Edgar Filing: 1 800 FLOWERS COM INC

flws20150329_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 29, 2015

___

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 incorporation)	(I.R.S. Employer 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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐(Do not check if a smaller reporting company)	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares outstanding of each of the Registrant’s classes of common stock:

28,485,023

(Number of shares of Class A common stock outstanding as of May 1, 2015)

36,777,094

(Number of shares of Class B common stock outstanding as of May 1, 2015)

1-800-FLOWERS.COM, Inc.

TABLE OF CONTENTS

INDEX

		Page
Part I.	Financial Information

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets – March 29, 2015 (Unaudited) and June 29, 2014	1

	Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended March 29, 2015 and March 30, 2014	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three and Nine Months Ended March 29, 2015 and March 30, 2014	3

	Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended March 29, 2015 and March 30, 2014	4

	Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	36

Part II.	Other Information

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults upon Senior Securities	39

Item 4.	Mine Safety Disclosures	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

Signatures		41

PART I. – FINANCIAL INFORMATION

ITEM 1. – FINANCIAL STATEMENTS

1-800-FLOWERS.COM, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands)

	March 29, 2015		June 29, 2014
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	52,721	$	5,203
Receivables, net		31,493		13,339
Insurance receivable		1,477		-
Inventories		82,350		58,520
Deferred tax assets		6,898		5,156
Prepaid and other		14,953		9,600
Total current assets		189,892		91,818

Property, plant and equipment, net		152,081		60,147
Goodwill		99,690		60,166
Other intangibles, net		58,489		44,616
Deferred tax assets		-		2,002
Other assets		13,005		8,820
Total assets	$	513,157	$	267,569

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	33,245	$	24,447
Accrued expenses		94,546		49,517
Current maturities of long-term debt		14,509		343
Total current liabilities		142,300		74,307

Long-term debt		121,125		-
Deferred tax liabilities		21,204		649
Other liabilities		8,542		6,495
Total liabilities		293,171		81,451
Total 1-800-FLOWERS.COM, Inc. stockholders' equity		217,944		183,199
Noncontrolling interest in subsidiary		2,042		2,919
Total equity		219,986		186,118
Total liabilities and equity	$	513,157	$	267,569

See accompanying Notes to Condensed Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
Net revenues	$	232,237		$	179,591		$	893,215		$	568,976
Cost of revenues		136,915			106,048			504,155			333,159
Gross profit		95,322			73,543			389,060			235,817
Operating expenses:
Marketing and sales		70,574			51,581			228,172			143,716
Technology and development		10,389			6,045			25,318			16,762
General and administrative		22,772			13,865			61,998			41,944
Depreciation and amortization		7,825			4,932			21,605			14,657
Total operating expenses		111,560			76,423			337,093			217,079
Operating income (loss)		(16,238	)		(2,880	)		51,967			18,738
Interest expense and other, net		1,631			249			5,022			959
Income (loss) from continuing operations before income taxes		(17,869	)		(3,129	)		46,945			17,779
Income tax expense (benefit) from continuing operations		(7,056	)		(1,391	)		16,796			6,590
Income (loss) from continuing operations		(10,813	)		(1,738	)		30,149			11,189
Income from discontinued operations, net of tax		-			13			-			434
Net income (loss)		(10,813	)		(1,725	)		30,149			11,623
Less: Net loss attributable to noncontrolling interest		(318	)		(300	)		(877	)		(341	)
Net income (loss) attributable to 1-800-FLOWERS.COM, Inc.	$	(10,495	)	$	(1,425	)	$	31,026		$	11,964


Basic net income (loss) per common share attributable to 1-800-FLOWERS.COM, Inc.
From continuing operations	$	(0.16	)	$	(0.02	)	$	0.48		$	0.18
From discontinued operations	$	-		$	-		$	-		$	0.01
Basic net income (loss) per common share	$	(0.16	)	$	(0.02	)	$	0.48		$	0.19

Diluted net income (loss) per common share attributable to 1-800-FLOWERS.COM, Inc.
From continuing operations	$	(0.16	)	$	(0.02	)	$	0.46		$	0.17
From discontinued operations	$	-		$	-		$	-		$	0.01
Diluted net income (loss) per common share	$	(0.16	)	$	(0.02	)	$	0.46		$	0.18

Weighted average shares used in the calculation of net income (loss) per common share
Basic		64,909			64,214			64,433			64,010
Diluted		64,909			64,214			67,134			66,429

See accompanying Notes to Condensed Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
				(in thousands)
Net income (loss)	$	(10,813	)	$	(1,725	)	$	30,149		$	11,623
Other comprehensive income (loss) (currency translation)		90			(40	)		(262	)		(52	)
Comprehensive income (loss)		(10,723	)		(1,765	)		29,887			11,571

Net loss attributable to noncontrolling interest		(318	)		(300	)		(877	)		(341	)
Other comprehensive gain (loss) (currency translation) attributable to noncontrolling interest		52			(18	)		(78	)		(23	)
Comprehensive loss attributable to noncontrolling interest		(266	)		(318	)		(955	)		(364	)

Comprehensive income (loss) attributable to 1-800-FLOWERS.COM, Inc.	$	(10,989	)	$	(1,447	)	$	28,932		$	11,935

See accompanying Notes to Condensed Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Nine Months Ended
	March 29, 2015			March 30, 2014

