Highlights Letter to Shareholders 1 2 Thoughtful Gifts for Every Celebration 4 Deepening Our Customer Relationships 6 Growing our Unique Fulfillment Network Exceptional Customer Service Selected Financial Statements MD&A Consolidated Financial Statements Company Information 8 10 11 12 18 IBC Financial Highlights Total Net Revenues Telephonic Revenues Online Revenues Non-floral Revenues* Gross Profit Margin Percentage EBITDA EPS Customer Base (millions) June 30, 2002 July 2, 2001 Years Ended June 27, June 29, June 28, 2000 1999 1998 (in thousands, except percentages and customer data) $497,205 248,931 218,179 46% 41.0% 11,396 (0.02) 18.1 $442,239 230,723 182,924 41% 39.4% (23,757) (0.64) 13.4 $379,528 227,380 116,810 32% 37.4% (59,102) (1.10) 9.1 $292,852 201,467 52,668 25% 38.6% 214 (0.27) 6.6 $218,212 159,715 26,684 13% 37.2% 10,583 0.07 4.7 * As a percentage of combined online and telephonic net revenues Fiscal 2002 Achievements Increased total revenues 12.4 percent to $497 million despite challenging retail economy ■ Grew online revenues 19.3 percent to $218 million, representing 44 percent of total revenues Increased Gross Profit Margin 160 basis points to 41 percent ■ Achieved EBITDA of $11.4 million, an increase of $35 million ■ Cost efficiently added 3 million new customers ■ Deepened customer relationships, increasing quarterly repeat order rate to 50+ percent ■ Acquired The Popcorn Factory® in May, 2002; completed integration of website and customer service functions October 1, 2002 Total Revenues Rapid Online Revenue Growth (in $ millions) (in $ millions) $497.2 $442.2 $379.5 $292.9 $218.2 $218.2 $182.9 $116.8 $52.7 $26.7 8 9 Y F 9 9 Y F 0 0 Y F 1 0 Y F 2 0 Y F 8 9 Y F 9 9 Y F 0 0 Y F 1 0 Y F 2 0 Y F ■ ■ T o O u r S h a r e h o l d e r s Fiscal 2002 was a very important year for our company, one in which we achieved solid revenue growth and significantly improved operating results despite a challenging retail economy. We accomplished this by leveraging the investments made during the past several years, particu- larly those in our technolo- gy platform, our fulfillment system and our expanded marketing and merchan- dising programs. ■ On the customer front: an increasing percentage of new customers and repeat business came to us online, representing approximately 44 percent of total revenues, up from 41 percent in the prior year. This trend is important for several reasons: orders placed online enable us to leverage the efficiency of our technology platform, providing lower order handling costs compared with telephonic orders. customers online can see our expanded range of non- floral gifts which carry a higher gross profit margin (averaging approximately 44 percent compared with floral gifts at approximately 37 percent) and help increase purchase frequency as customers bookmark us for more of their gifting occasions, and… ▲ when customers come to us online we get an opportunity to interact with them through the use of our extensive service offerings including gift search and gift reminder functions, as well as through e-mail marketing programs. ■ On product mix: the strong growth in our non-floral gift sales – up to 46 percent of total revenues in fiscal 2002 from 41 percent in the prior year – combined with our focus on customer service and operating efficiencies, enabled us to increase our gross profit margin for the year by 160 basis points to 41 percent compared with 39.4 percent in fiscal 2001. Key Initiatives In addition, during the year we made signifi- cant progress on some of our key initiatives such as: Product Offerings: expansion of gift bas- kets and gourmet gifts, plants, candy and plush stuffed animals – great gift categories in which we believe we can build market share, Fulfillment: further leveraging our unique ful- fillment network to test same-day delivery for an expanding range of non-floral gifts, including candy, Lenox and Waterford giftware, plush and more – all in addition to our traditional floral offerings, ■ Customer Service: completion of the re-engineering of our service platform, increasing staffing flexibility and productivity of our gift advisors while reducing overall labor costs, ■ Corporate Gifting: the expansion of our Corporate Gifting effort where we’re developing strategic product categories and gifting capabilities, such as personalization, that we antic- ipate will accelerate our growth in this area, and finally… ■ Continuity Programs: we’ve expanded our Continuity Gift programs, which allow our customers to conveniently send gifts that keep on giving month after month. Opportunistic Acquisition Strategy On the business development front, while our growth plan is based on “organic” expansion and does not require acquisitions to attain our goals, we continue to be opportunistic in the area of acquisi- tions. Specifically, we look to identify acquisition candidates that offer products and/or services that are consistent with our mission statement and which can be cost-effectively acquired and integrated. Two years ago, we advised our shareholders that our approach to future growth would not be the “high spend/hyper growth” typical of much of the retail sector in the late 1990’s, but rather one of building sustainable growth with lower spending require- ments. We believed this would allow us to achieve two important objectives. It would demonstrate the financial leverage in our business model by producing improved operating margins that would grow at a rate greater than our revenue growth rate, which in turn would accelerate our return to being EBITDA and EPS positive. Our fiscal 2002 results reflect the benefits of this initiative and we plan to continue to drive our business in this manner. Leveraging Our Investments During fiscal 2002, we reduced our operat- ing expenses, both as a percent of revenue and in absolute dollars, while continuing to grow our business. Total revenues increased 12 percent, fueled by a 19 percent increase in our online business. Importantly, our ability to leverage our operating infrastructure enabled us to achieve EBITDA of more than $11 million, an improvement of $35 million compared with fiscal 2001. In addition, we achieved positive EPS in three of four quarters during the fiscal year, resulting in a reduction in our net loss of approximately $40 million to a loss of $0.02 per share compared with a loss of $0.64 per share a year earlier. “Total revenues increased 12 percent fueled by a 19 percent increase in our online business...” Deepening Customer Relationships This was accomplished while we cost-efficiently added three million new customers during the year. We believe our cost to acquire a new customer, at less than $20, is among the lowest in the multi-channel, specialty retail industry. Concurrent with new customer additions, we deepened our relationship with the more than 10 million existing customers in our database, increasing the percent of repeat business to more than 50 percent during the fourth quarter and to approximately 40 percent for the full year. In fact, throughout fiscal 2002, we saw a continuation of several similarly favorable trends: 2 ▲ ▲ ■ ■ Using this disciplined approach, we have made several strategic acquisitions during the past few years, all of which have helped us expand our gift offering and deepen our relationship with our customers. Exemplifying this approach is the acquisition of The Popcorn Factory made in May 2002. The Popcorn Factory offers a line of premium popcorn and confection gifts that comple- ments our fast growing candy and food gift businesses for both our retail customers and corporate accounts. We believe that this low-investment profile will allow us to gen- erate a return on capital deployed in our business that is higher than most of the specialty retail sector. It will also enable us to produce increasing levels of free cash flow, which will add to our already strong balance sheet. Importantly, during the past several years we’ve gained significant experience and developed the necessary skills to quickly and effi- ciently integrate acquisitions. As a result, the integration of The Popcorn Factory business – including upgrading and moving their website onto our network and bringing their customer service Guidance During fiscal 2003, we anticipate achieving revenue growth in a range of 14-to-19 percent, further demonstrating our ability to grow our business despite continued uncertainty in the overall economy. We expect gross profit margin to increase another 50-to-100 basis points, to a range of 41.5-to-42 percent, as non-floral gifts grow to more than 50 percent of total sales and we continue to drive operating efficiencies and provide excellent customer service. This year, on the anniversary of September 11, 2001, the 1-800-FLOWERS.COM team members once again reached out to help others. In locations across the nation, 1-800-FLOWERS.COM associates helped to ease the pain of our customers, col- leagues and friends during this difficult time. They did so even as they dealt with their own sorrows. Because of their efforts, we were able to do what we do best as a company, help people express themselves, even on this occasion of deep, national sorrow. As a company, we were present at memorials across the country to honor those lost. And, as America begins to heal and move forward, we are there for our customers, each and every day. I would like to extend a personal thank you to all of our associ- ates as well as the vendors and suppliers who helped 1-800-FLOWERS.COM make a difference on this emotional anniversary. functions in house – was accomplished in record time. This posi- tions us well for the important holiday shopping season. We will continue to be both opportunistic as well as highly selective in our acquisition strategy. Looking ahead Going forward, we will further leverage our existing asset base to cost-efficiently attract new customers and to expand our suite of products and services which will enable us to deepen our customer relationships. One important note on future growth; we will maintain our strategy of low capital deployment, which minimizes our inventory and fixed asset requirements. The investments that we do make in fixed assets will continue to be primarily in the areas of technology that will enhance our ser- vices to our customers and drive operating efficiencies. With respect to inventory, we will continue to work closely with our vendor networks to minimize our inventory requirements. We also anticipate achieving fur- ther leverage in our operating expenses. As a result, we expect to generate EBITDA in excess of $30 million and EPS of more than $0.20 per share. Also, with fore- casted capital expenditures of approximately $13 million, down from $15 million last year and more than $20 million in each of the two prior years, we expect to generate free cash flow in excess of $15 million in fiscal 2003. Looking beyond 2003, we expect to grow EBITDA, EPS and Free Cash Flow at an accelerat- ed pace relative to top line growth and thereby build long-term shareholder value. Most important, we believe our customers increasingly view their relationship with 1-800-FLOWERS.COM as one of the most convenient and dependable means of helping them connect with all the important people in their lives. Through our expanded gift selection, attentive customer service, unique same-day and next- day delivery capability and extensive service offerings, we believe we can deepen and expand this relationship to help our cus- tomers with all of the celebrations in their lives. We thank our customers, associates, investors, vendors and business partners for their continued support. Sincerely Jim McCann Chairman and CEO 3 T h o u g h t f u l G i f t s F o r Birthdays, Graduations,Thank You, Anniversaries, Halloween to see their cute costumes!” Everyone has Get Well, Weddings, Job Promotion, Retirement, thoughts like these every day – while out jogging, in the Engagement, Secretaries’ Day, Bosses’ Day, Nurses Day,Teachers