UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 2006
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Old Country Road, Carle Place, New York 11514
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(Address of principal executive offices)(Zip code)
Registrant's telephone number, including area code: (516) 237-6000
Title of each class Name of each Exchange on which registered
Class A common stock, par value The Nasdaq Stock Market, Inc.
$0.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes | | No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15 (d) of the Act. Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
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). (Check
one):
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 aggregate market value of voting common stock held by non-affiliates of the
Registrant, based on the closing price of the Class A common stock on December
30, 2005 as reported on the Nasdaq National Market, was approximately
$173,999,000. Shares of common stock held by each officer and director and by
each person who owns 5% or more of the outstanding common stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The Registrant does not have any
non-voting common equity outstanding.
28,335.613
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(Number of shares of class A common stock outstanding as of September 8, 2006)
36,858,465
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(Number of shares of class B common stock outstanding as of September 8, 2006)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the
2006 Annual Meeting of Stockholders (the Definitive
Proxy Statement) are incorporated by reference into
Part III of this Report.
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended July 2, 2006
INDEX
PART I
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 18
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
Item 9A. Controls and Procedures 35
Item 9B. Other Information 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 39
Item 13. Certain Relationships and Related Transactions 39
Item 14. Principal Accountant Fees and Services 39
Part IV
Item 15. Exhibits and Financial Statement Schedules 40
Signatures 41
PART I
Item 1. BUSINESS
The Company
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(SM)"
program.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. 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 garden
merchandise from Plow & Hearth(R) (1-800-627-1712 or www.plowandhearth.com);
weather-themed gifts from Wind & Weather(R)(1-800-922-9463 or
www.windandweather.com), 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 www.cherylandco.com);
premium chocolates and confections from Fannie May Confections Brands
(www.fanniemay.com and www.harrylondon.com); gourmet foods from
Greatfoods.com(R) (www.greatfood.com), children's gifts from HearthSong(R)
(www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com); wine gifts from
the WineTasting Network(R) (www.ambrosiawine.com and www.winetasting.com); and
gift baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com).
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker
symbol FLWS.
References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" and the
"Company" refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's
principal offices are located at One Old Country Road, Suite 500, Carle Place,
NY 11514 and its telephone number at that location is (516) 237-6000.
The Origins of 1-800-FLOWERS.COM
The Company's operations began in 1976 when James F. McCann, its Chairman and
Chief Executive Officer, acquired a single retail florist in New York City,
which he subsequently expanded to a 14-store chain. Thereafter, the Company
modified its business strategy to take advantage of the rapid emergence of
toll-free calling. The Company acquired the right to use the toll-free telephone
number 1-800-FLOWERS, adopted it as its corporate identity and began to
aggressively build a national brand around it. The Company believes it was one
of the first companies to embrace this new way of conducting business.
To support the growth of its toll-free business and to provide superior customer
service, the Company developed an operating infrastructure that incorporated the
best available technologies. Over time, the Company implemented a sophisticated
transaction processing system that facilitated rapid order entry and
fulfillment, an advanced telecommunications system and multiple customer service
centers to handle increasing call volume.
To enable the Company to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, the
Company created BloomNet(R), a nationwide network including independent local
florists selected for their high-quality products, superior customer service and
order fulfillment and delivery capabilities.
The Company's online presence has enabled it to expand the number and types of
products it can effectively offer to its customers. As a result, the Company has
developed relationships with customers who purchase products for both a broad
range of celebratory gifting occasions as well as for everyday personal use.
Since 1995, the Company has broadened its product offering to include products
that a customer could expect to find in a high-end flower shop, including a wide
assortment of cut flowers and plants, candy, balloons, plush toys, giftware and
gourmet gift baskets. In addition, the Company has further expanded its product
1
offering to include home and garden merchandise through its April 1998
acquisition of The Plow & Hearth, Inc.; unique and educational children's gifts
through its acquisition of the HearthSong and Magic Cabin product lines in June
2001 and, more recently, weather-themed gifts and instruments through the
acquisition of Wind & Weather in October 2005. The Company has also
significantly expanded its presence in the food, wine and gift baskets category
through a combination of organic initiatives and strategic acquisitions
beginning with the purchase of GreatFood.com, Inc. in November 1999, followed by
the purchase of certain assets of The Popcorn Factory in May 2002, the addition
of wine gifts through the acquisition of The WineTasting Network in November
2004, the addition of cookies and other bakery gift items through the purchase
of Cheryl & Co. in March 2005 and, most recently adding premium chocolates and
confections with the acquisition of Fannie May Confections Brands, Inc. in May
2006.
The Company's Strategy
1-800-FLOWERS.COM's objective is to become the leading authority on thoughtful
gifting, to serve an expanding range of our customers celebratory needs, thereby
helping our customers connect with the important people in their lives. The
Company will continue to build on the trusted relationships with our customers
by providing them with ease of access, tasteful and appropriate gifts, and
superior service.
The Company believes that 1-800-FLOWERS.COM is one of the most recognized brands
in the floral and gift industry. The strength of its brand has enabled the
Company to extend its product offerings beyond the floral category into
complementary products, which include home and garden merchandise, children's
toys and games, gourmet popcorn, cookies and related baked and snack food
products, premium chocolate and confections, as well as wine gifts. This
extension of product offerings through its brands has enabled the Company to
increase the number of purchases and the average order value by existing
customers who have come to trust the 1-800-FLOWERS.COM brand, as well as
continue to attract new customers.
The Company believes its brands are characterized by:
o Convenience. All of the Company's product offerings can be purchased
either via the web, or via the Company's toll-free telephone numbers,
24 hours a day, seven days a week, for those customers who prefer a
personal gift advisor to assist them. The Company offers a variety of
delivery options, including same-day or next-day service throughout
the world.
o Quality. High-quality products are critical to the Company's continued
brand strength and are integral to the brand loyalty that it has built
over the years. The Company offers its customers a 100% satisfaction
guarantee on all of its products.
o Delivery. The Company has developed a market-proven fulfillment
infrastructure that allows delivery on a same-day, next-day and
any-day basis. Key to the Company's fulfillment capability is an
innovative "hybrid" model which combines BloomNet (comprised of
independent florists operating retail flower shops and Local
Fulfillment or Design Centers ("LFC's"), Company-owned stores,
LFC's, and franchise stores), with its eight distribution centers
located in California, Illinois, New York, Nevada, Ohio, and
Virginia, and third-party vendors who ship directly to the Company's
customers. These fulfillment points are connected by the Company's
proprietary "BloomLink" communication system, a secure internet-
based system through which orders and related information are
transmitted.
o Selection. Over the course of a year, the Company offers more than
2,000 varieties of fresh-cut flowers, floral arrangements and plants,
more than 5,600 SKUs of gifts, gourmet foods, cookies, chocolates
and wines, approximately 14,700 different SKUs for the home,
including garden accessories, casual lifestyle furnishings, weather
themed instruments and gift items, and unique and educational toys and
games.
o Customer Service. The Company strives to ensure that customer service,
whether online, via the telephone, or in one of its retail stores is
of the highest caliber. The Company operates five customer service
facilities to provide helpful assistance on everything from advice on
product selection to the monitoring of the fulfillment and delivery
process.
As part of the Company's continuing effort to serve the thoughtful gifting needs
of its customers, and leverage its business platform, where appropriate, the
Company intends to market other high-quality brands in addition to the
1-800-FLOWERS.COM brand. The Company intends to accomplish this through organic
growth, and where appropriate, through acquisition of complementary businesses.
In keeping with this strategy, in May 2006, the Company acquired Fannie May
Confections Brands, Inc. a manufacturer and direct retailer of premium
chocolates and confections, through its Fannie May(R), Harry London(R) and Fanny
Farmer(R) brands, while in March 2005, the Company acquired Cheryl&Co., a
manufacturer and direct marketer of premium cookies and related baked gift
items, and in November 2004, The Winetasting Network, a distributor and
direct-to-consumer marketer of wine. These acquisitions have enabled the Company
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to more fully develop its food, wine and gift baskets product line, which the
Company has identified as having significant revenue and earnings growth
potential. In November 2005, the Company acquired Wind & Weather, a
direct-marketer of weather-themed instruments and gift items. In June 2001 the
Company acquired The Children's Group, Inc. including its two brands of unique
and educational children's toys and games, HearthSong and Magic Cabin, deepening
its product assortment in the home and children's gift category which the
Company first entered in 1998, through its acquisition of The Plow & Hearth,
Inc., a direct marketer of home decor and garden merchandise. As a complement to
the Company's own brands and product lines, the Company has formed relationships
with Lenox(R), Waterford(R), Swarovski(R), Godiva(R), Hershey's(R), Gund(R),
Crabtree and Evelyn(R), and Yankee Candle(R), as well as developing signature
products with renowned celebrity floral artisans in order to provide its
customers with differentiated signature products and further its position as a
destination for all of their gifting needs.
Having now achieved a solid base of business, through organic efforts and
strategic acquisitions, management's current focus is on improving the Company's
earnings performance through a combination of gross margin improvement from
expanded overseas product sourcing and expected manufacturing efficiencies,
leveraging the Company's operating platform to reduce operating expenses, and
changes in advertising and marketing strategies designed to increase
effectiveness.
The Company's Products
The Company offers a wide range of products, including fresh-cut flowers, floral
arrangements and plants, gifts, popcorn, gourmet foods, cookies, candy and wine,
home and garden merchandise and unique toys and games for children. In addition
to selecting its core products, the Company's merchandising team works closely
with manufacturers and suppliers to select and design products that meet the
seasonal, holiday and other special needs of its customers. For the years ended
July 2, 2006, July 3, 2005, and June 27, 2004, the sale of floral products
represented 50.6%, 52.7%, and 52.2% of total combined telephonic and online net
revenues, respectively.
The Company's differentiated and value-added product offerings creates the
opportunity to have a relationship with customers who purchase items not only
for gift-giving occasions but also for everyday consumption. The Company's
merchandising team works closely with manufacturers and suppliers to select and
design its floral, gourmet foods and wine, home and garden and children's toys,
as well as other gift-related products that accommodate our customers' needs to
celebrate a special occasion, convey a sentiment or cater to a casual lifestyle.
As part of this continuing effort, the Company intends to continue to develop
differentiated products and signature collections that our customers have
embraced and come to expect from us while we eliminate marginal performers our
product offerings.
Over the course of a year, the Company's product selection consists of:
Flowers & Plants. The Company offers more than 1,600 varieties of fresh-cut
flowers and floral arrangements for all occasions and holidays, available for
same-day delivery. The Company provides its customers with a choice of florist
designed products, flowers delivered through its "Fresh From Our Growers (SM)"
program, and most recently, the Company expanded its successful "celebrity" gift
collections, including the unique floral creations of Jane Carroll, Julie McCann
Mulligan, Jane Packer, Preston Bailey and Nico De Swert. The Company also offers
approximately 400 varieties of popular plants to brighten the home and/or
office, and accent gardens and landscapes.
Gourmet Foods, Wine and Gifts. The Company offers more than 800 premium popcorn
and specialty snack products from The Popcorn Factory brand, as well as
approximately 400 carefully selected gourmet food and sweet products from the
GreatFood.com brand. Additionally, the Company has more than 900 premium cookies
and baked gift items from Cheryl & Co., which are delivered in beautiful and
innovative gift baskets and containers, providing customers with a variety of
assortments to choose from. Through the Winetasting Network, the Company
now offers its customer more than 500 different wines, primarily from
the prestigious wine regions in California. Currently, restrictions exist
in many states regarding interstate shipment of wine. As such, these items are
only available in selected states. Most recently, in May 2006, through the
acquisition of Fannie May Confections Brands, Inc. the Company offers more than
1,000 different selections of premium chocolate and candy. Many of the Company's
gourmet products can be packaged in seasonal, occasion specific or decorative
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tins, fitting the "giftable" requirement of our individual customers, while also
adding the capability to customize the tins with corporate logos and other
personalized features for the Company's corporate customer's gifting needs. The
Company offers more than 500 specially selected gift items, including plush toys
from Gund(R), balloons, bath and spa items and gift baskets, candles from Yankee
Candle(R), wreaths, ornaments, collectibles, home accessories and giftware.
Home and Children's Gifts. Through the Company's Plow & Hearth brands, including
most recently added Wind & Weather in November 2005, the Company offers more
than 7,800 SKUs for the home, hearth and outdoor living, including casual
lifestyle furniture and home accessories, clothing, footwear, candles and
lighting, vases, kitchen items and accents and approximately 2,500 gardening
items, including tools and accessories, pottery, nature and weather-related
products, books and related products. Through the HearthSong and Magic Cabin
brands, the Company offers over 4,200 products, including environmentally
friendly toys, plush stuffed animals, crafts and books with educational, nature
and art themes, as well as, natural-fiber soft dolls, kits and accessories for
children ages 3 through 12.
Marketing and Promotion
The Company's marketing and promotion strategy is designed to strengthen the
1-800-FLOWERS.COM brands, increase customer acquisition, build customer loyalty,
and encourage repeat purchases. The Company's goal is to make its brands
synonymous with thoughtful gifting. To do this, the Company intends to continue
to invest in its brands and acquisition of new customers through the use of
selective on and off-line media, direct marketing, public relations and
strategic internet relationships, while cost-effectively capitalizing on the
Company's large and loyal customer base.
Enhance its Customer Relationships. The Company intends to deepen its
relationship with its customers and be their trusted resource to fulfill their
need for quality, tasteful gifts. We plan to encourage more frequent and
extensive use of our branded Web sites, by continuing to provide product-related
content and interactive features which will enable the Company to reach its
customers during non-holiday periods, thereby increasing everyday purchases for
birthday's, anniversaries, weddings, and sympathy. Through customer panel
research, the 1-800-Flowers.com brand introduced a number of new signature
products during fiscal 2006 designed to increase everyday purchases. From its
celebrity floral artisan collection to the successful launch of its "Happy Hour"
collection of margarita, martini and daiquiri inspired floral arrangements,
which were advertised using innovative outdoor bus and billboard campaigns, the
Company's marketing and product offerings continue to evolve to meet consumer
needs. The Company will also continue to improve its customers' shopping
experience by personalizing the features of its Web site and, in compliance with
the Company's privacy policy, utilizing customer information to target product
promotions, identify individual and mass market consumption trends, remind
customers of upcoming occasions and convey other marketing messages. In
addition, the Company plans to drive purchase frequency improvements through the
use of loyalty, thank-you and reminder programs, as well as targeting catalog
content and mailings based on consumers changing purchasing habits. For example,
during fiscal 2006, the 1-800-Flowers.com brand introduced its Fresh Rewards
Program(R) whereby customers earn credit towards future purchases upon
achieving targeted spending levels. As of July 2, 2006, the Company's total
database of unique customers numbered approximately 28.0 million (13.6 million
of which have transacted business with the Company within the past 36 months).