Operating activities
Net income	$	30,149		$	11,623
Reconciliation of net income to net cash provided by operating activities, net of acquisitions:
Operating activities of discontinued operations		-			869
Gain on sale of discontinued operations		-			(815	)
Depreciation and amortization		21,605			14,657
Amortization of deferred financing costs		1,076			229
Deferred income taxes		(4,071	)		(1,376	)
Non-cash impact of write-offs related to warehouse fire		29,522			-
Acquisition transaction costs		925			-
Bad debt expense		1,170			1,027
Stock based compensation		4,405			3,491
Other non-cash items		748			433
Changes in operating items, excluding the effects of acquisitions:
Receivables		(6,647	)		(5,492	)
Insurance receivable		(1,477	)		-
Inventories		37,448			(5,585	)
Prepaid and other		7,489			4,162
Accounts payable and accrued expenses		14,967			197
Other assets		(1,026	)		(274	)
Other liabilities		679			426

Net cash provided by operating activities		136,962			23,572

Investing activities
Acquisitions, net of cash acquired		(133,117	)		(1,385	)
Capital expenditures		(20,946	)		(14,458	)
Investing activities of discontinued operations		-			500
Other		642			18
Net cash used in investing activities		(153,421	)		(15,325	)

Financing activities
Acquisition of treasury stock		(5,730	)		(7,423	)
Proceeds from exercise of employee stock options		5,303			334
Proceeds from bank borrowings		239,500			120,000
Repayment of bank borrowings		(169,567	)		(120,002	)
Debt issuance costs		(5,642	)		-
Other		113			4
Net cash provided by (used in) financing activities		63,977			(7,087	)

Net change in cash and equivalents		47,518			1,160
Cash and equivalents:
Beginning of period		5,203			154
End of period	$	52,721		$	1,314

See accompanying Notes to Condensed Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note 1 – Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 29, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending June 28, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended June 29, 2014.

The Company’s quarterly results may experience seasonal fluctuations. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, including the acquisition of Harry & David Holdings, Inc. (“Harry & David”) on September 30, 2014, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate nearly 50% of the Company’s annual revenues, and all of its earnings. Additionally, due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter. The Easter Holiday, which was on April 20^th in fiscal 2014, fell on April 5th in fiscal 2015. As a result of the timing of Easter, during fiscal 2015, a portion of revenue and EBITDA associated with the Easter Holiday shifted into the Company’s fiscal third quarter, from its fiscal fourth quarter of the prior year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends ASC 835-30, “Interest – Imputation of Interest.” In order to simplify the presentation of debt issuance costs, ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from that debt liability, consistent with the presentation of a debt discount. This presentation is consistent with the guidance in Concepts Statement 6, which states that debt issuance costs are similar to a debt discount and in effect reduce the proceeds of borrowing, thereby increasing the effective interest rate. Concepts Statement 6 further states that debt issuance costs are not assets because they provide no future economic benefit. This new guidance is effective for the Company’s fiscal year ending July 2, 2017 and should be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for the Company’s fiscal year ending July 1, 2018 and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amends ASC 205, “Presentation of Financial Statements,” and ASC 360, “Property, Plant, and Equipment.” ASU No. 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for the Company’s fiscal year ending July 3, 2016, and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amends ASC 740, “Income Taxes.” The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and may be applied on either a prospective or retrospective basis. The provisions are effective for the Company’s first quarter of fiscal year ending June 28, 2015. The adoption of these provisions did not have a significant impact on the Company’s consolidated financial statements.

Reclassifications

Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year.

Note 2 – Net Income (Loss) Per Common Share from Continuing Operations

The following table sets forth the computation of basic and diluted net income (loss) per common share from continuing operations:

	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
		(in thousands, except per share data)
Numerator:
Net income (loss) from continuing operations	$	(10,813	)	$	(1,738	)	$	30,149		$	11,189
Less: Net loss attributable to noncontrolling interest		(318	)		(300	)		(877	)		(341	)
Income (loss) from continuing operations attributable to1-800-FLOWERS.COM, Inc.	$	(10,495	)	$	(1,438	)	$	31,026		$	11,530

Denominator:
Weighted average shares outstanding		64,909			64,214			64,433			64,010
Effect of dilutive securities (2):
Employee stock options (1)		-			-			1,507			1,075
Employee restricted stock awards		-			-			1,194			1,344
		-			-			2,701			2,419

Adjusted weighted-average shares and assumed conversions		64,909			64,214			67,134			66,429

Net income (loss) per common share from continuing operations attributable to 1-800-FLOWERS.COM, Inc.
Basic	$	(0.16	)	$	(0.02	)	$	0.48		$	0.18
Diluted	$	(0.16	)	$	(0.02	)	$	0.46		$	0.17

	Note (1):	The effect of options to purchase 0.1 million and 0.3 million shares for the three and nine months ended March 29, 2015 and 1.2 million shares for the three and nine months ended March 30, 2014, respectively, were excluded from the calculation of net income (loss) per share on a diluted basis as their effect is anti-dilutive.

	Note (2):	As a result of the net loss from continuing operations attributable to 1-800-FLOWERS.COM, Inc. for the three months ended March 29, 2015 and March 30, 2014, there is no dilutive impact to the net loss per share calculation for the respective periods.

Note 3 – Stock-Based Compensation

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2014, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.