Day, Family Reunions, Sweetest Day, Valentine’s Day, Mother’s Day, Father’s Day, Hanukah, Passover, Rosh Hashanah,Yom Kippur, Earth Day, Halloween, Christmas, Kwanzaa, St. Patrick’s Day, Easter, Fourth of July, New Baby, Grandparent’s Day… shower, on the way to work, during that long, boring staff meeting – but we don’t always get to act on our thoughtfulness. At 1-800-FLOWERS.COM® we believe it is our mission to help people turn these thoughts into actions – actions that help people connect. We do this through convenient, multi-channel customer access – on the Internet, over the phone, at one of our company-owned or franchised stores – 24 x 7, year round anywhere and any way that is convenient for our customers. And we do it with unique same-day and next-day delivery capability to help capture all of those “spur-of-the-moment” thoughts. And we do it through Touching lives, stirring emotions our expanded gift offering – flowers, gift baskets, plants, home and gar- den décor, children’s gifts, collectibles, plush, balloons, gourmet items – wonderful gifts for any occasion. FLOWERS – THE CORE GIFT Floral gifts remain the cornerstone of the company’s business. In fact, a majority of our first-time customers come to us for a floral gift occasion. While non-floral gifts are the fastest growing segment of the Company’s business, the floral side continues to grow as well. When you think about it, there are many celebratory occasions in our lives, many opportunities to connect Signature pieces such as The Birthday Flower Cake™, Make Lemonade™ and Plum Crazy™ arrangements con- tinue to draw new customers for everyday occasions such as birthdays and anniversaries. This past year cus- with the people that are important to us. “My assistant tomers also embraced our growing line of collectibles did such a great job reorganizing my travel schedule, I and exclusive vases from Lenox®,Waterford® and other should send her something.” “My sister is a school partners. “Bundling” floral gifts with exclusive vases, nurse, I should let her know how proud I am of her.” candy from Godiva®, jewelry and even adorable stuffed “I wish I could be with my niece and nephew on animals also continues to be a great growth area. Many 4 E v e r y C e l e b r a t i o n of these bundled items are shipped overnight in specially PLUSH – BIGGER IS BEAR-ER? designed packages and some are even being made Plush – cuddly teddy bears and other available for same-day delivery. PLANTS SHOOT UP stuffed animals – is another fast growing gift category, great for children and adults alike. Our newly launched personalized Plants are a natural compliment to our floral business, Bobee Bear-It™ teddy bear offers cus- and fiscal 2002 was a booming year for plants as gifts. tomers the ability to have a personal Working with vendors throughout the country to message embroidered on ensure ready access and ease of delivery, we identified Bobee’s brightly colored new varieties of plants – from poinsettias to azaleas sweater, making it a great way to bonsai for a broad range of occasions. to connect to a niece or DELICIOUS AND FUN FOOD GIFTS nephew or to express yourself during a holiday like National From decadent candy to premium popcorn, gourmet Teachers’ Week or Nurses’ Week. fruit baskets, giant chocolate-dipped strawberries, tow- ers of baked goods and even vegetable of the month! Everyone likes to eat, and our broad selection of gift UNIQUE GIFTS AND GIFT CLUBS food items ensures that our customers can find some- Collectibles from Waterford®, Lenox® thing to please the palate of any recipient whether and Hummel® were a hit with cus- they are family, friends or business associates. tomers this past year and will grow in importance as they are offered Gift food items are one of the fastest growing cate- as both stand-alone gifts and bundled gories for 1-800-FLOWERS.COM. We expect this with flowers, plush and candy. And for trend to continue with the introduction of such great Holiday 2002, beautiful jewelry from gift items as our new line of whimsically oversized Swarovski® will be one of the season’s Animal Crackers, Life Savers® and other great snack new offerings. Additionally, many of GROWING NON-FLORAL GIFTING As % of combined online and telephonic revenues foods from one of our these great brands are also a part of newest vendors, Nabisco®. the Company’s Gift Club “continu- In addition, we recently ity” programs. From roses of the launched our own private month to orchids and bonsai label brand of delectable plants to collectible Lenox snow- baked goods under the men, wreaths, coffee, cheese Mama Moore’s™ Bake Shop cakes and much more. These brand, leveraging our great programs allow customers to growth in this area with baked goods ranging from send gifts that keep on giving cookies to crumb cake to month after cheesecake samplers and month, season even a very edible fruitcake! after season. 5 D e e p e n i n g O u r Responding to the familiar broadcast and online advertising as well as a variety of “ding” announcing the direct marketing vehicles, we are able to both attract arrival of e-mail, you click millions of new customers each year and increase the open the new message to repeat business from the many millions of existing find a timely reminder of customers in our databases. your mother-in-law’s upcom- ing birthday. What’s more, the During fiscal 2002, we began to shift the focus of our e-mail includes several full- marketing efforts to increase the emphasis on deepening color product shots of great the relationship with our more than 10 million existing gift items specifically chosen customers. We did this while continuing to cost to appeal to dear old mom. efficiently acquire a growing number of new customers Using your customer profile – 3 million in fiscal 2002 – who were attracted to the information, including your 1-800-FLOWERS.COM brand by the convenience of credit card number and our multi-channel access, our expanded gift offering and your mother-in-law’s our unique same-day and next-day delivery capability. address – information already entered in your customer profile CUSTOMER-IZED DIRECT MARKETING – you select a gift and send it Utilizing our large and growing customer database, we on its way for delivery right to are able to optimize our catalog marketing efforts by mom’s door in sunny Florida. pinpointing customers based on their specific gifting Once again, through the needs and buying habits. Based on data our customers convenient service of have provided about themselves and their gift recipi- 1-800-FLOWERS.COM, ents, we can tailor mailings to them that will be both you’ve endeared yourself to pertinent and timely. In addition, our expanded family mom and managed to avoid of gift brands – 1-800-FLOWERS.COM, Plow & a major “dust up” at home. Hearth, HearthSong, Magic Cabin Dolls and The GROWING ONLINE DEMAND Online revenues as % of total revenues E-mail reminder services are Popcorn Factory – offer us cross marketing opportuni- just one of the many ways that ties that further expand 1-800-FLOWERS.COM helps its our ability to fulfill our customers connect with the customers’ gifting needs. important people in their lives. It’s also one of the many ways that While catalogs can be we are deepening our relationship tailored to specific audi- with our customers as their gift ences, perhaps no direct provider for a broad range of marketing vehicle is more celebratory occasions. By leverag- personal than e-mail. ing the strength of our brand and 1-800-FLOWERS.COM uti- utilizing a broad range of mar- lizes various communication keting approaches, including streams within the e-mail 6 C u s t o m e r R e l a t i o n s h i p s channel, each providing the personal touch of being sent brations. Adding to these online ordering conveniences directly to a customer’s computer screen. Many also are customer relationship tools including personalized include interesting anecdotes about certain celebrations, “Gift Reminders” that remind our customers about often prompting immediate purchases. Another advan- upcoming occasions based on information they have tage is cost efficiency; on average, e-mail promotion costs provided. In fiscal 2002, the number of customers less than a penny per message. utilizing our Gift Reminder program grew by more In fiscal 2002, we grew our e-mail channel by introducing several new campaigns. “Purchase Reminders” are directed at customers who have placed birthday, anniversary or maternity purchases within the previous year. These customers are reminded of the recipient and order date, and also provided with gift suggestions. “Everyday Gifting” e-mails are sent during non-holiday periods, offering customers gift ideas for almost any occasion. “Reactivation” e-mails target customers who have not made a purchase within the past12 months with special offers to try us again. Looking forward to 2003, we plan to build on the success of our e-mail programs by introduc- ing several new communication streams, including “new customer welcome,” annual birthday and anniversary messages, and thank- you e-mails to customers after their orders are processed. These new initiatives will be driven by the personal purchasing history and A t t i n c t i n g n e w r a c r s , o m e t c u s i n g r e p e a t r e a s s s i n e b u s than 100 percent, giving us hundreds of thousands of gifting occasions that our customers have specifically asked information provided by the customer. us to remind them of with great gift suggestions. ENHANCING THE ONLINE SHOPPING EXPERIENCE ON TV AND IN PRINT Complementing our direct and online marketing strate- The 1-800-FLOWERS.COM website cross-merchandises gies is a full spectrum of broadcast media promotion products and gifting occasions throughout our online that includes national as well as regional television, channels, so the customer can shop by type of product, radio and print advertising. Commercials and ads are by price point, or by occasion such as a birthday, wed- created with a common theme: the customer can ding, new baby, graduation, or a myriad of other cele- depend on 1-800-FLOWERS.COM for thoughtful gifts 7 G r o w i n g O u r U n i q u e that convey the right sentiment for every celebration. Throughout the country and even internationally, cus- To keep our message “front of mind,” the success of tomers have come to rely on 1-800-FLOWERS.COM to our advertising is carefully tracked and consumer help them connect with the important people in their feedback is continually analyzed, lives and to do it real-time. We are uniquely positioned helping us fine-tune our brand posi- to provide such service because of the “hybrid” tioning as our customers’ trusted fulfillment system that we’ve evolved during our more gifting source. than 25 years as a specialty gift retailer. It’s Aunt Ida’s birthday today in Idaho (and you were This system weaves together three primary elements: ■ Our BloomNet® network of more than 1,600 always her favorite). Mom florists including independent florists, 26 company- is back in Montana and owned and 85 franchised floral shops which, together, tomorrow is Mother’s Day. provide nearly 100 percent coverage of the U.S. Brother Dave just closed Our independent BloomNet® members are selected on his new house in Boston. Little sister because of their high-quality standards and their exceptional service, characteristics that are regularly Sandy is having a baby monitored. In addition, many of these florists have shower next week in been affiliated with us for more than 10 years and Saratoga. You’re stuck in our volume of orders typically represent a substan- Boston on business. And, oh tial portion of their annual sales volume, ensuring yes, today is the three good communications and attention to quality month anniversary of your and service. first date with the girl of your ■ Approximately 600,000 square feet of our own dreams, Kim, back in Kansas. distribution and warehouse facilities located in No problem. With Madison,VA, Chicago, IL, and