Through its Business Gift Services division, the Company believes it has
significant opportunity to expand its corporate customer base and leverage
existing and/or develop successful gifting programs with corporate customers,
many of which are included in the Fortune 1000, such as AT&T, Bank of America,
General Electric, IBM, Verizon, Honeywell, Microsoft, Hewlett Packard, Ford, and
UPS, to name a few. These programs focus on developing and/or strengthening
strategic partnerships through the coordinated development of customized and
personalized gifts for their clients and employees, and are tailored to meet the
needs of small, mid-sized and large businesses. The Company helps its partners
manage the Life Celebrations at Work(SM) programs, which include occasions such
as Sympathy, Get Well, Anniversary, Birthday, Thank You and other daily floral
needs. Additionally, through the many brands supported by the Company, the
Business Gift Services division supports partners' holiday gifting, rewards and
recognition programs, conferences and events, as well as client acquisition and
customer retention programs to support their growth strategies.
Increase the Number of Online Customers. Online transactions are more cost
efficient to process. Although the Company expects its customers to choose the
most convenient channel available to them at the time of their purchase, the
4
Company expects its trend of online growth to continue. In order to maximize the
value of this trend, the Company intends to continue to:
o further build brand awareness to drive customers directly to the
Company's URLs, further reducing reliance on internet portals and
search engines; currently, greater than 70% of online revenues comes
directly to the Company's websites;
o cost effectively promote its Web site through internet portals,
online networks and search engines and affiliates;
o aggressively market the Company's Web site in its marketing
campaigns;
o facilitate access to the Company's Web site for its corporate
customers by implementing direct links from their internal corporate
networks, and develop customized co-branded micro-sites for larger
corporate partners; and
o actively promote the Company's Fresh Rewards loyalty program to
increase customer frequency and average order value.
In order to attract new customers and to increase purchase frequency and average
order value of existing customers, the Company markets and promotes its brands
and products as follows:
Direct Mail and Catalogs. The Company uses its direct mail promotions and
catalogs to increase the number of new customers and to increase purchase
frequency of its existing customers. Through the use of the Plow & Hearth, Wind
& Weather, HearthSong, Magic Cabin, Popcorn Factory and Cheryl & Co. catalogs,
the Company can utilize its extensive customer database to effectively
cross-promote its products. In addition to providing a direct sale mechanism,
these catalogs drive on-line sales and will attract additional customers to the
Company's Web sites. For the year ended July 2, 2006, the Company mailed in
excess of 130 million branded catalogs.
Off-line Media. The Company utilizes off-line media, including television, radio
and print to market its 1-800-Flowers.com brand and products. Off-line media
allows the Company to reach a large number of customers and to target particular
market segments.
The Company's Strategic Online Relationships. The Company promotes its products
through strategic relationships with leading internet portals, search engines
and online networks. The Company's online relationships include, among others,
AOL, Yahoo!, Microsoft, Google and Overture.
Affiliate and Co-Marketing Promotions. In addition to securing alliances with
frequently visited Web sites, the Company developed an affiliate network that
includes thousands of Web sites operated by third parties. Affiliate
participation may be terminated by them or by the Company at any time. These Web
sites earn commissions on purchases made by customers referred from their sites
to the Company's Web site. In order to expand the reach of its marketing
programs and stretch its marketing dollars, the Company has established a number
of co-marketing relationships and promotions to advertise its products. For
example, the Company has established co-marketing arrangements with American,
United and Delta Airlines, as well as Upromise, Capital One, American Express,
VISA and MasterCard, among others.
E-mails. The Company is able to capitalize on its customer database of
approximately 28.0 million unique customers (13.6 million of which have
transacted business with the Company within the past 36 months), 11.8 million of
which have transacted business with the Company on-line (7.6 million of which
have transacted business with the Company online within the past 36 months), by
utilizing cost-effective, targeted e-mails to notify customers of product
promotions, remind them of upcoming gifting occasions and convey other marketing
messages.
The Company's Web Sites
The Company offers floral, plant, gift baskets, gourmet foods, chocolate and
candies, plush and specialty gift products through its 1-800-FLOWERS.COM Web
site (www.1800flowers.com). Customers can come to the web site directly or be
linked by one of the Company's portal providers, search engine, or affiliate
relationships. These include AOL (keyword:flowers), Yahoo!, Microsoft, Google
and Overture, as well as thousands of its online affiliate program members.
The Company also offers home and garden products through Plow & Hearth
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(www.plowandhearth.com), weather-themed gifts through Wind & Weather
(www.windandweather.com) premium chocolates and confections from Fannie May
Confections Brands (www.fanniemay.com and www.harrylondon.com), gourmet food
products through GreatFood.com (www.greatfood.com), premium popcorn and
specialty food products through The Popcorn Factory (www.thepopcornfactory.com),
exceptional baked cookies and baked gifts from Cheryl&Co. (www.cherylandco.com),
children's gifts through its HearthSong (www.hearthsong.com) and Magic Cabin
(www.magiccabin.com), and wine gifts from The Winetasting Network
(www.ambrosiawine.com and www.winetasting.com) web sites. Greater than 70% of
online revenues are derived from traffic coming directly to one of the Company's
Universal Resource Locators ("URL's").
The Company's web sites allow customers to easily browse and purchase its
products, promote brand loyalty and encourage repeat purchases by providing an
inviting customer experience. The Company's web sites offer customers detailed
product information, complete with photographs, personalized shopping services,
including search and order tracking, contests, sweepstakes, gift-giving
suggestions and reminder programs, home decorating and how-to-tips and
information about special events and offers. The Company has designed its Web
sites to be fast, secure and easy to use and allows customers to order products
with minimal effort. The Company's Web sites include the following key features
in addition to the variety of delivery and shipping options (same day/next day)
and 24 hour/7 day customer service that are available to all its customers:
Technology Infrastructure
The Company believes it has been and continues to be a leader in implementing
new technologies and systems to give its customers the best possible shopping
experience, whether online or over the telephone. Through the use of customized
software applications, the Company is able to retrieve, sort and analyze
customer information to enable it to better serve its customers and target its
product offerings. The Company's online and telephonic orders are fed directly
from the Company's secure Web sites, or with the assistance of a gift advisor,
into a transaction processing system which captures the required customer and
recipient information. The system then routes the order to the appropriate
Company warehouse, or for florist fulfilled or drop-shipped items, selects a
vendor to fulfill the customer's order and electronically transmits the
necessary information using BloomLink, the Company's proprietary communication
system, assuring timely delivery. In addition, the Company's gift advisors have
electronic access to this system, enabling them to assist in order fulfillment
and subsequently track other customer and/or order information.
In prior years, the Company has invested heavily in building a scalable
technology platform to support the Company's order volume growth. The Company
employs a combination of in-house personnel which concentrate on core
competencies, including strategic direction and system and project management
and implementation. However, during fiscal 2006, the Company began outsourcing
certain of its programming and support services in order to achieve cost
efficiencies, allowing the Company to focus its resources on customer specific
projects to ensure an enjoyable shopping experience while providing improved
operational flexibility, additional capacity and system redundancy.
The Company's technology infrastructure, primarily consisting of the Company's
Web sites, transaction processing, customer databases and telecommunications
systems, is built and maintained for reliability, security, scalability and
flexibility. To minimize the risk of service interruptions from unexpected
component or telecommunications failure, maintenance and upgrades, the Company
has built full back-up and system redundancies into those components of its
systems that have been identified as critical. The Company plans to continue to
invest in technologies that will improve and expand its e-commerce and
telecommunication capabilities and utilize its informational technology
expertise to improve the technology infrastructure of its recently acquired
businesses to accommodate anticipated growth and improve their customers'
shopping experiences.
Fulfillment and Manufacturing Operations
The Company's customers primarily place their orders either online or over the
telephone. The Company's development of a hybrid fulfillment system which
enables the Company to offer same-day, next-day and any-day delivery, combines
the use of BloomNet (comprised of independent florists operating retail flower
shops and LFC's, Company-owned stores and LFC's, and franchise stores), with the
Company-owned distribution centers and brand-name vendors who ship directly to
6
the Company's customers. While providing a significant competitive advantage in
terms of delivery options, the Company's fulfillment system also has the added
benefit of reducing the Company's capital investments in inventory and
infrastructure. All of the Company's products are backed by a 100% satisfaction
guarantee, and the Company's business is not dependent on any single third-party
supplier.
To ensure reliable and efficient communication of online and telephonic orders
to its BloomNet members and third party gift vendors, the Company
internally-developed BloomLink(R), a proprietary and secure internet-based
communications system which is available to all BloomNet members and third-party
gift vendors. The Company also has the ability to arrange for international
delivery of floral products through independent wire services and direct
relationships.
The Company intends to improve its fulfillment capabilities to make its
operations more efficient by:
o strengthening relationships and increasing the number of its vendors
and BloomNet member florists, as appropriate, to ensure geographic
coverage and shorten delivery times;
o continuing to improve warehousing operations and reduce fulfillment
times in support of its floral, gifts, gourmet food and wines, and
home product lines; and
o expanding the use of cross-dock logistics, and work with additional
third party carriers to increase volume capability and utilizing
cross brand fulfillment capabilities to mitigate the impact of fuel
cost increases.
Fulfillment of products is as follows:
Flowers and Plants. A majority of the Company's floral orders are fulfilled by
one of the Company's BloomNet members, allowing the Company to deliver its
floral products on a same-day or next-day basis to ensure freshness and to meet
its customers' need for immediate gifting. In addition, the Company is better
positioned to ensure consistent product quality and presentation and offer a
greater variety of arrangements, which creates a better experience for its
customers and gift recipients. The Company selects retail florists for BloomNet
based upon the florist's design staff, facilities, quality of floral processing,
and delivery capabilities and allocates orders to members within a geographical
area based on historical performance of the florist in fulfilling orders, and
the number of BloomNet florists currently serving the area. The Company
regularly monitors BloomNet florists' performance and adherence to the Company's
quality standards to ensure proper fulfillment.
The Company's relationships with its BloomNet members are non-exclusive. Many
florists, including many BloomNet florists, also are members of other floral
fulfillment organizations. The BloomNet agreements generally are cancelable by
either party with ten days notification and do not guarantee any orders, dollar
amounts or exclusive territories from the Company to the florist. In fiscal
2001, the Company began entering into Order Fulfillment Agreement(s) with
selected BloomNet members to operate LFC's in high volume markets to facilitate
the fulfillment of the Company's floral and gift orders, improving the economics
of florist fulfilled transactions, and improving the Company's ability to
control product quality and branding. As of July 2, 2006, the Company had
entered into approximately 66 Order Fulfillment Agreements with selected
BloomNet members to operate LFC's, providing coverage of all significant
population centers across the United States. Generally, these agreements provide
for a three-year term, terminable upon 30 days notice upon breach and
immediately by the Company in the event of certain specified defaults by the
operator of the LFC. In consideration of the operator's satisfactory
performance, the Company agrees to use reasonable efforts to forward orders with
a specified minimum merchandise value during each year of the agreement. The
Company has not granted an exclusive territory to any operator.
In certain instances, the Company is required to fulfill orders through
non-BloomNet members, and transmits these orders to the fulfilling florist
using the communication system of an independent wire service or via telephone.
In addition to its Florist Designed product, the Company offers its customers an
alternative to florist designed products through its Fresh From Our Growers(SM)
program and by providing for a full array of products from bouquets to unique
floral celebrity expert designed products.
As of July 2, 2006, the Company operates 15 floral retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 8 fulfillment
centers. In addition, the Company has 85 franchised stores, located primarily in
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California, Colorado, New York and Texas. Company-owned stores serve as local
points of fulfillment and enable the Company to test new products and marketing
programs.
Gourmet Foods, Wine and Gifts. In order to take advantage of improved margins,
better control quality and to offer premium branded signature products in the
Food, Wine and Gift product category, which was identified by the Company as one
of its fastest growing and most profitable product lines, the Company has
recently acquired several gourmet food retailers with manufacturing operations.
The Company's premium chocolates are manufactured and distributed from its
200,000 square foot production facility in Akron, Ohio, and the Company's cookie
and baked gifts are fulfilled from its 51,000 square foot baking and
distribution center in Westerville, Ohio, while its premium popcorn and related
snack products are shipped from the Company's 148,000 square foot manufacturing
and distribution center located in Lake Forest, Illinois. Most wine gift and
fulfillment services are provided through the Company's 52,000 square foot
fulfillment center in Napa, California. The remainder of the Company's wine and
wine-related items are fulfilled by third-party gift vendors that ship products
directly to the customer by next-day or other delivery options chosen by the
customer.
Home and Children's Gifts. The Company packages and ships its home and
children's gift products primarily from its 300,000 square foot distribution
center located in Madison, Virginia, or through its 200,000 square foot
distribution center in Vandalia, Ohio or by third-party product suppliers using
next-day or other delivery options selected by the customer.
BloomNet Business
In order to further strengthen its florist designed fulfillment capabilities,
and to compete in the profitable florist-to-florist business, during fiscal
2005, the Company began expanding its network of BloomNet florists. The
Company's BloomNet business provides its members with products and services,
including: (i) clearinghouse services, consisting of the settlement of orders
between sending florists (including the 1-800-Flowers.com brand) and receiving
florists, (ii) advertising, in the form of member directories, (iii)
communication services, by which BloomNet florists are able to send and receive
orders and communicate between members, using Bloomlink, the Company's
proprietary electronic communication system, and (iv) wholesale products, which
consist of branded and non-branded floral supplies, enabling member florists to
reduce their costs through 1-800-Flowers purchasing leverage, while also
ensuring that member florists will be able to fulfill 1-800-Flowers.com brand
orders based on recipe specifications. While maintaining industry-high quality
standards for its 1-800-Flowers.com brand customers, the Company offers florists
a compelling value proposition, offering products and services that its florists
need to grow their business and to enhance profitability. After a two year
period of investment, during which time the Company increased its membership
from a base of approximately 3,000 members, to approximately 9,000 members as of
July 2, 2006, the Company expects that BloomNet operations will begin to
generate increasing profitability during fiscal 2007.