The amounts of stock-based compensation expense recognized in the periods presented are as follows:

	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
			(in thousands)
Stock options	$	113	$	111	$	337	$	322
Restricted stock		1,510		1,169		4,068		3,169
Total		1,623		1,280		4,405		3,491
Deferred income tax benefit		523		439		1,547		1,270
Stock-based compensation expense, net	$	1,100	$	841	$	2,858	$	2,221

Stock-based compensation is recorded within the following line items of operating expenses:

	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
			(in thousands)
Marketing and sales	$	535	$	320	$	1,352	$	968
Technology and development		114		64		283		239
General and administrative		974		896		2,770		2,284
Total	$	1,623	$	1,280	$	4,405	$	3,491

The following table summarizes stock option activity during the nine months ended March 29, 2015:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value (000s)
Outstanding at June 29, 2014		4,339,790		$	3.80
Granted		50,000		$	8.15
Exercised		(818,827	)	$	6.44
Forfeited		(216,474	)	$	8.44
Outstanding at March 29, 2015		3,354,489		$	2.91		4.43	$	29,505

Options vested or expected to vest at March 29, 2015		3,269,489		$	2.92		4.37	$	28,743
Exercisable at March 29, 2015		2,118,189		$	3.09		3.29	$	18,260

As of March 29, 2015, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $1.8 million and the weighted average period over which these awards are expected to be recognized was 4.1 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). The following table summarizes the activity of non-vested restricted stock awards during the nine months ended March 29, 2015:

	Shares			Weighted Average Grant Date Fair Value
Non-vested at June 29, 2014		2,686,685		$	3.90
Granted		945,882		$	8.02
Vested		(1,154,173	)	$	3.48
Forfeited		(137,118	)	$	7.21
Non-vested at March 29, 2015		2,341,276		$	5.58

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of March 29, 2015, there was $9.5 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.8 years.

Note 4 – Acquisitions and Dispositions

Acquisition of Harry & David

On September 30, 2014, the Company completed its acquisition of Harry & David Holdings, Inc (“Harry & David”), a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David brands. The transaction, for a purchase price of $142.5 million, includes the Harry & David’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and 48 Harry & David retail stores located throughout the country.

The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill. Of the acquired intangible assets, $2.5 million was assigned to customer lists, which is being amortized over the estimated remaining life of 5 years, $14.7 million was assigned to trademarks, and $38.6 million was assigned to goodwill, which is not expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Harry & David is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of acquisition of Harry & David:

	Harry & David Preliminary Purchase Price Allocation
	(in thousands)
Current assets	$	124,245
Intangible assets		17,209
Goodwill		38,635
Property, plant and equipment		91,023
Other assets		111
Total assets acquired		271,223

Current liabilities, including short-term debt		104,335
Deferred tax liabilities		23,252
Other liabilities assumed		1,136
Total liabilities assumed		128,723
Net assets acquired	$	142,500

Operating results of Harry & David are reflected in the Company’s consolidated financial statements from the date of acquisition, within its Gourmet Food & Gift Baskets segment.

Harry & David contributed net revenues of $319.9 million and operating income of approximately $41.6 million from September 30, 2014 through March 29, 2015. These amounts are not necessarily indicative of the results of operations that Harry & David would have realized had it continued to operate as a stand-alone company during the period presented due to integration activities since the acquisition date, and due to costs that are now reflected in the Company’s unallocated corporate costs which are not allocated to Harry & David.

As required by ASC 805, “Business Combinations,” the following unaudited pro forma financial information for the three and nine months ended March 29, 2015 and March 30, 2014, give effect to the Harry & David acquisition as if it had been completed on July 1, 2013. The unaudited pro forma financial information is prepared by management for informational purposes only in accordance with ASC 805 and is not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations. The unaudited pro forma financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies. The pro forma information has been adjusted to give effect to nonrecurring items that are directly attributable to the acquisition.

	Three Months Ended						Nine Months Ended
	March 29, 2015			March 30, 2014			March 29, 2015		March 30, 2014
Net revenues from continuing operations	$	232,237		$	230,603		$	923,812	$	912,122
Income (loss) from continuing operations attributable to 1-800-FLOWERS.COM, Inc.	$	(9,182	)	$	(14,918	)	$	24,388	$	26,095
Diluted net income (loss) per common share attributable to 1-800-FLOWERS.COM, Inc.	$	(0.14	)	$	(0.23	)	$	0.36	$	0.41

The unaudited pro forma amounts above include the following adjustments:

(1)

An increase of net revenues and a decrease of cost of sales by $1.6 million and $4.8 million, respectively, to reflect the impact of purchase accounting adjustments related to Harry & David’s deferred revenue and inventory fair value step-up in the nine months ended March 29, 2015.

(2)

A decrease of operating expenses by $1.7 million and $14.0 million during the three and nine months ended March 29, 2015, respectively, to eliminate non-recurring acquisition costs ($0 and $11.9 million during the three and nine months ended March 29, 2015) and integration costs ($1.7 million and $2.1 million during the three and nine months ended March 29, 2015) directly related to the transaction.

(3)

An increase to interest expense by $1.1 million for the nine months ended March 29, 2015, and $1.2 million and $3.7 million for the three and nine months ended March 30, 2014, respectively, to reflect the incremental impact of the 2014 Credit Facility utilized to finance the acquisition, assuming our new credit facility was in place on July 1, 2013.

(4)

The adjustments above were tax effected at the combined entity’s assumed effective tax rate for the respective periods.

Acquisition of Fannie May retail stores

On June 27, 2014, the Company and GB Chocolates LLC (“GB Chocolates”) entered into a settlement agreement, resulting in the termination of the GB Chocolates franchise agreement, and its exclusive area development rights.

In conjunction with the settlement agreement, the Company and GB Chocolates entered into an asset purchase agreement whereby the Company repurchased 16 of the original 17 Fannie May retail stores sold to GB Chocolates in November 2011. The acquisition was accounted for using the purchase method of accounting in accordance with FASB guidance regarding business combinations. The purchase price of $6.4 million was financed utilizing available cash balances.

