UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2006
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State of (I.R.S. Employer
incorporation) Identification No.)
One Old Country Road, Carle Place, New York 11514
-------------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( ) Accelerated filer(X) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares outstanding of each of the Registrant's classes of common
stock:
28,307,595
----------
(Number of shares of Class A common stock outstanding as of November 2, 2006)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of November 2, 2006)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - October 1, 2006 (Unaudited)
and July 2, 2006 1
Consolidated Statements of Income (Unaudited) - Three
Months Ended October 1, 2006 and October 2, 2005 2
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended October 1, 2006 and October 2, 2005 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
Signatures 24
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
October 1, July 2,
2006 2006
-------------- ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $9,698 $24,599
Receivables, net 19,993 13,153
Inventories 74,535 52,954
Deferred income taxes 22,292 17,427
Prepaid and other 27,123 10,347
-------------- ------------
Total current assets 153,641 118,480
Property, plant and equipment, net 62,071 59,732
Goodwill 131,390 131,141
Other intangibles, net 28,851 29,822
Deferred income taxes 6,224 6,224
Other assets 1,614 1,235
-------------- ------------
Total assets $383,791 $346,634
============== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 70,260 $ 63,869
Current maturities of long-term debt and obligations under capital leases 47,187 10,360
-------------- ------------
Total current liabilities 117,447 74,229
Long-term debt and obligations under capital leases 77,701 78,063
Other liabilities 1,721 1,159
-------------- ------------
Total liabilities 196,869 153,451
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued
Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,862,945
and 29,872,183 shares issued at October 1, 2006 and July 2, 2006, respectively 299 299
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
shares issued at October 1, 2006 and July 2, 2006, respectively 421 421
Additional paid-in capital 263,825 262,667
Retained deficit (63,430) (56,011)
Treasury stock, at cost, 1,555,350 Class A shares at October 1, 2006 and July 2,
2006, respectively and 5,280,000 Class B shares (14,193) (14,193)
-------------- ------------
Total stockholders' equity 186,922 193,183
-------------- ------------
Total liabilities and stockholders' equity $383,791 $346,634
============== ============
See accompanying Notes to Consolidated Financial Statements.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
October 1, October 2,
2006 2005
---------------- ----------------
Net revenues $137,132 $112,765
Cost of revenues 82,318 66,739
---------------- ----------------
Gross profit 54,814 46,026
Operating expenses:
Marketing and sales 42,370 38,224
Technology and development 5,161 4,769
General and administrative 13,343 10,636
Depreciation and amortization 4,744 3,524
---------------- ----------------
Total operating expenses 65,618 57,153
---------------- ----------------
Operating loss (10,804) (11,127)
Other income (expense):
Interest income 337 215
Interest expense (1,828) (84)
Other 11 6
---------------- ----------------
Total other income (expense), net (1,480) 137
---------------- ----------------
Loss before income taxes (12,284) (10,990)
Income tax benefit (4,865) (4,364)
---------------- ----------------
Net loss ($7,419) ($6,626)
================ ================
Basic and diluted net loss per common share ($0.11) ($0.10)
================ ================
Weighted average shares used in the calculation of
basic and diluted net loss per common share 65,195 65,088
================ ================
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
October 1, October 2,
2006 2005
--------------- ----------------
Operating activities:
Net loss ($7,419) ($6,626)
Reconciliation of net loss to net cash used in operations:
Depreciation and amortization 4,744 3,524
Deferred income taxes (4,865) (4,365)
Stock-based compensation 1,020 937
Bad debt expense 238 75
Other non-cash items 56 -
Changes in operating items:
Receivables (7,078) (2,382)
Inventories (21,581) (17,637)
Prepaid and other (16,776) (15,232)
Accounts payable and accrued expenses 6,391 14,617
Other assets (387) 145
Other liabilities 562 (112)
--------------- ----------------
Net cash used in operating activities (45,095) (27,056)
Investing activities:
Proceeds from sale of investments - 6,647
Capital expenditures (6,146) (7,196)
Other (262) 38
--------------- ----------------
Net cash used in investing activities (6,408) (511)
Financing activities:
Acquisition of treasury stock - (1,324)
Proceeds from employee stock options 138 122
Proceeds from bank borrowings 37,000 -
Repayment of notes payable (363) (237)
Payment of capital lease obligations (173) (398)
--------------- ----------------
Net cash provided by (used in) financing activities 36,602 (1,837)
--------------- ----------------
Net change in cash and equivalents (14,901) (29,404)
Cash and equivalents:
Beginning of period 24,599 39,961
--------------- ----------------
End of period $9,698 $10,557
=============== ================
See accompanying Notes to Consolidated Financial Statements.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended October 1, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 1, 2007.
The balance sheet information at July 2, 2006 has been derived from the audited
financial statements at that date.
The information in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2006.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Comprehensive Income
For the three months ended October 1, 2006 and October 2, 2005, the Company's
comprehensive losses were equal to the respective net losses for each of the
periods presented.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS No. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.
Reclassifications
Certain balances in the prior fiscal periods have been reclassified to conform
with the presentation in the current fiscal year.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period, and excludes the effect of 925,072 and 1,314,000 dilutive
potential common shares (consisting of employee stock options and unvested
restricted stock awards) for the three months ended October 1, 2006 and October
1, 2005, respectively, as their inclusion would be antidilutive.