Business Category Reorganization
With the addition of Fannie May Confections Brands and the growing importance of
BloomNet to the Company's operating results, the Company plans to restructure
its organization in fiscal 2007 in order to strengthen its execution and
customer focus, and align resources to better meet the demands of the consumers
that it serves and to deliver improved financial performance. To enhance the
visibility of the growth and profit characteristics of its different business
categories, the Company will provide results for its Consumer Floral, BloomNet,
Home & Children's Gifts, and Food, Wine and Gift Baskets businesses.
Since the reorganization will not become effective until after fiscal 2006, the
descriptions of the Company's business and its financial reporting in this
report will be based on the Company's organization as in effect during fiscal
2006.
Seasonality
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, including the acquisitions of The
Winetasting Network and Cheryl & Co. during fiscal 2005, as well as, Wind &
Weather and Fannie May Confections Brands, Inc. in fiscal 2006, the Thanksgiving
through Christmas holiday season, which falls within the Company's second fiscal
quarter, generates the highest proportion of the Company's annual revenues.
8
In addition, as the result of a number of major floral gifting occasions,
including Mother's Day, Administrative Professionals Week and Easter, revenues
also rise during the Company's fiscal fourth quarter. Finally, results during
the Company's fiscal first quarter will be negatively impacted by the
aforementioned acquisitions due to their seasonal nature and the incremental
overhead incurred during this slow period.
Competition
The growing popularity and convenience of e-commerce has continued to give rise
to established businesses on the Internet. In addition to selling their products
over the Internet, many of these retailers sell their products through a
combination of channels by maintaining a Web site, a toll-free phone number and
physical locations. Additionally, several of these merchants offer an expanding
variety of products and some are attracting an increasing number of customers.
Certain mass merchants have expanded their offerings to include competing
products and may continue to do so in the future. These mass merchants, as well
as other potential competitors, may be able to:
o undertake more extensive marketing campaigns for their brands and
services;
o adopt more aggressive pricing policies; and
o make more attractive offers to potential employees, distributors and
retailers.
In addition, the Company faces intense competition in each of its individual
product categories. In the floral industry, there are various providers of
floral products, none of which is dominant in the industry. The Company's
competitors include:
o retail floral shops, some of which maintain toll-free telephone
numbers and websites;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty retailers with floral
departments.
Similarly, the plant, gift basket, gourmet foods and wine, unique gifts,
children's toys and home and garden categories are highly competitive. Each of
these categories encompasses a wide range of products, is highly fragmented and
is served by a large number of companies, none of which is dominant. Products in
these categories may be purchased from a number of outlets, including mass
merchants, telemarketers, retail specialty shops, online retailers and
mail-order catalogs.
The Company believes the strength of its brands, product selection, customer
relationships, technology infrastructure and fulfillment capabilities position
it to compete effectively against its current and potential competitors in each
of its product categories. However, increased competition could result in:
o price reductions, decreased revenues and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors may adversely impact the Company's business
and results of operations.
Government Regulation and Legal Uncertainties
The Internet continues to evolve and there are laws and regulations directly
applicable to e-commerce. Legislatures are also considering an increasing number
of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
o user privacy;
o pricing;
o content;
o connectivity;
o intellectual property;
o distribution;
9
o taxation;
o liabilities;
o antitrust; and
o characteristics and quality of products and services.
Further, the growth and development of the market for online services may prompt
more stringent consumer protection laws that may impose additional burdens on
those companies conducting business online. The adoption of any additional laws
or regulations may impair the growth of the Internet or commercial online
services. This could decrease the demand for the Company's services and increase
its cost of doing business. Moreover, the applicability to the Internet of
existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on the
Company's business, financial condition and results of operations.
States or foreign countries might attempt to regulate the Company's business or
levy additional sales or other taxes relating to its activities. Because the
Company's products and services are available over the Internet anywhere in the
world, multiple jurisdictions may claim that the Company is required to do
business as a foreign corporation in one or more of those jurisdictions. Failure
to qualify as a foreign corporation in a jurisdiction where the Company is
required to do so could subject it to taxes and penalties. States or foreign
governments may charge the Company with violations of local laws.
Intellectual Property and Proprietary Rights
The Company regards its service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to its success. The Company has
applied for or received trademark and/or service mark registration for, among
others, "1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "Wind & Weather",
"GreatFood.com", "The Popcorn Factory", "TheGift.com", "HearthSong", "Magic
Cabin", "Winetasting Network", "Cheryl&Co.", "Fannie May" and "Harry London".
The Company also has rights to numerous domain names, including
www.1800flowers.com, www.800flowers.com, www.flowers.com, www.plowandhearth.com,
www.windandweather.com, www.greatfood.com, www.thepopcornfactory.com,
www.hearthsong.com, www.magiccabin.com, www.ambrosiawine.com,
www.winetasting.com, www.cherylandco.com, www.fanniemay.com and
www.harrylondon.com. In addition, the Company has developed transaction
processing and operating systems as well as marketing data, and customer and
recipient information databases.
The Company relies on trademark, unfair competition and copyright law, trade
secret protection and contracts such as confidentiality and license agreements
with its employees, customers, vendors and others to protect its proprietary
rights. Despite the Company's precautions, it may be possible for competitors to
obtain and/or use the Company's proprietary information without authorization or
to develop technologies similar to the Company's and independently create a
similarly functioning infrastructure. Furthermore, the protection of proprietary
rights in Internet-related industries is uncertain and still evolving. The laws
of some foreign countries do not protect proprietary rights to the same extent
as do the laws of the United States. The Company's means of protecting its
proprietary rights in the United States or abroad may not be adequate.
The Company intends to continue to license technology from third parties,
including Oracle, Microsoft, Verizon and AT&T, for its communications technology
and the software that underlies its business systems. The market is evolving and
the Company may need to license additional technologies to remain competitive.
The Company may not be able to license these technologies on commercially
reasonable terms or at all.
Third parties have in the past infringed or misappropriated the Company's
intellectual property or similar proprietary rights. The Company believes
infringements and misappropriations will continue to occur in the future. The
Company intends to police against infringement and misappropriation. However,
the Company cannot guarantee it will be able to enforce its rights and enjoin
the alleged infringers from their use of confusingly similar trademarks, service
marks, telephone numbers and domain names.
10
In addition, third parties may assert infringement claims against the Company.
The Company cannot be certain that its technologies or its products and services
do not infringe valid patents, trademarks, copyrights or other proprietary
rights held by third parties. The Company may be subject to legal proceedings
and claims from time to time relating to its intellectual property and the
intellectual property of others in the ordinary course of its business.
Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running the Company's business.
Employees
As of July 2, 2006, the Company had a total of approximately 3,700 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service, manufacturing and retail and fulfillment
personnel. The Company's personnel are not represented under collective
bargaining agreements and the Company considers its relations with its employees
to be good.
Item 1A. Risk Factors
Cautionary Statements Under the Private Securities Litigation Reform Act of 1995
Our disclosures and analysis in this Form 10-K contain some forward-looking
statements that set forth anticipated results based on management's plans and
assumptions. From time to time, we also provide forward-looking statements in
other statements we release to the public as well as oral forward-looking
statements. Such statements give our current expectations or forecasts of future
events; they do not relate strictly to historical or current facts. We have
tried, wherever possible, to identify such statements by using words such as
"anticipate," "estimate," "expect," "project," "intend," "plan, "believe" and
similar expressions in connection with any discussion of future operating or
financial performance. In particular, these include statements relating to
future actions; the effectiveness of our marketing programs; the performance of
our existing products and services; our ability to attract and retain customers
and expand our customer base; our ability to enter into or renew online
marketing agreements; our ability to respond to competitive pressures; expenses,
including shipping costs and the costs of marketing our current and future
products and services; the outcome of contingencies, including legal proceedings
in the normal course of business; and our ability to integrate acquisitions.
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 risk, uncertainties and potentially
inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
could differ materially from past results and those anticipated, estimated or
projected. You should bear this in mind as you 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 10-Q and 8-K reports to the SEC. Also note we provide the following
cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our business. These are factors that, individually or in
the aggregate, we think could cause our actual results to differ materially from
expected and historical results. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion
of all potential risks and uncertainties.
The Company's operating results may fluctuate, and this fluctuation could cause
financial results to be below expectations. The Company's operating results may
fluctuate from period to period for a number of reasons. In budgeting the
Company's operating expenses for the foreseeable future, the Company assumes
that revenues will continue to grow; however, some of the Company's operating
expenses are fixed in the short term. Sales of the Company's products are
seasonal, concentrated in the fourth calendar quarter, due to the Thanksgiving
and Christmas-time holidays, and the second calendar quarter, due to Mother's
Day and Administrative Professionals' Week. In anticipation of increased sales
activity during these periods, the Company hires a significant number of
temporary employees to supplement its permanent staff and the Company increases
its inventory levels. If revenues during these periods do not meet the Company's
expectations, it may not generate sufficient revenue to offset these increased
costs and its operating results may suffer.
11
The Company's quarterly operating results may significantly fluctuate and you
should not rely on them as an indication of its future results. The Company's
future revenues and results of operations may significantly fluctuate due to a
combination of factors, many of which are outside of management's control. The
most important of these factors include:
o seasonality;
o the retail economy;
o the timing and effectiveness of marketing programs;
o the timing of the introduction of new products and services;
o the Company's ability to find and maintain reliable sources for
certain of its products;
o the timing and effectiveness of capital expenditures;
o the Company's ability to enter into or renew online marketing
agreements; and
o competition.
The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue
without a corresponding reduction to its expenses, operating results may suffer.
The Company's operating results for any particular quarter may not be indicative
of future operating results. You should not rely on quarter-to-quarter
comparisons of results of operations as an indication of the Company's future
performance. It is possible that results of operations may be below the
expectations of public market analysts and investors, which could cause the
trading price of the Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the Company may
vary with general economic conditions. If general economic conditions
deteriorate and the Company's customers have less disposable income, consumers
may spend less on its products and its quarterly operating results may suffer.
If the Company's customers do not find its expanded product lines appealing,
revenues may not grow and net income may decrease. The Company's business
historically has focused on offering floral and floral-related gift products.
Although the Company has been successful in its expanded product lines including
plants, gift baskets, popcorn, gourmet food and wine, unique or specialty gifts,
home and garden accessories, and children's gifts, it expects to continue to
incur significant costs in marketing these products. If the Company's customers
do not continue to find its product lines appealing, the Company may not
generate sufficient revenue to offset its related costs and its results of
operations may be negatively impacted.
If the Company fails to develop and maintain its brands, it may not increase or
maintain its customer base or its revenues. The Company must continue to develop
and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its
revenues. In addition, the Company has introduced and acquired other brands in
the past, and may continue to do so in the future. The Company believes that the
importance of brand recognition will increase as it expands its product
offerings. Many of the Company's customers may not be aware of the Company's
non-floral products. If the Company fails to advertise and market its products
effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
will also depend on its success in providing its customers high-quality products
and a high level of customer service. If the Company's customers do not perceive
its products and services to be of high quality, the value of the
1-800-FLOWERS.COM brands would be diminished and the Company may lose customers
and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate
a significant amount of traffic could limit the growth of the Company's
business. Although the Company expects a significant portion of its online
customers will continue to come directly to its Website, it will also rely on
third party Web sites, search engines and affililates with which the Company has
strategic relationships for traffic. If these third-parties do not attract a
significant number of visitors, the Company may not receive a significant number
of online customers from these relationships and its revenues from these
relationships may decrease or remain flat. There continues to be strong
12
competition to establish or maintain relationships with leading Internet
companies, and the Company may not successfully enter into additional
relationships, or renew existing ones beyond their current terms. The Company
may also be required to pay significant fees to maintain and expand existing
relationships. The Company's online revenues may suffer if it does not enter
into new relationships or maintain existing relationships or if these
relationships do not result in traffic sufficient to justify their costs.
If local florists and other third-party vendors do not fulfill orders to the
Company's customers' satisfaction, customers may not shop with the Company
again. In many cases, floral orders placed by the Company's customers are
fulfilled by local independent florists, a majority of which are members of
BloomNet. The Company does not directly control any of these florists. In
addition, many of the non-floral products sold by the Company are manufactured
and delivered to its customers by independent third-party vendors. If customers
are dissatisfied with the performance of the local florist or other third-party
vendors, they may not utilize the Company's services when placing future orders
and its revenues may decrease.
If a florist discontinues its relationship with the Company, the Company's
customers may experience delays in service or declines in quality and may not
shop with the Company again. Many of the Company's arrangements with local
florists for order fulfillment may be terminated with 10 days notice. If a
florist discontinues its relationship with the Company, the Company will be
required to obtain a suitable replacement located in the same geographic area,
which may cause delays in delivery or a decline in quality, leading to customer
dissatisfaction and loss of customers.
If a significant amount of customers are not satisfied with their purchase, the
Company will be required to incur substantial costs to issue refunds, credits or
replacement products. The Company offers its customers a 100% satisfaction
guarantee on its products. If customers are not satisfied with the products they
receive, the Company will either replace the product for the customer or issue
the customer a refund or credit. The Company's net income would decrease if a
significant number of customers request replacement products, refunds or credits
and the Company is unable to pass such costs onto the supplier.
Increased shipping costs and labor stoppages may adversely affect sales of the
Company's products. Many of the Company's products are delivered to customers
either directly from the manufacturer or from the Company's fulfillment centers
located in California, Illinois, New York, Ohio and Virginia. The Company has
established relationships with Federal Express, United Parcel Service and other
common carriers for the delivery of these products. If these carriers were to
increase the prices they charge to ship the Company's goods, and the Company
passes these increases on to its customers, its customers might choose to buy
comparable products locally to avoid shipping charges. In addition, these
carriers may experience labor stoppages, which could impact the Company's
ability to deliver products on a timely basis to our customers and adversely
affect its customer relationships.