The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, and the determination of any residual amount that will be allocated to goodwill. The goodwill resulting from this acquisition amounted to $5.8 million, which is expected to be deductible for tax purposes.

	Preliminary Purchase Price Allocation
	(in thousands)
Current assets	$	105
Property, plant and equipment		487
Goodwill		5,781
Net assets acquired	$	6,373

Operating results of the acquired stores are reflected in the Company’s consolidated financial statements from the date of acquisition, within the Gourmet Food & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.

Acquisition of Colonial Gifts Limited

On December 3, 2013, the Company completed its acquisition of a controlling interest in Colonial Gifts Limited (iFlorist). iFlorist, located in the UK, is a direct-to-consumer marketer of floral and gift-related products sold and delivered throughout Europe. The acquisition was achieved in stages and was accounted for using the acquisition method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations.

Prior to December 3, 2013, the Company maintained an investment in iFlorist in the amount of $1.6 million, which was included on the Company’s balance sheet within Other assets. This investment was accounted for under the cost method, as the Company’s ownership stake was 19.9%, and it did not have the ability to exercise significant influence.

On December 3, 2013, the Company acquired an additional interest in iFlorist, bringing the Company’s ownership interest to 56.2%. The acquisition of the additional interest was financed through the conversion of $2.0 million of notes owed by iFlorist to the Company, and a $1.6 million cash payment to iFlorist’s founders. Concurrent with the additional investment, the Company remeasured its initial equity investment in iFlorist, and determined that the acquisition date fair value approximated the Company’s carrying value of $1.6 million, and therefore no gain or loss was recognized. On the acquisition date, the Company also measured the fair value of the noncontrolling interest which amounted to $3.6 million. The acquisition-date fair values of the Company’s previously held equity interest in iFlorist and the noncontrolling interest were determined based on the market price the Company paid for its ownership interest in iFlorist on the acquisition date, assuming that a 20% control premium was paid to obtain the controlling interest. The following summarizes the fair values of the acquisition date purchase price components:

	iFlorist Fair Value of Purchase Price Components
	(in thousands)
Cash	$	1,640
Converted debt		1,964
Initial equity investment		1,629
Noncontrolling interest		3,616
Total purchase price	$	8,849

During the quarter ended December 28, 2014, the Company finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on our estimates of their fair values on the acquisition date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. Of the acquired intangible assets, $0.7 million was assigned to customer lists, which is being amortized over the estimated remaining life of 3 years, $0.7 million was assigned to trademarks, and $7.9 million was assigned to goodwill, which is not expected to be deductible for tax purposes. As a result of cumulative tax losses in the foreign jurisdiction, offset in part by the deferred tax liability arising from the amortizable customer list which was considered a source of future income, the Company concluded that a full valuation allowance be recorded in such jurisdiction.

The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition, as well as adjustments made during the measurement period:

	iFlorist Preliminary Purchase Price Allocation		Measurement Period Adjustments (1)			iFlorist Final Purchase Price Allocation
	(in thousands)		(in thousands)			(in thousands)
Current assets	$	856	$	-		$	856
Intangible assets		3,177		(1,709	)		1,468
Goodwill		6,537		1,320			7,857
Property, plant and equipment		2,006		-			2,006
Other assets		30		-			30
Total assets acquired		12,606		(389	)		12,217

Current liabilities, including current maturities of long-term debt		3,014		-			3,014
Deferred tax liabilities		648		(389	)		259
Other liabilities assumed		95		-			95
Total liabilities assumed		3,757		(389	)		3,368
Net assets acquired	$	8,849	$	-		$	8,849

(1)

The measurement period adjustments were due to the finalization of valuations related to intangible assets and resulted in the following: a decrease to intangible assets and the related long-term deferred tax liabilities and an increase to goodwill.

The measurement period adjustments did not have a significant impact on our condensed consolidated statements of income for the three and nine months ended March 29, 2015. In addition, these adjustments did not have a significant impact on our condensed consolidated balance sheet as of June 29, 2014. Therefore, we have not retrospectively adjusted this financial information.

The estimated fair value of the acquired trademarks was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream association with the trademarks and the overall composition of the acquired assets.

The estimated fair value of the acquired customer relationships was determined using the with and without method. This method calculates the debt-free cash flows generated under two scenarios: the with and without. Under the with scenario, it is assumed that the Company achieves full projections and includes both existing customers as of the valuation date as well as new customers acquired during the course of normal business. The without scenario, assumes that the Company has no existing customers, but rather builds to management projections as new customers are acquired. The differential between the cash flows under the two scenarios is then discounted to present value to determine the value of the customer list as of the valuation date.

Operating results of the Company’s membership interest in iFlorist are reflected in the Company’s condensed consolidated financial statements from the date of acquisition, essentially all of which is included within the 1-800-Flowers.com Consumer Floral segment. Pro forma results of operations have not been presented, as the impact on the Company’s condensed consolidated financial results would not have been material.

