1-800-FLOWERS.COM
Annual Report 2004

Plain-text annual report

2004 Annual Report Special Bonus 2005 Celebrations appointment book About 1-800-FLOWERS.COM® For more than 25 years, 1-800-FLOWERS.COM, Inc. (NASDAQ: FLWS) has been the leading innovator in the floral industry, taking the extra step to help people connect and express themselves quickly and easily with exquisite floral gifts crafted with care by renowned artisans and the nation’s leading florists, as well as distinctive non-floral gifts appropriate for any occasion or sentiment. The Company provides gift solutions same day, any day, offering an unparalleled selection of flowers, plants, gourmet foods and confections, gift baskets and other expressive, unique gifts. As always, satisfaction is guaranteed, and customer service is paramount with quick, convenient ordering options, fast and reliable delivery and gift advisors always available. Customers can shop 1-800-FLOWERS.COM 24-hours a day, seven-days a week via the Internet (http://www.1800flowers.com); by calling 1-800-FLOWERS® (1-800-356-9377); or by visiting a Company-operated or franchised store. The 1-800-FLOWERS.COM family of brands also includes home decor and garden merchandise from Plow & Hearth® (1-800-627-1712 or http://www.plowandhearth.com); premium popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or http://www.thepopcornfactory.com); gourmet foods from GreatFood.com® (http://www.greatfood.com); and children’s gifts from HearthSong® (http://www.hearthsong.com) and Magic Cabin® (http://www.magiccabin.com). 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 Anumber 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 applicable statements. These risks and uncertainties include, but are not limited to: the Company’s ability to achieve 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 customer orders; its ability to cost effectively acquire and retain customers; its ability to continue growing revenues; its ability to compete against existing and new competitors; its ability to manage expenses associated with necessary general and administrative and technology investments; its ability to cost effectively manage inventories; its ability to improve its bottom line results; its ability to leverage its operating infrastructure; its ability to achieve its stated results guidance for fiscal 2005 and general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s products. 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. Financial Highlights Years Ended June 27, 2004 June 29, 2003 June 30, 2002 July 1, 2001 July 2, 2000 (in thousands, except percentages and customer data) $603,978 263,039 307,470 48% 41.9% 36,402 0.60** 23.9 $565,618 $497,205 $442,239 $379,528 271,071 265,278 49% 42.6% 27,510 0.18 21.2 248,931 218,179 46% 41.0% 11,396 (0.02) 18.1 230,723 182,924 41% 39.4% 227,380 116,810 32% 37.4% (23,757) (59,102) (0.64) 13.4 (1.10) 9.1 Total Net Revenues Telephonic Revenues Online Revenues Non-floral Revenues* Gross Profit Margin Percentage EBITDA EPS Customer Base (millions) * As a percentage of combined online and telephonic net revenues. ** For the year ended June 27, 2004, EPS included a net income tax benefit of $19.2 million, or $0.28 per share. Fiscal 2004 Achievements Grew online revenues 16 percent to $307 million, representing 54 percent of combined online and telephonic revenues. Achieved EPS of $0.60** per diluted share, compared with $0.18 per share in the prior year. Grew our cash and investments position by $30 million to $111 million. Cost effectively attracted 3.1 million new customers; simultaneously deepened our relationship with existing customers and increased annual repeat order rate to approximately 45 percent. Total Revenues Online Revenue Growth Online Percentage (in $ millions) (in $ millions) As % of combined online and telephonic revenues . 5 9 7 3 $ . 2 2 4 4 $ . 2 7 9 4 $ . 6 5 6 5 $ . 9 3 0 6 $ . 8 6 1 1 $ . 9 2 8 1 $ . 2 8 1 2 $ . 3 5 6 2 $ . 5 7 0 3 $ % 4 3 % 4 4 % 7 4 % 9 4 % 4 5 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 FY00 FY01 FY02 FY03 FY04 To our shareholders Fiscal 2004 was a year that included a number of important accomplish- ments for our Company. Foremost among these was the deepening of the rela- tionships we have with our customers who increasingly view us as their leading provider of thoughtful gifts and services for all of their celebratory occasions. This is best illustrated by our repeat order rate, which increased to 45 percent during fiscal 2004 compared with 42 percent in the prior year. Concurrent with this effort, we also cost- effectively attracted more than three million new customers, of which 58 percent came to us online, up from 55 percent last year. Importantly, our customer acquisition cost remained below our $20 target – a level that we believe is among the best in the specialty retailing sector. We believe these customer metrics illustrate the successful leveraging of our marketing investments in broadcast adver- tising, direct mail and a broad range of online programs. Customers increasingly Thursday 7 8 14 15 Friday Saturday 1 New Year’s Day come to us because of the strength and reliability of our brand, the con- venience of our multi-channel access and our expanded offering of gifts and services that help them connect with all of the people who are important in their lives. We plan to build on these relationships and thereby continue growing our business profitably during fiscal 2005. 22 21 29 28 Financial Highlights Financial Highlights In terms of financial results, for the year we grew total revenues approximately seven percent, or $38 million, to more than $600 million. Highlighting this growth was the strength of our floral gift business, which grew 10 percent, compared with the prior year. In addition, all of the comple- mentary gift categories that we have identi- fied as having the strongest growth potential for our future – including gourmet food gifts, gift baskets and children’s gifts – grew at a double-digit pace. With that said, we believe that our results could have and should have been even stronger. As we noted throughout the year, customer demand in our home and garden gift category was below our expectations. We believe this can be attributed to a combination of internal merchandising and marketing issues as well as the increasingly competitive market conditions within this sector. Beginning in fiscal 2004 and continuing into the current year, we conducted a thorough review of our home and garden business and implemented plans that, we believe, will enhance its product offering, creative look and feel, and marketing strategy. We expect to begin to see the fruits of these efforts during our fiscal 2005 second quarter, which includes the year-end holiday period, the largest, in terms of sales, for the category. We are confident that we can reinvigorate this segment of our business and achieve sustainable revenue growth during fiscal 2005 and beyond. While total revenue growth for the year was at the lower end of our expectations, it still represented solid, organic (or “same- store”) growth. Importantly, revenue in our online channel increased by approximately 16 percent to more than $300 million, representing 54 percent of combined tele- phonic and online revenues. As I’ve stated in the past, this is important because, as our customers increasingly migrate to our online channels: We have lower order processing costs; We can introduce them to our expanded range of gifts, which helps increase the number of celebratory and connective occasions that they can come to us for; They get the opportunity to use our rich service offerings, such as occasion-reminder, gift search and our address book features, all of which make shopping more convenient and thereby increase customer loyalty and frequency; And, we have the opportunity to engage them in an electronic dialog via cost-effective e-marketing programs. Last year, 1-800-FLOWERS.COM customers and investors alike enjoyed our annual report’s built-in Celebrations Calendar. This year, as a special bonus, we’ve made the annual report even more interactive by including the 2005 Celebrations Appointment Book. Highlighting important holidays throughout the year, and filled with tips and descriptions January 2005 The perfect gift for all your celebrations Sunday Monday Tuesday Wednesday Tip of the month Water, a flower’s best friend. Fresh cut flowers last longer and look healthier, even in winter... if you keep them well-hydrated. Always be sure that stems are submersed. If your tap water is less than pure, try adding several drops of household bleach to counteract the negative effects of minerals and sediments. Start the new year off right. Welcome to 2005. It’s sure to be a great year, and 1-800-FLOWERS.COM can make all your 2005 celebrations and gifting occasions even better. Visit www.1800flowers.com for money-saving offers and promotions each month featuring some of the most distinctive gifts you’ve ever seen. Also sign up for our free members-only benefits, such as Gift Reminders, Online Order Tracking, Bill Me Later, Express Checkout and much more. 2 9 16 23 30 3 10 4 11 17 Martin Luther King Jr.’s Birthday (observed) 18 25 24 31 Want to send thanks for the holiday presents you received? Visit www.1800flowers.com for thoughtful thank-you greetings. 5 12 19 26 6 13 20 27 Check the back pages of this appointment book for valuable coupons! of all our great customer-engage- ment services, the appointment book is designed to make planning for all your celebratory occasions fun and easy. And, as an added value, we’ve included discount coupons good for our entire family of great gift brands. So make an appointment today to call, click or come in to one of our stores so that we can help you connect with all the important people in your life. Operating Leverage = Increased Profitability During fiscal 2004 we further leveraged our infrastructure and reduced our operating expense ratio by 220 basis points compared with the prior year. We also maintained a strong gross profit margin despite the impact of lower sales in our higher margin home and garden category. Together, these factors enabled us to significantly increase our profitability. For the year we grew operating income by 77 percent compared with the prior year, and, given our low working capital and capital expenditure needs, grew our cash and investments position by $30 million to $111 million. Progress in Key Initiatives In addition to the positive financial growth accomplished during the year, we made significant progress in several of our key business initiatives: We enhanced our fulfillment operations, completing the roll-out of our Local Fulfillment Center, or “LFC,” strategy through our Bloomnet® network of profes- sional florists. We now have these “mini- distribution centers” covering all of the top 50 markets in the country. Other than the original eight that we built, all of the LFCs are owned and operated by independent Bloomnet florists. We believe the LFCs, and our enhanced Bloomnet network, give us a significant competitive advantage, enabling us to increase our same-day and next-day delivery capabilities for both floral and non- floral gifts. This is important as it makes us far less reliant on third party carriers, compared with many of our competitors. In the merchandising area, we further broadened our complementary gift offerings with our “UCD” initiative. These are “Unique, Creative & Differentiated” products – including an expanded range of gourmet-, spa- and sports-related gift baskets. We also expanded our relationships with premium gift partners Lenox, Waterford and Godiva and added such new partners as Yankee Candle and Swarovski, among others. In bakery gifts, we saw con- tinued strong customer acceptance for our own Mama Moore’s BakeshopSM brand, which is quickly becoming one of our best selling gourmet food gift lines. During the year, we expanded our industry- leading floral offering with the successful launch of our first “designer” collection featuring the unique creations of floral artisan Jane Carroll. Customer response to the new gift line has been very positive and we plan to expand this program. Combined with our “Fresh from our GrowersSM” overnight floral gift program and our Florist Designed same-day delivery gifts, we offer our customers a range of choices unique in the floral