Vandalia, OH. These facilities, together, shipped more than 2 million 1-800-FLOWERS.COM’s unique packages in fiscal 2002 fulfillment capabilities you can including a broad range connect with all of the impor- of gifts from home and tant people in your life same- day, next-day or any day. So, garden décor to children’s gifts to it’s the signature The Birthday popcorn. GROWING CUSTOMER BASE Total Customers (in millions) Flower Cake™ to Aunt Ida for delivery by five, a Several hundred third- dozen multi-colored roses in a Lenox® vase for Mom party drop ship vendors arriving tomorrow, a brass fireplace set for brother who receive their Dave’s new hearth. A basket filled with baby goodies orders directly from us for sister Sandy will arrive next week, and two dozen and ship directly out of long-stemmed red roses in a beautiful Lenox® vase for their facilities to our Kim will be delivered today, just before you get home customers according to from your business trip. What a thoughtful guy… our stringent packaging 8 ■ F u l f i l l m e n t N e t w o r k and shipping requirements. These vendors enable independent florists with increased order volume and us to offer our customers everything from towers enhanced operating economics, further strengthening of baked goods to gourmet fruit baskets and even our business partnership. Adirondack chairs. Virtually all of these elements are tied together by in its next phase of development, to provide BloomLink®, our proprietary “extra-net” communica- same-day delivery availability for a selection of non- In addition, the LFC concept offers the opportunity, tions system that provides our fulfilling vendors with everything from their daily gift orders to sales forecasts, product recipes and even perfor- mance “report cards.” A key advantage of this system is the capability it provides for same-day and next-day delivery while minimizing invest- ment requirements for inventory or bricks-and-mortar distribution facilities. THE LFC ADVANTAGE A recent further hybridization of our distribu- tion system is the creation of local fulfillment centers, or LFCs. These are a cross between the production room of a large floral shop and a sophisticat- ed but small distribution center. These facilities are typically 5-to- 15,000 square feet of warehouse and production space located away from higher-cost retail locations designed to handle a high volume of local floral gift deliveries. Each LFC runs a small fleet of 1-800-FLOW- ERS.COM branded delivery vans that H e l p i n g p e o p l e i n c o n n e c t , re a l t i m e floral gifts. During fiscal 2003 we plan to test customer demand for same-day delivery of such great gifts as Lenox® and Waterford® vases, Godiva® chocolates, gourmet fruit baskets, serve the dual purposes of quick deliveries in-market popcorn, plush stuffed animals and potentially much and “billboard effect” for increased brand awareness. more, representing a great competitive advantage and yet another way we can help our customers connect with the At fiscal 2002 year end, in addition to the seven original important people in their lives. company-owned LFCs that we built to develop and test the concept, we had extended the concept to our You’re in a taxi on the way to the airport when independent BloomNet® members, who have opened an you realize you should send a thank you to your additional 33 facilities in key markets throughout the marketing department for the great presentation country. These BloomNet®-owned LFCs provide our they created that just helped you land that new 9 E x c e p t i o n a l C u s t o m e r S e r v i c e account. Your nephew is heading off to college and “every-day” average of 1,100 gift advisors to as many you have no idea what kind of gift is appropriate as 3,000 or more during peak holiday periods. for a teenage boy these days. The niece you just sent flowers to in the hospital for her new baby has already been discharged and you need to re-route the flowers to her home. It’s times like these that the voice of a 1-800-FLOWERS.COM gift advisor can make all the difference in the world. The “human touch” is one of the keys to our efforts in deepening our relationship with our customers. Even as growing numbers of customers come to us online versus the telephone, many still need to hear a reassur- ing voice or utilize the expert gift giving advice of one of our customer service agents. Our focus on provid- NEW INITIATIVES ■ Order Status Checks: order information is available online at our websites, allowing customers to check on their orders ing helpful, personable and well-informed gift advisors to service our customers whenever they are needed continues to set us apart and enhance our customers’ shopping experience. During fiscal 2002, we completed the re-engi- neering of our customer service platform, con- solidating several of our smaller facilities that had been located in high-cost markets with shrinking labor pools into newer, larger centers in Ardmore, Oklahoma and Alamogordo, New P rov i d i n g p e rs o n a l , k n o w l e d ge ab l e g i f t i n g a s s i s t a n c e whenever they wish, thereby significantly reducing telephone status checks. ■ Delivery Confirmation e-mails: a unique capability lets customers know via e-mail when their gifts have been delivered, Mexico. Combined with our existing facilities in thereby eliminating frantic “did it get there yet?” Westbury, New York and Madison,Virginia, we now have phone calls. four customer service centers, all tied together by ■ Capacity Sharing: working with partner companies, state-of-the-art computer-telephony integration software such as Choice Hotels, that have different seasonal that enables us to provide flexible and cost efficient peak business periods, we can cross-train agents to 24-by-7, year-round service coverage. In addition, we handle either company’s customer inquiries. This have a fifth,“virtual” service center in the form of several increases overall productivity and enables us to retain hundred agents who work from their homes through high-speed Internet connections that tie them directly a deeper year-round workforce of trained agents. ■ Q-Force Training: during fiscal 2002, more than into our service grid. 1,000 associates underwent comprehensive training on customized quality tools.They also learned com- As a result of this re-engineering, we have significantly pany history and philosophy to enable them to enhanced the cost efficiency and flexibility of our cus- focus on relentless process improvement.The result tomer service network enabling us to go from an is a significant reduction in customer service issues. 10 Selected Financial Data 1-800-FLOWERS.COM, Inc. and Subsidiaries The following tables summarize the Company’s consolidated statement of operations and balance sheet data. The Company acquired The Popcorn Factory in May 2002, The Children’s Group in June 2001, disposed of Floral Works in January 2000, 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. This information should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual Report. Years Ended June 30, July 1, July 2, June 27, June 28, 2002 2001 2000 1999 1998 (in thousands, except per share data) Consolidated Statement of Operations Data: Net revenues: Telephonic Online Retail/fulfillment Total net revenues Gross profit $248,931 218,179 30,095 497,205 203,936 $230,723 182,924 28,592 442,239 174,460 $227,380 116,810 35,338 379,528 142,035 $201,467 52,668 38,717 292,852 113,155 Operating (loss) income (3,665) (45,473) (75,581) (8,171) Net (loss) income (1,511) (41,321) (66,830) (6,846) $159,715 26,684 31,813 218,212 81,246 6,415 5,074 Net (loss) income applicable to common stockholders Net (loss) income per common share applicable to common stockholders: Basic Diluted $ (1,511) $ (41,321) $ (66,830) $ (12,061) $ 3,466 $ (0.02) $ (0.02) $ (0.64) $ (0.64) $ (1.10) $ (1.10) $ (0.27) $ (0.27) $ $ 0.08 0.07 As of June 30, July 1, July 2, June 27, June 28, 2002 2001 2000 1999 1998 (in thousands) Consolidated Balance Sheet Data: Cash and equivalents and short term investments Working capital Investments Total assets Long-term liabilities Redeemable class C common stock Total stockholders’ equity $ 63,399 23,301 9,591 207,157 15,939 –– 123,908 $ 63,896 27,409 16,284 195,257 16,029 –– 117,816 $111,624 82,129 1,918 224,641 12,947 –– 158,918 $ 99,183 85,619 984 182,355 37,766 –– 109,003 $ 8,873 1,950 1,383 81,746 35,359 17,692 672 11 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1-800-FLOWERS.COM, Inc. and Subsidiaries Overview 1-800-FLOWERS.COM, Inc. is a leading gift retailer, providing a broad range of thoughtful gift products including an extensive array of flowers, plants, gourmet food, gift baskets, candies, home décor, garden mer- chandise, unique children’s toys and other specialty products. With one of the most recognized brands in retailing and a history of successfully integrating tech- nologies and business innovations, the Company has become the trusted guide to gifting for our customers, providing convenient, multi-channel access for custom- ers 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 accommo- date 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 décor and garden merchandise, (www.plowandhearth.com), GreatFood.com, gourmet food products, (www.greatfood.com), The Popcorn Factory, premium popcorn and specialty food gifts (www.thepopcornfactory.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. 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. The Company’s gourmet popcorn and related merchandise is fulfilled primarily from its Lake Forest, Illinois manufacturing facility. As of June 30, 2002 the Company owned retail fulfillment operations consisted of 28 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 83 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. 12 After a period of significant investment in the Company’s systems and infrastructure, as well as brand name building and product line extensions, the Company expects to return to profitability during fiscal 2003. However, the Company has incurred losses in recent years, and no assurances can be made that positive net income can be achieved on this schedule or in the foreseeable future. In order to achieve and maintain 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 more fully described in the Company’s SEC filings. 