If the Company fails to continuously improve its web site, it may not attract or
retain customers. If potential or existing customers do not find the Company's
Web site a convenient place to shop, the Company may not attract or retain
customers and its sales may suffer. To encourage the use of the Company's web
site, it must continuously improve its accessibility, content and ease of use.
Customer traffic and the Company's business would be adversely affected if
competitors' web sites are perceived as easier to use or better able to satisfy
customer needs.
Competition in the floral, plant, gift basket, gourmet food and wine, specialty
gift, children's toys and games and home and garden industries is intense and a
failure to respond to competitive pressure could result in lost revenues. There
are many companies that offer products in these categories. In the floral
category, the Company's competitors include:
o retail floral shops, some of which maintain toll-free telephone
numbers and web sites;
o online floral retailers;
o catalog companies that offer floral products;
o floral telemarketers and wire services; and
o supermarkets, mass merchants and specialty gift retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food, cookie, candy, wine,
specialty gift, children's toys and home and garden categories are highly
competitive. Each of these categories encompasses a wide range of products and
13
is highly fragmented. Products in these categories may be purchased from a
number of outlets, including mass merchants, retail shops, online retailers and
mail-order catalogs.
Competition is intense and the Company expects it to increase. Increased
competition could result in:
o price reductions, decreased revenue and lower profit margins;
o loss of market share; and
o increased marketing expenditures.
These and other competitive factors could materially and adversely affect the
Company's results of operations.
If the Company does not accurately predict customer demand for its products, it
may lose customers or experience increased costs. In the past, the Company did
not need to maintain a significant inventory of products. However, as the
Company expands the volume of non-floral products offered to its customers, the
Company will be required to increase inventory levels and the number of products
maintained in its warehouses. If the Company overestimates customer demand for
its products, excess inventory and outdated merchandise could accumulate, tying
up working capital and potentially resulting in reduced warehouse capacity and
inventory losses due to damage, theft and obsolescence. If the Company
underestimates customer demand, it may disappoint customers who may turn to its
competitors. Moreover, the strength of the 1-800-FLOWERS.COM brands could be
diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
rise or flowers may be unavailable and the Company's revenues and gross margins
could decline. A variety of factors affect the supply of flowers in the
country-regionplaceUnited States and the price of the Company's floral products.
If the supply of flowers available for sale is limited due to weather conditions
or other factors, prices for flowers could rise and customer demand for the
Company's floral products may be reduced, causing revenues and gross margins to
decline. Alternatively, the Company may not be able to obtain high quality
flowers in an amount sufficient to meet customer demand. Even if available,
flowers from alternative sources may be of lesser quality and/or may be more
expensive than those currently offered by the Company.
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that
this will continue in the future. The availability and price of flowers could be
affected by a number of factors affecting these regions, including:
o import duties and quotas;
o agricultural limitations and restrictions to manage pests and disease;
o changes in trading status;
o economic uncertainties and currency fluctuations;
o severe weather;
o work stoppages;
o foreign government regulations and political unrest; and
o trade restrictions, including United States retaliation against
foreign trade practices.
The Company's franchisees may damage its brands or increase its costs by failing
to comply with its franchise agreements or its operating standards. The
Company's franchise business is governed by its Uniform Franchise Offering
Circulars, franchise agreements and applicable franchise law. If the Company's
franchisees do not comply with its established operating standards or the terms
of the franchise agreements, the 1-800-FLOWERS.COM brands may be damaged. The
Company may incur significant additional costs, including time-consuming and
expensive litigation, to enforce its rights under the franchise agreements.
Additionally, the Company is the primary tenant on certain leases, which the
franchisees sublease from the Company. If a franchisee fails to meet its
obligations as subtenant, the Company could incur significant costs to avoid
default under the primary lease. Furthermore, as a franchiser, the Company has
obligations to its franchisees. Franchisees may challenge the performance of the
Company's obligations under the franchise agreements and subject it to costs in
defending these claims and, if the claims are successful, costs in connection
with their compliance.
14
If third parties acquire rights to use similar domain names or phone numbers or
if the Company loses the right to use its phone numbers, its brands may be
damaged and it may lose sales. The Company's Internet domain names are an
important aspect of its brand recognition. The Company cannot practically
acquire rights to all domain names similar to www.1800flowers.com, or its other
brands, whether under existing top level domains or those issued in the future.
If third parties obtain rights to similar domain names, these third parties may
confuse the Company's customers and cause its customers to inadvertently place
orders with these third parties, which could result in lost sales and could
damage its brands.
Likewise, the phone number that spells 1-800-FLOWERS is important to the
Company's brand and its business. While the Company has obtained the right to
use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as
common toll-free "FLOWERS" misdials, it may not be able to obtain rights to use
the FLOWERS phone number as new toll-free prefixes are issued, or the rights to
all similar and potentially confusing numbers. If third parties obtain the phone
number which spells "FLOWERS" with a different prefix or a toll-free number
similar to FLOWERS, these parties may also confuse the Company's customers and
cause lost sales and potential damage to its brands. In addition, under
applicable FCC rules, ownership rights to phone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS (1-800-356-9377).
A lack of security over the Internet may cause Internet usage to decline and
cause the Company to expend capital and resources to protect against security
breaches. A significant barrier to electronic commerce over the Internet has
been the need for secure transmission of confidential information and
transaction information. Internet usage could decline if any well-publicized
compromise of security occurred. Additionally, computer "viruses" may cause the
Company's systems to incur delays or experience other service interruptions.
Such interruptions may materially impact the Company's ability to operate its
business. If a computer virus affecting the Internet in general is highly
publicized or particularly damaging, the Company's customers may not use the
Internet or may be prevented from using the Internet, which would have an
adverse effect on its revenues. As a result, the Company may be required to
expend capital and resources to protect against or to alleviate these problems.
Unexpected system interruptions caused by system failures may result in reduced
revenues and harm to the Company's brand. In the past, particularly during peak
holiday periods, the Company has experienced significant increases in traffic on
its Web site and in its toll-free customer service centers. The Company's
operations are dependent on its ability to maintain its computer and
telecommunications systems in effective working order and to protect its systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. The Company's systems have in the past, and may in
the future, experience:
o system interruptions;
o long response times; and
o degradation in service.
The Company's business depends on customers making purchases on its systems, its
revenues may decrease and its reputation could be harmed if it experiences
frequent or long system delays or interruptions or if a disruption occurs during
a peak holiday season.
If AT&T and Verizon do not adequately maintain the Company's telephone service,
the Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and Verizon to provide telephone services to its
customer service centers. Although the Company maintains redundant
telecommunications systems, if AT&T and Verizon experience system failures or
fail to adequately maintain the Company's systems, the Company may experience
interruptions and its customers might not continue to utilize its services. If
the Company loses its telephone service, it will be unable to generate revenue.
The Company's future success depends upon these third-party relationships
because it does not have the resources to maintain its telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms may disrupt the Company's operations or
require it to incur significant unanticipated costs.
Interruptions in Teleflora's Dove System or a reduction in the Company's access
to this system may disrupt order fulfillment and create customer
dissatisfaction. A minimal portion of the Company's customers' orders are
15
communicated to the fulfilling florist through a third party system. This system
is an order processing and messaging network used to facilitate the transmission
of floral orders between florists. If this system experiences interruptions in
the future, the Company could experience difficulties in fulfilling some of its
customers' orders and those customers might not continue to shop with the
Company.
The Company's operating results may suffer due to economic, political and social
unrest or disturbances. Like other American businesses, the Company is unable to
predict what long-term effect acts of terrorism, war, or similar unforeseen
events, may have on its business. The Company's results of operations and
financial condition could be adversely impacted if such events cause an economic
slowdown in the United States, or other negative effects that cannot now be
anticipated.
If the Company is unable to hire and retain key personnel, its business may
suffer. The Company's success is dependent on its ability to hire, retain and
motivate highly qualified personnel. In particular, the Company's success
depends on the continued efforts of its Chairman and Chief Executive Officer,
James F. McCann, and its President, Christopher G. McCann, as well as its senior
management team which help manage its business. The loss of the services of any
of the Company's executive management or key personnel or its inability to
attract qualified additional personnel could cause its business to suffer and
force it to expend time and resources in locating and training additional
personnel.
Many governmental regulations may impact the Internet, which could affect the
Company's ability to conduct business. Any new law or regulation, or the
application or interpretation of existing laws, may decrease the growth in the
use of the Internet or the Company's Web site. The Company expects there will be
an increasing number of laws and regulations pertaining to the Internet in the
United States and throughout the world. These laws or regulations may relate to
liability for information received from or transmitted over the Internet, online
content regulation, user privacy, taxation and quality of products and services
sold over the Internet. Moreover, the applicability to the Internet of existing
laws governing intellectual property ownership and infringement, copyright,
trademark, trade secret, obscenity, libel, employment, personal privacy and
other issues is uncertain and developing. This could decrease the demand for the
Company's products, increase its costs or otherwise adversely affect its
business.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of the Company's Internet business or its marketing efforts. The Federal
Trade Commission has proposed regulations regarding the collection and use of
personal identifying information obtained from individuals when accessing Web
sites, with particular emphasis on access by minors. These regulations may
include requirements that the Company establish procedures to disclose and
notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by the Company. These regulations
may also include enforcement and redress provisions. Moreover, even in the
absence of those regulations, the Federal Trade Commission has begun
investigations into the privacy practices of other companies that collect
information on the Internet. One investigation resulted in a consent decree
under which an Internet company agreed to establish programs to implement the
principles noted above. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts, or those of other governmental bodies, may adversely affect its ability
to collect demographic and personal information from users, which could
adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may
damage its brands. Unauthorized use of the Company's intellectual property by
third parties may damage its brands and its reputation and may likely result in
a loss of customers. It may be possible for third parties to obtain and use the
Company's intellectual property without authorization. Third parties have in the
past infringed or misappropriated the Company's intellectual property or similar
proprietary rights. The Company believes infringements and misappropriations
will continue to occur in the future. Furthermore, the validity, enforceability
and scope of protection of intellectual property in Internet-related industries
is uncertain and still evolving. The Company has been unable to register certain
of its intellectual property in some foreign countries and, furthermore, the
laws of some foreign countries are uncertain or do not protect intellectual
property rights to the same extent as do the laws of the United States.
Defending against intellectual property infringement claims could be expensive
and, if the Company is not successful, could disrupt its ability to conduct
business. The Company cannot be certain that the products it sells, or services
it offers, do not or will not infringe valid patents, trademarks, copyrights or
other intellectual property rights held by third parties. The Company may be a
16
party to legal proceedings and claims relating to the intellectual property of
others from time to time in the ordinary course of its business. The Company may
incur substantial expense in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against the
Company may result in substantial monetary liability or may materially disrupt
its ability to conduct business.
The Company may lose sales or incur significant expenses should states be
successful in imposing broader guidelines to state sales and use taxes. In
addition to the Company's retail store operations, the Company collects sales or
other similar taxes in states where the Company's online and telephonic sales
channels have applicable nexus. Our customer service and fulfillment networks,
and any further expansion of those networks, along with other aspects of our
evolving business, may result in additional sales and use tax obligations. A
successful assertion by one or more states that we should collect sales or other
taxes on the sale of merchandise could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional retailers, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales
made over the Internet. However, a number of states, as well as the U.S.
Congress, have been considering various initiatives that could limit or
supersede the Supreme Court's position regarding sales and use taxes on Internet
sales. If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect additional sales and use taxes. The imposition by state and
local governments of various taxes upon Internet commerce could create
administrative burdens for us and could decrease our future sales.
A failure to integrate our acquisitions may cause the results of the acquired
company to suffer as well as the results of the Company. The Company has
opportunistically acquired a number of companies over the past several years. As
part of the acquisition process, the Company embarks upon a project management
effort to integrate the acquisition onto our information technology systems and
management processes. If we are unsuccessful in integrating our acquisitions,
the results of our acquisitions may suffer, management may have to divert
valuable resources to oversee and manage the acquisitions, the Company may have
to expend additional investments in the acquired company to upgrade personnel
and/or information technology systems and the results of the Company may suffer.
Product liability claims may subject the Company to increased costs. Several of
the products the Company sells, including perishable food and alcoholic beverage
products, home and garden products, or children's toys may expose it to product
liability claims in the event that the use or consumption of these products
results in personal injury. Although the Company has not experienced any
material losses due to product liability claims to date, it may be a party to
product liability claims in the future and incur significant costs in their
defense. Product liability claims often create negative publicity, which could
materially damage the Company's reputation and its brands. Although the Company
maintains insurance against product liability claims, its coverage may be
inadequate to cover any liabilities it may incur.
The wine industry is subject to governmental regulation. The alcoholic beverage
industry is subject to extensive specialized regulation under state and federal
laws and regulations, including the following matters: licensing; the payment of
excise taxes; advertising, trade and pricing practices; product labeling; sales
to minors and intoxicated persons; changes in officers, directors, ownership or
control; and, relationships among product producers, importers, wholesalers and
retailers. While the Company believes that it is in material compliance with all
applicable laws and regulations, in the event that it should be determined that
the Company is not in compliance with any applicable laws or regulations, the
Company could become subject to cease and desist orders, injunctive proceedings,
civil fines, license revocations and other penalties which could have a material
adverse effect on the Company's business and its results of operations.
In addition, the alcoholic beverage industry is subject to potential legislation
and regulation on a continuous basis including in such areas as direct and
Internet sales of alcohol. Certain states still prohibit the sale of alcohol
into their jurisdictions from out of state wineries and/or retailers. There can
be no assurance that new or revised laws or regulations, increased licensing
fees, specialized taxes or other regulatory requirements will not have a
material adverse effect on the Company's business and its results of operations.
17
While, to date, the Company has been able to obtain and retain licenses
necessary to sell wine at retail, the failure to obtain renewals or otherwise
retain such licenses in one or more of the states in which the Company operates
would have a material adverse effect on the Company's business and its results
of operations. The Company's growth strategy for its wine business includes
expansion into additional states; however, there can be no assurance that the
Company will be successful in obtaining the required permits or licenses in any
additional states. From time to time, the Company may introduce new marketing
initiatives, which may be expected to undergo regulatory scrutiny. There can be
no assurance that such initiatives will not be stymied by regulatory criticism.