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:

	March 29, 2015		June 29, 2014
	(in thousands)
Finished goods	$	38,788	$	30,859
Work-in-process		9,514		8,566
Raw materials		34,048		19,095
	$	82,350	$	58,520

Note 6 – Goodwill and Intangible Assets

The following table presents goodwill by segment and the related change in the net carrying amount:

	1-800- Flowers.com Consumer Floral			BloomNet Wire Service		Gourmet Food & Gift Baskets			Total
	(in thousands)
Balance at June 29, 2014	$	16,691		$	-	$	43,475		$	60,166
Harry & David acquisition		-			-		38,635			38,635
iFlorist measurement period adjustment		1,320			-		-			1,320
iFlorist translation adjustment		(429	)		-		-			(429	)
Other		-			-		(2	)		(2	)
Balance at March 29, 2015	$	17,582		$	-	$	82,108		$	99,690

The Company’s other intangible assets consist of the following:

			March 29, 2015						June 29, 2014
	Amortization Period (in years)		Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
					(in thousands)

Intangible assets with determinable lives
Investment in licenses		14 - 16	$	7,420	$	5,700	$	1,720	$	7,420	$	5,621	$	1,799
Customer lists		3 - 10		19,125		14,119		5,006		17,313		12,818		4,495
Other		5 - 8		2,538		2,538		-		2,538		2,538		-
				29,083		22,357		6,726		27,271		20,977		6,294

Trademarks with indefinite lives				51,763		-		51,763		38,322		-		38,322
Total identifiable intangible assets			$	80,846	$	22,357	$	58,489	$	65,593	$	20,977	$	44,616

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. No material impairment was recognized for the three and nine months ended March 29, 2015. Future estimated amortization expense is as follows: remainder of fiscal 2015 - $0.4 million, fiscal 2016 - $1.9 million, fiscal 2017 - $1.3 million, fiscal 2018 - $1.1 million, fiscal 2019 - $0.6 million and thereafter - $1.4 million.

Note 7 – Investments

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee. The Company’s equity method investments are comprised of a 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $3.0 million as of March 29, 2015 and $3.2 million as of June 29, 2014, and is included in Other assets within the condensed consolidated balance sheets. The Company’s equity in the net loss of Flores Online for three and nine months ended March 29, 2015 and March 30, 2014 was less than $0.1 million and $0.2 million, respectively.

Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within Other assets in the Company’s condensed consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $0.7 million as of March 29, 2015 and $0.8 million as of June 29, 2014. In addition, the Company had notes receivable from a company it maintains an investment in of $0.3 million as of March 29, 2015 and $0.5 million as of June 29, 2014.

The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included in Other assets in the condensed consolidated balance sheets (see Note 10).

Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the condensed consolidated statement of operations.

Note 8 –Debt

The Company’s current and long-term debt consists of the following:

	March 29, 2015		June 29, 2014
	(in thousands)

Revolver (1)	$	-	$	-
Term Loan (1)		135,375		-
Bank loan (2)		233		343
Other		26		-
Total debt		135,634		343
Less short-term debt		14,509		343
Long-term debt	$	121,125	$	-

	(1)	In order to finance the Harry & David acquisition, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to applicable sublimits) and general corporate purposes. The Term Loan is payable in 20 quarterly installments of principal and interest beginning in December 2014, with escalating principal payments at the rate of 10% in years one and two, 15% in years three and four, and 20% in year five, with the remaining balance of $42.75 million due upon maturity. Upon closing of the acquisition, the Company borrowed $136.7 million under the Revolver to re-pay amounts outstanding under the Company’s and Harry & David’s previous credit agreements, as well as to pay acquisition-related transaction costs.

		The 2014 Credit Facility requires that while any borrowings are outstanding the Company comply with certain financial and non-financial covenants, including the maintenance of certain financial ratios. Outstanding amounts under the 2014 Credit Facility bear interest at the Company’s option at either: (i) LIBOR, plus a spread of 175 to 250 basis points, as determined by the Company’s leverage ratio, or (ii) ABR, plus a spread of 75 to 150 basis points. The 2014 Credit Agreement is secured by substantially all of the assets of the Company and the Subsidiary Guarantors.

(2)

Bank loan assumed through the Company’s acquisition of a majority interest in iFlorist.

Note 9. Fire at the Fannie May warehouse and distribution facility

On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility. While the fire did not cause any injuries, the building was severely damaged, rendering it inoperable for the key calendar 2014 holiday season, and all Fannie May and Harry London confections in the facility were destroyed. As a result, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during the holiday season. While the Company implemented contingency plans to increase production for Fannie May Fine Chocolates and Harry London Chocolates products at its production facility in Canton, Ohio and to shift warehousing and distribution operations to alternate Company facilities, product availability was severely limited.

Although the Company had restored operations prior to the end of March 29, 2015, revenues derived from our Fannie May and Harry London Chocolates during the fiscal third quarter were impacted due to limited product supply in the Company’s retail stores. The Company does not believe that there will be any further significant impact from this issue beyond the quarter ended March 29, 2015.

The impact of lost sales related to the fire was estimated to be $3.4 and $17.3 million, during the three and nine months ended March 29, 2015, with corresponding loss of income from continuing operations before income taxes of $1.0 and $6.6 million, respectively. While no insurance recoveries have been recorded to date related to lost sales, the Company expects that its property and business interruption insurance will cover these losses.

The following table reflects the incremental costs related to the fire and related insurance recovery for the three and nine months ended March 29, 2015:

Loss on inventory	$	29,522
Other fire related costs		1,955
		31,477
Less: Fire related recoveries		(31,477	)
Fire related charges, net	$	—

Through March 29, 2015, the Company has incurred fire related costs totaling $31.5 million, including a $29.5 million write-down of inventory. Based on the provisions of the Company's insurance policies and management's estimates, the losses incurred have been reduced by the estimated insurance recoveries. The Company has determined that recovery of the incurred losses, including amounts related to the retentions described above, is probable and recorded $31.5 million of insurance recoveries through March 29, 2015. Through March 29, 2015, the Company received $30.0 million of insurance proceeds, representing an advance of funds. As a result, the insurance receivable balance was $1.5 million as of March 29, 2015.