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 2002 and 2001, which ended on June 30, 2002 and July 1, 2001, respectively, consisted of 52 weeks, while fiscal year 2000, which ended July 2, 2000, consisted of 53 weeks. As such, the Company’s fiscal year 2000 revenues, and associated variable expenses, contained an additional week of activity in comparison to fiscal year 2001 or 2002. Net Revenues Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Net Revenues: Telephonic $248,931 7.9% $230,723 1.5% $227,380 Online 218,179 19.3% 182,924 56.6% 116,810 Retail/fulfillment 30,095 5.3% 28,592 (19.1%) 35,338 $497,205 12.4% $442,239 16.5% $379,528 Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. The Company’s combined telephonic and online revenue growth during the fiscal years ended June 30, 2002 and July 1, 2001 was due primarily to an increase in order volume and average order value, which resulted from efficient market- ing 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, children’s toys and other specialty gifts. Non-floral gift products accounted for 45.8%, 40.7% and 32.4% of total combined telephonic and online net revenues during the fiscal years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively. The Company fulfilled approximately 7,172,000, 6,520,000, and 5,616,000 orders through its combined telephonic and online sales channels during the fiscal years ended June 30, 2002, July 1, 2001, and July 2, 2000, respectively, representing increases of 10.0%, and 16.1% over the respective prior fiscal years. The growth was primarily the result of increases in online order volume driven by traffic both directly to the Company’s Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries URL’s (“Universal Resource Locators”) and through third- party portals and Websites, and telephonic order volume resulting primarily from the addition of the Company’s children’s gifts product line in June 2001. Additionally, the Company’s combined telephonic and online sales chan- nel average order value increased 2.5% to $65.02 and 3.6% to $63.42 during the fiscal years ended June 30, 2002 and July 1, 2001. The Company intends to continue to drive revenue growth through its online business, and continue the migration of its customers from the tele- phone to the Web for several important reasons: (i) online orders are less expensive to process than telephonic orders, (ii) online customers can view the Company’s full range of gift offerings – including non-floral gifts, which yield higher gross margin opportunities, (iii) online customers can utilize all of the Company’s services, such as the various gift search functions, order status check and reminder service, thereby deepening its relationship with them and leading to increased order rates, and (iv) when customers visit the Company online, it provides an opportunity to engage them in an electronic dialog via cost efficient e-mail marketing programs. Revenues derived from The Popcorn Factory, which is included in the Company’s results of operations since it was acquired on May 3, 2002, was immaterial in relation to consolidated revenues for the fiscal year ended June 30, 2002. Retail/fulfillment revenues for the fiscal year ended June 30, 2002 increased in comparison to the prior fiscal year primarily due to the November 2001 opening of a new home and garden outlet store in Williamsburg, VA, and an increase in same store sales, offset in part by the reduc- tion in retail stores late in the fiscal year. The decrease in retail/fulfillment revenues for the fiscal year ended July 1, 2001 was primarily due to a reduction in floral wholesale net revenues of $7.2 million 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. Gross Profit Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Gross profit $203,936 16.9% $174,460 22.8% $142,035 Gross margin % 41.0% 39.4% 37.4% 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 include labor and facility costs related to direct-to-consumer merchandise production operations, as well as facility costs on properties that are sublet to the Company’s franchisees. Gross profit increased during the fiscal years ended June 30, 2002 and July 1, 2001 as a result of increased order volume, and an improved gross margin percentage. Gross margin percentage increased by 160 basis points and 200 basis points during the fiscal years 13 ended June 30, 2002 and July 1, 2001, respectively, primarily as a result of the continued growth in non-floral product sales, which in fiscal 2002, was further comple- mented by the addition of the Company’s children’s gifts product line, which generate a higher gross margin, and an increase in online service and shipping charges, aligning them with industry norms. In addition, the Company’s continued focus on customer service and operational efficiencies further enhanced the gross margin percentage through the implementation of stricter quality control standards and enforcement methods which reduced the rate of credits/returns and replacements. As the Company continues to expand its higher margin, non-floral business, the Company expects that gross margin percentage, while varying by quarter due to sea- sonal changes in product mix, will continue to increase. Marketing and Sales Expense Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Marketing and sales $150,638 (2.4%) $154,321 (0.7%) $155,353 Percentage of sales 30.3% 34.9% 40.9% 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 activi- ties. Marketing and sales expenses decreased to 30.3% of net revenues during the fiscal year ended June 30, 2002, compared to 34.9% (33.3%, exclusive of the non- recurring charge discussed below) during the prior fiscal year, as a result of volume related cost, operating 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. In fiscal 2001, the Company incurred a non- recurring charge of $7.3 million ($0.11 per share), as a result of the modification of an interactive marketing agreement with one of the Company’s portal providers. As a result of the Company’s cost efficient customer retention programs, of the 4,934,000 customers who placed orders during the fiscal year ended June 30, 2002, approximately 39.2% represented repeat customers compared to 33.5% in the prior fiscal year. In addition, despite the overall reduction in spending, as a result of the strength of the Company’s brands, combined with its cost effective marketing programs, the Company added approximately 3.0 million new customers during each of the fiscal years ended June 30, 2002 and July 1, 2001. Although the Company incurred a non-recurring charge of $7.3 million (as discussed above) during fiscal 2001, marketing and sales expense during the fiscal year ended July 1, 2001, decreased to 34.9% of net revenues, com- pared to 40.9% of net revenues during the fiscal year ended July 2, 2000 as a result of volume related efficiencies and cost effective advertising, coupled with the Company’s Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries strong brand name and savings realized from successful renegotiations of certain of its portal agreements. 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 leverag- ing its already significant customer base through cost effective, customer retention initiatives. Such spending will be within the context of the Company’s overall marketing plan, which is continually evaluated and revised to reflect the results of the Company’s most recent market research, including 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 associ- ated with the acquisition of The Popcorn Factory in May 2002, and volume related expenses associated with the Company’s customer service operations, spending as a percentage of net revenues is expected to continue to decrease in comparison to prior fiscal years. Technology and Development Expense Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Technology and development Percentage of $13,723 (18.6%) $16,853 0.3% $16,809 sales 2.8% 3.8% 4.4% Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associ- ated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfill- ment and database systems. Technology and develop- ment expense decreased during the fiscal year ended June 30, 2002 in comparison to the prior year as a result of cost efficiencies realized by bringing Web-hosting and development capabilities in-house during the latter half of fiscal 2001. Internalizing the Company’s hosting and development functions has enabled the Company to cost effectively enhance the content and functionality of its Web sites, including the September 2001 relaunch of its Plow & Hearth Web site (www.plowandhearth.com), and improve the performance of the Company’s fulfillment and database systems, while adding improved opera- tional flexibility, capacity and system redundancy. During the fiscal years ended June 30, 2002, July 1, 2001, and July 2, 2000, the Company expended $24.5 million, $30.7 million, and $35.3 million on technology and development, of which $10.8 million, $13.8 million, and $18.5 million, respectively, has been capitalized. Although the Company believes that continued investment in technology and development is critical to attaining its strategic objectives, the Company expects that its spending in comparison to prior fiscal years, particularly in the areas of Website hosting and develop- ment and database management, will continue to de- crease as a percentage of net revenues, as the ongoing benefits from previous investments in the Company’s current technology platform will reduce the effect of incremental costs expected to be incurred as a result of the acquisition of The Popcorn Factory in May 2002. General and Administrative Expenses Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) General and administrative $28,179 4.2% $27,043 (6.7%) $28,975 Percentage of sales 5.7% 6.1% 7.6% General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human re- sources and other administrative functions, as well as professional fees and other general corporate expenses. General and administrative expenses increased during the fiscal year ended June 30, 2002, in comparison to the prior fiscal year as a result of the incremental costs associated with an increase in insurance resulting from overall market conditions and the acquisitions of The Children’s Group and The Popcorn Factory, in June 2001 and May 2002, respectively. 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 manage- ment put liability associated with the Company’s acquisi- tion of the minority shareholders’ interest in Plow & Hearth. Exclusive of such charge, general and adminis- trative 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 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 acquisition of The Popcorn Factory in May 2002, general and administrative expenses is expected to continue to decline as a percentage of net revenues, on a seasonally adjusted basis. Depreciation and Amortization Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Depreciation and amortization Percentage of sales $15,061 (30.6%) $21,716 31.8% $16,479 3.0% 4.9% 4.3% The decrease in depreciation and amortization expense during the fiscal year ended June 30, 2002 in comparison to the prior fiscal year, was primarily the result of the Company’s early adoption of SFAS No. 142, Goodwill and Other Intangible Assets, which requires the 14 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries discontinuance of amortization of goodwill and other intangible assets with indefinite useful lives. As a result, depreciation and amortization expense for the years ended July 1, 2001 and July 2, 2000 include $7.5 million ($0.12 per share) and $4.7 million ($0.08 per share), respectively, of goodwill amortization which is not included in fiscal 2002. Increases in depreciation and amortization, net of the aforementioned goodwill amorti- zation over the past two years resulted from incremental capital expenses, primarily in information systems hardware and software. Other Income (Expense) Years Ended June 30, July 1, July 2, 2002 % Change 2001 % Change 2000 (in thousands) Interest income $ 2,688 (55.0%) $5,971 (30.9% ) $ 8,645 Interest expense (1,245) 1.5% (1,264) 12.5% (1,444) Other, net 5 100.9% (555) (351.1%) 221 $ 1,448 (65.1%) $4,152 (44.1%) $ 7,422 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 years ended June 30, 2002 and July 1, 2001 was primarily due to the decline in invested cash balances which were used to fund the Company’s capital expenditures (and operations during fiscal 2001), as well as a decline in the Company’s average rate of return on its investments. Additionally, during fiscal 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 minority 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 investment in American Floral Services, Inc. (“AFS”). Income Taxes As a result of recent tax law changes, which extended the period for which companies are allowed to carry-back losses, the Company was able to recover previously paid income taxes, thereby resulting in an income tax benefit of $0.7 million during the fiscal year ended June 30, 2002. The Company has provided a full valuation allow- ance on its deferred tax assets, consisting primarily of net operating loss carryforwards. Liquidity and Capital Resources At June 30, 2002, the Company had working capital of $23.3 million, including cash and equivalents and short- term investments of $63.4 million, compared to working capital of $27.4 million, including cash and equivalents and short-term investments of $63.9 million, at July 1, 2001. The decrease in working capital resulted primarily from the funding of capital expenditures