gift industry. On the corporate gifting front we added personnel, extended our reach and increased sales. This program, now known as our Business Gift Services division, added more than 1,000 new corporate accounts during the fiscal year. We continue to believe that this area offers us excellent growth potential and we plan to further expand our efforts here during fiscal 2005. Focused on Growth and Profitability Looking ahead, we believe we are well positioned to grow our revenues while delivering increasingly strong profitability. We finished fiscal 2004 with more than $100 million in cash and investments on our balance sheet. This positions us well to pursue our strategy of growing our business through a combina- tion of organic and acquisition growth. On the acquisition front, we continue to look for companies that will help us expand and deepen our relationships with our customers as their resource and authority for all of their celebratory and connective occasions. We believe we have demonstrated our ability to efficiently integrate acquisitions and leverage our asset base – including our technology and customer service platforms, our large and growing customer database and our unique fulfillment capabilities – to achieve both accelerated revenue growth and synergistic cost savings. During fiscal 2005 we plan to focus our marketing and merchandising efforts and investments on achieving double-digit revenue growth in our floral gift business as well as in those complementary gift categories that I have previously mentioned. Furthermore, we expect the changes we are implementing in marketing and mer- chandising for our home and garden gift category will result in a return to sustainable revenue growth for that business. Based on these expectations, we anticipate achieving organic revenue growth in a range of 8-to-10 percent during fiscal 2005 compared with fiscal 2004. In terms of channels, we expect online sales to grow at a double-digit rate during fiscal 2005, while telephonic sales are expected to remain relatively flat. We also expect to achieve further reductions in our operating expense ratio by continuing to leverage the investments we have made in our brands, technology platform, unique fulfillment system and growing customer database. Regarding capital spending plans, our technology and customer service platforms are robust and highly scalable and we do not require significant capital for bricks and mortar facilities. As such, we expect capital expenditures to remain in a range of $10-to-$12 million during fiscal 2005. Based on anticipated net income growth, combined with our business model’s low working capital and capital expenditure requirements, during fiscal 2005 we expect to grow our cash and investments position by approximately 30 percent compared with last year. In summary, we believe we are well positioned to grow our business profitably and thereby build shareholder value during fiscal 2005 and beyond. We thank our associates, investors and business partners for their continued support. Most of all, we thank our customers for trusting us to help them connect with the people that are important in their lives for all of their celebratory occasions. Sincerely, Jim McCann Chairman and CEO January 2005 Sunday Monday Tuesday Tip of the month Water, a flower’s best friend. Fresh cut flowers last longer and look healthier, even in winter... if you keep them well-hydrated. Always be sure that stems are submersed. If your tap water is less than pure, try adding several drops of household bleach to counteract the negative effects of minerals and sediments. Start the new year off right. Welcome to 2005. It’s sure to be a great year, and 1-800-FLOWERS.COM can make all your 2005 celebrations and gifting occasions even better. Visit www.1800flowers.com for money-saving offers and promotions each month featuring some of the most distinctive gifts you’ve ever seen. Also sign up for our free members-only benefits, such as Gift Reminders, Online Order Tracking, Bill Me Later, Express Checkout and much more. 2 9 16 23 30 3 10 4 11 17 Martin Luther King Jr.’s Birthday (observed) 18 25 24 31 Looking for ways to say thanks for the holiday presents you received? Visit www.1800flowers.com for thoughtful thank-you greetings. The perfect gift for all your celebrations Wednesday Thursday Friday Saturday 1 New Year’s Day 5 12 19 26 6 13 20 27 7 14 21 28 8 15 22 29 Check the back pages of this appointment book for valuable coupons! February 2005 Sunday Monday Tuesday Tip of the month Your sweetheart will be charmed, we’re sure. Make your Valentine celebration extra romantic by dangling a charm locket containing a picture of your loved one around the neck of a decanter or bottle of wine. This personal touch will create just the right mood. Shakespeare couldn’t have said it any better. 6 7 1 8 Searching for the perfect words to express your Valentine emotions? Look no further than Expressions Exchange, a free service from 1-800-FLOWERS.COM. With Expressions Exchange you can borrow a broad range of eloquent expressions wordsmithed by our customers and ready to be sent in a digital greeting or attached to a gift. 13 20 27 14 Valentine’s Day 15 21 President’s Day 22 28 Searching for one-of-a-kind gifts that captivate the imagination? Visit www.1800flowers.com to see the Jane Carroll collection of floral artistry. Gifts from the heart are always remembered Wednesday Thursday Friday Saturday 2 Groundhog Day 3 9 16 23 10 17 24 4 11 18 25 5 12 19 26 See the money saving coupons in the back pages of this appointment book. March 2005 Sunday Monday Tuesday Tip of the month Make colorful Easter egg vases. Using a pushpin, pierce each end of an egg then insert a wire through the holes and gently blow out the egg white and yolk into a bowl. Snip an opening at one end of the shell. Let the shell dry, color it and fill with mini daffodils or grape hyacinths for a festive Easter look. Send greetings to someone you care about. 6 At 1-800-FLOWERS.COM, sending a greeting for Easter or any other occasion is easy and fun! Create personalized paper Greeting Cards expressing your thoughts. You can even upload your own photos or artwork and we’ll include them in your cards! Plus, with our Email-A-Bouquet service, you can build a beautiful virtual floral bouquet that you can send for free with a simple click. Visit www.1800flowers.com today. 13 7 14 20 First Day of Spring 21 27 Easter 28 1 8 15 22 29 Know someone who would just love a gift basket? Log on to www.1800flowers.com and www.1800giftbaskets.com for delectable Mama Moore’s BakeshopSM creations and much more. Celebrate the start of spring in thoughtful ways Wednesday Thursday Friday Saturday 2 9 16 23 30 3 10 4 11 17 St. Patrick’s Day 18 25 24 31 5 12 19 26 See the money saving coupons in the back pages of this appointment book. April 2005 Sunday Monday Tuesday Tip of the month Put spring in the air with scented blooms. Like magical perfumes ready to wake us from winter hibernation, scented spring flowers signal that summer will be coming soon. Here are some blooms you can place throughout your home to create glorious springtime scents: daffodils, gardenias, hyacinths, lilacs, mimosas, roses and muscari. 4 11 18 5 12 19 25 Administrative Professionals’ Week Begins 26 Looking for exceptional outdoor gifts and garden accents to welcome in spring? Visit www.plowandhearth.com. Remember all your gifting occasions, the easy way. 3 Birthdays, anniversaries, graduations, weddings, holidays – so many celebrations and gifting occasions to keep track of. 1-800-FLOWERS.COM makes it simple to remember them all! Visit www.1800flowers.com today and sign up for our Gift Reminder Service. You’ll receive automatic email reminders throughout the year! 10 17 24 Flowers are blooming, and emotions are stirring Wednesday Thursday Friday Saturday 1 April Fool’s Day 8 15 22 29 2 9 16 23 Passover Begins at Sunset 30 6 13 20 7 14 21 27 Administrative Professionals’ Day 28 Check the back pages of this appointment book for valuable coupons! May 2005 Sunday Monday Tuesday Have your own gift advisor. Not sure how to select the perfect gift for Mother’s Day? Relax; 1-800-FLOWERS.COM has you covered. Our personal Gift Advisors are knowledgeable, friendly and at your service! Log on to www.1800flowers.com or call 1-800-356-9377 and see how easy we make it to choose a gift that will have mom smiling from ear to ear. 1 8 Mother’s Day 15 22 29 2 9 16 23 3 10 17 24 30 Memorial Day (observed) 31 Visit www.1800flowers.com for same-day or next-day delivery of stunning floral arrangements. All our flowers come with a 100% satisfaction and freshness guarantee. 4 11 18 25 Give Mom a bunch of reasons to smile Wednesday Thursday Friday Saturday 5 Cinco de Mayo 6 National Bring Your Mom to Work Day 7 12 19 26 13 20 27 14 21 28 Tip of the month Color her world with this creative idea. Of course, Mom will appreciate the floral bouquet you give her. She or you can enhance the celebration of fresh flowers even more by adding a drop or two of food coloring to the water in a clear glass vase. Choose a color that complements the arrangement, but don’t overdo...the color should barely tint the water. See the money saving coupons in the back pages of this appointment book. June 2005 Sunday Monday Tuesday Tip of the month Planning a Father’s Day celebration? Maybe the whole family is coming over to salute dear old dad. Add some excitement to your table’s centerpiece by filling Mason jars with colorful fruit or vegetables. Or, float stemmed multi-colored flowers in Mason jars full of water to add to nature’s beauty. 6 13 7 14 Flag Day Buy the perfect gift now, pay later. 5 Dad taught you the importance of shopping smart. Now you can purchase gifts online for Father’s Day without using your credit card. Bill Me Later® service from 1-800-FLOWERS.COM is easy and convenient! Just select your gifts and choose the “Bill Me Later” option during checkout. Visit www.1800flowers.com for details. 12 19 Father’s Day 20 21 First Day of Summer 26 27 28 Does Dad have a sweet tooth? Visit www.1800giftbaskets.com for yummy Mama Moore’s BakeshopSM bakery and confection gifts or www.thepopcornfactory.com for delicious popcorn and candy treats. Let Dad know how special he is Wednesday Thursday Friday Saturday 3 10 17 24 4 11 18 25 1 8 15 22 29 2 9 16 23 30 See the money saving coupons in the back pages of this appointment book. July 2005 Sunday Monday Tuesday Tip of the month Set a fabulous July 4th table. July is highlighted by warm weather celebrations, including Independence Day. Here’s a tip for an outdoor party: wrap sunglasses and suntan lotion in patriotic colored bandannas and place a bundle at each table setting. Your guests will love your ingenuity and thoughtfulness. Fresh ideas for bringing flowers into your life. 3 4 Independence Day 5 Love the beauty of fresh flowers, but not certain how to create floral arrangements yourself? Our inspiring new book called A Year Full of Flowers includes step-by- step instructions and photos for more than 30 easy projects! To order the book, visit www.1800flowers.com or find it at your favorite bookstore. 10 17 11 18 24 Parents’ Day 25 31 12 19 26 Make summer days and nights even more enjoyable with delicious treats you’ll find at www.1800giftbaskets.com and flavorful gourmet choices at www.greatfood.com. Stars and stripes, family and friends Wednesday Thursday Friday Saturday 6 13 20 27 1 8 7 14 Bastille Day 15 21 28 22 29 2 9 16 23 30 See the money saving coupons in the back pages of this appointment book. August 2005 Sunday Monday Tuesday 1 8 2 9 15 National Friendship Week Begins 16 22 29 23 30 Shop online, stay informed. Vacations, family gatherings, picnics. There are many fun celebrations on your mind during summer. So why wonder about the status of an online purchase? With Online Order Tracking from 1-800-FLOWERS.COM, you can check delivery information at www.1800flowers.com any time, in just a few simple steps! 