Note 3 - Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully
described in Note 11 of the Company's 2006 Annual Report on Form 10-K, that
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.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended
-------------------------
October 1, October 2,
2006 2005
------------- -----------
(in thousands, except
per share data)
Stock options $856 $850
Restricted stock awards 164 87
------------- -----------
Total 1,020 937
Related deferred income tax benefit 281 210
------------- -----------
$739 $727
============= ===========
Impact on basic and diluted net loss per common share $0.01 $0.01
============= ===========
Marketing and sales $358 $330
Technology and development 153 140
General and administrative 509 467
------------- -----------
Total (*) $1,020 $937
============= ===========
(*) Stock based compensation expense has not been allocated to the
Company's business categories, but is reflected in Corporate
expenses.
The Company did not grant stock options during the three months ended October 1,
2006. 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 during the three months ended October 2,
2005 were as follows:
Three Months Ended
-------------------------------
October 1, October 2,
2006 2005
--------------- ---------------
Weighted average fair value of
options granted - $3.38
Expected volatility - 46%
Expected life - 5.2 yrs
Risk-free interest rate - 4.17%
Expected dividend yield - 0.0%
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. The Company estimated the
expected life of options granted to be the average of the Company's historical
expected term from vest date and the midpoint between the average vesting term
and the contractual term. The risk-free interest rate is determined using the
yield available for zero-coupon country-regionplaceU.S. government issues with a
remaining term equal to the expected life of the option. The Company has never
paid a dividend, and as such the dividend yield is 0.0%.
The following table summarizes stock option activity during the three months
ended October 1, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
----------------------------------------------------------
Outstanding at July 2, 2006 10,103,491 $8.09
Granted 0
Exercised (31,255) $4.44
Forfeited (186,349) $11.06
-------------
Outstanding at October 1, 2006 9,885,887 $8.04 5.6 years $3,841
=============
Options vested or expected to vest at October 1, 2006 9,678,383 $8.06 4.7 years $3,841
Exercisable at October 1, 2006 7,485,722 $8.33 4.7 years $3,841
As of October 1, 2006, the total future compensation cost related to nonvested
options, not yet recognized in the statement of income, was $6.3 million and the
weighted average period over which these awards are expected to be recognized
was 1.9 years.
The Company grants shares of common stock to its employees that are subject to
restrictions on transfer and risk of forfeiture until fulfillment of applicable
service conditions and, in certain cases, holding periods (Restricted Stock
Awards). The following table summarizes the activity of non-vested restricted
stock during the three months ended October 1, 2006:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 2, 2006 293,681 $7.44
Granted 11,058 $5.13
Vested (29,163) $6.65
Forfeited (1,438) $7.72
-------------
Non-vested at October 1, 2006 274,138 $7.43
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of October 1, 2006, there was $1.1 million of total
unrecognized compensation cost related to non-vested restricted stock-based
compensation to be recognized over a weighted-average period of 2.4 years.
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 4 - Acquisitions
The Company accounts for its business combinations in accordance with SFAS No.
141, "Business Combinations," which addresses financial accounting and reporting
for business combinations and requires that all such transactions be accounted
for using the purchase method. Under the purchase method of accounting for
business combinations, the aggregate purchase price for the acquired business is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Operating results of the acquired
entities are reflected in the Company's consolidated financial statements from
date of acquisition.
Acquisition of Fannie May Confections Brands, Inc.
On May 1, 2006, the Company acquired all of the outstanding common stock of
Fannie May Confections Brands, Inc. ("Fannie May Confections Brands"), a
manufacturer and multi-channel retailer and wholesaler of premium chocolate and
other confections under the well-known Fannie May, Harry London and Fanny Farmer
brands. The acquisition, for a purchase price of approximately $92.2 million in
cash, including estimated working capital adjustments and transaction costs,
includes a modern 200,000-square foot manufacturing facility in North Canton,
Ohio and 52 Fannie May retail stores in the Chicago area, where the chocolate
brand has been a tradition since 1920. The purchase price is subject to
"earn-out" incentives which amount to a maximum of $4.5 million during the year
ending July 1, 2007 and $1.5 million during the year ending June 29, 2008, upon
achievement of specified earnings targets. Fannie May Confections Brands
generated revenues of approximately $75.0 million in its most recent fiscal year
ended April 30, 2006.
As described further under "Long-Term Debt," in order to finance the
acquisition, on May 1, 2006, the Company entered into a $135.0 million secured
credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a
group of lenders (the "2006 Credit Facility"). The 2006 Credit Facility includes
an $85.0 million term loan and a $50.0 million revolving facility, which bear
interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the Company's
leverage ratio. At closing, the Company borrowed $85.0 million of the term
facility to acquire all of the outstanding capital stock of Fannie May
Confections Brands.
The Company is in the process of obtaining independent appraisals for the
purpose of allocating the purchase price to individual assets acquired and
liabilities assumed as a result of the acquisition of Fannie May Confections
Brands. This will result in potential adjustments to the carrying value of
Fannie May Confections Brands' recorded assets and liabilities, the
establishment of certain additional intangible assets, revisions of useful lives
of intangible assets, some of which will have indefinite lives not subject to
amortization, and the determination of any residual amount that will be
allocated to goodwill. The preliminary allocation of the purchase price included
in the current period balance sheet is based on the best estimates of management
and is subject to revision based on final determination of asset fair values and
useful lives.