and the acquisi- tion of The Popcorn Factory in May 2002, offset in part by the cash provided by operations. Net cash provided by operating activities of $11.6 million for the fiscal year ended June 30, 2002 was primarily attributable to income, before depreciation and amortization and other non-cash charges of $14.1 million, partially offset by changes in working capital, primarily associated with the addition of The Popcorn Factory in May 2002. Net cash used in investing activities of $34.6 million for the fiscal year ended June 30, 2002 was principally comprised of purchases of short-term investment grade government and corporate securities, capital expendi- tures for computer hardware and software, including those associated with the construction of a new 300 seat service center in Alamogordo, New Mexico, and the acquisition of The Popcorn Factory in May 2002. The Popcorn Factory purchase price of $12.6 million was funded through the issuance of 353,003 shares of the Company’s Class A common stock and $7.6 million in cash, $7.3 million of which was used to retire The Popcorn Factory’s outstanding debt, while the remaining $0.3 million was used to pay for costs of the transaction. The Company expects that as it continues its return to positive cash flow, it will reallocate available cash balances into longer term securities in order to maximize the return on its investments. Net cash used in financing activities was $0.3 million for the fiscal year ended June 30, 2002, resulting primarily from the repayment of amounts outstanding under the Company’s credit facilities, offset in part by the net proceeds received upon the exercise of employee stock options. The Company’s material capital commitments consist of: (cid:127) obligations outstanding under capital and operating leases (including guarantees of $0.5 million) as well as commercial notes related to obligations arising from, and collateralized by, the underlying assets of the Company’s warehousing/fulfillment facility in Madison, Virginia ($12.2 million – 2003, $10.2 million – 2004, $8.9 million – 2005, $5.2 million – 2006, $3.2 million – 2007, $11.0 million – thereafter); (cid:127) online marketing agreements ($8.9 million); and (cid:127) i nventory commitments for the upcoming Thanks- giving through Christmas holiday season ($17.4 million). At June 30, 2002, the Company’s significant known commitments for the subsequent twelve months totaled approximately $38.5 million and were comprised of fees related to online marketing agreements, 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. Although no repurchases have been made as of September 23, 2002, any such purchases could be made from time to time in the open market and through privately negotiated transac- tions, subject to general market conditions. The repur- chase 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 expects to be cash flow 15 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries positive in fiscal 2003 and believes that current cash and investments 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 require- ments, 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 accept- able to the Company, if at all. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its finan- cial statements and results of operations are based upon 1-800-FLOWERS.COM’s consolidated financial state- ments, 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 assump- tions that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contin- gent assets and liabilities. On an ongoing basis, man- agement evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of its consolidated financial statements. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company states inventory at the lower of cost or market. In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare that with inventory levels. It is possible that changes in consumer demand could cause a reduction in the net realizable value of inventory. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is evaluated annually for impairment. Prior to fiscal 2002, goodwill was amortized over periods not exceeding 20 years. 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 busi- nesses for potential impairment indicators. Judgment regarding the existence of impairment indicators is based on market conditions and operational performance of the Company. Future events could cause the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses is impaired. Recently Issued Accounting Pronouncements On July 2, 2001, the Company adopted Financial Accounting Standards Board Statements No. 141, Business Combinations (“SFAS 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of- interests method of accounting for business combina- tions completed on or after July 1, 2001 and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with determinable useful lives will continue to be amortized. Beginning July 2, 2001, the Company ceased amortizing goodwill. During 2002, the Company has completed its assessment of the assets impacted by the adoption of SFAS 142, and based upon such review no impairment to the carrying value of goodwill was identified. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”), which addresses the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated retirement costs. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will adopt both SFAS 143 and SFAS 144 on July 1, 2002, and does not expect these statements to materially impact the Company’s financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). This pronouncement is effective for exit or disposal activities that are initiated after December 31, 2002, and requires these costs to be recognized when the liability is incurred and not at project initiation. The Company does not expect this statement to have a material impact on its financial statements. 16 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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, certain of its financing arrangements. Under its current policies, the Company does not use interest rate derivative instru- ments to manage exposure to interest rate changes. Cautionary Note Regarding Forward-Looking Statements Certain of the matters and subject areas discussed in this Annual Report contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than state- ments 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 uncertain- ties. The Company’s actual results could differ materially from those anticipated in these forward-looking state- ments as a result of several factors, including those more fully described in the Company’s SEC filings. 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 state- ments made in this Annual Report 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. Quarterly Results of Operations The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2002 and 2001. 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 June 30, Mar. 31, Dec. 30, Sept. 30, July 1, Apr. 1, Dec. 31, Oct. 1, 2002 2002 2001 2001 2001 2001 2000 2000 (in thousands) Net revenues: Telephonic Online Retail fulfillment Total net revenues Cost of revenues Gross Profit Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization Total operating expenses Operating income (loss) Other income (expense), net Income tax benefit $ 63,699 68,468 8,120 140,287 83,076 $ 50,715 56,874 7,835 115,424 70,690 $ 93,550 60,497 8,278 162,325 91,626 57,211 44,734 70,699 37,529 3,279 7,353 3,912 52,073 31,533 3,222 6,847 3,788 45,390 54,945 3,532 7,065 3,767 69,309 $ 40,967 32,340 5,862 79,169 47,877 31,292 26,631 3,690 6,914 3,594 40,829 $ 61,607 62,655 7,997 132,259 79,569 $ 48,642 47,139 7,440 103,221 64,020 $ 79,182 47,708 7,353 134,243 79,099 52,690 39,201 55,144 36,715 3,492 6,062 6,012 52,281 32,251 4,253 6,969 5,383 48,856 50,827 4,482 6,617 5,280 67,206 $ 41,292 25,422 5,802 72,516 45,091 27,425 34,528 4,626 7,395 5,041 51,590 5,138 (656) 1,390 (9,537) 409 (9,655) (12,062) (24,165) 322 –– 115 706 420 –– 591 –– (183) –– 1,145 –– 1,526 –– 1,664 –– Net income (loss) $ 5,460 $ 165 $ 1,810 $ (8,946) $ 226 $ (8,510) $ (10,536) $(22,501) Net income (loss) per share $ 0.08 $ 0.00 $ 0.03 $ (0.14) $ 0.00 $ (0.13) $ (0.16) $ (0.35) The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into gift, home, gourmet and other related products, the Thanksgiving through Christmas holiday season, which fall within the Company’s second fiscal quarter, generate the highest proportion of the Company’s annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother’s Day, Administrative Professionals Week and Easter, revenues also rise during the Company’s fiscal fourth quarter, in relation to its fiscal first and third quarters. 17 Consolidated Balance Sheets 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except share data) June 30, July 1, 2002 2001 Assets Current Assets: Cash and equivalents Short-term investments Receivables, net Inventories Prepaid and other Total current assets Property, plant and equipment, net Investments Capitalized investment in leases Goodwill Other intangibles, net Other assets Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses Current maturities of long-term debt and obligations under capital leases Total current liabilities Long-term debt and obligations under capital leases Other liabilities Total liabilities Commitments and contingencies Stockholders’ equity: $ 40,601 22,798 9,345 15,647 2,220 90,611 51,002 9,591 465 37,772 4,074 13,642 $ 207,157 $ 64,156 3,154 67,310 12,244 3,695 83,249 $ 63,896 –– 8,209 14,885 1,831 88,821 49,861 16,284 706 25,632 4,152 9,801 $ 195,257 $ 58,481 2,931 61,412 12,519 3,510 77,441 Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued in 2002 and 2001 Class A common stock, $.01 par value, 200,000,000 shares authorized, 28,319,677 and 26,586,875 shares issued in 2002 and 2001, respectively Class B common stock, $.01 par value, 200,000,000 shares authorized, –– 283 –– 266 42,480,925 and 43,028,525 shares issued in 2002 and 2001, respectively 430 238,906 Additional paid-in capital Retained deficit (120,189) (118,678) Treasury stock, at cost – 52,800 Class A and 5,280,000 Class B shares (3,108) (3,108) 123,908 117,816 $195,257 $ 207,157 Total stockholders’ equity 425 246,497 Total liabilities and stockholders’ equity See accompanying notes. 18 Consolidated Statements of Operations 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except per share data) Years Ended June 30, July 1, July 2, 2002 2001 2000 Net revenues Cost of revenues Gross profit $442,239 267,779 174,460 $497,205 293,269 203,936 $379,528 237,493 142,035 Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization 155,353 16,809 28,975 16,479 217,616 Operating loss (3,665) (45,473) (75,581) 154,321 16,853 27,043 21,716 219,933 150,638 13,723 28,179 15,061 207,601 Total operating expenses Other income (expense): Interest income 8,645 Interest expense (1,245) (1,264) (1,444) 221 Other, net 7,422 (555) 4,152 5 1,448 Total other income 2,688 5,971 Loss before income taxes and minority interests (2,217) (41,321) (68,159) 1,286 Benefit from income taxes –– 706 Loss before minority interests (1,511) (41,321) (66,873) 43 Minority interests in operations of consolidated subsidiaries –– –– Net loss $ (1,511) $ (41,321) $ (66,830) Basic and diluted net loss per common share $ (0.02) $ (0.64) $ (1.10) Shares used in the calculation of basic and diluted net loss per common share 64,703 64,197 60,889 See accompanying notes. 