Note 10 - Fair Value Measurements

Cash and cash equivalents, receivables, accounts payable and accrued expenses are reflected in the condensed consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. The Company’s long-term debt also approximates fair value due to the variable nature of the underlying interest. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

Level 1		Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2		Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3		Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of March 29, 2015:

			Fair Value Measurements Assets (Liabilities)
	Carrying Value		Level 1		Level 2		Level 3
	(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)	$	2,845	$	2,845	$	-	$	-
	$	2,845	$	2,845	$	-	$	-

(1)

The Company maintains a Non-qualified Deferred Compensation Plan for certain members of senior management. Deferred compensation is invested in mutual funds held in a “rabbi trust” which is restricted for payment to participants of the NQDC Plan. Trading securities held in the trust are measured using quoted market prices at the reporting date and are included in Other assets, with the corresponding liability included in Other liabilities, in the condensed consolidated balance sheets.

The following table presents, by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of June 29, 2014:

			Fair Value Measurements Assets (Liabilities)
	Carrying Value		Level 1		Level 2		Level 3
		(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)	$	2,146	$	2,146	$	-	$	-
	$	2,146	$	2,146	$	-	$	-

(1)

Note 11 – 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 from continuing operations for the three and nine months ended March 29, 2015 was 39.5% and 35.8% respectively, compared to 44.5% and 37.1% in the same periods of the prior year. The effective rate for fiscal 2015 and fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, which were partially offset by various permanent differences and tax credits.

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company concluded its federal examination for fiscal 2011 during the quarter ended December 29, 2013, however, fiscal years 2012 through 2014 remain subject to federal examination. Due to ongoing state examinations and non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008. The Company commenced operations in foreign jurisdictions in 2012. The Company's foreign income tax filings are open for examination by its respective foreign tax authorities, mainly Canada and the United Kingdom.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At March 29, 2015 the Company has remaining unrecognized tax positions of approximately $0.5 million, including accrued interest and penalties of $0.1 million. The Company believes that none of its unrecognized tax positions will be resolved over the next twelve months.

Note 12 – Business Segments

The Company’s management reviews the results of the Company’s operations by the following three business segments:

●

1-800-Flowers.com Consumer Floral,

●

BloomNet Wire Service, and

●

Gourmet Food and Gift Baskets

Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (1) below), nor does it include depreciation and amortization, other income and income taxes, or stock-based compensation and Harry & David transaction/integration costs, both of which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.

	Three Months Ended						Nine Months Ended
Net Revenues from Continuing Operations	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
				(in thousands)

Segment Net Revenues:
1-800-Flowers.com Consumer Floral	$	116,705		$	122,256		$	290,703		$	290,938
BloomNet Wire Service		22,950			22,571			63,071			62,829
Gourmet Food & Gift Baskets		92,951			35,330			539,979			216,193
Corporate (1)		283			202			795			600
Intercompany eliminations		(652	)		(768	)		(1,333	)		(1,584	)
Total net revenues	$	232,237		$	179,591		$	893,215		$	568,976

	Three Months Ended						Nine Months Ended
Operating Income from Continuing Operations	March 29, 2015			March 30, 2014			March 29, 2015			March 30, 2014
				(in thousands)

Segment Contribution Margin:
1-800-Flowers.com Consumer Floral	$	12,557		$	11,165		$	29,334		$	26,274
Bloomnet Wire Service (*)		7,290			7,079			20,455			20,043
Gourmet Food & Gift Baskets (*)		(5,413	)		(3,180	)		82,607			25,817
Segment Contribution Margin Subtotal		14,434			15,064			132,396			72,134
Corporate (**)		(22,847	)		(13,012	)		(58,824	)		(38,739	)
Depreciation and amortization		(7,825	)		(4,932	)		(21,605	)		(14,657	)
Operating income	$	(16,238	)	$	(2,880	)	$	51,967		$	18,738

(*)

Refer to Note 9 - Fire at the Fannie May warehouse and distribution facility. On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility.

As a result of the fire, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during its fiscal second and third quarter.

The impact of lost sales related to the fire was estimated to be $3.4 and $17.3 million during the three and nine months ended March 29, 2015, with a corresponding loss of income from continuing operations before income taxes of $1.0 and $6.6 million, respectively. The Company does not believe that there will be any further significant impact from this issue beyond the quarter ended March 29, 2015.

(**)

Corporate expenses consist of the Company's enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation, and during the three and nine months ended March 29, 2015 acquisition and integration costs related to the acquisition of Harry & David, in the amount of $1.7 million and $6.2 million, respectively. 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, other than those of the Customer Service Center, which are allocated directly to the above segments based upon usage, are included within corporate expenses, as they are not directly allocable to a specific segment. The Company has commenced integrating Harry & David into its operating platforms, and as such, their operating costs have been classified in a similar manner.

Note 13-Discontinued Operations

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its e-commerce and procurement businesses on December 31, 2013. The Company has classified the results of the e-commerce and procurement business of Winetasting Network as a discontinued operation for fiscal 2014.

Results for discontinued operations are as follows:

	Three Months Ended				Nine Months Ended
	March 29, 2015		March 30, 2014		March 29, 2015		March 30, 2014
	(in thousands)
Net revenues from discontinued operations	$	-	$	9	$	-	$	1,669
Income from discontinued operations, net of tax	$	-	$	13	$	-	$	434

Note 14 – Commitments and Contingencies

Leases

The Company currently leases office, store facilities, and equipment under various leases through fiscal 2030. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company has also entered into leases that are on a month-to-month basis. These leases are classified as either capital leases, operating leases or subleases, as appropriate.