Acquisition of Wind & Weather
On October 31, 2005, the Company acquired all of the outstanding common stock of
Wind & Weather, a Fort Bragg, California based direct marketer of weather-themed
gifts, with annual revenues of approximately $14.4 million during its then most
recently completed fiscal year ended March 31, 2005. The purchase price of
approximately $5.2 million, including acquisition costs, was funded utilizing
the Company's line of credit which was repaid during the Company's second
quarter utilizing cash generated from operations, and excludes the assumption of
Wind & Weather's $1.2 million balance on its seasonal working capital line. The
Company has since relocated the operations of Wind & Weather to its Madison,
Virginia facility, and terminated operations in California.
The following table summarizes the allocation of purchase price to the estimated
fair values of assets acquired and liabilities assumed at the date of
acquisitions of Fannie May Confections Brands and Wind & Weather:
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Fannie May
Confections
Brands Wind & Weather
Purchase Price Purchase Price
Allocation Allocation
------------------ --------------------
(in thousands)
Current assets $21,979 $4,014
Property, plant and equipment 3,640 67
Intangible assets 13,200 2,560
Goodwill 63,001 2,703
Other 156 20
------------------ --------------------
Total assets acquired 101,976 9,364
------------------ --------------------
Current liabilities 4,929 3,810
Deferred tax liabilities 4,485 265
Other 399 39
------------------ --------------------
Total liabilities assumed $9,813 4,114
Net assets acquired $92,163 $5,250
================== ====================
Of the $15.8 million of acquired intangible assets related to the Fannie May
Confections Brands and Wind & Weather acquisitions, $1.9 million was assigned to
trademarks that are not subject to amortization, while the remaining acquired
intangibles of $13.9 million were allocated primarily to customer related
intangibles which are being amortized over the assets' determinable useful life
of 5 years.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Fannie May Confections Brands and Wind &
Weather had taken place at the beginning of each fiscal year presented. The
following unaudited pro forma information is not necessarily indicative of the
results of operations in future periods or results that would have been achieved
had the acquisitions taken place at the beginning of the periods presented.
Three Months Ended
------------------------------
October 1, October 2,
2006 2005
-------------- --------------
(in thousands, except per
share data)
Net revenues $137,132 $124,885
Operating loss ($10,804) ($12,075)
Net loss ($7,419) ($8,106)
Net loss per basic and diluted
common share ($0.11) ($0.12)
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 5 - Inventory
The Company's inventory, stated at cost, which is not in excess of market,
includes purchased and manufactured finished goods for resale, packaging
supplies, raw material ingredients for manufactured products and associated
manufacturing labor, and is classified as follows:
October 1, July 2,
2006 2006
---------------- -----------
(in thousands)
Finished goods $51,647 $36,689
Work-in-Process 5,093 3,370
Raw materials 17,795 12,895
----------- -----------
$74,535 $52,954
=========== ===========
Note 6 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
October 1,
2006
----------------
(in thousands)
Goodwill - beginning of year $131,141
Acquisition of Fannie May Confections Brands 249
-----------
Goodwill - end of period $131,390
===========
The Company's other intangible assets consist of the following:
October 1, 2006 July 2, 2006
---------------------------------------- ----------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
------------- ------------- --------------- ----------- ----------- --------------- ------------
(in thousands)
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $3,842 $1,085 $4,927 $3,762 $1,165
Customer lists 3 - 6 years 18,500 3,082 15,418 18,500 2,231 16,269
Other 5 - 8 years 1,754 314 1,440 1,754 252 1,502
------------ --------------- ----------- ----------- --------------- ------------
25,181 7,238 17,943 25,181 6,245 18,936
Trademarks with
indefinite lives 10,908 - 10,908 10,886 - 10,886
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $36,089 $7,238 $28,851 $36,067 $6,245 $29,822
============ =============== =========== =========== =============== ============
Estimated future amortization expense is as follows: remainder of fiscal 2007 -
$3.0 million, fiscal 2008 - $4.0 million, fiscal 2009 - $3.9 million, fiscal
2010 - $3.8 million, fiscal 2011 - $2.9 million, and thereafter - $0.3 million.
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
October 1, July 2,
2006 2006
---------------- -----------
(in thousands)
Term loan $85,000 $85,000
Revolving credit line 37,000 -
Commercial note 2,603 2,942
Seller financed acquisition obligations - 23
Obligations under capital leases 285 458
---------------- -----------
124,888 88,423
Less current maturities of long-term debt and obligations under
capital leases 47,187 10,360
---------------- -----------
$77,701 $78,063
================ ===========
In order to finance the acquisition of Fannie May Confections Brands, on May 1,
2006, the Company entered into a $135.0 million secured credit facility with
JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders (the
"2006 Credit Facility"). The 2006 Credit Facility includes an $85.0 million term
loan and a $50.0 million revolving facility, which bear interest at LIBOR plus
0.625% to 1.125%, with pricing based upon the Company's leverage ratio. At
closing, the Company borrowed $85.0 million of the term facility to acquire all
of the outstanding capital stock of Fannie May Confections Brands. The Company
is required to pay the outstanding term loan in escalating quarterly
installments, with the final installment payment due on May 1, 2012. As of
October 1, 2006, $37.0 million was outstanding under the revolving credit
facility, the proceeds of which were used to fund working capital requirements
for the Company's upcoming holiday season.