19 A m o r t i z a t i o n o f s t o c k o p t i o n s a n d w a r r a n t s F o r f e i t u r e o f e m p o y e e l i E x e r c s e o f s t o c k o p t i o n s i C o n v e r s o n o f p r e f e r r e d s t o c k d e f e r r e d c o m p e n s a t i o n – – – – – – – – – – – – 2 , 4 3 1 , 8 5 7 – – – – – – – – 2 5 i l n t o C a s s A c o m m o n s t o c k ( 1 , 1 2 7 , 5 4 6 ) ( 1 1 7 , 5 7 3 ) 1 1 , 2 7 5 , 4 6 0 1 1 3 S e e a c c o m p a n y n g i n o t e s . B a l a n c e a t J u n e 3 0 , 2 0 0 2 c o m m o n s t o c k I s s u a n c e o f s h a r e s o f C o n v e r s i o n o f C l a s s B E x e r c i s e o f s t o c k o p t i o n s l E m p o y e e s t o c k p u r c h a s e p l a n c o m m o n s t o c k i n t o C l a s s A T h e P o p c o r n F a c t o r y w i t h t h e a c q u i s i t i o n o f c o m m o n s t o c k i n c o n n e c t i o n T o t a l c o m p r e h e n s i v e l o s s l B a a n c e a t J u y 1 , 2 0 0 1 l s t o c k o p t i o n s C o n v e r s o n o f i l C a s s B c o m p e n s a t i o n F o r f e i t u r e o f e m p o y e e l A m o r t i z a t i o n o f d e f e r r e d c o m m o n s t o c k c o m m o n s t o c k i l n t o C a s s A T o t a l c o m p r e h e n s v e i l o s s l E m p o y e e s t o c k p u r c h a s e p a n l l B a a n c e a t J u y 2 , 2 0 0 0 l i E x e r c s e o f s t o c k o p t i o n s T h e G i f t . c o m w i t h t h e a c q u s t i o n o f i c o m m o n s t o c k i n c o n n e c t i o n T o t a l c o m p r e h e n s v e i l o s s c o m m o n s t o c k I s s u a n c e o f s h a r e s o f C o n v e r s o n o f i l C a s s B c o s t s o f $ 1 1 , 2 3 6 I s s u a n c e o f c o m m o n s t o c k i n O f f e r i n g , n e t o f i s s u a n c e c o n n e c t i o n w i t h I n i t i a l P u b l i c c o m m o n s t o c k i l n t o C a s s A – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 1 3 , 1 2 0 – – 1 4 , 5 1 2 9 7 , 1 7 5 – – – – – – 1 – – – – – – 1 ( 1 1 3 , 1 2 0 ) – – – – – – – – – – – – ( 1 ) – – – – – – – – – – – – ( 9 4 4 ) – – 2 9 9 7 5 2 6 , 3 6 2 , 0 6 8 2 6 4 4 3 , 1 4 1 , 6 4 5 4 3 1 2 3 9 , 4 7 6 1 1 7 , 3 7 9 – – – – 1 – – – – – – – – 1 , 4 9 0 – – – – 6 , 0 0 0 , 0 0 0 6 0 – – 2 , 4 3 7 , 3 6 0 2 4 ( 2 , 4 3 7 , 3 6 0 ) ( 2 4 ) – – – – – – – – – – – – – – 1 1 4 , 7 0 4 – – – – – – – – 1 1 7 , 4 6 0 – – ( 3 1 5 ) 9 8 ( 4 1 , 3 2 1 ) – – – – – – – – – – ( 7 7 , 3 5 7 ) ( 6 6 , 8 3 0 ) – – – – – – – – – – – – – – 3 5 3 , 0 0 3 – – – – 4 – – – – 5 4 7 , 6 0 0 5 ( 5 4 7 , 6 0 0 ) 7 8 8 , 0 0 8 4 4 , 1 9 1 – – 8 – – – – – – – – ( 5 ) – – – – 4 , 9 8 1 – – 2 , 2 2 8 3 8 2 – – ( 1 , 5 1 1 ) – – – – – – – – 2 6 , 5 8 6 , 8 7 5 2 6 6 4 3 , 0 2 8 , 5 2 5 4 3 0 2 3 8 , 9 0 6 ( 1 1 8 , 6 7 8 ) 2 8 , 3 1 9 , 6 7 7 $ 2 8 3 4 2 , 4 8 0 , 9 2 5 $ 4 2 5 $ 2 4 6 , 4 9 7 $ ( 1 2 0 , 1 8 9 ) $ – – – – – – – – – – – – – – – – – – 9 4 4 ( 1 5 6 ) – – – – 5 , 3 3 2 , 8 0 0 $ ( 3 , 1 0 8 ) $ 1 2 3 , 9 0 8 – – – – – – – – – – – – – – – – – – – – ( 1 , 5 1 1 ) 4 , 9 8 5 2 , 2 3 6 3 8 2 – – 5 , 3 3 2 , 8 0 0 ( 3 , 1 0 8 ) 1 1 7 , 8 1 6 – – – – – – – – – – – – – – – – – – – – – – – – ( 4 1 , 3 2 1 ) – – – – ( 1 5 6 ) 3 0 0 7 5 ( 7 8 8 ) 5 , 3 3 2 , 8 0 0 ( 3 , 1 0 8 ) 1 5 8 , 9 1 8 – – – – – – – – – – 3 6 7 3 1 5 – – – – – – – – – – – – – – – – – – – – – – – – ( 6 6 , 8 3 0 ) 1 , 4 9 1 – – – – 1 1 4 , 7 6 4 – – – – – – – – – – 3 6 7 – – 1 2 3 20 l B a a n c e a t J u n e 2 7 , 1 9 9 9 1 , 1 2 7 , 5 4 6 $ 1 1 7 , 5 7 3 4 , 1 0 0 , 0 1 2 $ 4 1 4 5 , 5 7 9 , 0 0 5 $ 4 5 5 $ 6 , 0 3 9 $ ( 1 0 , 5 2 7 ) $ ( 1 , 4 7 0 ) 5 , 3 3 2 , 8 0 0 $ ( 3 , 1 0 8 ) $ 1 0 9 , 0 0 3 S h a r e s A m o u n t P r e f e r r e d S t o c k l C a s s A l C a s s B S h a r e s A m o u n t S h a r e s A m o u n t C o m m o n S t o c k i P a d - I n C a p i t a l A d d i t i o n a l D e f i c i t R e t a n e d i C o m p e n s a t i o n S h a r e s A m o u n t E q u i t y D e f e r r e d T r e a s u r y S t o c k S t o c k h o d e r s l ’ T o t a l ( i n t h o u s a n d s , e x c e p t s h a r e d a t a ) Y e a r s e n d e d J u n e 3 0 , 2 0 0 2 , J u y l 1 , 2 0 0 1 , a n d J u y l 2 , 2 0 0 0 1 - 8 0 0 - F L O W E R S C O M . , I n c . a n d S u b s d a r i e s i i C o n s o l i d a t e d S t a t e m e n t s o f S t o c k h o d e r s l ’ E q u i t y Consolidated Statements of Cash Flows 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands) Years Ended June 30, July 1, July 2, 2002 2001 2000 Operating activities: Net loss Reconciliation of net loss to net cash provided by (used in) $(41,321) $ (1,511) $ (66,830) operations: Depreciation and amortization Deferred income taxes Management put liability Bad debt expense Minority interests Credit to/amortization of deferred compensation Loss on disposal of equipment and other Changes in operating items, excluding the effects of acquisitions: Receivables Inventories Prepaid and other Accounts payable and accrued expenses Other assets Other liabilities 15,061 –– –– 107 –– –– 425 21,716 –– –– 377 16,479 1,321 1,451 221 –– (43) 367 (156) 560 743 (1,031) (204) (1,622) (7) (215) 2,499 7,226 2,264 (3,544) (1,875) 59 (13) (838) (3,574) 166 20,663 (4,699) 344 (12,630) (34,412) Net cash provided by (used in) operating activities 11,608 Investing activities: Acquisitions, net of cash acquired Capital expenditures, net of non-cash expenditures – $2,894, $4,176 and $1,445 in 2002, 2001 and 2000, respectively Purchases of investments Proceeds from sales of investments Proceeds from sale of business Other Net cash used in investing activities Financing activities: Proceeds from issuance of common stock, net Proceeds from bank borrowings Repayment of notes payable and bank borrowings Payments of capital lease obligations Net cash (used in) provided by financing activities (7,037) (4,892) (25,515) (11,994) (22,798) 6,693 –– 495 (34,641) 2,618 –– (826) (2,054) (262) (15,791) (16,284) 1,194 –– 76 (21,901) (1,000) 15 2,488 222 (35,697) (45,691) 375 16,510 (14,827) (1,459) 599 115,899 21,717 (43,568) (1,504) 92,544 Net change in cash and equivalents Cash and equivalents: Beginning of year End of year (23,295) (47,728) 12,441 63,896 $ 40,601 111,624 $ 63,896 99,183 $111,624 Supplemental Cash Flow Information: - Interest paid amounted to $1,245, $1,264 and $1,457 for the years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively. - The Company received tax refunds, net of income taxes paid of approximately $706, $1,613 and $472 for the years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively. See accompanying notes. 21 Notes to Consolidated Financial Statements 1-800-FLOWERS.COM, Inc. and Subsidiaries June 30, 2002 Note 1. Description of Business 1-800-FLOWERS.COM, Inc. (“1-800-FLOWERS.COM”) is a leading gift retailer, providing a broad range of thoughtful gift products including flowers, plants, gourmet foods, candies, gift baskets, and other unique gifts to our customers around the world. The 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, The Popcorn Factory, Inc., a manufacturer and direct marketer of premium popcorn and specialty food gifts, and the Children’s Group, Inc., a direct marketer of unique children’s toys and games operating under the HearthSong and Magic Cabin Dolls brand names. 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 2002 and 2001, which ended on June 30, 2002 and July 2, 2001, 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 intercom- pany accounts and transactions have been eliminated in consolidation. The accompanying financial statements and foot- notes 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 state- ments 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, United States government securities, overnight repurchase agreements and commercial paper with maturities of three months or less when purchased. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting. Property, Plant and Equipment Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives using the straight-line method. Estimated useful lives are based on Company averages ranging from 3 to 10 years for furniture, fixtures and equipment and 40 years for buildings. Amortization of leasehold improve- ments, which range from 5 to 20 years, 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. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is evalu- ated annually for impairment. Prior to fiscal 2002, goodwill was amortized over periods not exceeding 20 years. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits consumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. Deferred Catalog Costs The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion with actual sales from the correspond- ing catalog over a period not to exceed 26-weeks. Included within other assets was $2.7 million and $2.2 million at June 30, 2002 and July 1, 2001, respectively, relating to prepaid catalog costs. Investments The Company considers all of its debt and equity securities, for which there is a determinable fair market value and no restrictions on the Company’s ability to sell within the next 12 months, as available-for-sale. Avail- able-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity. For the years ended June 30, 2002, July 1, 2001 and July 2, 2000, there were no significant unrealized gains or losses. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. Fair Values of Financial Instruments The recorded amounts of the Company’s cash and equivalents, short-term investments, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of investments, including available-for-sale securities, is based on quoted market prices where available. The fair value of the Company’s long-term obligations are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method, the Company’s fair value of long-term obliga- tions was not significantly different than the carrying values at June 30, 2002 and July 1, 2001. 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 22 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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. Allow- ances relating to accounts receivable ($1.0 million and $1.1 million at June 30, 2002 and July 1, 2001, respec- tively) have been recorded based upon previous experi- ence and management’s evaluation. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Cost of Revenues Cost of revenues consists primarily of florist fulfill- ment 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. Marketing and Sales Marketing and sales expenses consist primarily of advertising and promotional expenditures, catalog costs, online portal agreements, retail store and fulfill- ment 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 mer- chandising activities. The Company expenses all advertising costs at the time the advertisement is first shown. Advertising expense (including the amortization of catalog costs of $37.8 million, $26.9 million and $21.8 million for the years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively) was $69.6 million, $71.0 million and $79.5 million for the years ended June 30, 2002, July 1, 2001 and July 2, 2000, respectively. Technology and Development Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associ- ated 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 modifica- tions 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. Comprehensive Income (Loss) For the years ended June 30, 2002, July 1, 2001 and July 2, 2000, the Company’s comprehensive losses were equal to the respective net losses for each of the periods presented. Loss Per Share Net loss per common share is computed using the weighted-average number of common shares outstand- ing. 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 com- mon 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. Recent Accounting Pronouncements On July 2, 2001, the Company adopted Financial Accounting Standards Board Statements No. 141, Business Combinations (“SFAS 141”), and No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of- interests method of accounting for business combina- tions completed on or after July 1, 2001 and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with determinable useful lives will continue to be amortized. During fiscal 2002, the Company completed its assessment of the assets impacted by the adoption of SFAS 142. Based upon such review, no impairment to the carrying value of goodwill was identified, and the Company ceased amortizing goodwill effective July 2, 2001. (See Note 4) In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”), which addresses the financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated retirement costs. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The Company will adopt both SFAS 143 and SFAS 144 on July 1, 2002, and does not expect these statements to materially impact the Company’s financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). This pronouncement is effec- 23 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries tive for exit or disposal activities that are initiated after December 31, 2002, and requires these costs to be recognized when the liability is incurred and not at project initiation. The Company does not expect this statement to have a material impact on its financial statements. 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 Popcorn Factory On May 3, 2002, the Company extended its gourmet food product assortment when it completed the acquisi- tion of selected operating assets and liabilities of The Popcorn Factory, a manufacturer and direct marketer of premium popcorn and specialty food gifts. The purchase price of approximately $12.6 million, including $0.3 million of transaction costs, was comprised of $7.3 million used to retire The Popcorn Factory’s outstanding debt and the issuance of 353,003 shares of the Company’s Class A common stock, valued at approximately $5.0 million, based upon the average closing price of the Company’s common stock on the date of and the two days preceding and following the closing of the transaction. The acquisi- tion was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, and the operating results of The Popcorn Factory have been included in the Company’s consolidated results of operations since the date of acquisition. The initial purchase price allocation of The Popcorn Factory business resulted in the following condensed balance sheet of assets acquired and liabilities assumed. The Popcorn Factory Initial Purchase Price Allocation (in thousands) $ 1,704 Current assets 1,061 Property, plant and equipment 1,120 Intangible assets 12,081 Goodwill(*) 15,966 3,200 142 3,342 $12,624 Total liabilities assumed Net assets acquired Current liabilities Non-current liabilities Total assets acquired (*) Approximately $12.1 million is expected to be deductible for tax purposes. The Popcorn Factory acquisition resulted in $1.1 million in total intangible assets acquired, other than goodwill, with $0.2 million allocated to trademarks with indefinite lives. The remaining $0.9 million of acquired intangibles were allocated to customer list, and is being amortized over the asset’s determinable useful life of 3 years. 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 24 offering, sold under the HearthSong and Magic Cabin Dolls brand names. The purchase price of approxi- mately $4.9 million, paid in cash, included the acquisi- tion 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, which approximated the purchase price, 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 pur- chase price over the fair market value of the net assets acquired, $18.9 million, was allocated to goodwill and was being amortized over three years. In accordance with the provisions of SFAS 142, effective July 2, 2001, the Company ceased amortizing the goodwill associ- ated with this acquisition, which at such time had a remaining balance of $8.9 million. 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, approxi- mating $1.7 million, was allocated to intangible assets and is being amortized over the asset’s determinable useful life of 3 years. 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 approxi- mated 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 acqui- sitions of The Popcorn Factory, The Children’s Group, GreatFood.com, TheGift.com and the sale of Floral Works had taken place at the beginning of fiscal year 2000. The following unaudited pro forma information is Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisitions of The Popcorn Factory, The 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 June 30, July 1, July 2, 2002 2001 2000 (in thousands, except per share data) Net revenues(*) Loss from operations Net loss Net loss per $528,103 $509,214 $443,090 $ (6,407) $ (50,392) $ (85,823) $ (4,688) $ (46,671) $ (78,676) common share $ (0.07) $ (0.73) $ (1.29) (*) 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. 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 comple- tion of the Company’s initial public offering in August 1999, the Company satisfied its obligation under the Plow & Hearth management put liability when it ac- quired 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 fiscal 2000 as general and administra- tive 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, $18.9 million, was allocated to goodwill and was being amortized over 20 years. In accordance with the provisions of SFAS 142, effective July 2, 2001, the Company ceased amortizing the goodwill associ- ated with this acquisition, which at such time had a remaining balance of $15.9 million. Note 4. Goodwill and Intangible Assets The change in the net carrying amount of goodwill for the year ended June 30, 2002 is as follows: June 30, 2002 (in thousands) Goodwill, net, beginning of year Acquisition of The Popcorn Factory Other Goodwill, net, end of year $ 25,632 12,081 59 $ 37,772 Identifiable intangible assets as of June 30, 2002 and July 1, 2001 are comprised as follows: June 30, July 1, 2002 2001 Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization (in thousands) Intangible Assets with Determinable Lives: Investments in licenses(*) Customer lists Technology Other Trademarks with indefinite lives: Total identifiable intangible assets $4,927 910 1,659 171 7,667 $2,468 51 1,428 122 4,069 $4,927 $2,145 1,659 641 7,227 875 306 3,326 480 4 255 4 $8,147 $4,073 $7,482 $3,330 (*) Investment in 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 the franchise estimated lives ranging from 14 to 16 years. The amortization of intangible assets for the years ended June 30, 2002, July 1, 2001 and July 2, 2000 was $0.7 million, $0.9 million and $0.8 million, respectively. Estimated amortization expense over the next five years is as follow: 2003-$0.9 million, 2004 - $0.6 million, 2005 - $0.6 million, 2006 - $0.3 million and 2007 - $0.3 million. The following table provides pro forma disclosure of net loss and net loss per share for the years ended July 1, 2001 and July 2, 2000, as if goodwill and indefinite- lived intangibles had not been amortized: July 1, July 2, 2001 2000 (in thousands, except per share data) Reported net loss Amortization Adjusted net loss Reported net loss per common share Amortization per common share Adjusted net loss per $(41,321) 7,458 $(33,863) $(66,830) 4,732 $(62,098) $ (0.64) 0.11 $ (1.10) 0.08 common share $ (0.53) $ (1.02) 25 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 5. 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 approxi- mately $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 unrecover- able book value of abandoned fixtures, equipment and leasehold improvements in the amount of approximately $1.1 million, and the estimated provision for the future lease obligations and related facility shut down costs in the amount of approximately $1.0 million. As part of the redeployment plan, 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. An additional service center, located in Alamagordo, New Mexico became operational in November 2001, replacing its Phoenix, Arizona and San Antonio, Texas service centers, which were closed in June 2001. In addition, in 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 2002 and fiscal 2001, $0.2 million and $1.6 million respectively was charged against the accrual, leaving a balance of $0.3 million, consisting primarily of accruals for future lease commitments related to the closed service center facilities. Note 6. Property, Plant and Equipment June 30, July 1, 2002 2001 (in thousands) $33,989 Computer equipment 27,451 Software development costs 6,059 Telecommunication equipment Leasehold improvements 11,588 Building and building improvements 11,489 6,253 Equipment 3,576 Furniture and fixtures 666 Land 101,071 Accumulated depreciation and amortization 50,069 $51,002 $27,853 23,659 5,559 11,333 8,439 5,732 3,207 637 86,419 36,558 $49,861 Note 7. Long-Term Debt June 30, July 1, 2002 2001 (in thousands) Commercial notes and revolving credit line (1-5) Seller financed acquisition obligations (6-7) Obligations under capital leases (see Note 13) Less current maturities of long-term debt and obligations under capital leases $ 7,380 $ 8,153 202 256 7,816 15,398 7,041 15,450 3,154 2,931 $12,244 $12,519 The following notes and credit lines relate to obliga- tions arising from, and collateralized by, the underlying assets of the Company’s Plow & Hearth facility in Madison, Virginia: (1) $5,000,000 revolving credit line dated May 31, 2002, renewable on September 30, 2002 (none out- standing at June 30, 2002 and July 1, 2001) bearing interest equal to the monthly LIBOR Index plus 1.75% per annum (3.59% at June 30, 2002). (2) $2,400,000 note dated June 13, 1997 ($2,001,000 outstanding at June 30, 2002), 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 ($1,222,000 outstanding at June 30, 2002), bearing interest equal to the monthly Treasury Bill rate plus 2.1% per annum (3.78% at June 30, 2002). 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 ($2,653,000 outstanding at June 30, 2002), bearing interest at 7.61% per annum. The note is payable in 180 equal monthly installments of principal and interest commencing October 15, 1999. (5) $2,300,000 note dated August 8, 2000 ($1,504,000 outstanding June 30, 2002) 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 acquisi- tion 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 ($88,000 outstanding at June 30, 2002), 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 ($114,000 outstanding at June 30, 2002). The note is payable in 84 monthly installments commencing January 1, 2001. 26 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries As of June 30, 2002, long-term debt maturities, excluding amounts relating to capital leases, are as follows: Year Debt Maturities (in thousands) significant components of the Company’s deferred tax assets (liabilities) are as follows: June 30, July 1, July 2, 2002 2001 2000 (in thousands) 2003 2004 2005 2006 2007 Thereafter Note 8. Income Taxes $ 820 890 942 441 448 4,041 $ 7,582 Deferred tax assets: Net operating loss carryforwards Accrued expenses and reserves $37,946 $37,097 $ 20,909 3,086 3,031 Valuation allowance (38,242) (37,447) (22,098) 2,946 Deferred tax liabilities: Installment sales (54) (61) (70) Tax in excess of book depreciation (2,681) (2,535) (1,827) Significant components of the benefit for income Net deferred tax assets $ $ $ taxes are as follows: Years Ended June 30, July 1, July 2, 2002 2001 2000 (in thousands) Current: Federal (*) State and local $ 706 $ $ 2,607 2,607 Deferred (1,321) $1,286 $ 706 706 $ (*) As a result of tax law changes enacted in fiscal 2002, which extended the period for which companies are allowed to carry-back losses, the Company was able to recover previously paid income taxes, thereby resulting in an income tax benefit of $0.7 million. The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax benefit is as follows: Years Ended June 30, July 1, July 2, 2002 2001 2000 34.0% Tax at U.S. statutory rates State income taxes, net of federal tax benefit Goodwill amortization Change in deferred tax asset valuation 3.6 (13.8) 4.9 (6.8) 3.9 (2.6) 34.0% 34.0% 8.6 (33.0) (32.0) (1.4) 0.9 (0.6) 1.9% 0.0% 31.8% Other Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The At June 30, 2002, the Company’s U.S. federal and state net operating loss carryforwards for income tax purposes were approximately $94.9 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 $6.8 million, the resulting benefits will be credited to additional paid-in capital. Note 9. 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 27 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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. 