As of March 29, 2015 future minimum payments under non-cancelable operating leases with initial terms of one year or more consist of the following:

	Operating Leases
	(in thousands)

2015	$	6,147
2016		21,777
2017		18,581
2018		15,050
2019		11,720
Thereafter		47,100
Total minimum lease payments	$	120,375

Legal Proceedings

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business:

In re Trilegiant Corporation, Inc. (Frank v.Trilegiant Corporation, Inc., et al):

On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act ("CUTPA") among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company's subsidiaries previously engaged in with certain third-party vendors. On December 23, 2011, plaintiff filed a notice of voluntary dismissal seeking to dismiss the entire action without prejudice. The court entered an Order on November 28, 2012, dismissing the case in its entirety. This case was subsequently refiled in the United States District Court for the District of Connecticut.

On March 6, 2012 and March 15, 2012, two additional purported class action complaints were filed in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants in actions purporting to assert claims substantially similar to those asserted in the lawsuit filed on November 10, 2010. In each case, plaintiffs seek to have the respective case certified as a class action and seek restitution and other damages, each in an amount in excess of $5.0 million. On April 26, 2012, the two Connecticut cases were consolidated with a third case previously pending in the United States District Court for the District of Connecticut in which the Company is not a party (the "Consolidated Action"). A consolidated amended complaint was filed by plaintiffs on September 7, 2012, purporting to assert claims substantially similar to those originally asserted. The Company moved to dismiss the consolidated amended complaint on December 7, 2012, which was subsequently refiled at the direction of the Court on January 16, 2013.

On December 5, 2012, the same plaintiff from the action voluntarily dismissed in the United States District Court for the Eastern District of New York filed a purported class action complaint in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants, purporting to assert claims substantially similar to those asserted in the consolidated amended complaint (the “Frank Action”). On January 23, 2013, plaintiffs in the Consolidated Action filed a motion to transfer and consolidate the action filed on December 5, 2012 with the Consolidated Action. The Company intends to defend each of these actions vigorously.

On January 31, 2013, the court issued an order to show cause directing plaintiffs' counsel in the Frank Action, also counsel for plaintiffs in the Consolidated Action, to show cause why the Frank Action is distinguishable from the Consolidated Action such that it may be maintained despite the prior-pending action doctrine. On June 13, 2013, the court issued an order in the Frank Action suspending deadlines to answer or to otherwise respond to the complaint until 21 days after the court decides whether the Frank Action should be consolidated with the Consolidated Action. On July 24, 2013 the Frank Action was reassigned to Judge Vanessa Bryant, before whom the Consolidated Action is currently pending, for all further proceedings. On August 14, 2013, other defendants filed a motion for clarification in the Frank Action requesting that Judge Bryant clarify the order suspending deadlines.

On March 28, 2014, the Court issued a series of rulings disposing of all the pending motions in both the Consolidated Action and the Frank Action. Among other things, the Court dismissed several causes of action, leaving pending a claim for CUTPA violations stemming from Trilegiant’s refund mitigation strategy and a claim for unjust enrichment. Thereafter, the Court consolidated the Frank case into the Consolidated Action. On April 28, 2014 plaintiffs moved for leave to appeal the various rulings against them to the United States Court of Appeals for the Second Circuit and to have a partial final judgment entered dismissing those claims that the Court had ordered dismissed. The Company filed its Answer to the Complaint on May 12, 2014. On March 26, 2015, the Court denied plaintiffs’ motions and the parties are now preparing to engage in discovery.

Edible Arrangements:

On November 20, 2014, a complaint was filed in the United States District Court for the District of Connecticut by Edible Arrangements LLC and Edible Arrangements International, LLC, alleging that the Company’s use of the terms “Fruit Bouquets,” “Edible,” “Bouquet,” “Edible Fruit Arrangements,” Edible Arrangements,” and “DoFruit” and its use of a six petal pineapple slice design in connection with marketing and selling edible fruit arrangements constitutes trademark infringement, false designation of origin, dilution, and contributory infringement under the federal Lanham Act, 29 USC § 1114 and 1125(a), common law unfair competition, and a violation of the Connecticut Unfair Trade Practices Act, Connecticut General Statutes § 42-110b (a). The Complaint alleges Edible Arrangements has been damaged in the amount of $97,411,000. The Complaint requests a declaratory judgment in favor of Edible Arrangements, an injunction against the Company’s use of the terms and design, an accounting and payment of the Company’s profits from its sale of edible fruit arrangements, a trebling of the Company’s profits from such sales or of any damages sustained by Edible Arrangements, punitive damages, and attorneys’ fees. On November 24, 2014, the Complaint was amended to add a breach of contract claim for use of these terms and the design, based on a contract that had been entered by one of the Company’s remote subsidiaries prior to its acquisition by the Company.

On January 29, 2015, the Plaintiffs amended the Complaint to add one of the Company’s subsidiaries and to claim its damages were $ 101,436,000. The Company filed an Answer and a Counterclaim on February 27, 2015. The Answer asserts substantial defenses, including fair use by the Company of generic and descriptive terms, as expressly permitted under the Lanham Act, invalidity of Edible Arrangements’ trademark registrations on grounds of fraud and trademark misuse, lack of exclusive rights on the part of Edible Arrangements, functionality of the claimed design mark, acquiescence, estoppel, and Edible Arrangements’ use of the claimed trademarks in violation of the antitrust laws.