The Company is dependent on common carriers to deliver its wine shipments. The
Company primarily uses FedEx and UPS to deliver its wine shipments. If FedEx or
UPS were to terminate delivery services for alcoholic beverages in certain
states, as it did in 1999 in Florida, Nevada and Connecticut, the Company would
likely incur significantly higher shipping rates that would have a material
adverse effect on the Company's business and its results of operations. If any
state prohibits or limits intrastate shipping of alcoholic beverages by third
party couriers, the Company would likely incur significantly higher shipping
rates that would have a material adverse effect on the Company's business and
its results of operations.
There are various health issues regarding wine consumption. Since 1989, federal
law has required health-warning labels on all alcoholic beverages. Although an
increasing number of research studies suggest that health benefits may result
from the moderate consumption of wine, these suggestions have been widely
challenged and a number of groups advocate increased governmental action to
restrict consumption of alcoholic beverages. Restrictions on the sale and
consumption of wine or increases in the taxes imposed on wine in response to
concerns regarding health issues may have a material adverse effect on the
Company's business and operating results. There can be no assurance that there
will not be legal or regulatory challenges to the industry as a whole, and any
such legal or regulatory challenge may have a material adverse effect on the
Company's business and results of operations.
The price at which the Company's Class A common stock will trade may be highly
volatile and may fluctuate substantially. The stock market has from time to time
experienced price and volume fluctuations that have affected the market prices
of securities, particularly securities of companies with Internet operations. As
a result, investors may experience a material decline in the market price of the
Company's Class A common stock, regardless of the Company's operating
performance. In the past, following periods of volatility in the market price of
a particular company's securities, securities class action litigation has often
been brought against that company. The Company may become involved in this type
of litigation in the future. Litigation of this type is often expensive and
diverts management's attention and resources, and as such, could have a material
adverse effect on the Company's business and its results of operations.
Additional Information
The Company's internet address is www.1800flowers.com. We make available,
through the investor relations tab located on our website at
www.1800flowers.com, access to our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after they are electronically
filed with or furnished to the Securities and Exchange Commission. All such
filings on our investor relations website are available free of charge. (The
information posted on the Company's website is not incorporated into this Annual
Report of Form 10-K.) A copy of this annual report on Form 10-K is available
without charge upon written request to: Investor Relations, 1-800-FLOWERS.COM,
Inc., One Old Country Road, Suite 500, Carle Place, NY 11514. In addition, the
SEC maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC.
Item 1B. Unresolved Staff Comments
We have received no written comments regarding our current or periodic reports
from the staff of the SEC that were issued 180 days or more preceding the end of
our fiscal year ended July 2, 2006 that remain unresolved.
18
Item 2. PROPERTIES
Square
Location Type Principal Use Footage Ownership
---------------------- -------------------- ---------------------------------------- ---------------- ----------------
Carle Place, NY Office Headquarters and customer service 92,000 leased
Alamogordo, NM Office Customer service 23,000 owned
Ardmore, OK Office Customer service 24,000 leased
Madison, VA Office and Distribution, administrative and customer
warehouse service 300,000 owned
Napa, CA Office and Distribution, administrative and customer
warehouse service 68,000 leased
Westerville, OH Office and
warehouse Distribution and customer service 21,000 leased
Chicago, IL Office Administrative and customer service 18,000 leased
Reno, NV Warehouse Distribution 140,000 leased
Vandalia, OH Warehouse Distribution 200,000 owned
Obetz, OH Warehouse Distribution 176,000 leased
Lake Forest, IL Office, plant and Manufacturing, distribution and administrative
warehouse 148,000 leased
Akron, OH Office, plant and Manufacturing, distribution and administrative
warehouse 200,000 leased
Westerville, OH Office, plant and Manufacturing, distribution and administrative
warehouse 44,000 owned
In addition to the above properties, the Company leases approximately 356,000
square feet for owned or franchised retail stores and local fulfillment centers
with lease terms typically ranging from 5 to 20 years. Some of its leases
provide for a minimum rent plus a percentage rent based upon sales after certain
minimum thresholds are achieved. The leases generally require the Company to pay
insurance, utilities, real estate taxes and repair and maintenance expenses. In
general, our properties are well maintained, adequate and suitable for their
purposes.
Item 3. LEGAL PROCEEDINGS
There are various claims, lawsuits, and pending actions against the Company
incident to the operations of its businesses. It is the opinion of management,
after consultation with counsel, that the ultimate resolution of such claims,
lawsuits and pending actions will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the last
quarter of our fiscal year ended July 2, 2006.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals were serving as executive officers of the Company and
certain of its subsidiaries on September 15, 2006:
Name Age Position with the Company
------------------------------------------------ ------ ----------------------------------------------------------
James F. McCann........................... 55 Chairman of the Board and Chief Executive Officer
Christopher G. McCann..................... 45 Director and President
Gerard M. Gallagher....................... 53 Senior Vice President of Business Affairs,
General Counsel, and Corporate Secretary
Thomas G. Hartnett........................ 43 Chief Operating Officer of Consumer Floral
Tim Hopkins............................... 52 President of Specialty Brands
Mary McCormack............................ 53 Vice President of Corporate Development
Enzo J. Micali............................ 47 Chief Information Officer
William E. Shea........................... 47 Senior Vice President, Treasurer, and
Chief Financial Officer
David Taiclet............................. 43 Chief Executive Officer - Fannie May Confection Brands, Inc.
Monica Woo................................ 50 President of Consumer Floral
James F. McCann has served as the Company's Chairman of the Board and Chief
Executive Officer since inception. Mr. McCann has been in the floral industry
since 1976 when he began a retail chain of flower shops in the New York
metropolitan area. Mr. McCann is a member of the board of directors of Gtech
Corporation, Willis Holdings Group and Boyd's Collection. James F. McCann is the
brother of Christopher G. McCann, a Director and the President of the Company.
Christopher G. McCann has been the Company's President since September 2000 and
prior to that had served as the Company's Senior Vice President. Mr. McCann has
been a Director of the Company since inception. Mr. McCann serves on the board
of directors of Neoware, Inc. and Bluefly, Inc. and is a member of the Board of
Trustees of Marist College. Christopher G. McCann is the brother of James F.
McCann, the Company's Chairman of the Board and Chief Executive Officer.
Gerard M. Gallagher has been our Senior Vice President, General Counsel and
Corporate Secretary since August 1999 and has been providing legal services to
the Company since its inception. Mr. Gallagher is the founder and a managing
partner in the law firm Gallagher, Walker, Bianco and Plastaras, based in
Mineola, New York, specializing in corporate, litigation and intellectual
property matters since 1993. Mr. Gallagher is duly admitted to practice before
the New York State Courts and the United States District Courts of both the
Eastern District and Southern District of New York.
Thomas G. Hartnett has been Chief Operating Officer of the 1-800-Flowers.com
Consumer Floral brand since July 2006. Before holding this position, Mr.
Hartnett held various positions within the Company since joining the Company in
1991, including Senior Vice President of Retail and Fulfillment, Controller,
Director of Store Operations, Vice President of Retail Operations and Vice
President of Strategic Development.
Tim Hopkins has been our President of the Specialty Brands division since March
2005. Prior to joining the Company, Mr. Hopkins was Chief Executive Officer and
Director of Sur La Table, Inc., a multi-channel upscale specialty retailer of
gourmet culinary and serveware products. Prior to Sur La Table, Inc., Mr.
Hopkins was President, Corporate Merchandising and Logistics, Worldwide, for
Borders Group, Inc. Before this position, Mr. Hopkins held other senior level
positions in the multi-channel retailing sector.
20
Mary McCormack has been our Vice President, Corporate Development, since January
2006. Prior to joining the Company, Ms. McCormack was a marketing consultant for
Long Point Capital, a private equity firm. Ms. McCormack was previously employed
at McCann-Erickson WorldGroup as Vice President, Director of Mergers and
Acquisitions and at The Hertz Corporation as Director of Acquisitions. Before
joining The Hertz Corporation, Ms. McCormack had assumed a number of senior
executive positions in corporate mergers and acquisitions, private equity and
investment banking.
Enzo J. Micali has been our Chief Information Officer and prior thereto our
Senior Vice President of Information Technology since joining the Company in
2000. Prior to joining the Company, Mr. Micali served as Chief Technology
Officer for InsLogic. Prior to joining InsLogic, Mr. Micali spent 12 years in
various technology management positions with J.P. Morgan Chase & Co., formerly
Chase Manhattan.
William E. Shea has been our Senior Vice President of Finance and Administration
and Chief Financial Officer since September 2000. Before holding his current
position, Mr. Shea was our Vice President of Finance and Corporate Controller
after joining us in April 1996. From 1980 until joining us, Mr. Shea was a
certified public accountant with Ernst & Young LLP.
David Taiclet has been our Chief Executive Officer of Fannie May Confections
Brands, Inc. since April 2006, upon our acquisition of the company. Mr. Taiclet
was a Co-Founder of Fannie May Confections Brands, Inc. (formerly Alpine
Confections, Inc.), a multi-branded and multi-channel retailer, manufacturer,
and distributor of confectionery and specialty food products. Prior thereto, Mr.
Taiclet spent four years in a variety of management positions, including the
Strategy and Business Development Group of Cargill, Inc. Cargill, Inc. is an
international marketer, processor and distributor of food, financial and
industrial products. Mr. Taiclet also served four years of active duty in the
U.S. Army, attaining the rank of Captain.
Monica L. Woo has been President of the 1-800-Flowers.com Consumer Floral brand
since July 2006 after having been the 1-800-Flowers.com brand Chief Marketing
Officer since joining the Company in January 2004. Prior to joining the Company,
Ms. Woo had founded a successful consulting practice focusing on growth
strategies for such multi-national clients as Deutsche Bank, Northwest Airlines
and Campbell's Soup. Prior to that, Ms. Woo was the President of Bacardi Global
Brands, Inc., of Bacardi Limited. Before holding this position, Ms. Woo had
assumed a number of senior executive positions in the financial services and
consumer packaged goods sectors, including the Global Marketing Director of
Citibank On-line and the Citibank Private Bank, and the Sr. Vice President,
European Marketing Director of Diageo PLC.
21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
1-800-FLOWERS.COM's Class A common stock trades on The Nasdaq Stock Market under
the ticker symbol "FLWS." There is no established public trading market for the
Company's Class B common stock. The following table sets forth the reported high
and low sales prices for the Company's Class A common stock for each of the
fiscal quarters during the fiscal years ended July 2, 2006 and July 3, 2005.
High Low
-------------- --------------
Year ended July 2, 2006
July 4, 2005 - October 2, 2005 $ 7.86 $ 6.45
October 3, 2005 - January 1, 2006 $ 7.65 $ 5.83
January 2, 2006 - April 2, 2006 $ 7.10 $ 6.16
April 3, 2006 - July 2, 2006 $ 7.90 $ 5.39
Year ended July 3, 2005
June 28, 2004 - September 26, 2004 $ 9.64 $ 7.01
September 27, 2004 - December 26, 2004 $ 8.95 $ 7.44
December 27, 2004 - March 27, 2005 $ 8.75 $ 7.20
March 28, 2005 - July 3, 2005 $ 7.83 $ 6.52
Rights of Common Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
Holders
As of September 8, 2006, there were approximately 266 stockholders of record of
the Company's Class A common stock, although the Company believes that there is
a significantly larger number of beneficial owners. As of September 8, 2006,
there were approximately 18 stockholders of record of the Company's Class B
common stock.
Dividend Policy
Although the Company has never declared or paid any cash dividends on its Class
A or Class B common stock, the Company anticipates that it will generate
increasing free cash flow in excess of its capital investment requirements. As
such, although the Company has no current intent to do so, the Company may
choose, at some future date, to use some portion of its cash for the purpose of
cash dividends.
Resales of Securities
39,931,543 shares of Class A and Class B common stock are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market from time to time only if
registered or if they qualify for an exemption from registration under Rule 144
or 701 under the Securities Act. As of September 8, 2006, all of such shares of
the Company's common stock could be sold in the public market pursuant to and
22
subject to the limits set forth in Rule 144. Sales of a large number of these
shares could have an adverse effect on the market price of the Company's Class A
common stock by increasing the number of shares available on the public market.
Purchases of Equity Securities by the Issuer
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 July 2, 2006, the
Company had repurchased 1,510,050 shares of common stock for $11.1 million, of
which $1.3 million and $9.8 million was repurchased during the fiscal years
ending July 2, 2006 and July 3, 2005, respectively.
The following table sets forth, for the months indicated, the Company's purchase
of Class A common stock during the fiscal year ending July 2, 2006, which
includes the period July 4, 2005 through July 2, 2006.
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Total Number of Part of Publicly Be Purchased Under
Shares Purchased Average Price Announced Plans or the Plans or
Period Paid Per Share Programs Programs
--------------------------- ------------------ ------------------ --------------------- ----------------------
(in thousands, except average price paid per share)
7/4/05 - 7/31/05 120.5 $7.19 120.5 $9,315
8/1/05 - 8/28/05 61.5 $7.31 61.5 $8,863
8/29/05 - 10/2/05 - $- - $8,863
10/3/05 - 10/30/05 - $- - $8,863
10/31/05 - 11/27/05 - $- - $8,863
11/28/05 - 1/1/06 - $- - $8,863
1/2/06 - 1/29/06 - $- - $8,863
1/30/06 - 2/26/06 - $- - $8,863
2/27/06 - 4/2/06 - $- - $8,863
4/3/06 - 4/30/06 - $- - $8,863
5/1/06 - 5/28/06 - $- - $8,863
5/29/06 - 7/2/06 - $- - $8,863
------------------ ------------------ ---------------------
Total 182.0 $7.23 182.0
================== ================== =====================
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended July 2,
2006, July 3, 2005 and June 27, 2004 and the consolidated balance sheet data as
of July 2, 2006 and July 3, 2005, have been derived from the Company's audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The selected consolidated statement of income data for the years
ended June 29, 2003 and June 30, 2002, and the selected consolidated balance
sheet data as of June 27, 2004, June 29, 2003 and June 30, 2002, are derived
from the Company's audited consolidated financial statements which are not
included in this Annual Report on Form 10-K.