Note 8 - Income Taxes
At the end of each interim reporting period, the Company estimates its effective
income tax rate expected to be applicable for the full year. This estimate is
used in providing for income taxes on a year-to-date basis and may change in
subsequent interim periods. The Company's effective tax rate for the three
months ended October 1, 2006 was 39.6% compared to 39.7% during the comparative
three month period ended October 2, 2005. The effective tax rate during the
three months ended October 1, 2006 and October 2, 2005 includes the impact of
stock-based compensation recognized in accordance with SFAS No. 123(R), and
resulted in decreases in the effective income tax rate of approximately 1.1% and
1.6%, respectively, resulting primarily from the associated book/tax differences
in accounting for incentive stock options.
Note 9 - Business Segments
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The Company's management reviews the results
of the Company's operations by the following four business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service;
o Gourmet Food and Gift Baskets; and
o Home and Children's Gifts.
Category performance is measured based on contribution margin, which includes
only the direct controllable revenue and operating expenses of the categories.
As such, management's measure of profitability for these categories does not
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
include the effect of corporate overhead such as Information Technology, Human
Resources and Finance, which are operated under a centralized management
platform, providing services throughout the organization, nor does it include
depreciation and amortization , other income (net), and income taxes. Assets and
liabilities are reviewed at the consolidated level by management and not
accounted for by category.
Three Months Ended
-------------------------------
Net Revenues October 1, October 2,
2006 2005
-------------- ----------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $82,525 $76,275
BloomNet Wire Service 7,166 4,516
Gourmet Food & Gift Baskets 22,176 8,587
Home & Children's Gifts 24,595 22,676
Corporate (*) 1,378 1,399
Intercompany eliminations (708) (688)
-------------- ---------------
Total net revenues $137,132 $112,765
============== ===============
Three Months Ended
-------------------------------
Operating Income (Loss) October 1, October 2,
2006 2005
-------------- ----------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $7,841 $5,916
BloomNet Wire Service 1,702 673
Gourmet Food & Gift Baskets (1,606) (1,428)
Home & Children's Gifts (2,055) (1,942)
-------------- ----------------
Category Contribution Margin Subtotal: 5,882 3,219
Corporate (*) (11,942) (10,822)
Depreciation and amorization (4,744) (3,524)
-------------- ----------------
Operating Loss ($10,804) ($11,127)
============== ================
(*) Corporate expenses consist of the Company's enterprise
shared service cost centers, and include, among others,
Information Technology, Human Resources, Accounting and
Finance, Legal, Executive and Customer Service Center
functions. In order to leverage the Company's
infrastructure, these functions are operated under a
centralized management platform, providing support
services throughout the organization. The costs of
these functions, (including share-based compensation),
other than those of the Customer Service Center, which
are allocated directly to the above categories based
upon usage, are included within corporate expenses as
they are not directly allocable to a specific category.
Note 10 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
The section entitled "Forward Looking Information and Factors that May Affect
Future Results," provides a description of the risks and uncertainties that
could cause actual results to differ materially from those discussed in
forward-looking statements set forth in this report relating to the financial
results, operations and business prospects of the Company. Such forward-looking
statements are based on management's current expectations about future events,
which are inherently susceptible to uncertainty and changes in circumstances.
Overview
For more than 30 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice(R)" -
has been providing customers around the world with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers delivered through its "Fresh From Our Growers"
program.
Customers can "call, click or come in" to shop 1-800-FLOWERS.COM twenty four
hours a day, 7 days a week at 1-800-356-9377 or www.1800flowers.com. Sales and
Service Specialists are available 24/7, and fast and reliable delivery is
offered same day, any day. As always, 100 percent satisfaction and freshness is
guaranteed. The 1-800-FLOWERS.COM collection of brands also includes home decor
and children's gifts from Plow & Hearth(R) (1-800-627-1712 or
www.plowandhearth.com), Problem Solvers(R) (www.problemsolvers.com), Wind &
Weather(R) (www.windandweather.com), Madison Place(R) (www.madisonplace.com),
HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com);
gourmet gifts including popcorn and specialty treats from The Popcorn Factory(R)
(1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked
gifts from Cheryl&Co.(R) (1-800-443-8124 or wwwcherylandco.com); premium
chocolates and confections from Fannie May Confections Brands(R)
(www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com(R)
(www.greatfood.com); wine gifts from Ambrosia.com (www.ambrosia.com); gift
baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com) and the BloomNet(R)
international floral wire service providing quality products and diverse
services to a select network of florists.
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker symbol
FLWS.
Category Information
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The following table presents the contribution
of net revenues, gross profit and "EBITDA" (earnings before interest, taxes,
depreciation and amortization) from each of the Company's business categories.
Prior year information has been restated for comparative purposes.