7 14 21 28 Invited to a pool party? Hosting a barbeque? Visit www.1800flowers.com for our amazing “Summer Celebrations” gift collections. Summertime is fun time Wednesday Thursday Friday Saturday 3 10 17 24 31 4 11 18 5 12 19 25 26 6 13 20 27 Tip of the month Do your summer guests a favor. August is a month of entertaining, from pool parties to barbeques to intimate backyard gatherings. Jane Carroll, one of the world’s most innovative floral designers, suggests filling little boxes with miniature floral blossoms to give away as party favors...providing a keepsake so guests remember your celebration for months and years to come. See the money saving coupons in the back pages of this appointment book. September 2005 Sunday Monday Tuesday Tip of the month Dazzlingly different book covers. School is starting and that means textbooks need to be covered. Instead of boring plain covers, pump up the energy by using heavy- duty gift wrapping paper adorned with action figures or mesmerizing designs. Wrapping paper will give you more choices and you’ll probably find that it’s cheaper than ready-made book covers. Enhance your working relationships. 4 5 Labor Day 6 Show your customers, prospects and employees how important they are to you by utilizing Business Gift Services from 1-800-FLOWERS.COM. Call 1-888-755-7474 to speak with an account manager about our wide selection of impressive gift ideas. The bottom line? Thoughtful gifts can help you celebrate business growth! 11 Patriot Day Grandparents’ Day 12 18 25 19 26 13 20 27 In addition to school, September also means Grandparents’ Day. Log on to www.1800giftbaskets.com for delicious gifts every grandparent will adore, and visit www.magiccabin.com or www.hearthsong.com for wonderful children’s gifts. Back to school, back to business Wednesday Thursday Friday Saturday 1 8 2 9 15 16 22 First Day of Fall 23 29 30 7 14 21 28 3 10 17 24 Check the back pages of this appointment book for valuable coupons! October 2005 Sunday Monday Tuesday Tip of the month Bewitching cookies for young and old. For a fun treat that will make your Halloween celebration extra delicious, serve “witch hats.” They’re simple to make: just ice a cookie with chocolate frosting and place a Hershey®’s Kiss® in the cookie’s center. Take the trick out of Halloween treating. 2 3 Rosh Hashanah Begins at Sunset 4 With so many ways to express your Halloween spirit, choosing the right gifts and decorations can be frightening. 1-800-FLOWERS.COM has the perfect solution. Visit www.1800flowers.com for scrump- tious gourmet treats, beautiful floral arrangements, cuddly plush toys and much more! 9 National Children’s Day 10 Columbus Day (observed) 11 16 National Bosses’ Day 17 23 30 24 31 Halloween 18 25 The perfect Halloween treat is just a click away. Visit www.thepopcornfactory.com for yummy popcorn and confections and www.greatfood.com for a wide assortment of delectable goodies. Ghoulishly clever gifts for a delightful Halloween Wednesday Thursday Friday Saturday 1 8 15 Sweetest Day 22 29 5 6 12 Yom Kippur Begins at Sunset 13 19 26 20 27 7 14 21 28 See the money saving coupons in the back pages of this appointment book. November 2005 Sunday Monday Tuesday Tip of the month Cook your Thanksgiving turkey to perfection. Whether you’re planning a Thanksgiving celebration for 2 or 20, turkey is likely to be the main event. If you stuff the bird, allow 2 hours more for cooking. And, use a meat thermometer, which should register 180°F when the turkey is done. The center of the stuffing should be 160°F. Innovative designs, imaginative gifts. It’s a striking, unconventional combination of art, sculpture and premium flowers...it’s the world of Jane Carroll, a wondrous collection of unique gifts and decor available from 1-800-FLOWERS.COM. You may have seen Jane’s stylish creations on Oprah®. To see more, visit www.1800flowers.com. 6 13 20 27 7 14 21 28 1 8 Election Day 15 22 29 Visit www.plowandhearth.com to enhance home and hearth for a warm, inviting holiday look. The holidays are here, celebrate in style Wednesday Thursday Friday Saturday 2 9 16 23 30 3 10 17 4 5 11 Veteran’s Day 12 18 19 26 24 Thanksgiving Day 25 See the money saving coupons in the back pages of this appointment book. December 2005 Sunday Monday Tuesday Tip of the month ‘Tis the season for crafting. Many people love to create homemade crafts for their holiday celebrations. Typically a glue gun is used to assemble crafts. Remember to keep glue sticks in the freezer to protect them from heat and moisture that can cause the glue to form “strings” and clog the nozzle. So many people on your list, so little time. 4 You don’t have a moment to spare, especially during the busy holiday shopping season. Express Checkout from 1-800-FLOWERS.COM can save you precious time by storing your information so you can click through checkout with speed and ease! Visit www.1800flowers.com and find out what fast is all about. 11 18 5 12 19 6 13 20 25 Christmas Day Hanukkah Begins at Sunset 26 First Day of Kwanzaa 27 Nothing can match the glow on young faces during the holidays. Visit www.hearthsong.com and www.magiccabin.com for unique, fun and educational children’s toys. Season’s greetings to you and yours Wednesday Thursday Friday Saturday 1 8 15 7 14 21 First Day of Winter 22 28 29 2 9 16 23 30 3 10 17 24 31 See the money saving coupons on the next page of this appointment book. % 5 1 f f O W L F 3 C : e d o c y e K r e t n E 6 7 6 2 - 1 4 5 - 0 0 8 - 1 l l a c r o 5 0 0 2 , 1 3 r e b m e c e D s e r i p x E % 5 1 f f O S W L F : e d o C n o i t o m o r P r e t n E ) 7 7 3 9 - 6 5 3 - 0 0 8 - 1 ( s r e w o l f - 0 0 8 - 1 l l a c r o 5 0 0 2 , 1 3 r e b m e c e D s e r i p x E % 5 1 f f O f f o % 5 1 t e g o t n o p u o C s i h t e s U . e r o m r o 9 9 . 9 2 $ f o r e d r o r u o y f f o % 5 1 t e g o t n o p u o C s i h t e s U . e r o m r o 9 9 9 2 $ . f o r e d r o r u o y m o c . y r o t c a f n r o c p o p e h t t a e n i l n o r e d r O m o c . s r e w o l f 0 0 8 1 t a e n i l n o r e d r O ® % 5 1 f f O f f o % 5 1 t e g o t n o p u o C s i h t e s U . e r o m r o 9 9 . 9 2 $ f o r e d r o r u o y f f o % 5 1 t e g o t n o p u o C s i h t e s U . e r o m r o 9 9 . 9 2 $ f o r e d r o r u o y % 5 1 f f O % 5 1 f f O % 5 1 f f O S W L F : e d o C n o i t o m o r P r e t n E 2 0 5 2 - 5 2 3 - 0 0 8 - 1 l l a c r o 5 0 0 2 , 1 3 r e b m e c e D s e r i p x E m o c . g n o s h t r a e h t a e n i l n o r e d r O % 5 1 f f O S W L F : e d o C n o i t o m o r P r e t n E 2 1 7 1 - 7 2 6 - 0 0 8 - 1 l l a c r o 5 0 0 2 , 1 3 r e b m e c e D s e r i p x E m o c . h t r a e h d n a w o l p t a e n i l n o r e d r O Selected Financial Data 1-800-FLOWERS.COM, Inc. and Subsidiaries The following tables summarize the Company’s consolidated statement of income and balance sheet data. The Company acquired The Popcorn Factory in May 2002, The Children’s Group in June 2001, disposed of Floral Works in January 2000, and acquired GreatFood.com and TheGift.com in November 1999. The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition and up through the date of disposition. This information should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial state- ments and notes to those statements included elsewhere in this Annual Report. Years Ended June 27, June 29, June 30, July 1, July 2, 2004 2003 2002 2001 2000 (in thousands, except per share data) Consolidated Statement of Income Data: 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, net Income (loss) before income taxes and minority interests Income tax benefit Income (loss) before minority interests Minority interests Net income (loss) Net income (loss) per common share: $263,039 307,470 33,469 603,978 351,111 252,867 172,251 13,799 30,415 14,992 231,457 21,410 320 21,730 19,174 40,904 –– $271,071 265,278 29,269 565,618 324,565 241,053 170,013 13,937 29,593 15,389 228,932 12,121 117 $248,931 218,179 30,095 497,205 293,269 203,936 150,638 13,723 28,179 15,061 207,601 $230,723 182,924 28,592 442,239 267,779 174,460 154,321 16,853 27,043 21,716 219,933 $227,380 116,810 35,338 379,528 237,493 142,035 155,353 16,809 28,975 16,479 217,616 (3,665) (45,473) (75,581) 1,448 4,152 7,422 12,238 (2,217) (41,321) (68,159) –– 706 –– 1,286 12,238 (1,511) (41,321) (66,873) –– –– –– 43 $ 40,904 $ 12,238 $ (1,511) $ (41,321) $ (66,830) Basic Diluted $ $ .62 .60 $ $ 0.19 0.18 $ (0.02) $ (0.02) $ (0.64) $ (0.64) $ (1.10) $ (1.10) Shares used in the calculation of net income (loss) per common share: Basic Diluted 65,959 68,165 65,566 67,670 64,703 64,703 64,197 64,197 60,889 60,889 As of June 27, June 29, June 30, July 1, July 2, 2004 2003 2002 2001 2000 (in thousands) Consolidated Balance Sheet Data: Cash and equivalents and short-term investments Working capital Investments-non current Total assets Long-term liabilities Total stockholders’ equity $103,374 83,704 8,260 261,552 8,874 186,390 $ 61,218 26,875 19,471 214,796 12,820 137,288 $ 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 1 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1-800-FLOWERS.COM, Inc. and Subsidiaries Overview For more than 25 years, 1-800-FLOWERS.COM, Inc. (NASDAQ: FLWS) has been the leading innovator in the floral industry, taking the extra step to help people connect and express themselves quickly and easily with exquisite floral gifts crafted with care by renowned artisans and the nation’s leading florists, as well as distinctive non-floral gifts appropriate for any occasion or sentiment. The Company provides gift solutions same day, any day, offering an unparalleled selection of flowers, plants, gourmet foods and confections, gift baskets and other impressive unique gifts. As always, satisfaction is guaranteed, and customer service is paramount with quick, convenient ordering options, fast and reliable delivery, and gift advisors always available. Customers can shop 1-800-FLOWERS.COM 24- hours a day, seven-days a week via the Internet (http:// www.1800flowers.com); by calling 1-800-FLOWERS® (1-800-356-9377); or by visiting a Company-operated or franchised store. The 1-800-FLOWERS.COM family of brands also includes home decor and garden merchan- dise from Plow & Hearth® (1- 800-627-1712 or http:// www.plowandhearth.com); premium popcorn and specialty treats from The Popcorn Factory® (1-800-541- 2676 or http://www.thepopcornfactory.com); gourmet foods from GreatFood.com® (http://www.greatfood.com); and children’s gifts from HearthSong® (http:// www.hearthsong.com) and Magic Cabin® (http:// www.magiccabin.com). Most 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 fulfill- ment 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 27, 2004, the Company-owned retail fulfillment operations consisted of 22 retail stores and 8 fulfillment centers. Retail fulfillment revenues also includes fees paid to the Company by, and the sale of wholesale products by the Company to, members of its BloomNet® network as well as royalties, fees and sublease rent paid to the Company by its 73 franchise stores. Company-owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs. As such, a significant percent- age 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. 