The following tables summarize the Company's consolidated statement of income
and balance sheet data. The Company acquired Fannie May Confections Brands, Inc.
in May 2006, Wind & Weather in October 2005, Cheryl & Co. in March 2005, The
Winetasting Network in November 2004 and The Popcorn Factory, Inc. in May 2002.
The following financial data reflects the results of operations of these
subsidiaries since their respective dates of acquisition. This information
should be read together with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes to those statements included
elsewhere in this Annual Report on Form 10-K.
23
Years ended (1)
----------------------------------------------------------------------
July 2, July 3, June 27, June 29, June 30,
2006(2) 2005 2004 2003 2002
------------- -------------- ------------- ------------ --------------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net revenues:
Online $ 430,285 $ 360,902 $ 307,470 $ 265,278 $ 218,179
Telephonic 275,716 259,929 263,039 271,071 248,931
Retail/fulfillment 75,740 49,848 33,469 29,269 30,095
------------- -------------- ------------- ------------ --------------
Total net revenues 781,741 670,679 603,978 565,618 497,205
Cost of revenues 456,097 395,028 351,111 324,565 293,269
------------- -------------- ------------- ------------ --------------
Gross profit 325,644 275,651 252,867 241,053 203,936
Operating expenses:
Marketing and sales 239,573 198,935 172,251 170,013 150,638
Technology and development 19,819 14,757 13,799 13,937 13,723
General and administrative 43,978 35,572 30,415 29,593 28,179
Depreciation and amortization 15,765 14,489 14,992 15,389 15,061
------------- -------------- ------------- ------------ --------------
Total operating expenses 319,135 263,753 231,457 228,932 207,601
------------- -------------- ------------- ------------ --------------
Operating income (loss) 6,509 11,898 21,410 12,121 (3,665)
Other income, net (141) 1,349 320 117 1,448
------------- -------------- ------------- ------------ --------------
Income (loss) before income taxes 6,368 13,247 21,730 12,238 (2,217)
Income taxes (benefit) 3,181 5,398 (19,174) - (706)
------------- -------------- ------------- ------------ --------------
Net income (loss) $ 3,187 $ 7,849 $40,904 $ 12,238 $ (1,511)
============= ============== ============= ============ ==============
Net income (loss) per common share:
Basic $0.05 $0.12 $0.62 $0.19 $(0.02)
============= ============== ============= ============ ==============
Diluted $0.05 $0.12 $0.60 $0.18 $(0.02)
============= ============== ============= ============ ==============
Shares used in the calculation of net income (loss)
per common share:
Basic 65,100 66,038 65,959 65,566 64,703
============= ============== ============= ============ ==============
Diluted 66,429 67,402 68,165 67,670 64,703
============= ============== ============= ============ ==============
Note (1): The Company's fiscal year is a 52- or 53-week period ending on the
Sunday nearest to June 30. Fiscal years ended July 2, 2006, June 27, 2004, June
29, 2003 and June 30, 2002, consisted of 52 weeks, while the fiscal year ended
July 3, 2005 consisted of 53 weeks.
Note (2): Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
The impact of the adoption, which reduced net income per common share for the
fiscal year ended July 2, 2006 by $0.05 is described in further detail in Note 2
of the Company's Annual Financial Statements.
As of
-------------- ------------- -------------- --------------- --------------
July 2, 2006 July 3, 2005 June 27, 2004 June 29, 2003 June 30, 2002
-------------- ------------- -------------- --------------- --------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short-term investments $ 24,599 $ 46,608 $103,374 $ 61,218 $ 63,399
Working capital 41,182 41,692 83,704 26,875 23,301
Investments-non current - - 8,260 19,471 9,591
Total assets 346,634 251,952 261,552 214,796 207,157
Long-term liabilities 80,437 5,900 8,874 12,820 15,939
Total stockholders' equity 193,183 186,334 186,390 137,288 123,908
24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 through its "Fresh From Our Growers(SM)" program.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. 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 garden
merchandise from Plow & Hearth(R) (1-800-627-1712 or www.plowandhearth.com);
weather-themed gifts from Wind & Weather(R) (1-800-922-9463 or
www.windandweather.com); 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 www.cherylandco.com);
premium chocolates and confections from Fannie May Confections Brands
(www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com(R)
(www.greatfood.com); children's gifts from HearthSong(R) (www.hearthsong.com)
and Magic Cabin(R) (www.magiccabin.com); wine gifts from the WineTasting
Network(R) (www.ambrosiawine.com and www.winetasting.com); and gift baskets from
1-800-BASKETS.COM(R) (www.1800baskets.com).
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker symbol
FLWS.
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal years 2006 and 2004, which ended on July 2, 2006 and
June 27, 2004, respectively, consisted of 52 weeks, while fiscal year 2005,
which ended on July 3, 2005, consisted of 53 weeks.
Net Revenues
Years Ended
----------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
Online $430,285 19.2% $360,902 17.4% $307,470
Telephonic 275,716 6.1% 259,929 (1.2%) 263,039
Retail/fulfillment 75,740 51.9% 49,848 48.9% 33,469
------ ------ ------
$781,741 16.6% $670,679 11.0% $603,978
======== ======== ========
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
revenue growth of 16.6% during the fiscal year ended July 2, 2006 was due to a
combination of organic growth, as well as the acquisitions of Cheryl & Co., a
manufacturer and direct marketer of cookies and baked gifts, acquired on March
28, 2005, Wind & Weather, a direct marketer of weather-themed gifts, acquired on
October 31, 2005, and Fannie May Confections Brands, Inc., a manufacturer and
multi-channel retailer of premium chocolates and other confections, acquired on
May 1, 2006. Excluding the impact of acquisitions, and adjusted for the
additional week of sales during fiscal 2005 which consisted of 53 weeks,
compared to fiscal 2006 which consisted of 52 weeks, total revenue growth during
fiscal 2006 was 9.3%, reflecting: (i) the Company's strong brand name
recognition, (ii) continued leveraging of its existing customer base, and (iii)
25
increased spending on its marketing and selling programs, designed to improve
customer acquisition and accelerate top-line growth. Total revenue growth during
fiscal 2005 was 11.0%, reflecting: (i) organic growth of approximately 8%, (ii)
the aforementioned acquisition of Cheryl & Co., and the acquisition of The
Winetasting Network on November 15, 2004, as well as the inclusion of an
additional week of sales, due to its 53 week year.
The Company fulfilled approximately 11,315,000, 10,213,000, and 9,322,000 orders
through its combined online and telephonic sales channels during the fiscal
years ended July 2, 2006, July 3, 2005, and June 27, 2004, respectively,
representing increases of 10.8% and 9.6% over the respective prior fiscal years.
Order volume through the Company's online sales channel, which contributed
60.9%, 58.1% and 53.9% of the total combined online and telephonic revenues
during the fiscal years ended July 2, 2006, July 3, 2005 and June 27, 2004,
increased 14.7% and 17.5%, during the fiscal years ended July 2, 2006 and July
3, 2005, respectively, as a result of increased marketing efforts through search
engines and affiliates, and the incremental online revenue generated by Cheryl &
Co., which was acquired in March 2005 and Wind & Weather acquired in October
2005. During fiscal 2006 the Company's telephonic channel order volume increased
4.6%, which was primarily attributable to the additional revenue from Cheryl &
Co. and Wind & Weather, whereas fiscal 2005 telephonic order volume decreased
1.1%, due to continued migration of customers to the Company's online sales
channel. During fiscal 2006 the Company's combined online and telephonic sales
channel average order value increased 2.6% to $62.39, as a result of increased
service and shipping charges implemented to align them with industry norms, and
to partially offset the impact of increased fuel costs passed on from freight
carriers. During fiscal 2005, the Company's average sale from its combined
online and telephonic sales channel of $60.79 declined slightly as a result of
product mix, compared with $61.20 in fiscal 2004.
During the fiscal year ended July 2, 2006, non-floral gift products accounted
for 49.4% of total combined telephonic and online net revenues, compared to
47.3% and 47.8% during the years ended July 3, 2005 and June 27, 2004,
respectively.
Retail/fulfillment revenues for the fiscal years ended July 2, 2006 and July 3,
2005 increased in comparison to the prior years, primarily as a result of its
recent acquisitions of The Winetasting Network, Cheryl & Co, and Fannie May
Confections Brands, Inc. as well as increased membership and sales of products
to the Company's BloomNet members.
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 this period, 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 that its organic revenue growth may decrease
slightly from its current rate of greater than 9%, but result in improved
profitability.
Gross Profit
Years Ended
-------------------------------------------------------------------
July 6, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- -------------
(in thousands)
Gross profit $325,644 18.1% $275,651 9.0% $252,867
Gross margin % 41.7% 41.1% 41.9%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (primarily fees paid directly to
florists), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and associated costs including inbound and outbound
shipping charges. Additionally, cost of revenues include labor and facility
costs related to direct-to-consumer merchandise operations. Gross profit
increased during the fiscal year ended July 2, 2006, as a result of the revenue
growth described above, and improved gross margin percentage, which increased 60
basis points to 41.7% in comparison to prior year. The improved gross margin
percentage during fiscal 2006 resulted from a combination of product mix,
including the additions of the Cheryl & Co. and Wind & Weather product lines,
which have higher gross margins and pricing initiatives related to both delivery
surcharges during the Valentine's Day holiday and increases in base
26
service/shipping charges. During fiscal 2005, gross margin percentage declined
by 80 basis points in comparison to the prior fiscal year, due to a combination
of product mix, increased promotional pricing, and increased carrier fuel
surcharges and shipping costs associated with the Monday placement of the
Valentine's Day Holiday.
During fiscal 2007, although varying by quarter due to seasonal changes in
product mix, the Company expects that its gross margin percentage will continue
to improve primarily through: (i) growth of its higher margin non-floral gift
lines, including Cheryl & Co., Wind & Weather, and most recently, Fannie May
Confections Brands, (ii) improved product sourcing, pricing initiatives and
customer service and fulfillment enhancements which are expected to
substantially mitigate continued pressure on shipping costs, and (iii) the
contribution of the BloomNet florist business, which has completed its roll-out
investment phase, including the absorption of incremental sales and technology
personnel in order to develop a member directory, increase Bloomlink penetration
and expand membership, which increased from approximately 3,000 members as of
June 27, 2004 to over 9,000 members as of July 2, 2006.
Marketing and Sales Expense
Years Ended
-------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- -------------
(in thousands)
Marketing and sales $239,573 20.4% $198,935 15.5% $172,251
Percentage of sales 30.6% 29.7% 28.5%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search agreements, retail store
and fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expense increased as a percentage of net
revenues during the fiscal years ended July 2, 2006 and July 3, 2005, as a
result of several factors including: (i) the Company's efforts to increase new
customer acquisition and accelerate top-line growth through increased marketing
efforts both online and via broadcast advertising, (ii) investments required to
expand its BloomNet business-to-business floral operations, (iii) incremental
expenses associated with the Company's recent acquisitions, which, while
contributing to revenue growth and achieving higher gross product margins, also
incur higher marketing expenses, and (iv) the impact of adopting SFAS No.
123(R), "Share-Based Payment" - refer to Footnote 2 of the Company's Annual
Financial Statements for further details. During the fiscal year ended July 2,
2006, the Company added 3,556,000 new customers, compared with 3,311,000 and
3,141,000 in fiscal 2005 and fiscal 2004, respectively. Of the 6,631,000
customers who placed orders during the fiscal year ended July 2, 2006,
approximately 46.4% represented repeat customers, consistent with the prior
year. Repeat customers represented 45.0% of total customers during fiscal 2004.
As referenced above, while the Company's marketing programs achieved strong
revenue growth in fiscal 2006 and 2005, this growth has been below the level
that was targeted with the Company's increased level of marketing spend. 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 decrease in comparison to the prior year.
Technology and Development Expense
Years Ended
-------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- -------------
(in thousands)
Technology and development $19,819 34.3% $14,757 6.9% $13,799
Percentage of sales 2.5% 2.2% 2.3%
27
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Technology and development expense increased
as a percentage of net revenues during the fiscal year ended July 2, 2006,
primarily as a result of: (i) incremental expenses associated with system
improvements required by The Winetasting Network, and integration projects for
Wind & Weather, which was absorbed into the Company's Madison, Virginia
operations, (ii) content development for the upgrade of the Company's
1-800-Flowers.com branded website which was launched in the fourth quarter of
fiscal 2006, (iii) increases in the cost of maintenance and license agreements
required to support the Company's technology platform, and (iv) the impact of
adopting SFAS No. 123(R), "Share-Based Payment" - refer to Footnote 2 of the
Company's Annual Financial Statements for further details. Technology and
development expenses increased by 6.9% during fiscal 2005 in comparison to prior
year, but decreased as a percentage of net revenues primarily as a result of the
incremental expenses of The Winetasting Network and Cheryl & Co., both of which
were acquired during fiscal 2005. During the fiscal years ended July 2, 2006,
July 3, 2005, and June 27, 2004, the Company expended $33.6 million, $24.0
million, and $22.8 million, respectively, technology and development, of which
$13.8 million, $9.2 million, and $9.0 million, respectively, 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 it most recently acquired businesses, the Company expects that
its spending in fiscal 2007 will remain consistent or decrease slightly as a
percentage of net revenues.
General and Administrative Expenses
Years Ended
------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- ------------
(in thousands)
General and administrative $43,978 23.6% $35,572 17.0% $30,415
Percentage of sales 5.6% 5.3% 5.0%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. General and administrative expense increased
during the fiscal year ended July 2, 2006 in comparison to the prior year,
primarily as a result of: (i) incremental expenses associated with the Company's
acquired businesses, (ii) expenses associated with the Company's corporate
headquarters relocation, and (iii) the impact of adopting SFAS No. 123(R),
"Share-Based Payment" - refer to Footnote 2 of the Company's Annual Financial
Statements for further details.
General and administrative expense increased during the fiscal year ended July
3, 2005 in comparison to the prior year, due to: (i) incremental expenses
associated with the Company's wine gift product line and additional overhead
added during a seasonally slow period for Cheryl & Co., which was acquired in
March 2005, (ii) an increase in professional fees associated with Sarbanes-Oxley
compliance, and (iii) increased travel and entertainment related to the
Company's BloomNet business-to-business expansion.