Three Months Ended
------------------------------------------------
Net Revenues October 1, October 2, % Change
2006 2005
---------------- ---------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $82,525 $76,275 8.2%
BloomNet Wire Service 7,166 4,516 58.7%
Gourmet Food & Gift Baskets 22,176 8,587 158.3%
Home & Children's Gifts 24,595 22,676 8.5%
Corporate (*) 1,378 1,399 (1.5%)
Intercompany eliminations (708) (688) (2.9%)
---------------- ----------------
Total net revenues $137,132 $112,765 21.6%
================ ================
12
Three Months Ended
------------------------------------------------
Gross Profit October 1, October 2, % Change
2006 2005
---------------- ---------------- --------------
(in thousands)
Gross Profit:
1-800-Flowers.com Consumer Floral $31,373 $29,201 7.4%
BloomNet Wire Service 4,100 2,613 56.9%
Gourmet Food & Gift Baskets 8,487 3,768 125.2%
Home & Children's Gifts 10,166 9,690 4.9%
Corporate (*) 732 796 (8.0%)
Intercompany eliminations (44) (42) (4.8%)
---------------- ----------------
Total gross profit $54,814 $46,026 19.1%
================ ================
Three Months Ended
------------------------------------------------
EBITDA October 1, October 2, % Change
2006 2005
---------------- ---------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $7,841 $5,916 32.5%
BloomNet Wire Service 1,702 673 152.9%
Gourmet Food & Gift Baskets (1,606) (1,428) (12.5%)
Home & Children's Gifts (2,055) (1,942) (5.8%)
---------------- ----------------
Category Contribution Margin Subtotal: 5,882 3,219 82.7%
Corporate (*) (11,942) (10,822) (10.3%)
---------------- ----------------
EBITDA ($6,060) ($7,603) 20.3%
================ ================
(*) Corporate expenses consist of the Company's enterprise shared
service cost centers, and include, among others, Information
Technology, Human Resources, Accounting and Finance, Legal, Executive
and Customer Service Center functions. In order to leverage the
Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout
the organization. The costs of these functions, (including share-based
compensation), other than those of the Customer Service Center, which
are allocated directly to the above categories based upon usage, are
included within corporate expenses as they are not directly allocable
to a specific category.
(**) Performance is measured based on category contribution margin or
category EBITDA, reflecting only the direct controllable revenue and
operating expenses of the categories. As such, management's measure of
profitability for these categories does not include the effect of
corporate overhead, described above, nor does it include depreciation
and amortization, other income (net), and income taxes. Management
utilizes EBITDA as a performance measurement tool because it considers
such information a meaningful supplemental measure of its performance
and believes it is frequently used by the investment community in the
evaluation of companies with comparable market capitalization. The
Company also uses EBITDA as one of the factors used to determine the
total amount of bonuses available to be awarded to executive officers
and other employees. The Company's credit agreement uses EBITDA (with
additional adjustments) to measure compliance with covenants such as
interest coverage and debt incurrence. EBITDA is also used by the
Company to evaluate and price potential acquisition candidates. EBITDA
has limitations as an analytical tool, and should not be considered in
isolation or as a substitute for analysis of the Company's results as
reported under GAAP. Some of these limitations are: (a) EBITDA does
not reflect changes in, or cash requirements for, the Company's
working capital needs; (b) EBITDA does not reflect the significant
interest expense, or the cash requirements necessary to service
interest or principal payments, on the Company's debts; and (c)
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized may have to be replaced in the
future, and EBITDA does not reflect any cash requirements for such
capital expenditures. Because of these limitations, EBITDA should only
be used on a supplemental basis combined with GAAP results when
evaluating the Company's performance.
13
Results of Operations
Net Revenues
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
-------------- -------------- -------------
(in thousands)
Net revenues:
E-commerce $109,259 $100,655 8.5%
Other 27,873 12,110 130.2%
-------------- ---------------
Total net revenues $137,132 $112,765 21.6%
============== ===============
The Company's revenue growth of 21.6% during the three months ended October 1,
2006 was due to a combination of organic growth, as well as the acquisitions of
Wind & Weather, a direct marketer of weather-themed gifts, acquired on October
31, 2005, and Fannie May Confections Brands, Inc., a manufacturer and retailer
of premium chocolates and other confections, acquired on May 1, 2006. Excluding
the impact of acquisitions, total revenue growth during the three months ended
October 1, 2006 was 9.5%, reflecting: (i) the Company's strong brand name
recognition, (ii) continued leveraging of its existing customer base, and (iii)
cost effective spending on its marketing and selling programs, designed to
improve customer acquisition and accelerate top-line growth. The Company
fulfilled approximately 1,637,000 orders through its E-commerce sales channels
(online and telephonic sales) during the three months ended October 1, 2006, an
increase of 2.6% over the prior year period. The Company's E-commerce average
order value of $66.74 increased 5.8% over the respective prior year period,
primarily from a combination of product mix and pricing initiatives. Other
revenues, for the three months ended October 1, 2006, increased in comparison to
the same period of the prior year primarily as a result of retail/wholesale
contribution of Fannie May Confections Brands, Inc., as well as the continued
membership growth and wholesale floral product and service offerings from the
Company's BloomNet Wire Service category.
The 1-800-Flowers.com Consumer Floral category includes the 1-800-Flowers brand
operations which derives revenue from the sale of consumer floral products
through its E-Commerce sales channels (telephonic and online sales) or
company-owned and operated retail floral stores, as well as royalties from its
franchise operations. Net revenues during the three months ended October 1, 2006
increased by 8.2% over the prior year period primarily from a combination of
increased average order value and order volumes from its E-commerce sales
channel, offset in part by lower retail sales from its company-owned floral
stores due to the sale or closure of several under-performing locations.
The BloomNet Wire Service category includes revenues from membership fees as
well as other service offerings to florists. Net revenues during the three
months ended October 1, 2006 increased by 58.7% over the prior year period
primarily as a result of increased florist membership, as well as increased
wholesale floral product sales.
The Gourmet Food & Gift Basket category includes the operations of the Cheryl &
Co., Fannie May Confections, The Popcorn Factory and The Winetasting Network
brands. Revenue is derived from the sale of cookies, baked gifts, premium
chocolates and confections, gourmet popcorn and wine gifts through its
E-commerce sales channels (telephonic and online sales) or company-owned and
operated retail stores under the Cheryl & Co. and Fannie May brands, as well as
wholesale operations. Net revenue during the three months ended October 1, 2006
increased by 158.3% over the prior year period, primarily as a result of the
contribution of Fannie May Confections Brands, Inc.