2 Results of Operations The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2004, 2003 and 2002 which ended on June 27, 2004, June 29, 2003 and June 30, 2002, respectively, consisted of 52 weeks. Net Revenues Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Net revenues: Telephonic $263,039 (3.0%) $271,071 8.9% $248,931 Online 307,470 15.9% 265,278 21.6% 218,179 Retail/fulfillment 33,469 14.3% 29,269 (2.7%) 30,095 $603,978 6.8% $565,618 13.8% $497,205 Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. The Company’s combined telephonic and online revenue growth of 6.4% and 14.8% during the fiscal years ended June 27, 2004 and June 29, 2003, respectively, was due to an increase in order volume resulting from: (i) the Company’s strong brand name recognition, (ii) continued leveraging of its existing customer base, and (iii) the success of our marketing and merchandising efforts to enhance revenue growth in our floral gift category and in complimentary categories, including gourmet food gifts, such as the Popcorn Factory line of products acquired in May 2002, gift baskets, candy and children’s gifts. This growth was offset, in part by, slower sales in the home and garden gift product line as a result of internal marketing and merchandising issues, as well as increasingly competitive market conditions. The Company has completed a review of this product line and has begun to implement a marketing plan to enhance product offerings, and the creative look and feel of its catalogs and website. The Company fulfilled approximately 9,322,000, 8,681,000 and 7,172,000 orders through its combined telephonic and online sales channels during the fiscal years ended June 27, 2004, June 29, 2003, and June 30, 2002, respectively, representing increases of 7.4% and 21.0% over the respective prior fiscal years. The growth resulted primarily from increases in online order volume, which increased 15.6% and 24.1%, during the years ended June 27, 2004 and June 29, 2003, respectively, in comparison to prior years, driven by improved conversion of qualified traffic through the Company’s Web sites, and through third-party portals, search engines and affiliates, and the continued migration of customers from the Company’s telephonic sales channel. During the fiscal year ended June 29, 2003, telephonic order volume increased 17.7% over the comparative prior fiscal year, primarily as a result of the acquisition of the Company’s gourmet popcorn product line in May 2002. The Company’s combined telephonic and online sales channel average order value decreased 1.0% and 5.1% to $61.20 and $61.79 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries during the fiscal years ended June 27, 2004 and June 29, 2003, respectively, primarily as a result of product sales mix, and, in fiscal 2003, the addition of the gourmet popcorn product line which has a lower average order value. The Company’s online sales channel contributed 53.9%, 49.5% and 46.7% of the total combined telephonic and online revenues during the fiscal years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. The Company intends to continue to drive revenue growth through its online sales channel and continue the migration of its custom- ers from the telephone to the Web for several important reasons: (i) online orders are less expensive to process than telephonic orders, (ii) online customers can view the Company’s full range of gift offerings, including non- floral gifts, which yield higher gross margin opportuni- ties, (iii) online customers can utilize all of the Company’s services, such as the various gift search functions, order status check and reminder service, thereby deepening the relationship with its customers and leading to increased order rates, and (iv) when customers visit the Company online, it provides an opportunity to interact with customers in an electronic dialog via cost efficient marketing programs. In order to improve overall demand, in response to forecasted economic conditions and analysis of consumer buying patterns within the Company’s available product offerings, during the fiscal year ended June 27, 2004, the Company reallocated its marketing spending, reducing the circulation of certain home and garden gift product catalogs and redirecting those funds to various online and media programs featuring floral gifts. As a result, during the fiscal year ended June 27, 2004, non-floral gift products accounted for 47.8% of total combined telephonic and online net revenues, compared to 49.5% and 45.8% during the years ended June 29, 2003 and June 30, 2002, respectively. The increase in the percentage of non-floral gift products sold during the fiscal year ended June 29, 2003 resulted from the expansion of candy, gift basket and gourmet foods, including the Popcorn Factory line in May 2002. In the future, the Company will continue to emphasize appropriate products and categories to match consumer preferences and economic conditions. Retail/fulfillment revenues for the fiscal year ended June 27, 2004 increased compared to the prior year primarily as a result of enhancements to our BloomNet® network of fulfilling florists and to our Bloomlink commu- nication system, as well as sales of wholesale products to its BloomNet® members. During the fiscal year ended June 29, 2003, retail/fulfillment revenues decreased as compared to the prior year primarily as a result of the sale, closure, or conversion of certain company-owned retail stores into franchised operations. Gross Profit Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Gross profit $252,867 4.9% $241,053 18.2% $203,936 Gross margin % 41.9% 42.6% 41.0% Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfill- ment costs (fees paid directly to florists and fees paid to wire service entities that serve as clearinghouses for floral orders, net of wire service rebates), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues include labor and facility costs related to direct-to-consumer merchandise production operations, as well as facility costs on properties that are sublet to the Company’s franchisees. Gross profit increased during the fiscal years ended June 27, 2004 and June 29, 2003 as a result of increased order volume, and in fiscal 2003, as a result of an improved gross margin percentage. During the fiscal year ended June 27, 2004 gross margin percentage declined by 70 basis points over the prior fiscal year, primarily as a result of product mix, specifi- cally, lower sales of home décor and garden merchan- dise which generate higher gross margins in comparison to the Company’s floral merchandise. Gross margin percentage during the fiscal year ended June 29, 2003 increased over the comparative prior year due to several factors including: (i) increased non-floral product sales, which were further complemented by the acquisition of the Popcorn Factory product line in May 2002 which earns higher gross margins, (ii) improvements in product shipping costs, inventory management and product sourcing, (iii) increases in the Company’s service charge, to align it with industry norms, and (iv) the Company’s continued focus on customer service, whereby stricter control standards and enforcement methods reduced the rate of product credits/returns and replacements. As the Company implements its plans to restore sustainable growth in its home and garden gift line, the Company expects that over the longer term it will continue to grow its higher margin, non-floral business. During fiscal 2005, while varying by quarter due to seasonal changes in product mix, the Company expects that its gross margin percentage will remain consistent with results achieved during the fiscal year ended June 27, 2004. Marketing and Sales Expense Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Marketing and sales $172,251 1.3% $170,013 12.9% $150,638 Percentage of sales 28.5% 30.1% 30.3% 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 mer- chandising activities. Marketing and sales expenses decreased as a percentage of net revenues as a result of volume related operating efficiencies and a reduction in order processing costs. During fiscal 2004, marketing 3 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries and sales expense, as a percentage of net revenue, was further reduced as a result of a net reduction in advertising cost per order, resulting from the aforemen- tioned shift in the mix of products being promoted by the Company, which enabled it to proportionately reduce the circulation of higher cost per order catalogs in favor of lower cost media and online advertising. As a result of the Company’s cost efficient customer retention pro- grams, of the 5.7 million customers who placed orders during the fiscal year ended June 27, 2004, approxi- mately 45.3% represented repeat customers, compared to 42.4% in fiscal 2003 and 39.2% in fiscal 2002. In addition, as a result of the strength of the Company’s brands, combined with its cost-efficient marketing programs, the Company added approximately 3.1 million new customers during the fiscal year ended June 27, 2004, consistent with the prior fiscal year. In order to further execute its business plan, the Company expects to continue to invest in its marketing and sales efforts to acquire new customers, while also leveraging its already significant customer base through cost effective customer retention initiatives. Such spending will be within the context of the Company’s overall marketing plan, which is continually evaluated and revised to reflect the results of the Company’s most recent market research, including the impact of chang- ing economic conditions and consumer preferences, and seeks to determine the most cost-efficient use of the Company’s marketing dollars. Although the Company believes that increased spending in the area of market- ing and sales will be necessary for the Company to continue to grow its revenues, the Company expects that, on an annual basis, marketing and sales expense will continue to decline as a percentage of net revenues. Technology and Development Expense Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Technology and development $13,799 (1.0)% $13,937 1.6% $13,723 Percentage of sales 2.3% 2.5% 2.8% Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Technology and development expense decreased as a percentage of net revenue during the years ended June 27, 2004 and June 23, 2003, and in absolute spending in fiscal 2004, due to the Company’s ability to internalize its development functions, thereby cost effectively enhanc- ing the content and functionality of the Company’s Web sites and improving the performance of the fulfillment and database systems, while adding improved operational flexibility and supplemental back-up and system redun- dancy. During the fiscal years ended June 27, 2004, June 29, 2003, and June 30, 2002, the Company expended $22.8 million, $22.2 million and $24.5 million on technol- ogy and development, of which $9.0 million, $8.3 million and $10.8 million, respectively, has been capitalized. Although the Company believes that continued investment in technology and development is critical to attaining its strategic objectives, the Company expects that its spending in comparison to prior fiscal years will continue to decrease as a percentage of net revenues due to the expected benefits from previous investments in the Company’s current technology platform. General and Administrative Expenses Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) General and administrative $30,415 2.8% $29,593 5.0% $28,179 Percentage of sales 5.0% 5.2% 5.7% General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate ex- penses. Although declining as a percentage of net revenues, general and administrative expenses increased during the fiscal years ended June 27, 2004 and June 29, 2003, in comparison to their respective prior years, primarily as a result of increased health and business insurance costs, partially offset by various cost reduction initiatives. The increase in fiscal 2003 was also attributable to the incremental costs associated with the acquisition of The Popcorn Factory in May 2002. The Company believes that its current general and administrative infrastructure is sufficient to support existing requirements, and as such, while increasing in absolute dollars, general and administrative expenses on an annual basis are expected to continue to decline as a percentage of net revenues. Depreciation and Amortization Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Depreciation and amortization $14,992 (2.6)% $15,389 2.2% $15,061 Percentage of sales 2.5% 2.7% 3.0% Depreciation and amortization expense decreased during the fiscal year ended June 27, 2004, in compari- son to the prior year, due to the declining rate of capital additions, and that certain software components of the Company’s order entry, customer service, fulfillment and database systems, are now fully depreciated. The increase in depreciation and amortization expense during the fiscal year ended June 29, 2003, in comparison to the prior fiscal year, was primarily the result of the incremental deprecia- 4 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries tion and amortization associated with The Popcorn Factory, which was acquired in May 2002. Although the Company believes that continued investment in its infrastructure, primarily in the areas of technology and development, is critical to attaining its strategic objectives, the Company expects that deprecia- tion and amortization will continue to decrease as a percentage of net revenues in comparison to prior years. Other Income (Expense) Years Ended June 27, June 29, June 30, 2004 % Change 2003 % Change 2002 (in thousands) Interest income $ 1,324 14.4% $ 1,157 (57.0%) $ 2,688 Interest expense (663) 32.5% (982) 21.1% (1,245) Other, net (341) 487.9% (58) (126.0%) 5 $ 320 173.5% $ 117 (91.9%) $ 1,448 Other income (expense) consists primarily of interest income earned on the Company’s investments and available cash balances, offset by interest expense, primarily attributable to the