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 the
recently acquired businesses, as well as the impact of the adoption of SFAS
123(R), the Company expects that its general and administrative expenses as a
percentage of net revenue during fiscal 2007 will be consistent with the prior
year period.
28
Depreciation and Amortization
Years Ended
-------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- -------------
(in thousands)
Depreciation and amortization $15,765 8.8% $14,489 (3.4)% $14,992
Percentage of sales 2.0% 2.2% 2.5%
Depreciation and amortization expense increased during the fiscal year ended
July 2, 2006 in comparison to the prior year period, due primarily to the
incremental amortization expense related to the intangibles established as a
result of the acquisitions of Cheryl & Co., Wind & Weather and more recently
Fannie May Confections Brands, Inc. Depreciation and amortization expense
decreased slightly during the fiscal year ended July 3, 2005 in comparison to
the prior year period, as a result of the Company's then declining rate of
capital additions. During both fiscal 2006 and 2005, depreciation and
amortization expense, as a percentage of revenue, decreased over their
respective prior year periods, reflecting the Company's leverage of its existing
infrastructure.
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
fiscal 2007 will increase slightly as a percentage of net revenues in comparison
to the prior year.
Other Income (Expense)
Years Ended
-------------------------------------------------------------------
July 2, July 3, June 27,
2006 % Change 2005 % Change 2004
------------ ------------ ------------- ------------- -------------
(in thousands)
Interest income $1,260 (25.4)% $1,690 27.6% $1,324
Interest expense (1,407) (192.5)% (481) 27.5% (663)
Other, net 6 (95.7)% 140 141.1% (341)
------------ ------------ -------------
$(141) (110.5)% $1349 321.6% $320
============ ============ =============
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases, long-term debt, and
revolving line of credit. In order to finance the acquisition of Fannie May
Confections Brands, Inc. 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, Inc.
The decrease in other income (expense) during the fiscal year ended July 2,
2006, in comparison to fiscal 2005 was the result of higher interest expense on
the Company's 2006 Credit Facility, as well as lower interest income, resulting
from a decrease in average cash balances, due to the acquisitions of The
Winetasting Network in November 2004, Cheryl & Co. in March 2005, Wind & Weather
in November 2005, and Fannie May Confections Brands, Inc. in May 2006, which was
partially funded from the Company's existing cash balances, as well as the
Company's stock buy-back program.
The increase in other income (expense) during the fiscal years ended July 3,
2005, in comparison to the fiscal 2004 was primarily attributable to higher
interest income resulting from an increase in interest rate returns, as well as
lower interest expense due to maturing debt and capital lease obligations.
29
Income Taxes
During the fiscal years ended July 2, 2006 and July 3, 2005, the Company
recorded income tax expense of $3.2 million and $5.4 million, respectively. The
Company's effective tax rate for the fiscal years ended July 2, 2006 and July 3,
2005 was 50.0% and 40.7%, respectively. The effective tax rate during the fiscal
year ended July 2, 2006 includes the impact of share-based compensation
recognized in accordance with SFAS No. 123(R), and resulted in an increase in
the annual effective income tax rate for fiscal 2006 of approximately 8.5%,
resulting primarily from the associated book/tax differences in accounting for
incentive stock options. Additionally, the Company's effective tax rate for the
fiscal years ended July 2, 2006 and July 3, 2005 differed from the U.S. federal
statutory rate of 35% primarily due to state income taxes, partially offset by
various tax credits.
During the fiscal year ended June 27, 2004, the Company recorded an income tax
benefit of approximately $19.2 million (net) due to the removal of the Company's
valuation allowance on its deferred tax assets which consisted primarily of net
operating loss carryforwards (see below), offset in part by income tax expense
for federal alternative minimum tax and various state taxes resulting from state
tax law changes that deferred the use of available net operating losses for
state purposes.
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it was more likely than not that the deferred tax assets would
be realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises. The favorable impact of the income tax benefit
has distorted the trends in our net income and will impact the comparability of
our net income with other periods.
At July 2, 2006, the Company's federal and state net operating loss
carryforwards were approximately $63.4 million, which, if not utilized, will
begin to expire in fiscal year 2020.
30
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2006 and 2005. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited consolidated financial statements and all necessary
adjustments, consisting of only normal recurring adjustments, have been included
in the amounts stated below to present fairly the Company's results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
Three months ended
-------------------------------------------------------------------------------------
Jul. 2, Apr. 2, Jan. 1, Oct. 2, Jul. 3, Mar. 27, Dec. 26, Sep. 26,
2006 2006 2006 2005 2005 2005 2004 2004
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
(in thousands, except per share data)
Net revenues:
Online $124,372 $110,278 $133,362 $62,273 $108,492 $91,638 $107,686 $53,086
Telephonic 60,670 51,542 125,122 38,382 60,349 52,424 109,570 37,586
Retail/fulfillment 26,088 18,197 19,345 12,110 17,277 12,971 12,758 6,842
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total net revenues 211,130 180,017 277,829 112,765 186,118 157,033 230,014 97,514
Cost of revenues 126,778 109,743 152,837 66,739 111,737 97,947 127,402 57,942
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Gross profit 84,352 70,274 124,992 46,062 74,381 59,086 102,612 39,572
Operating expenses:
Marketing and sales 60,287 53,188 87,874 38,224 50,389 45,813 72,841 29,892
Technology and development 5,083 5,170 4,797 4,769 4,201 4,160 3,292 3,104
General and administrative 11,804 11,181 10,357 10,636 10,152 9,864 7,954 7,602
Depreciation and amortization 4,555 3,877 3,809 3,524 3,473 3,350 3,770 3,896
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total operating expenses 81,729 73,416 106,837 57,153 68,215 63,187 87,857 44,494
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Operating income (loss) 2,623 (3,142) 18,155 (11,127) 6,166 (4,101) 14,755 (4,922)
Other income (expense), net (678) 515 (115) 137 423 509 172 245
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Income (loss) before income taxes 1,945 (2,627) 18,040 (10,990) 6,589 (3,592) 14,927 (4,677)
Income taxes (benefit) 928 (1,087) 7,704 (4,364) 2,688 (1,546) 6,223 (1,967)
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Net income (loss) $1,017 $(1,540) $10,336 $(6,626) $3,901 $(2,046) $8,704 $(2,710)
========= ========= ========== =========== ========= ========== ========== ==========
Basic and diluted net income(loss)
per share: $0.02 $(0.02) $0.16 $(0.10) $0.06 $(0.03) $0.13 $(0.04)
========= ========= ========== =========== ========= ========== ========== ==========
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, including the acquisitions of The
Winetasting Network and Cheryl & Co. during fiscal 2005 as well as Wind &
Weather and Fannie May Confections Brands, Inc. during fiscal 2006, the
Thanksgiving through Christmas holiday season, which falls within the Company's
second fiscal quarter, generates the highest proportion of the Company's annual
revenues. Additionally, as the result of a number of major floral gifting
occasions, including Mother's Day, Administrative Professionals Week and Easter,
revenues also rise during the Company's fiscal fourth quarter. Results during
the Company's fiscal first quarter will be negatively impacted by the
aforementioned acquisitions due to their seasonal nature and the incremental
overhead incurred during this slow period. Also, it should be noted that the
operating expenses for their respective quarterly periods in fiscal 2006 reflect
the impact of adopting SFAS No. 123(R), "Share-Based Payment" - refer to audited
financial statement Note (2) for further details.
Liquidity and Capital Resources
At July 2, 2006, the Company had working capital of $41.2 million, including
cash and equivalents of $24.6 million, compared to working capital of $41.7
million, including cash and equivalents and short-term investments of $46.6
million, at July 3, 2005.
31
Net cash provided by operating activities of $14.7 million for the fiscal year
ended July 2, 2006 was primarily attributable to earnings, adjusted for
depreciation and amortization, share-based compensation expense, deferred income
taxes and other non-cash charges, which in total amounted to $26.1 million,
offset in part by increases in inventory due to lead times required to source
lower cost foreign products, and decreases in accounts payable and accrued
expenses.
Net cash used in investing activities of $110.7 million for the fiscal year
ended July 2, 2006 was primarily attributable to funding acquisitions ($96.9
million), including Wind & Weather ($5.0 million) and Fannie May Confections
Brands, Inc. ($91.9 million), as well as capital expenditures, primarily related
to the Company's technology infrastructure, offset in part by net proceeds from
the sale of the Company's short-term investments.
Net cash provided by financing activities of $80.6 million for the fiscal year
ended July 2, 2006, was due primarily to bank borrowings against the Company's
2006 Credit Facility which was used to fund the acquisition of Fannie May
Confections Brands, Inc. in May 2006, as well as net proceeds received upon the
exercise of employee stock options, offset in part by cash used to repay
outstanding debt and long-term capital lease obligations, as well as repurchase
182,000 shares of the Company's Class A common stock, which were placed in
treasury, for approximately $1.3 million.
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. Concurrent with the 2006 Credit
Facility, the Company's previous $25.0 million revolving credit facilities were
terminated. The Company expects to draw down on its revolving credit facility
towards the end of its fiscal first quarter in order to fund pre-holiday
manufacturing and inventory purchases.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. Due to the Company's continued expansion into non-floral products,
including the aforementioned acquisitions of Fannie May Confections Brands, Inc.
the Company expects to utilize its existing $50.0 million line of credit during
its fiscal first and second quarter to fund working capital requirements, which
have increased during this time period as a result of increased inventory and
pre-holiday manufacturing requirements.
At July 2, 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
(including interest) $107,871 $15,673 $30,922 $34,836 $26,440
Capital lease obligations 489 409 36 26 18
Operating lease obligations 62,437 9,666 15,774 9,344 27,653
Sublease obligations 6,776 2,120 2,780 1,302 574
Other cash obligations (*) 2,000 2,000 - - -
Purchase commitments (**) 27,491 27,491 - - -
----------- -------------- ---------- ------------ -------------
Total $207,064 $57,359 $49,512 $45,508 $54,685
=========== ============== ========== ============ =============
(*) Other cash obligations consist primarily of online marketing contractual
agreements.
(**) Purchase commitments consist primarily of inventory and equipment purchase
orders made in the ordinary course of business.
32
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 July 2, 2006, the
Company had repurchased 1,510,050 shares of common stock for $11.1 million, of
which $1.3 million and $9.8 million was repurchased during the fiscal years
ending July 2, 2006 and July 3, 2005, respectively.
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 online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment. 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.
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.
33
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. Prior to July 3, 2005, the Company
followed APB No. 25, and related interpretations. Under APB No. 25, no
stock-based compensation expense was recognized related to the Company's stock
option program, as all options granted had an exercise price equal to the market
value of the underlying common stock price on the date of grant.
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 July 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.
34
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations
due to changes in interest rates primarily from its investment of
available cash balances in money market funds and investment grade
corporate and U.S. government securities. Under its current policies,
the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements: See Part IV, Item 15 of this Annual
Report on Form 10-K.
Selected Quarterly Financial Data: See Part II, Item 7 of this Annual
Report on Form 10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. 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
the Company's disclosure controls and procedures pursuant to Exchange
Act Rules 13a-15(e) or 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 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
Exhange Act Rules 13a-15(f) and 15d-15(f) during the fiscal quarter
ended July 2, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
35
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules
13-a-15(f) and 15d-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the Company's principal
executive and principal financial officers and effected by the
Company's board of directors, management and other personnel to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally accepted
accounting principles and includes those policies and procedures
that:
o pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
o provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles,
and that receipts and expenditures of the Company are being
made only in accordance with authorization of management and
directors of the Company; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal
control over financial reporting as of July 2, 2006. In making
this assessment, management used the criteria established in
"Internal Control-Integrated Framework," issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, management believes that, as of July 2,
2006 the Company's internal control over financial reporting is
effective.
The Company acquired Fannie May Confections Brands, Inc. on May
1, 2006, and has excluded the acquired company from its
assessment of and conclusion on the effectiveness of internal
control over financial reporting. For the year ended July 2,
2006, the acquired business accounted for 0.7% of the Company's
total net revenue. As of July 2, 2006, the acquired business
accounted for 8.4% of the Company's total assets, excluding $75.5
million of goodwill and other intangible asset amounts that were
recorded in connection with the acquisition.
Ernst & Young LLP, the Company's independent registered public
accounting firm, has issued a report on management's assessment
and the effectiveness of the Company's internal control over
financial reporting, as of July 2, 2006; their report is included
in Item 9A.
36
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of 1-800-FLOWERS.COM,
Inc. and Subsidiaries
We have audited management's assessment, included in the
accompanying Management's Report on Internal Control Over
Financial Reporting, that 1-800-FLOWERS.COM, Inc. and
Subsidiaries (the "Company") maintained effective internal
control over financial reporting as of July 2, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). 1-800-FLOWERS.COM,
Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of
the company's internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material
effect on the financial statements.
37
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal
Control Over Financial Reporting in Item 9A, management's
assessment of and conclusion on the effectiveness of internal
control over financial reporting did not include the internal
controls of Fannie May Confections Brands, Inc., which are
included in the Fiscal 2006 consolidated financial statements
of 1-800-FLOWERS.COM, Inc. and Subsidiaries and constituted 8.4%
of total assets as of July 2, 2006, excluding $75.5 million
of goodwill and other intangible asset amounts recorded in
connection with these acquisitions, and 0.7% of revenues for the
fiscal year then ended. Our audit of internal control over
financial reporting of 1-800-FLOWERS.COM, Inc. and Subsidiaries
also did not include an evaluation of the internal control over
financial reporting of Fannie May Confections Brands, Inc.
In our opinion, management's assessment that 1-800-FLOWERS.COM,
Inc. and Subsidiaries maintained effective internal control over
financial reporting as of July 2, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our
opinion, 1-800-FLOWERS.COM, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial
reporting as of July 2, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of 1-800-FLOWERS.COM, Inc. and
Subsidiaries as of July 2, 2006 and July 3, 2005, and the related
consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended July 2,
2006 and our report dated September 13, 2006 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
September 13, 2006
38
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the
quarter ended July 2, 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement for the 2006
annual meeting of stockholders is incorporated herein by
reference.