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. No repurchases have been made as of June 30, 2002. Note 10. 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% (1,933,702 shares, 1,925,615 shares and 1,852,172 shares during fiscal 2002, 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 discre- tionary 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 plans are determined by the Company’s board of directors or compensation committee as set forth in the applicable option agree- ment, 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 compen- sation charge of $1.7 million associated with the January 1999 option grants, of which $0.4 million was amortized during the year ended July 2, 2000. 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 June 30, July 1, July 2, 2002 2001 2000 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 6,455,262 Grants 2,897,950 Exercises (788,008) Forfeitures (452,060) Balance, end of year 8,113,144 Weighted-average fair value of options issued during the year 5,788,171 $ 6.64 $12.43 2,143,925 $ 2.72 (97,175) $ 9.94 (1,379,659) 6,455,262 $ 8.95 1,237,500 $ 8.53 $ 3.91 5,099,550 $ 3.83 (61,250) $10.52 (487,629) 5,788,171 $ 6.64 $ 7.32 $ 2.21 28 $ 1.73 $10.57 $ 2.00 $13.38 $ 8.53 $ 6.33 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries The following table summarizes information about stock options outstanding at June 30, 2002: Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Average Average Average Options Remaining Exercise Options Exercise Exercise Price Outstanding Contractual Life Price Exercisable Price $ 1.61 - 3.65 4.02 - 5.50 5.63 - 12.44 12.63 - 15.77 17.38 - 23.10 2,175,142 1,747,575 1,632,544 1,863,309 694,574 8,113,144 7.9 years 7.7 years 8.6 years 9.4 years 7.0 years 8.3 years $ 3.30 $ 4.56 $ 11.40 $ 12.98 $ 21.08 $ 8.95 869,367 570,245 213,837 108,428 408,014 2,169,891 $ 2.82 $ 4.55 $ 11.81 $ 13.40 $ 21.04 $ 8.11 At June 30, 2002, the Company has reserved approximately 15,903,000 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 esti- mated 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 4.50%, 5.35% and 6.15% in 2002, 2001 and 2000, respectively; no dividend yield; 66%, 60% and 70% volatility in 2002, 2001 and 2000 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 June 30, July 1, July 2, 2002 2001 2000 (in thousands, except per share data) Net loss: As reported Pro forma Basic and diluted $(1,511) $(41,321) $(66,830) (6,958) (46,272) (71,766) net loss per share: As reported $ (0.64) $ (1.10) $ (0.02) Pro forma (0.11) (0.72) (1.18) Note 11. Employee Stock Purchase Plan In December 2000, the Company’s board of director’s approved the 1-800-FLOWERS.COM, Inc. 2001 Em- ployee Stock Purchase Plan (ESPP), a non-compensa- tory 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, 29 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. At June 30, 2002, the Company has reserved approximately 1,886,000 shares of common stock for issuance under its ESPP. Note 12. Profit Sharing Plan The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employees who have attained the age of 21 are eligible to participate upon completion of one year of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceeding federal guidelines. On an annual basis the Company, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company’s contributions based upon years of service. The Company made contributions of $0.3 million, $0.2 million and $0.1 million, for the years ended June 30 2002, July 1, 2001 and July 2, 2000, respectively. 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 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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. At June 30, 2002, 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) 2003 2004 2005 2006 2007 Thereafter $ 2,829 $ 2,816 2,398 1,870 1,521 1,100 2,667 $12,445 $12,372 2,413 1,879 1,528 1,106 2,690 In addition to the above, the Company has agreed to provide rent guarantees for leases entered into by certain franchisees with third party landlords. At June 30, 2002, the aggregate minimum rent payable by franchisees guaranteed by the Company was approxi- mately $0.5 million. Rent expense was approximately $8.7 million, $8.4 million, and $10.2 million for the years ended June 30, 2002, July 1, 2001, and July 2, 2000 respectively. Online Marketing Agreements The Company has commitments under online marketing agreements with various portal providers. Such online marketing costs are capitalized and amor- tized on a straight-line basis over the term of the agreements. On September 1, 2000, the Company entered into a five-year $22.1 million online marketing agreement with an Internet company commencing October 1, 2001 and ending August 31, 2005. As a result of the modification of the previous agreement, the Company recorded a one-time charge of approximately $7.3 million during fiscal 2001. 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. The Company leases certain computer, telecommu- nication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $18.4 million and $15.5 million at June 30, 2002 and July 1, 2001, respec- tively, and accumulated amortization of $12.4 million and $9.8 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 classi- fied as operating leases, are classified as capital leases and have initial lease terms of approximately 20 years (including option periods in some cases). The Company has a $10.0 million equipment lease line of credit with a bank. Interest under this line, which is renewable annually, is determined on the date of each commitment to borrow and is based on the bank’s base rate on such date. At June 30, 2002, the Company had financed $7.1 million of equipment purchases through such lease line. The borrowings, which bear interest at rates ranging from 5.39% to 6.36% annually, are payable in 60 monthly installments of principal and interest commencing in February 2001. Borrowings under the line are collateralized by the underlying equipment purchased and an equal amount of pledged investments. As of June 30, 2002, 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) 2003 2004 2005 2006 2007 Thereafter Total minimum lease payments Less amounts $ 2,887 2,144 1,857 1,438 353 20 $ 244 134 53 29 20 20 $ 4,606 4,275 3,739 1,402 942 3,176 8,699 500 $18,140 representing interest (883) (35) Present value of net minimum lease payments $ 7,816 $ 465 30 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 June 30, 2002 and July 1, 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended June 30, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 consoli- dated financial position of 1-800-FLOWERS.COM, Inc. and Subsidiaries at June 30, 2002 and July 1, 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other indefinite-lived intan- gible assets effective July 2, 2001 to conform with the provisions of Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets.” Melville, New York August 2, 2002 31 Market for 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 com- mon stock for each of the fiscal quarters during the fiscal years ended June 30, 2002 and July 1, 2001. High Low Year ended June 30, 2002 July 2, 2001 – September 30, 2001 October 1, 2001 – December 30, 2001 December 31, 2001 – March 31, 2002 April 1, 2002 – June 30, 2002 Year ended July 1, 2001 July 3, 2000 – October 1, 2000 October 2, 2000 – December 31, 2000 January 1, 2001 – April 1, 2001 April 2, 2001 – July 1, 2001 $ 14.78 $ 16.50 $ 17.86 $ 14.68 $ 9.90 $ 8.20 $ 10.72 $ 9.85 $ 6.13 $ 5.13 $ 8.13 $ 15.50 $ 4.50 $ 2.55 $ 4.13 $ 5.96 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, 2002, there were approxi- mately 100 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, 2002, there were approximately 17 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. Resales of Securities 45,730,302 shares of Class A and Class B com- mon stock are “restricted securities” as that term is defined in Rule 144 under the Securities Act. Re- stricted 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, 2002, 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. 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. No repurchases have been made as of June 30, 2002. Equity Compensation Plan Information The following table gives information about the Company’s common stock that may be issued upon the exercise of options under all of the Company’s equity compensation plans as of June 30, 2002. The table includes the 1-800-FLOWERS.COM 1997 Stock Option Plan and the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive Plan. Number of securities remaining available for future issuance Number of under equity securities to be Weighted- compensation issued upon average plans (excluding exercise of exercise price securities Plan outstanding of outstanding reflected Category options options in column (a)) (a) (b) (c) Equity compensation plans approved by security holders 8,113,144 Equity compensation plans not approved by security holders $8.95 7,789,412 Total 8,113,144 $8.95 7,789,412 32 Company Information BOARD OF DIRECTORS CORPORATE OFFICERS STOCK EXCHANGE LISTING James F. McCann Chairman and Chief Executive Officer 1-800-FLOWERS.COM James F. McCann Chairman and Chief Executive Officer 1-800-FLOWERS.COM NASDAQ National Market Ticker Symbol: FLWS T. Guy Minetti Vice Chairman 1-800-FLOWERS.COM Christopher G. McCann President 1-800-FLOWERS.COM Kevin J. O’Connor Chairman DoubleClick, Inc. Jeffrey C.Walker Managing Director JPMorgan Partners Lawrence V. Calcano Managing Director Goldman Sachs & Company Mary Lou Quinlan CEO JUST ASK A WOMAN John J. Conefry Vice Chairman Astoria Financial Corporation T. Guy Minetti Vice Chairman Corporate Development 1-800-FLOWERS.COM Christopher G. McCann President 1-800-FLOWERS.COM William E. Shea Senior Vice President of Finance and Administration,Treasurer and Chief Financial Officer 1-800-FLOWERS.COM Gerard M. Gallagher Senior Vice President/General Counsel/Secretary 1-800-FLOWERS.COM Thomas G. Hartnett Senior Vice President of Retail and Fulfillment 1-800-FLOWERS.COM Vincent J. McVeigh Senior Vice President 1-800-FLOWERS.COM Pamela Knox Senior Vice President of Marketing 1-800-FLOWERS.COM Peter G. Rice President Plow & Hearth Enzo J. Micali Senior Vice President of Information Technology 1-800-FLOWERS.COM TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, New York 11219 (718) 921-8200 INDEPENDENT AUDITORS Ernst & Young LLP 395 North Service Road Melville, New York 11747 (631) 752-6100 SEC COUNSEL Cahill Gordon and Reindel 80 Pine Street New York, NY 10005 (212) 701-3000 SHAREHOLDER INQUIRIES Copies of the Company’s reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and additional information about 1-800-FLOWERS.COM may be obtained without charge by calling 516-237-4714. Information is also available via the Internet in the Investor Relations section at www.1800flowers.com, or by writing to: Investor Relations 1-800-FLOWERS.COM 1600 Stewart Avenue Westbury, New York 11590 Receiving a gift opens the door to many things. First there’s the guessing game of who sent it, followed by the poetic sincerity of the card message. Then there’s the unmistakable sounds of wrapping paper eagerly being unwrapped and boxes being opened. Finally, the warm glow of giving that radiates from the gift itself lights up the room. It’s this checklist of cherished moments that makes the giving and receiving of gifts such a special connection, and for over 25 years 1-800-FLOWERS.COM has been helping people give someone special, something specialsm. Our breathtaking floral bouquets, stunning plants for the home or office, candy and gourmet treats, savory gift baskets, adorable plush stuffed animals, and collectible gifts...combined with our unique same-day and next-day delivery capability... are designed to help our customers connect with the important people in their lives and enhance all the celebrations in their lives. 1-800-FLOWERS.COM, Inc. 1600 Stewart Avenue Westbury, NY 11590 

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