Company’s capital leases and other long-term debt. The increase in other income (expense) during the fiscal year ended June 27, 2004, in comparison to the prior fiscal year, resulted primarily from: (i) an increase in interest income resulting from higher invested cash balances generated from operations, and (ii) a reduction in interest expense associated with the refinancing of a series of fixed and variable rate mortgage and equipment notes in June 2003, partially offset by losses incurred upon closure/conversion of certain retail stores. The decrease in other income (expense) during the fiscal year ended June 29, 2003, in comparison to the prior fiscal year, was primarily due to a decline in interest income resulting from a decrease in cash and investment balances in order to fund capital expenditures and the acquisition of The Popcorn Factory in May 2002, as well as the decline of the Company’s average rate of return on its investments, partially offset by the decline of interest expense due to the decline in interest rates on the Company’s variable rate long-term debt. Income Taxes During the fiscal year ended June 27, 2004, the Company recorded an income tax benefit of approximately $19.2 million (net) due to the removal of the Company’s valuation allowance on its deferred tax assets which consisted primarily of net operating loss carryforwards (see below), offset in part by income tax expense for federal alternative minimum tax and various state taxes resulting from state tax law changes that deferred the use of available net operating losses for state purposes. At June 27, 2004, management of the Company reassessed the valuation allowance previously estab- lished against its net deferred tax assets. Based on the Company’s earnings history and projected future taxable income, management determined that it is more likely than not that the deferred tax assets would be realized. Accordingly, the Company removed the valuation allowance of approximately $30.0 million from 5 its deferred tax assets resulting in the recognition of an income tax benefit of approximately $20.8 million, a reduction of goodwill of approximately $3.1 million, related to the acquired net operating losses of GreatFood.com, and an increase in additional paid-in- capital of approximately $6.1 million related to income tax benefits associated with employee stock option exercises. The favorable impact of the income tax benefit has distorted the trends in our net income and will impact the comparability of our net income with other periods. During fiscal 2005, the Company anticipates an effective rate of approximately 41%. During the fiscal year ended June 29, 2003, the Company provided no income tax provision due to the availability of net operating loss carryforwards. During the fiscal year ended June 30, 2002, the Company recorded a tax benefit related to previously paid income taxes of approximately $0.7 million as a result of tax law changes which extended the period for which compa- nies were allowed to carry-back losses. At June 27, 2004, the Company’s federal and state net operating loss carryforwards were approximately $72.1 million, which, if not utilized, will begin to expire in fiscal year 2020. Liquidity and Capital Resources At June 27, 2004, the Company had working capital of $83.7 million, including cash and equivalents and short-term investments of $103.4 million, compared to working capital of $26.9 million, including cash and equivalents and short-term investments of $61.2 million, at June 29, 2003. In addition to cash and short-term investments, at June 27, 2004 and June 29, 2003, the Company maintained approximately $8.3 million and $19.5 million of long-term investments, respectively, consisting primarily of investment grade corporate and U.S. government securities. Net cash provided by operating activities of $42.1 million for the fiscal year ended June 27, 2004 was primarily attributable to earnings, adjusted for deprecia- tion and amortization, deferred income taxes and other non-cash charges, which in total amounted to $35.8 million, as well as decreases in other assets, primarily related to recoverable income taxes. Net cash used in investing activities of $9.6 million for the fiscal year ended June 27, 2004 was principally comprised of capital expenditures related to the Company’s technology infrastructure. Net cash used in financing activities was $0.8 million for the fiscal year ended June 27, 2004, resulting primarily from the repayment of amounts outstanding under the Company’s credit facilities and long-term capital lease obligations, offset in part by the net proceeds received upon the exercise of employee stock options and employee stock purchase plan. The Company has a $5.0 million revolving line of credit, renewable November 30, 2004 (none outstanding at any point during the fiscal year ending June 27, 2004), available for working capital purposes. Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries At June 27, 2004, the Company’s contractual obligations consist of: Payments due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years (in thousands) Long-term debt Capital lease obligations Operating lease obligations Sublease obligations Other cash obligations (*) Purchase commitments (**) $ 5,589 3,495 11,788 9,692 228 25,894 $ 1,284 1,738 4,417 2,781 228 25,894 $ 2,751 1,732 3,490 3,670 –– –– $ 1,554 19 1,570 2,009 –– –– $ –– 6 2,311 1,232 –– –– Total $ 56,686 $ 36,342 $ 11,643 $ 5,152 $ 3,549 (*) Other cash obligations include $0.2 million of franchise lease guarantees. (**) Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. On September 16, 2001, the Company’s Board of Directors approved the repurchase of up to $10.0 million of the Company’s Class A common stock. Although no repurchases have been made as of June 27, 2004, any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its financial position and results of operations are based upon the consolidated financial statements of 1-800- FLOWERS.COM, Inc., which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inven- tory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experi- ence 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 assump- tions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of its consolidated financial statements. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers or franchisees to make required payments. If the financial condition of the Company’s customers or franchisees were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company states inventory at the lower of cost or market. In assessing the realization of inventories, we are required to make judgments as to future demand requirements and compare that with inventory levels. It is possible that changes in consumer demand could cause a reduction in the net realizable value of inventory. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and is evalu- ated annually for impairment. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits consumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. The Company periodically evaluates acquired businesses for potential impairment indicators. Judg- ment regarding the existence of impairment indicators is based on market conditions and operational perfor- mance of the Company. Future events could cause the Company to conclude that impairment indicators exist and that goodwill and other intangible assets associ- ated with our acquired businesses is impaired. Capitalized Software The carrying value of capitalized software, both pur- chased and internally developed, is periodically reviewed for potential impairment indicators. Future events could cause the Company to conclude that impairment indicators exist and that capitalized software is impaired. Income Taxes The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company has recognized as a deferred tax asset the tax benefits associated with losses related to 6 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries operations, which are expected to result in a future tax benefit. Realization of this deferred tax asset assumes that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that we consider in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be imple- mented to realize the deferred tax assets. Quantitative and Qualitative Disclosures About Market Risk The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and investment grade corporate and U.S. government securities. Under its current policies, the Company does not use interest rate derivative 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 state- ments” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company’s current expectations, assumptions, estimates and projections about its business and the Company’s industry. These forward-looking statements involve risks and 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 under the caption “Business - Risk Factors that May Affect Future Results” and elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Annual Report 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 2004 and 2003. The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly the Company’s results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Three Months Ended June 27, Mar. 28, Dec. 28, Sept. 28, June 29, Mar. 30, Dec. 29, Sep. 29, 2004 2004 2003 2003 2003 2003 2002 2002 (in thousands) Net revenues: Telephonic Online Retail fulfillment Total net revenues Cost of revenues Gross Profit Operating expenses: $58,443 93,135 9,989 161,567 98,039 63,528 $50,851 74,521 8,697 134,069 79,429 54,640 $113,374 $ 40,371 48,936 5,853 95,160 56,093 39,067 90,878 8,930 213,182 117,550 95,632 $ 62,254 84,133 8,456 154,843 91,588 63,255 $52,287 $113,999 75,750 7,680 197,429 107,335 90,094 64,595 7,239 124,121 73,095 51,026 Marketing and sales Technology and development General and administrative Depreciation and amortization 38,950 3,289 7,187 3,660 53,086 Total operating expenses 10,442 Operating income (loss) Other income (expense), net 455 Income (loss) before income taxes 10,897 Income tax benefit (provision) 19,532 Net income (loss) Net income (loss) per share: 37,693 66,762 3,576 3,503 7,872 7,577 3,572 3,843 52,713 81,685 13,947 1,927 82 23 13,970 (292) $ 13,678 28,846 3,431 7,779 3,917 43,973 (4,906) (240) (5,146) –– 40,372 3,621 7,381 3,698 55,072 8,183 79 8,262 –– $ (5,146) $ 8,262 35,710 3,323 7,343 3,594 49,970 1,056 127 1,183 –– $ 1,183 64,978 3,415 7,462 4,068 79,923 10,171 (84) 10,087 –– $ 10,087 2,009 (66) $30,429 $ 1,943 Basic Diluted $ 0.46 $ 0.03 $ 0.45 $ 0.03 $ 0.21 $ 0.20 $ (0.08) $ $ (0.08) $ 0.13 0.12 $ 0.02 $ 0.02 $ 0.15 $ 0.15 $ (0.11) $ (0.11) The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into gift, home, gourmet and other related products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates the highest proportion of the Company’s annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother’s Day, Administrative Professionals Week and Easter, revenues also rise during the Company’s fiscal fourth quarter, in relation to its fiscal first and third quarters. 7 $42,531 40,800 5,894 89,225 52,547 36,678 28,953 3,578 7,407 4,029 43,967 (7,289) (5) (7,294) –– $ (7,294) Consolidated Balance Sheets 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except share data) June 27, June 29, 2004 2003 Assets Current Assets: Cash and equivalents Short-term investments Receivables, net Inventories Deferred income taxes Prepaid and other Total current assets Property, plant and equipment, net Investments Goodwill Other intangibles, net Deferred income taxes 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: $ 80,824 22,550 9,013 19,625 16,463 1,517 149,992 42,460 8,260 34,529 2,598 13,548 10,165 $261,552 $ 63,266 3,022 66,288 6,062 2,812 75,162 $ 49,079 12,139 7,767 20,370 2,208 91,563 46,500 19,471 37,692 3,211 16,359 $ 214,796 $ 61,663 3,025 64,688 9,124 3,696 77,508 Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,428,143 and 28,679,848 shares issued in 2004 and 2003, respectively 295 287 Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465 and 42,399,915 shares issued in 2004 and 2003, respectively 424 421 247,636 255,829 Additional paid-in capital Retained deficit (67,047) (107,951) Treasury stock, at cost – 52,800 Class A and 5,280,000 Class B shares (3,108) (3,108) 137,288 Total stockholders’ equity 186,390 Total liabilities and stockholders’ equity $261,552 $214,796 See accompanying notes. 