The Counterclaim seeks a declaratory judgment of lack of infringement and invalidity of claimed marks, cancellation of Edible Arrangements’ registrations due to its fraud and misuse, genericism, and lack of secondary meaning as to any terms deemed descriptive, and damages in an amount to be determined for violation of the antitrust provisions of the federal Sherman Act and the Connecticut Unfair Trade Practices Act.

Discovery has recently begun and Edible Arrangements filed a motion to dismiss the Company’s Sherman Act and Connecticut Unfair Trade Practices Act claims. Under the Court’s schedule, the Company’s response to the motion has not yet been filed. By its Order dated May 4, 2015, the court ordered a phasing of the case and bifurcated the antitrust Counterclaim from the infringement claims.

The Company believes its Counterclaims to the Edible Arrangements’ claims are meritorious and that there are substantial defenses to both of the claims above and expects to defend the claims vigorously.

There are no assurances that additional legal actions will not be instituted in connection with the Company’s former post-transaction marketing practices involving third party vendors nor can we predict the outcome of any such legal action. At this time, we are unable to estimate a possible loss or range of possible loss for the aforementioned actions for various reasons, including, among others: (i) the damages sought are indeterminate, (ii) the proceedings are in the very early stages and in the Frank v. Trilegiant Corporation, Inc. matter, the court has not yet ruled as to whether the classes will be certified, and (iii) there is uncertainty as to the outcome of pending motions. As a result of the foregoing, we have determined that the amount of possible loss or range of loss is not reasonably estimable. However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which may be beyond our control.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results” and under Part I, Item 1A, of the Company’s Annual Report on Form 10-K under the heading “Risk Factors.”

Overview

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 38 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee® backs every gift. 1-800-FLOWERS.COM was named a winner of the 2015 “Best Companies to Work for in New York State” award by The New York Society for Human Resource Management. 1-800-FLOWERS.COM was awarded the 2014 Silver Stevie Award, recognizing the organization's outstanding Customer Service and commitment to our 100% Smile Guarantee®. 1-800-FLOWERS.COM received a Gold Award for Best User Experience on a Mobile Optimized Site for the 2013 Horizon Interactive Awards.

The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably. The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as premium, gift-quality fruits and other gourmet items from Harry & David® (1-877-322-1200 or www.harryanddavid.com), popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); carved fresh fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com); as well as premium branded customizable invitations and personal stationery from FineStationery.com® (www.finestationery.com). The Company’s Celebrations® brand (www.celebrations.com) is a source for creative party ideas, must-read articles, online invitations and e-cards, all created to help people celebrate holidays and the everyday.

On September 30, 2014, the Company completed its acquisition of Harry & David Holdings, Inc (Harry & David), a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David®, Wolferman’s® and Cushman’s® brands. The transaction, at a purchase price of $142.5 million, included the Harry & David’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and 48 Harry & David retail stores located throughout the country. Harry & David’s revenues were approximately $386 million in fiscal 2014, with adjusted EBITDA of approximately $28 million.

Including the anticipated contribution of Harry & David from date of acquisition, the Company anticipates generating total annual net revenues in excess of $1.1 billion and adjusted EBITDA in excess of $90.0 million for fiscal 2015 (excluding stock based compensation, transaction/integration costs and purchase accounting adjustments related to the Harry & David acquisition and the impact of the Fannie May warehouse fire). It should be noted that the revenue and Adjusted EBITDA projections for fiscal 2015 do not include the results of Harry & David for the fiscal first quarter of the year, which is typically its lowest in terms of revenues and includes significant losses due to the seasonality of its business. The historical results of Harry & David, as well as applicable pro-forma results are included in the Company’s Form 8-K/A filed on December 16, 2014.

In order to finance the acquisition, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to the applicable sublimit) and general corporate purposes.

Although the Company had restored operations prior to the end of March 29, 2015, revenues derived from our Fannie May and Harry London Chocolates during the fiscal third quarter were impacted due to limited product supply in the Company’s retail stores and for wholesale. The Company does not believe that there will be any further significant impact from this issue beyond the quarter ended March 29, 2015.

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its Winetasting Network business on December 31, 2013. The Company has classified for fiscal 2014 and prior, the results of the e-commerce and procurement business of Winetasting Network as a discontinued operation.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

Segment Information

1-800-FLOWERS.COM, Inc. and Subsidiaries

Selected Financial Information - Segment Information

(in thousands)

	Three Months Ended
	March 29, 2015			Impact of Warehouse Fire		Impact of Acquisition Costs		Impact of Integration and Severance Costs		Adjusted March 29, 2015			March 30, 2014			% Change
Net revenues from continuing operations:
1-800-Flowers.com Consumer Floral	$	116,705		$	-	$	-	$	-	$	116,705		$	122,256			-4.5	%
BloomNet Wire Service		22,950			100		-		-		23,050			22,571			2.1	%
Gourmet Food & Gift Baskets		92,951			3,338		-		-		96,289			35,330			172.5	%
Corporate		283			-		-		-		283			202			40.1	%
Intercompany eliminations		(652	)		-		-		-		(652	)		(768	)		15.1	%
Total net revenues from continuing operations	$	232,237		$	3,438	$	-	$	-	$	235,675		$	179,591			31.2	%

	Three Months Ended
	March 29, 2015		Impact of Warehouse Fire		Impact of Acquisition Costs		Impact of Integration and Severance Costs		Adjusted March 29, 2015		March 30, 2014		% Change

Gross profit from continuing operations:
1-800-Flowers.com Consumer Floral	$	45,716	$	-	$	-	$	-	$	45,716	$	47,565		-3.9	%
		39.2