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, Problem Solvers, Madison Place, HearthSong and Magic Cabin brands.
Revenue is derived from the sale of home decor and children's gifts through its
E-commerce sales channels (telephonic and online sales) or company-owned and
operated retail stores under the Plow & Hearth brand. Net revenue during the
three months ended October 1, 2006 increased by 8.5% over the prior year period
primarily as a result of the contribution of Wind & Weather.
14
At the start of the second half of fiscal 2005, the Company initiated a strategy
designed to extend the Company's leadership position in the floral and
thoughtful gift marketplace, and implemented plans to increase its marketing
spending to drive increased customer acquisition, particularly in the core
floral gift category. While the Company was successful in achieving strong
revenue growth during the prior year, the growth was below the level that the
Company targeted to achieve with its increased marketing spend, resulting in
lower than anticipated earnings. Having now achieved a solid base of business,
through a combination of organic efforts and strategic acquisitions,
management's current focus is on improving the Company's earnings performance.
As such, the Company expects revenue growth for fiscal 2007 to be in the range
of 17-20 percent.
Gross Profit
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
--------------- -------------- ------------
(in thousands)
Gross profit $54,814 $46,026 19.1%
Gross margin % 40.0% 40.8%
Gross profit increased during the three months ended October 1, 2006, in
comparison to the same period of the prior year, primarily as a result of the
revenue growth described above. Gross margin percentage decreased 80 basis
points, to 40.0%, from the prior year period, primarily as a result of the
seasonally lower margins of Fannie May Confections Brands, acquired in May 2006.
The 1-800-Flowers.com Floral Consumer category gross profit increased by 7.4%
over the prior year period as a result of the aforementioned increase in net
revenues. Gross margin percentage decreased 30 basis points, to 38.0% during the
three months ended October 1, 2006, primarily as a result of increased shipping
costs due to carrier fuel surcharges.
The BloomNet Wire Service category gross profit increased by 56.9% over the
prior year period as a result of increases in florist membership and floral
wholesale product sales. Gross margin percentage decreased 70 basis points, to
57.2% during the three months ended October 1, 2006, as a result of sales mix,
reflecting the impact of increased wholesale products revenues which carry lower
margins.
The Gourmet Food & Gift Basket category gross profit increased by 125.2% over
the prior year period primarily as a result of the incremental revenue generated
by Fannie May Confections Brands. Gross margin percentage decreased 560 basis
points to 38.3% during the three months ended October 1, 2006, as a result of
the seasonally lower margins of Fannie May Confections Brands.
The Home & Children's Gift category gross profit increased by 4.9% over the
prior year period primarily as a result of the additional revenue generated by
Wind & Weather. Gross margin percentage decreased 140 basis points to 41.3%
during the three months ended October 1, 2006, as a result of higher shipping
costs due to carrier fuel surcharges.
During the remainder of fiscal 2007, although varying by quarter due to seasonal
changes in product mix, the Company expects that its gross margin percentage
will improve primarily through: (i) growth of its higher margin business
categories, including Cheryl & Co., Wind & Weather, and more recently, Fannie
May Confections Brands, Inc., (ii) improved product sourcing, new product
development and process improvement initiatives implemented during the latter
half of the first quarter which are expected to mitigate continued pressure on
shipping costs, and (iii) the contribution of the BloomNet Wire Service
business, which has completed its roll-out investment phase.
15
Marketing and Sales Expense
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
--------------- -------------- ------------
(in thousands)
Marketing and sales $42,370 $38,224 10.8%
Percentage of net revenues 30.9% 33.9%
During the three months ended October 1, 2006, marketing and sales expenses
decreased from 33.9% of net revenue to 30.9%, reflecting improved operating
leverage based on a number of cost-saving initiatives and the completion of the
investment phase of the Company's BloomNet Wire Service business, including the
absorption of incremental sales and technology personnel in order to develop a
member directory, increase BloomNet Technologies penetration and expand
membership. Marketing and sales expense increased over the prior year period by
10.8% as a result of several factors including: (i) incremental expenses
associated with the recent acquisitions of Wind & Weather and Fannie May
Confections Brands, (ii) incremental variable costs to accommodate the higher
sales volumes, and (iii) personnel associated with the expansion of the BloomNet
Wire Service business. During the three months ended October 1, 2006, the
Company added 548,000 new customers, an increase of 7.8% over the same period of
the prior year. As a result of the Company's effective customer retention
efforts, 798,000 existing customers placed e-commerce orders during the three
months ended October 1, 2006, consistent with the same period of the prior year.
Of the 1,345,000 total customers who placed e-commerce orders during the three
months ended October 1, 2006, approximately 59.3% were repeat customers,
reflecting the Company's ongoing focus on deepening the relationship with its
existing customers as their trusted source for gifts and services for all of
their celebratory occasions.
During fiscal 2007, the Company is focused on improving its operating expense
ratio through a number of cost saving initiatives, including catalog printing
and e-mail pricing improvements, as well as a review of the type, quantity and
effectiveness of its marketing programs. In addition to the improved operating
results expected now that the Company has completed the investment phase of its
BloomNet florist business, the Company expects that marketing and sales expense,
as a percentage of revenue, will continue to decrease in comparison to the prior
year.