8 Consolidated Statements of Income 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except per share data) Years Ended June 27, June 29, June 30, 2004 2003 2002 Net revenues Cost of revenues Gross profit $603,978 351,111 252,867 $565,618 324,565 241,053 $497,205 293,269 203,936 Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization Total operating expenses Operating income (loss) 172,251 13,799 30,415 14,992 231,457 21,410 170,013 13,937 29,593 15,389 228,932 12,121 150,638 13,723 28,179 15,061 207,601 (3,665) Other income (expense): Interest income 2,688 Interest expense (663) (982) (1,245) 5 Other, net 1,448 (341) 320 (58) 117 Total other income, net 1,157 1,324 Income (loss) before income taxes Income tax benefit 21,730 19,174 12,238 –– (2,217) 706 Net income (loss) $ 40,904 $ 12,238 $ (1,511) Net income (loss) per common share: Basic Diluted $ $ 0.62 0.60 $ $ 0.19 0.18 $ (0.02) $ (0.02) Weighted shares used in the calculation of net income (loss) per common share: Basic Diluted 65,959 68,165 65,566 67,670 64,703 64,703 See accompanying notes. 9 N e t i n c o m e c o m m o n s t o c k 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 n v e r s i o n o f C l a s s B c o m m o n s t o c k i n C l a s s A l b e n e f i t s f r o m e m p o y e e s t o c k o p t i o n e x e r c i s e s R e v e r s a l o f v a l u a t i o n a l l o w a n c e r e l a t e d t o i n c o m e t a x 2 5 5 , 4 5 0 – – 4 4 0 , 7 4 1 5 2 , 1 0 4 – – – – 3 – – 1 4 ( 2 5 5 , 4 5 0 ) – – – – – – – – – – ( 3 ) – – – – – – 6 , 0 7 2 1 , 7 3 0 3 9 1 – – – – 4 0 , 9 0 4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – l B a a n c e a t J u n e 2 9 , 2 0 0 3 2 8 , 6 7 9 , 8 4 8 2 8 7 4 2 , 3 9 9 , 9 1 5 4 2 4 2 4 7 , 6 3 6 ( 1 0 7 , 9 5 1 ) 5 , 3 3 2 , 8 0 0 ( 3 , 1 0 8 ) S e e a c c o m p a n y i n g n o t e s . B a l a n c e a t J u n e 2 7 , 2 0 0 4 2 9 , 4 2 8 , 1 4 3 $ 2 9 5 4 2 , 1 4 4 , 4 6 5 $ 4 2 1 $ 2 5 5 , 8 2 9 $ ( 6 7 , 0 4 7 ) 5 , 3 3 2 , 8 0 0 $ ( 3 , 1 0 8 ) $ , 1 8 6 3 9 0 , 4 0 9 0 4 – – , 6 0 7 2 , 1 7 3 4 3 9 2 , 1 3 7 2 8 8 , 1 2 2 3 8 – – 2 9 8 8 4 4 N e t i n c o m e c o m m o n s t o c k C o n v e r s o n o f i l C a s s B c o m m o n s t o c k i l n t o C a s s A 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 N e t l o s s c o m m o n s t o c k i E x e r c s e o f s t o c k o p t i o n s l B a a n c e a t J u n e 3 0 , 2 0 0 2 C o n v e r s o n o f i l C a s s B c o m m o n s t o c k i l n t o C a s s A w i t h t h e a c q u s i t i o n o f i T h e P o p c o r n F a c t o r y i E x e r c s e o f s t o c k o p t i o n s l B a a n c e a t J u y 1 , 2 0 0 1 l 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 I s s u a n c e o f s h a r e s 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 8 1 , 0 1 0 – – 2 2 8 , 6 6 6 5 0 , 4 9 5 – – 1 1 2 ( 8 1 , 0 1 0 ) – – – – – – – – ( 1 ) – – – – – – – – 2 9 7 8 4 2 1 2 , 2 3 8 – – – – – – – – – – – – – – – – – – – – – – S h a r e s A m o u n t S h a r e s A m o u n t l C a s s A l C a s s B C o m m o n S t o c k C a p i t a l i P a d - I n 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 ( 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 2 7 , 2 0 0 4 , J u n e 2 9 , 2 0 0 3 , a n d J u n e 3 0 , 2 0 0 2 1 - 8 0 0 - F L O W E R S . C O M , I n c . a n d S u b s i d i a r i e s 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 l d e r s ’ E q u i t y S h a r e s A m o u n t E q u i t y T r e a s u r y S t o c k T o t a l t S o c k h o d e r s l ’ 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 ) 5 , 3 3 2 , 8 0 0 $ ( 3 , 1 0 8 ) $ 1 1 7 8 1 6 , 5 4 7 , 6 0 0 – – 3 5 3 , 0 0 3 7 8 8 , 0 0 8 4 4 , 1 9 1 – – 5 4 – – 8 ( 5 4 7 , 6 0 0 ) – – – – – – – – – – ( 5 ) – – – – – – 4 , 9 8 1 2 , 2 2 8 3 8 2 – – – – ( 1 , 5 1 1 ) – – – – – – – – – – – – – – – – – – – – – – – – – – – – , ( 1 5 1 1 ) – – , 4 9 8 5 , 2 2 3 6 3 8 2 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 ) 5 , 3 3 2 , 8 0 0 ( 3 , 1 0 8 ) , 1 2 3 9 0 8 10 Consolidated Statements of Cash Flows 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands) Years Ended June 27, June 29, June 30, 2004 2003 2002 Operating activities: Net income (loss) Reconciliation of net income (loss) to net cash $ 12,238 40,904 $ (1,511) $ provided by operations: Depreciation and amortization Deferred income taxes Bad debt expense Other non-cash items Changes in operating items, excluding the effects of acquisitions: Receivables Inventories Prepaid and other Accounts payable and accrued expenses Other assets Other liabilities Net cash provided by operating activities Investing activities: Acquisitions, net of cash acquired Capital expenditures, net of non-cash expenditures – $0, $0, and $2,894 in 2004, 2003 and 2002, respectively Purchases of investments Proceeds from sales of investments Other Net cash used in investing activities Financing activities: Proceeds from employee stock options/stock purchase plan Repayment of notes payable and bank borrowings Payments of capital lease obligations Net cash used in financing activities 14,992 (20,776) 437 250 (1,683) 745 691 1,624 5,829 (884) 42,129 (10,576) (62,584) 63,384 217 (9,559) 2,126 (1,176) (1,775) (825) 15,389 15,061 426 72 107 425 1,152 (4,723) 12 (2,493) (2,555) 1 19,519 (1,031) (7) (215) 2,264 (3,544) 59 11,608 (7,037) (10,269) (11,994) (56,412) (22,798) 6,693 495 (9,100) (34,641) 57,191 390 1,142 (1,492) (1,591) (1,941) 2,618 (826) (2,054) (262) Net change in cash and equivalents Cash and equivalents: Beginning of year End of year 31,745 8,478 (23,295) 49,079 80,824 $ 40,601 $ 49,079 63,896 $ 40,601 Supplemental Cash Flow Information: - Interest paid amounted to $663, $982 and $1,245 for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. - The Company received tax refunds, net of income taxes paid of approximately $1,476, $0 and $706 for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. See accompanying notes. 11 Notes to Consolidated Financial Statements 1-800-FLOWERS.COM, Inc. and Subsidiaries June 27, 2004 Note 1. Description of Business 1-800-FLOWERS.COM, Inc. (“1-800-FLOWERS.COM”) is a leading gift retailer, providing a broad range of thoughtful gift products including flowers, plants, gourmet foods, candies, gift baskets, and other unique gifts to our customers around the world. The 1-800- FLOWERS.COM family of brands also includes Plow & Hearth, a direct marketer of home decor and garden merchandise, GreatFood.com, a source for gourmet products, The Popcorn Factory, a manufacturer and direct marketer of premium popcorn and specialty food gifts, and HearthSong and Magic Cabin, direct market- ers of unique children’s toys and games. The Company operates in one business segment, providing its customers with convenient, multi-channel access via the Internet, telephone, catalogs and retail stores. Note 2. Significant Accounting Policies Fiscal Year The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30th. Fiscal years 2004, 2003 and 2002, which ended June 27, 2004, June 29, 2003 and June 30, 2002, respec- tively, consisted of 52 weeks. Basis of Presentation The consolidated financial statements include the accounts of 1-800-FLOWERS.COM and its wholly- owned subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assump- tions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Equivalents Cash and equivalents consist of demand deposits with banks, highly liquid money market funds, United States government securities, overnight repurchase agreements and commercial paper with maturities of three months or less when purchased. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting. Property, Plant and Equipment Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives using the straight-line method. Amortization of leasehold improvements and capital leases are calcu- lated 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 improve- ments. Estimated useful lives are periodically reviewed, and where appropriate, changes are made prospectively. The Company’s property, plant and equipment is depreci- ated using the following estimated lives: Buildings Leasehold improvements Furniture, Fixtures and Equipment Software 40 years 3 - 10 years 3 - 10 years 3 years Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangibles are not amortized, but are evaluated annually in the Company’s fiscal fourth quarter for impairment. To date, there has been no impairment of these assets. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits consumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. Deferred Catalog Costs The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion with actual sales from the correspond- ing catalog over a period not to exceed 26-weeks. Included within other assets was $3.8 million and $2.6 million at June 27, 2004 and June 29, 2003, respec- tively, 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 27, 2004, June 29, 2003 and June 30, 2002, there were no significant unrealized gains or losses. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. Fair Values of Financial Instruments The recorded amounts of the Company’s cash and equivalents, short-term investments, receivables, accounts payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of investments, including available-for-sale securities, is based on quoted market prices where available. The fair value of the Company’s long-term obligations are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method, the Company’s fair value of long-term obliga- tions was not significantly different than the carrying values at June 27, 2004 and June 29, 2003. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents, investments and accounts receivable. The Company maintains cash 12 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries and equivalents and investments with high credit, quality financial institutions. Concentration of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers and their dispersion throughout the United States, and the fact that a substantial portion of receivables are related to balances owed by major credit card companies. Allowances relating to consumer, corporate and franchise accounts receivable ($1.4 million and $1.3 million at June 27, 2004 and June 29, 2003, respec- tively) have been recorded based upon previous experience and management’s evaluation. Revenue Recognition Net revenues are generated by online, telephonic and retail fulfillment operations and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Cost of Revenues Cost of revenues consists primarily of florist fulfill- ment costs (fees paid directly to florists and fees paid to wire service entities that serve as clearinghouses for floral orders, net of wire service rebates), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues includes labor and facility costs related to direct-to-consumer merchandise production opera- tions, as well as facility costs on properties that are sublet to the Company’s franchisees. Marketing and Sales Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, interactive marketing agreements, retail store and fulfillment operations (other than costs included in cost of revenues), and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and mer- chandising activities. The Company expenses all advertising costs, with the exception of catalog costs (see Deferred Catalog Costs above) at the time the advertisement is first shown. Advertising expense was $91.1 million, $88.9 million and $69.6 million for the years ended June 27, 2004, June 29, 2003 and June 30, 2002, respectively. Technology and Development Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its Web sites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Costs associated with the acquisition or development of software for internal use are capitalized if the software is expected to have a useful life beyond one year and amortized over the software’s useful life, typically three years. Costs associated with repair, maintenance or the development of Web site content are expensed as incurred as the useful lives of such software modifica- tions are less than one year. 13 Stock-Based Compensation The Company accounts for its employee stock option and stock purchase plans under the recognition and measurement principles of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. Under APB No. 25, no stock-based compen- sation is reflected in net income, as all options granted under the plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant and the related number of shares granted is fixed at that point in time. The following table illustrates the effect on net income (loss) per share as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Stan- dards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Account- ing for Stock-Based Compensation – Transition and Disclosure (see Note 9, “Stock Option Plans”): Years Ended June 27, June 29, June 30, 2004 2003 2002 (in thousands, except per share data) Net income (loss), as reported Less: FAS 123 stock based $40,904 $12,238 $(1,511) compensation (*) 1,339 7,803 5,447 Pro Forma net income (loss) $39,565 $ 4,435 $(6,958) Net income (loss) per share: Basic - As reported Basic - Pro forma Diluted - As reported Diluted - Pro forma $ 0.62 $ 0.60 $ 0.60 $ 0.58 $ $ $ $ 0.19 0.07 0.18 0.07 $ (0.02) $ (0.11) $ (0.02) $ (0.11) (*)Note: During fiscal 2004, FAS 123 stock based compensation is net of the income tax benefit, of $6.1 million, associated with the removal of the valuation allowance on deferred tax assets arising from employee stock option exercises. Comprehensive Income (Loss) For the years ended June 27, 2004, June 29, 2003 and June 30, 2002, the Company’s comprehensive income (losses) were equal to the respective net income (losses) for each of the periods presented. Net Income (Loss) Per Share Basic net income (loss) per common share is com- puted using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting of employee stock options) outstand- ing during the period. Diluted net loss per common share is computed using the weighted-average number of common shares and excludes dilutive potential common shares outstanding, as their effect is antidilutive. Reclassifications Certain balances in the prior fiscal years have been reclassified to conform with the presentation in the current fiscal year. Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 3. Acquisitions and Disposition Acquisition of Selected Assets of The Popcorn Factory On May 3, 2002, the Company extended the breadth of its gourmet food product assortment when it completed the acquisition of selected operating assets and liabilities of The Popcorn Factory, a manufacturer and direct marketer of premium popcorn and specialty food gifts. The purchase price of approximately $12.6 million, including $0.3 million of transaction costs, was comprised of $7.3 million used to retire The Popcorn Factory’s outstanding debt and the issuance of 353,003 shares of the Company’s Class A common stock, valued at approximately $5.0 million, based upon the average closing price of the Company’s common stock on the date of and the two days preceding and following the closing of the transaction. The acquisition was accounted for as a purchase and, accordingly, acquired assets and liabilities are recorded at their fair values, and the operating results of The Popcorn Factory have been included in the Company’s consolidated results of operations since the date of acquisition. The excess of the purchase price over the fair market value of net assets acquired of $12.0 million was allocated to goodwill. The purchase price allocation of The Popcorn Factory business resulted in the following condensed balance sheet of assets acquired and liabilities assumed. The Popcorn Factory Purchase Price Allocation were allocated to customer list, and is being amortized over the asset’s determinable useful life of 3 years. Pro forma Results of Operation The following unaudited pro forma consolidated financial information has been prepared as if the acquisition of The Popcorn Factory had taken place at the beginning of fiscal year 2002. The following unau- dited pro forma information is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisition taken place at the beginning of the periods presented. Years Ended June 27, June 29, June 30, 2004 2003 2002 (as reported) (as reported) (pro forma) (in thousands, except per share data) Net revenues Income (loss) from operations Net income (loss) Net income (loss) per common share $603,978 $565,618 $528,103 $ 21,410 $ 40,904 $ 12,121 $ 12,238 $ (6,407) $ (4,688) Basic Diluted $ 0.62 $ 0.60 $ 0.19 $ 0.18 $ (0.07) $ (0.07) Note 4. Goodwill and Intangible Assets The change in the net carrying amount of goodwill is as follows: June 27, June 29, 2004 2003 (in thousands) Goodwill - beginning of year Removal of deferred tax asset valuation allowance related to net operating losses acquired from GreatFood.com, Inc. Other Goodwill - end of year $37,692 $37,772 (3,163) –– $34,529 –– (80) $37,692 (in thousands) Current assets Property, plant and equipment Intangible assets Goodwill(*) Total assets acquired Current liabilities Non-current liabilities Total liabilities assumed Net assets acquired $ 1,704 1,061 1,120 12,001 15,886 3,120 142 3,262 $12,624 (*) Approximately $12.0 million is expected to be deductible for tax purposes. The Popcorn Factory acquisition resulted in $1.1 million in total intangible assets acquired, other than goodwill, with $0.2 million allocated to trademarks with indefinite lives. The remaining $0.9 million of acquired intangibles 14 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries The Company’s intangible assets consist of the following: June 27, June 29, 2004 2003 Gross Gross Amortization Carrying Accumulated Carryin g Accumulated Period Amount Amortization Net Amo unt Amortization Net (in thousands) Intangible assets with determinable lives: Investment in licenses Customer lists Other 14-16 years 3 years 20 years Trademarks with indefinite lives Total intangible assets –– $4,927 910 194 6,031 476 $6,507 $3,115 657 137 3,909 –– $3,909 $1,812 253 57 2,122 476 $2,598 $4,927 910 171 6,008 476 $6,484 $2,792 354 127 3,273 –– $3,273 $2,135 556 44 2,735 476 $3,211 (in thousands) Less current maturities of The amortization of intangible assets for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 was $0.6 million, $0.9 million and $0.7 million, respectively. Future estimated amortization expense is as follows: 2005 - $0.6 million, 2006 - $0.3 million, 2007 - $0.3 million, 2008 - $0.3 million, and 2009 - $0.3 million, and thereafter - $0.3 million. Note 5. Property, Plant and Equipment June 27, June 29, 2004 2003 Computer equipment Software Telecommunication equipment Leasehold improvements Building and building improvements Equipment Furniture and fixtures Land Accumulated depreciation and amortization $41,173 36,321 6,842 11,767 12,038 8,016 3,755 666 $37,429 31,712 6,411 12,267 11,454 7,160 3,712 666 120,578 110,811 78,118 64,311 $46,500 $42,460 Note 6. Long-Term Debt June 27, June 29, 2004 2003 (in thousands) Commercial notes and revolving credit line (1-2) Seller financed acquisition obligations (3-4) Obligations under capital leases (see Note 12) long-term debt and obligations under capital leases $5,504 $6,612 85 145 3,495 9,084 5,392 12,149 3,022 $6,062 3,025 $9,124 The following notes and credit lines relate to obligations arising from, and collateralized by, the underlying assets of the Company’s Plow & Hearth facility in Madison, Virginia. (1) $5,000,000 revolving credit line, renewable on November 30, 2004 (none outstanding at June 27, 2004), bearing interest equal to the monthly LIBOR Index plus 1.75% per annum (3.09% at June 27, 2004). (2) $6,612,000 note dated June 27, 2003, ($5,504,000 outstanding at June 27, 2004), bearing 15 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries interest at 5.44% per annum. The note, which resulted from the consolidation and refinancing of a series of fixed and variable rate mortgage and equipment notes in June 2003, is payable in 60 equal monthly install- ments of principal and interest commencing August 1, 2003. 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: (3) $275,000 promissory note dated November 1, 1994 ($16,000 outstanding at June 27, 2004), bearing interest at 8% per annum. The note is payable in 120 equal monthly installments of principal and interest commencing December 1, 1994. (4) $160,000 non-interest bearing promissory note dated September 30, 1999 ($69,000 outstanding at June 27, 2004). The note is payable in 8 annual installments commencing August 2000. As of June 27, 2004, long-term debt maturities, excluding amounts relating to capital leases, are as follows: Year Debt Maturities (in thousands) 2005 2006 2007 2008 $1,284 1,338 1,413 1,554 $5,589 Note 7. Income Taxes Significant components of the income tax benefit are as follows: Years Ended June 27, June 29, June 30, 2004 2003 2002 (in thousands) Current provision (benefit): Federal State Deferred benefit: Federal State $ $ 677 923 1,600 (15,796) (4,980) (20,776) Income tax benefit $ (19,174) $ –– –– –– –– –– –– –– $ (706) –– (706) –– –– –– $ (706) A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows: Years Ended 35.0% June 27, June 29, June 30, 2004 2003 2002 Tax at U.S. statutory rates State income taxes, net of federal tax benefit Goodwill amortization Tax settlements Change in tax rates Change in valuation (3.6) 5.9 1.0 13.8 2.7 –– –– 4.2 –– –– 2.8 .5 34.0% (34.0)% allowance Other (140.1) 6.7 (88.2)% (39.7) (1.2) 0.0% (8.6) 0.6 (31.8)% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred income tax assets (liabilities) are as follows: Years Ended June 27, June 29, June 30, 2004 2003 2002 (in thousands) Deferred income tax assets: Net operating loss carryforwards Accrued expenses and reserves Valuation allowance Deferred tax liabilities: $27,878 $34,247 $37,946 3,463 3,031 3,624 –– (36,523) (38,242) Installment sales (39) (53) (54) Tax in excess of book depreciation (1,291) (1,295) (2,681) Net deferred income tax assets $30,011 $ –– $ –– At June 27, 2004, management of the Company reassessed the valuation allowance previously estab- lished against its net deferred income tax assets. Based on the Company’s earnings history and projected future taxable income, management determined that it is more likely than not that the deferred income tax assets would be realized. Accordingly, the Company removed the valuation allowance of approximately $30.0 million from its deferred income tax assets resulting in the recogni- tion of an income tax benefit of approximately $20.8 million, a reduction of goodwill of approximately $3.1 million, related to the acquired net operating losses of GreatFood.com, and an increase in additional paid-in- 16 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries capital of approximately $6.1 million related to income tax benefits associated with employee stock option exercises. During the fiscal year ended June 30, 2002, the Com- pany recorded a benefit related to previously paid income taxes of approximately $0.7 million as a result of tax law changes which extended the period for which companies were allowed to carry-back losses. At June 27, 2004, the Company’s federal and state net operating loss carryforwards were approximately $72.1 million, which, if not utilized, will begin to expire in fiscal year 2020. Note 8. Capital Stock Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters pre- sented 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 com- mon stock at any time on a one-for-one share basis. Each share of Class B common stock will automati- cally convert into one share of Class A common stock upon its transfer, with limited exceptions. On September 16, 2001, the Company’s Board of Directors approved the repurchase of up to $10.0 million of the Company’s Class A common stock. Any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash. No repurchases had been made as of June 27, 2004. Note 9. Stock Option Plans In December 2003, the Company’s Board of Direc- tors and shareholders approved the 1-800- FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the “Plan”). The Plan is a broad-based, long-term incentive program that is intended to attract, retain and motivate employees, consultants and directors to achieve the Company’s long-term growth and profitability objectives, and therefore align stock- holder and employee interests. The Plan provides for the grant to eligible employees, consultants and directors of stock options, share appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and other share-based awards (collectively “Awards”). The Plan reserves 7,500,000 shares of Common Stock, which is approximately the amount of shares which had been previously available for issuance under the Company’s 1999 