Technology and Development Expense
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
--------------- -------------- ------------
(in thousands)
Technology and development $5,161 $4,769 8.2%
Percentage of net revenues 3.8% 4.2%
During the three months ended October 1, 2006, technology and development
expense decreased from 4.2% of net revenue to 3.8%, reflecting improved
operating leverage, but increased over the prior year period by 8.2% as a result
of the incremental expenses associated with the acquisitions of Wind & Weather
and Fannie May Confections Brands, as well as for increases in the cost of
maintenance and license agreements required to support the Company's technology
platform. During the three months ended October 1, 2006, the Company expended
$8.5 million on technology and development, of which $3.3 million has been
capitalized.
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives. While many of its
acquisition-related integration projects are complete, as a result of
incremental expenses associated with Fannie May Confections Brands, the Company
expects that its spending for the remainder of fiscal 2007 will remain
consistent or decrease slightly as a percentage of net revenues in comparison to
the prior year.
16
General and Administrative Expense
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
--------------- -------------- ------------
(in thousands)
General and administrative $13,343 $10,636 25.5%
Percentage of net revenues 9.7% 9.4%
General and administrative expense increased 25.5% during the three months ended
October 1, 2006, and from 9.4% of net revenue in the prior year to 9.7% during
the current year period, primarily as a result of: (i) incremental expenses
associated with Fannie May Confections Brands, (ii) incremental travel expenses
associated with the expansion of the Company's BloomNet Wire Service business,
and (iii) higher insurance costs.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements and drive
operating leverage, as a result of the incremental expenses associated with
Fannie May Confections Brands, including costs associated with Sarbanes-Oxley
compliance, the Company expects that its general and administrative expenses as
a percentage of net revenue during the remainder of fiscal 2007 will be
consistent with the prior year period.
Depreciation and Amortization Expense
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
--------------- -------------- ------------
(in thousands)
Depreciation and amortization $4,744 $3,524 34.6%
Percentage of net revenues 3.5% 3.1%
Depreciation and amortization expense increased during the three months ended
October 1, 2006 over the prior year period primarily as a result of the
incremental amortization expense related to the intangibles established as a
result of the acquisitions of Wind & Weather and Fannie May Confections Brands,
as well as depreciation associated with recently completed technology projects
designed to provide improved order/warehouse management functionality across the
enterprise.
The Company believes that continued investment in its infrastructure, primarily
in the areas of technology and development, including the improvement of the
technology platforms are critical to attaining its strategic objectives. As a
result of these improvements, but primarily as a result of an increase in
amortization expense associated with intangibles established as a result of
recent acquisitions, the Company expects that depreciation and amortization for
the remainder of fiscal 2007 will remain consistent or increase slightly as a
percentage of net revenues in comparison to the prior year.
Other Income (Expense)
Three Months Ended
-------------------------------------------
October 1, October 2,
2006 2005 % Change
-------------- -------------- -------------
(in thousands)
Interest income $337 $215 56.7%
Interest expense (1,828) (84) (2,076.2%)
Other 11 6 83.3%
-------------- --------------
($1,480) $137
============== ==============
17
The decrease in other income (expense) during the three months ended October 1,
2006, in comparison to prior year period was the result of higher interest
expense on the Company's 2006 Credit Facility, offset in part by slightly higher
interest income, resulting from an increase in average cash balances and rates.
The Company utilized an $85.0 million term loan to finance the acquisition, and
as of October 1, 2006, had an outstanding balance of $37.0 million on its
revolving credit facility to fund working capital needs in preparation for the
holiday season.
Income Taxes
During the three months ended October 1, 2006 and October 2, 2005, the Company
recorded an income tax benefit of $4.9 million and $4.4 million, respectively.
The Company's effective tax rate for the three months ending October 1, 2006 was
39.6% compared to 39.7% during the comparative period of the prior year. The
effective tax rate during the three months ended October 1, 2006 and October 2,
2005 includes the impact of share-based compensation recognized in accordance
with SFAS No. 123(R), and resulted in a decrease in the effective income tax
rate of approximately 1.1% and 1.6%, respectively, resulting primarily from the
associated book/tax differences in accounting for incentive stock options.
Liquidity and Capital Resources
At October 1, 2006, the Company had working capital of $36.2 million, including
cash and equivalents of $9.7 million, compared to working capital of $44.3
million, including cash and equivalents and short-term investments of $24.6
million, at July 2, 2006.
Net cash used in operating activities of $45.1 million for the three months
ended October 1, 2006 was primarily attributable to the Company's net loss,
non-cash charges for deferred income taxes, and seasonal changes in working
capital, including increases in inventory, receivables and prepaids, consisting
primarily of prepaid catalog production costs, partially offset by higher
accounts payable and accrued expenses, which increased in preparation for the
upcoming holiday selling season.
Net cash used in investing activities of $6.4 million for the three months ended
October 1, 2006 was primarily attributable to capital expenditures related to
the Company's technology infrastructure.
Net cash provided by financing activities of $36.6 million for the three months
ended October 1, 2006, was primarily from bank borrowings of $37.0 million was
used to fund seasonal operating losses and working capital requirements,
partially offset by the repayment of outstanding debt and long-term capital
lease obligations.