Stock Incentive Plan. No further awards will be issued under the 1999 Stock Incentive Plan. During a calendar year i) the maximum number of shares with respect to which options and SARs may be granted to an eligible participant under the Plan will be 1,000,000 shares, and ii) the maximum number of shares with respect to which Awards intended to qualify as performance-based compensation other than options and SARs may be granted to an eligible participant under the Plan will be 500,000 shares. The Plan is administered by the Compensation Committee or such other Board committee (or the entire Board) as may be designated by the Board (the “Com- mittee”). Unless otherwise determined by the Board, the Committee will consist of two or more members of the Board who are nonemployee directors within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Committee will determine which eligible employees, consultants and directors receive awards, the types of awards to be received and the terms and conditions thereof. The Chief Executive Officer shall have the power and authority to make Awards under the Plan to employees and consultants not subject to Section 16 of the Exchange Act, subject to limitations imposed by the Committee. At June 27, 2004, the Company has reserved approximately 17,415,000 shares of common stock for issuance under common stock option plans, including options previously authorized for issuance under the 1999 Stock Incentive Plan. The following table summarizes activity in stock options: Years Ended June 27, June 29, June 30, 2004 2003 2002 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 10,001,345 Grants 154,800 Exercises (440,741) Forfeitures (606,419) 8,113,144 $ 8.28 $10.15 3,036,705 $ 3.93 (228,666) $ 9.38 (919,838) 6,455,262 $ 8.95 $ 6.55 2,897,950 $ 3.69 (788,008) $ 9.43 (452,060) Balance, end of year 9,108,985 $ 8.45 10,001,345 $ 8.28 8,113,144 $ 6.64 $12.43 $ 2.72 $ 9.94 $ 8.95 17 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries The following table summarizes information about stock options outstanding at June 27, 2004: 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 - 2.00 $ $ 3.32 - 4.50 $ 4.95 - 6.70 $ 6.76 - 10.00 $ 10.20 - 14.69 $ 15.77 - 17.38 $ 21.00 - 23.10 297,325 2,664,927 2,615,853 164,900 2,725,080 1,100 639,800 9,108,985 4.0 years 6.2 years 8.2 years 8.1 years 7.0 years 7.5 years 4.9 years 6.9 years $ 1.95 $ 4.05 $ 6.45 $ 8.39 $12.41 $15.92 $21.09 $ 8.45 297,325 1,879,829 24,724 50,000 1,356,950 440 639,800 4,249,068 $ 1.95 $ 4.08 $ 5.14 $ 8.24 $12.49 $15.92 $21.09 $ 9.23 Fair Value Disclosures The exercise price of employee stock option grants is set at the closing price of the Company’s common stock on the date of grant and the related number of shares granted is fixed at that point in time. Therefore, under the principles of APB No. 25, the Company does not recog- nize compensation expense associated with the grant of employee stock options. SFAS No. 123 requires the use of option valuation models to provide supplemental information regarding options granted after 1994. The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black- Scholes option valuation model, were as follows: Years Ended June 27, June 29, June 30, 2004 2003 2002 Weighted average fair value of options granted $5.99 Risk-free interest rate Expected life (in years) Expected volatility Expected dividend yield 3.61% 5.0 67.8% 0.0% $3.95 3.95% 5.0 70.0% 0.0% $7.32 4.50% 5.0 66.0% 0.0% Note 10. Employee Stock Purchase Plan In December 2000, the Company’s Board of Director’s approved the 1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a non- compensatory employee stock purchase plan under Section 423 of the Internal Revenue Code, to provide substantially all employees who have completed six months of service, an opportunity to purchase shares of the Company’s Class A common stock. Employees may contribute a maximum of 15% of eligible compensation, but in no event can an employee purchase more than 500 shares on any purchase date. Offering periods have a duration of six months, and the purchase price per share will be the lower of: (i) 85% of the fair market value of a share of Class A common stock on the last trading day of the applicable offering period, or (ii) 85% of the fair market value of a share of Class A common stock on the last trading day before the commencement of the offering period. At June 27, 2004, the Company has reserved approximately 3,098,000 shares of common stock for issuance under its ESPP. The share pool shall be increased on the first trading day of each calendar year, by a number equal to the lesser of (i) 1% of the total number of shares of common stock then outstanding, or (ii) 750,000 shares of Class A common stock. Note 11. Profit Sharing Plan The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employees who have attained the age of 21 are eligible to participate upon completion of one year of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceed- ing federal guidelines. On an annual basis the Com- pany, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company’s contributions based upon years of service. The Company made contributions of $0.3 million, $0.4 million and $0.3 million, for the years ended June 27, 2004, June 29 2003 and June 30, 2002, respectively. Note 12. Commitments and Contingencies Leases The Company currently leases office, store facilities, and equipment under various operating leases through fiscal 2019. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insur- ance, common area maintenance and operating 18 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries At June 27, 2004, the aggregate future sublease rental income under long-term operating sub-leases for land and buildings and corresponding rental expense under long-term operating leases were as follows: Sublease Sublease Income Expense (in thousands) 2005 2006 2007 2008 2009 Thereafter $2,778 2,066 1,610 1,193 827 1,244 $9,718 $2,781 2,066 1,604 1,187 822 1,232 $9,692 In addition to the above, the Company has agreed to provide rent guarantees for leases entered into by certain franchisees with third party landlords. At June 27, 2004, the aggregate minimum rent payable by franchisees guaranteed by the Company was approxi- mately $0.2 million. Rent expense was approximately $8.4 million, $9.0 million, and $8.7 million for the years ended June 27, 2004, June 29, 2003 and June 30, 2002 respectively. Litigation There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. expenses applicable to the leased properties. The Company has also entered into leases that are on a month-to-month basis. All leases and subleases with an initial term of greater than one year are accounted for under SFAS No. 13, Accounting for Leases. These leases are classified as either capital leases, operating leases or subleases, as appropriate. The Company leases certain computer, telecommu- nication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $18.4 million at June 27, 2004 and June 29, 2003, and accumulated amorti- zation of $15.6 million and $14.1 million, respectively. In addition, the Company subleases land and buildings (which are leased from third parties) to certain of its franchisees. Certain of the leases, other than land leases which have been classified as operating leases, are classified as capital leases and have initial lease terms of approximately 20 years (including option periods in some cases). The Company has a $5.0 million equipment lease line of credit with a bank. Interest under this line, which is renewable annually, is determined on the date of each commitment to borrow and is based on the bank’s base rate on such date. At June 27, 2004, approximately $3.5 million is outstanding. The borrowings, which bear interest at rates ranging from 5.39% to 6.36% annually, are payable in 60 monthly installments of principal and interest commencing in February 2001. Borrowings under the line are collateralized by the underlying equipment purchased and an equal amount of pledged investments. As of June 27, 2004, future minimum payments under non-cancelable capital lease obligations and operating leases with initial terms of one year or more consist of the following: Obligations Under Capital Operating Leases Leases (in thousands) $1,934 2005 1,440 2006 367 2007 12 2008 12 2009 7 Thereafter Total minimum lease payments 3,772 Less amounts representing interest (277) Present value of net minimum lease payments $3,495 $ 4,417 2,087 1,403 1,066 504 2,311 $11,788 19 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of 1-800-FLOWERS.COM, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) as of June 27, 2004 and June 29, 2003, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the three years in the period ended June 27, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures 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 27, 2004 and June 29, 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 27, 2004, in conformity with U.S. generally accepted accounting principles. Melville, New York July 30, 2004 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 27, 2004 and June 29, 2003. High Low Year ended June 27, 2004 $10.14 June 30, 2003 – September 28, 2003 September 29, 2003 – December 28, 2003 $12.14 $12.10 December 29, 2003 – March 28, 2004 $11.15 March 29, 2004 – June 27, 2004 Year ended June 29, 2003 July 1, 2002 – September 29, 2002 $11.25 September 30, 2002 – December 29, 2002 $10.90 $ 7.50 December 30, 2002 – March 30, 2003 $ 8.91 March 31, 2003 – June 29, 2003 $ 7.55 $ 7.48 $ 8.90 $ 9.08 $ 4.75 $ 5.75 $ 5.61 $ 6.45 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 pre- sented 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 com- mon stock at any time on a one-for-one share basis. Each share of Class B common stock will automati- cally convert into one share of Class A common stock upon its transfer, with limited exceptions. Holders As of September 7, 2004, there were approxi- mately 260 shareholders of record of the Company’s Class A common stock, although the Company believes that there is a significantly larger number of beneficial owners. As of September 7, 2004, there were approximately 14 shareholders of record of the Company’s Class B common stock. Dividend Policy Although the Company has never declared or paid any cash dividends on its Class A or Class B common stock, the Company anticipates that it will generate increasing free cash flow in excess of its capital investment requirements. As such, although the Company has no current intent to do so, the Company may chose, at some future date, to use some portion of its cash for the purpose of cash dividends. Resales of Securities 40,613,080 shares of Class A and Class B 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 7, 2004, all of such shares of the Company’s common stock could be sold in the public market pursuant to and subject to the limits set forth in Rule 144. Sales of a large number of these shares could have an adverse effect on the market price of the Company’s Class A com- mon stock by increasing the number of shares available on the public market. Purchases of Equity Securities by the Issuer On September 16, 2001, the Company’s Board of Directors approved the repurchase of up to $10.0 million of the Company’s Class A common stock. Any such purchases could be made from time to time in the open market and through privately negotiated transac- tions, subject to general market conditions. The repurchase program will be financed utilizing avail- able cash. No repurchases were made during the fiscal year ended June 27, 2004. 20 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 Partner JPMorgan Partners Mary Lou Quinlan CEO JUST ASK A WOMAN John J. Conefry Vice Chairman Astoria Financial Corporation Leonard J. Elmore Senior Counsel LeBoeuf, Lamb, Green and MacRae, LLP 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 and 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 Peter G. Rice President Plow & Hearth Enzo J. Micali Senior Vice President of Information Technology 1-800-FLOWERS.COM Monica L. Woo Senior Vice President and Chief Marketing Officer 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 516-237-6113. 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 SM 1-800-FLOWERS.COM, Inc. 1600 Stewart Avenue Westbury, NY 11590 (516) 237-6000 

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