On May 1, 2006, the Company entered into a $135.0 million secured credit
facility with JPMorgan Chase Bank, N.A., as administrative agent, and a group of
lenders (the "2006 Credit Facility"). The 2006 Credit Facility includes an $85.0
million term loan and a $50.0 million revolving credit facility, which bear
interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the Company's
leverage ratio. At closing, the Company borrowed $85.0 million of the term
facility to acquire all of the outstanding capital stock of Fannie May
Confections Brands, Inc. The Company is required to pay the outstanding term
loan in quarterly installments, with the final installment payment due on May 1,
2012. The 2006 Credit Facility contains various conditions to borrowing, and
affirmative and negative financial covenants.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. However, due to the Company's continued expansion into non-floral
products, including the acquisition of Fannie May Confections Brands, the
Company had borrowed $37.0 million against its line of credit to fund working
capital requirements, which have increased during this time period as a result
of increased inventory and pre-holiday manufacturing requirements. The Company
expects to increase its level of borrowing during its fiscal second quarter, but
also expects that all such amounts will be repaid prior to the end of the
quarter.
18
At October 1, 2006, the Company's contractual obligations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
----------- --------------- ------------ ------------- ----------------
Long-term debt $145,332 $53,514 $30,542 $34,836 $26,440
Capital lease obligations 311 231 36 25 19
Operating lease obligations 67,289 8,672 17,412 10,681 30,524
Sublease obligations 6,076 1,530 2,669 1,303 574
Purchase commitments (*) 37,422 37,422 - - -
----------- --------------- ------------ ------------- ----------------
Total $256,430 $101,369 $50,659 $46,845 $57,557
=========== =============== ============ ============= ================
(*) Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. 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. As of October 1, 2006, the
Company had repurchased 1,510,050 shares of common stock for $11.1 million, of
which none were repurchased during the three months ended October 1, 2006.
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 U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition,
inventory and long-lived assets, including goodwill and other intangible assets
related to acquisitions. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/fulfillment)
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. Shipping terms are FOB shipping point.
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.
19
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company performs an annual impairment test as of the first day of its fiscal
fourth quarter, or earlier if indicators of potential impairment exist, to
evaluate goodwill. Goodwill is considered impaired if the carrying amount of the
reporting unit exceeds its estimated fair value. In assessing the recoverability
of goodwill, the Company reviews both quantitative as well as qualitative
factors to support its assumptions with regard to fair value. Judgment regarding
the existence of impairment indicators is based on market conditions and
operational performance of the Company. Future events could cause the Company to
conclude that impairment indicators exist and that goodwill and other intangible
assets associated with our acquired businesses is impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Stock-based Compensation
SFAS No. 123R requires the measurement of stock-based compensation expense based
on the fair value of the award on the date of grant. The Company determines the
fair value of stock options issued by using the Black-Scholes option-pricing
model. The Black-Scholes option-pricing model considers a range of assumptions
related to volatility, dividend yield, risk-free interest rate and employee
exercise behavior. Expected volatilities are based on historical volatility of
the Company's stock price. The dividend yield is based on historical experience
and future expectations. The risk-free interest rate is derived from the US
Treasury yield curve in effect at the time of grant. The Black-Scholes model
also incorporates expected forfeiture rates, based on historical behavior.
Determining these assumptions are subjective and complex, and therefore, a
change in the assumptions utilized could impact the calculation of the fair
value of the Company's stock options.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS no. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.
20
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking information
about the Company's financial results and estimates, business prospects that
involve substantial risks and uncertainties. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historic or current facts. They use words such as
"will," "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "target," "forecast" and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, future
performance, new products and product categories, the outcome of contingencies,
such as legal proceedings, and financial results. Among the factors that could
cause actual results to differ materially are the following:
o the Company's ability:
o to achieve solid, sustainable revenue growth;
o to maintain and enhance its online shopping web sites to attract
customers;
o to successfully introduce new products and product categories;
o to successfully integrate acquisitions, including the acquisition of
Fannie May Confections Brands, Inc.;
o to cost effectively acquire and retain customers;
o to compete against existing and new competitors;
o to manage expenses associated with necessary general and
administrative and technology investments;
o to cost efficiently manage inventories; and
o to grow its revenues and leverage its operating infrastructure to
enhance profitability;
o general consumer sentiment and economic conditions that may affect
levels of discretionary customer purchases of the Company's products;
and
o competition from existing and potential new competitors.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from past results and those anticipated, estimated or projected.
Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Our Annual Report on Form 10-K filing for the fiscal year ended July
2, 2006 listed various important factors that could cause actual results to
differ materially from expected and historic results. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
Readers can find them in Part I, Item 1, of that filing under the heading "Risk
Factors that May Affect Future Results". We incorporate that section of that
Form 10-K in this filing and investors should refer to it. You should understand
that it is not possible to predict or identify all such factors. Consequently,
you should not consider any such list to be a complete set of all potential
risks or uncertainties.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds. While the Company currently does not use interest rate
derivative instruments to manage exposure to interest rate changes, in order to
finance the acquisition of Fannie May Confections, on May 1, 2006, the Company
entered into a $135.0 million secured credit facility. The credit facility
includes an $85.0 million term loan and a $50.0 million revolving facility,
which bear interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the
Company's leverage ratio.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, these disclosure controls and procedures
are effective in alerting them in a timely manner to material information
required to be disclosed in the Company's periodic reports filed with the SEC.
There were no changes in our internal control over financial reporting (as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three
months ended October 1, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
22
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1,
Item 1, of the Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
(Registrant)
Date: 11/10/2006 /s/ James F. McCann
--------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: 11/10/2006 /s/ William E. Shea
--------------------------- -----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)