The Company maintains a Code of Ethics, which is applicable to
all directors, officers and employees on the Investor
Relations-Corporate Governance tab of the Company's website at
www.1800flowers.com. Any amendment or waiver to the Code of
Ethics that applies to our directors or executive officers will
be posted on our website or in a report filed with the SEC on
Form 8-K. A copy of the Code of Ethics is available without
charge upon written request to: Investor Relations,
1-800-FLOWERS.COM, Inc., Old Country Road, Suite 500, Carle
Place, New York 11514.
Item 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement for the 2006
Annual Meeting of Stockholders is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information set forth in the Proxy Statement for the 2006
Annual Meeting of Stockholders is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement for the 2006
Annual Meeting of Stockholders is incorporated herein by
reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth in the Proxy Statement for the 2006
Annual Meeting of Stockholders is incorporated herein by
reference.
39
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Index to Consolidated Financial Statements:
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of July 2, 2006 and July 3, 2005 F-2
Consolidated Statements of Income for the years ended July 2, 2006,
July 3, 2005 and June 27, 2004 F-3
Consolidated Statements of Stockholders' Equity for the years ended
July 2, 2006, July 3, 2005 and June 27, 2004 F-4
Consolidated Statements of Cash Flows for the years ended July 2, 2006,
July 3, 2005 and June 27, 2004 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S-1
All other information and financial statement schedules are omitted
because they are not applicable, or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
(a)(3) Index to Exhibits
Exhibits marked with an asterisk (*) are incorporated by reference to
exhibits or appendices previously filed with the Securities and Exchange
Commission, as indicated by the reference is brackets. All other exhibits
are filed herewith. Exhibits 10.3, 10.4, 10.5, 10.6, 10.7 and 10.8 are
management contracts or compensatory plans or arrangements.
Exhibit Description
------- -----------
*2.1 Stock Purchase Agreement, dated as of April 5, 2006, by and among
1-800-FLOWERS.COM, Inc., FMCB Acquisition Co., Inc., Fannie May
Confections Brands, Inc. (formerly known as Alpine Confections, Inc.),
Alpine Confections Holdings, Inc., Alpine Confections Canada, ULC,
Maxfield Candy Company, Kencraft, Inc., the securityholders of Fannie
May Confections Brands, Inc. whose names are set forth on the signature
pages thereto and R. Taz Murray, as Sellers' Representative (current
report on Form 8-K filed on May 4, 2006, Exhibit 2.1)
*3.1 Third Amended and Restated Certificate of Incorporation. (Registration
Statement on Form S-1/A (No. 333-78985)filed on July 9, 1999, Exhibit
3.1)
*3.2 Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation. (Registration Statement on Form S-1/A (No. 333-78985)
filed on July 22, 1999, Exhibit 3.2)
*3.3 Amended and Restated By-laws.(Registration Statement on Form S-1/A
(No. 333-78985)filed on May 21, 1999, Exhibit 3.3)
*4.1 Specimen Class A common stock certificate.(Registration Statement on
Form S-1/A (No. 333-78985)filed on July 9, 1999, Exhibit 4.1)
*4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining the rights of
holders of Common Stock of the Registrant.
*10.1 Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C.
and 800-FLOWERS, Inc.(Registration Statement on Form S-1(No. 333-78985)
filed on May 21, 1999, Exhibit 10.1)
*10.2 Credit Agreement dated as of May 1, 2006 among 1-800-FLOWERS.COM, Inc.
the Subsidiary Borrowers party thereto, the Guarantors party thereto
and JP Morgan Chase Bank, N.A. as administrative agent. (Current Report
on Form 8-K filed on May 5, 2006, Exhibit 99.1).
*10.3 1997 Stock Option Plan, as amended. (Registration Statement on Form
S-1 (No. 333-78985)filed on May 21, 1999, Exhibit 10.10)
*10.4 1999 Stock Incentive Plan. (Registration Statement on Form S-1/A
(No. 333-78985)filed on July 27, 1999, Exhibit 10.18)
*10.5 Employment Agreement, effective as of July 1, 1999 between James F.
McCann and 1-800-FLOWERS.COM, Inc. (Registration Statement on Form
S-1/A (No. 333-78985)filed on July 9, 1999, Exhibit 10.19)
*10.6 Employment Agreement, effective as of July 1, 1999 between Christopher
G. McCann and 1-800-FLOWERS.COM, Inc. (Registration Statement on Form
S-1/A (No. 333-78985)filed on July 9, 1999, Exhibit 10.20)
*10.7 2003 Long Term Incentive and Share Award Plan (Definitive Proxy
Statement filed on October 27, 2003 (No. 000-26841), Annex D)
*10.8 Employment Agreement, dated as of May 1, 2006 by and among 1-800-
FLOWERS.COM, Inc., Fannie May Confections Brands, Inc. and David
Taiclet.
*10.9 Lease, dated May 20, 2005, between Treeline Mineola, LLC and
1-800-FLOWERS.COM, Inc.(Annual Report on Form 10-K for the fiscal year
ended July 3, 2005 filed on September 15, 2005, Exhibit 10.26)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Powers of Attorney (included in the signature page).
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 15, 2006 1-800-FLOWERS.COM, Inc.
By: /s/ James F. McCann
----------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below:
Dated: September 15, 2006 By: /s/ James F. McCann
-------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 15, 2006 By: /s/ William E. Shea
--------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
Dated: September 15, 2006 By: /s/ Christopher G. McCann
-------------------------------
Christopher G. McCann
Director, President
Dated: September 15, 2006 By: /s/ John J. Conefry, Jr.
------------------------------
John J. Conefry, Jr.
Director
Dated: September 15, 2006 By: /s/ Leonard J. Elmore
---------------------------
Leonard J. Elmore
Director
Dated: September 15, 2006 By: /s/ Kevin J. O'Connor
---------------------------
Kevin J. O'Connor
Director
Dated: September 15, 2006 By: /s/ Mary Lou Quinlan
--------------------------
Mary Lou Quinlan
Director
Dated: September 15, 2006 By: /s/ Deven Sharma
-----------------------
Deven Sharma
Director
Dated: September 15, 2006 By: /s/ Jeffrey C. Walker
---------------------------
Jeffrey C. Walker
Director
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of July 2, 2006 and
July 3, 2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended July 2,
2006. Our audits also included the financial statement schedule listed in the
index at Item 15(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 1-800-FLOWERS.COM,
Inc. and Subsidiaries at July 2, 2006 and July 3, 2005, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 2, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements the Company
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment," as revised, effective July 4, 2005.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of
1-800-FLOWERS.COM, Inc.'s internal control over financial reporting as of July
2, 2006, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated September 13, 2006 expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Melville, New York
September 13, 2006
F-1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
July 2, July 3,
2006 2005
------------- ------------
Assets
Current assets:
Cash and equivalents $ 24,599 $ 39,961
Short-term investments - 6,647
Receivables, net 13,153 10,619
Inventories 52,954 28,675
Deferred income taxes 17,427 10,219
Prepaid and other 6,063 5,289
------------- ------------
Total current assets 114,196 101,410
Property, plant and equipment, net 59,732 50,474
Goodwill 131,141 63,219
Other intangibles, net 29,822 14,215
Deferred income taxes 6,224 17,161
Other assets 5,519 5,473
------------- ------------
Total assets $346,634 $251,952
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 62,654 $ 57,121
Current maturities of long-term debt and obligations under capital leases 10,360 2,597
------------- ------------
Total current liabilities 73,014 59,718
Long-term debt and obligations under capital leases 78,063 3,347
Other liabilities 2,374 2,553
------------- ------------
Total liabilities 153,451 65,618
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, 29,872,183
and 29,888,603 shares issued in 2006 and 2005, respectively 299 300
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
and 42,144,465 shares issued in 2006 and 2005 421 421
Additional paid-in capital 262,667 258,848
Retained deficit (56,011) (59,198)
Deferred compensation - (1,116)
Treasury stock, at cost-1,555,350 and 1,380,850 Class A shares in 2006 and
2005, respectively, and 5,280,000 Class B shares (14,193) (12,921)
------------- ------------
Total stockholders' equity 193,183 186,334
------------- ------------
Total liabilities and stockholders' equity $346,634 $251,952
============= ============
See accompanying notes.
F-2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Years ended
--------------------------------------------
July 2, JulY 3, June 27,
2006 2005 2004
-------------- -------------- -------------
Net revenues $781,741 $670,679 $603,978
Cost of revenues 456,097 395,028 351,111
-------------- -------------- -------------
Gross profit 325,644 275,651 252,867
Operating expenses:
Marketing and sales 239,573 198,935 172,251
Technology and development 19,819 14,757 13,799
General and administrative 43,978 35,572 30,415
Depreciation and amortization 15,765 14,489 14,992
-------------- -------------- -------------
Total operating expenses 319,135 263,753 231,457
-------------- -------------- -------------
Operating income 6,509 11,898 21,410
Other income (expense):
Interest income 1,260 1,690 1,324
Interest expense (1,407) (481) (663)
Other, net 6 140 (341)
-------------- -------------- -------------
Total other income, net (141) 1,349 320
-------------- -------------- -------------
Income before income taxes 6,368 13,247 21,730
Income taxes (benefit) 3,181 5,398 (19,174)
-------------- -------------- -------------
Net income $3,187 $7,849 $40,904
============== ============== =============
Net income per common share:
Basic $0.05 $0.12 $0.62
============== ============== =============
Diluted $0.05 $0.12 $0.60
============== ============== =============
Weighted average shares used in the calculation of net income
per common share:
Basic 65,100 66,038 65,959
============== ============== =============
Diluted 66,429 67,402 68,165
============== ============== =============
See accompanying notes.
F-3
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 2, 2006, July 3, 2005 and June 27, 2004
(in thousands, except share data)
Common Stock
--------------------------------------
Class A Class B Additional Unearned Treasury Stock
------------------- ------------------- Paid-in Retained Stock-Based ------------------ Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Shares Amount Equity
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
June 30, 2002 28,679,848 $287 42,399,915 $424 $247,636 $(107,951) $ - 5,332,800 $(3,108) $137,288
Exercise of
employee stock
options 440,741 4 - - 1,730 - - - - 1,734
Employee stock
purchase plan 52,104 1 - - 391 - - - - 392
Reversal of
valuation allowance
related to income tax
benefits from employee
stock option exercises - - - - 6,072 - - - - 6,072
Conversion of Class B
common stock into
Class A common stock 255,450 3 (255,450) (3) - - - - - -
Net income - - - - - 40,904 - - - 40,904
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
June 27, 2004 29,428,143 295 42,144,465 421 255,829 (67,047) - 5,332,800 (3,108) 186,390
Exercise of
employee stock
options 228,695 2 - - 1,247 - - - - 1,249
Employee stock
purchase plan 75,846 1 - - 466 - - - - 467
Issuance of
restricted stock 161,795 2 - - 1,355 - (1,357) - - -
Amortization of
unearned restricted
stock, net - - - - - - 192 - - 192
Forfeiture of unvested
restricted stock (5,876) - - - (49) - 49 - - -
Stock repurchase
program - - - - - - - 1,328,050 (9,813) (9,813)
Net income - - - - - 7,849 - - - 7,849
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
July 3, 2005 29,888,603 300 42,144,465 421 258,848 (59,198) (1,116) 6,660,850 (12,921) 186,334
Exercise of
employee stock
options and vesting
of restricted stock 133,499 1 - - 649 - - - - 650
Share-based
compensation - - - - 4,284 - - (7,500) 52 4,336
Reclassification of
unvested restricted
stock upon adoption of
SFAS No. 123R-Share
Based Payment (155,919) (2) - - (1,114) - 1,116 - - -
Stock repurchase
program - - - - - - - 182,000 (1,324) (1,324)
Conversion of Class B
common stock into
Class A common stock 6,000 - (6,000) - - - - - - -
Net income - - - - - 3,187 - - - 3,187
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
July 2, 2006 29,872,183 $299 42,138,465 $421 $262,667 $(56,011) $ - 6,835,350 $(14,193) $193,183
========== ======== =========== ======== ========== =========== ============ ========= ========= ============
See accompanying notes.
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
July 2, 2006 July 3, 2005 June 27, 2004
--------------- --------------- ---------------
Operating activities:
Net income $3,187 $7,849 $40,904
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 15,765 14,489 14,992
Deferred income taxes 2,175 4,702 (20,776)
Bad debt expense 476 270 437
Share-based compensation 4,336 192 -
Other non-cash items 125 - 250
Changes in operating items, excluding the effects of
acquisitions:
Receivables 1,316 (655) (1,683)
Inventories (9,106) (6,345) 745
Prepaid and other 685 (3,445) 691
Accounts payable and accrued expenses (2,262) (10,953) 1,624
Other assets (1,380) 4,584 5,829
Other liabilities (579) (259) (884)
--------------- --------------- ---------------
Net cash provided by operating activities 14,738 10,429 42,129
Investing activities:
Purchases of investments - (93,946) (62,584)
Proceeds from sales of investments 6,647 118,109 63,384
Acquisitions, net of cash acquired (96,874) (50,965) -
Capital expenditures (20,491) (13,334) (10,576)
Other 2 192 217
--------------- --------------- ---------------
Net cash used in investing activities (110,716) (39,944) (9,559)
Financing activities:
Acquisition of treasury stock (1,324) (9,813) -
Proceeds from employee stock options/stock purchase plan 558 1,533 2,126
Proceeds from bank borrowings and revolving line of credit 105,000 - -
Repayment of notes payable and bank borrowings (22,482) (1,391) (1,176)
Repayment of capital lease obligations (1,228) (1,677) (1,775)
Other 92 - -
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 80,616 (11,348) (825)
--------------- --------------- ---------------
Net change in cash and equivalents (15,362) (40,863) 31,745
Cash and equivalents:
Beginning of year 39,961 80,824 49,079
--------------- --------------- ---------------
End of year $ 24,599 $ 39,961 $ 80,824
=============== =============== ===============
Supplemental Cash Flow Information:
----------------------------------
- Interest paid amounted to $1,407, $481, and $663 for the years ended
July 2, 2006, July 3, 2005 and June 27, 2004, respectively.
- The Company paid income taxes of approximately $23 and $762, net of tax
refunds received for the years ended July 2, 2006 and July 3, 2005. The
Company received tax refunds, net of income taxes paid of approximately
$1,476 for the year ended June 27, 2004.
See accompanying notes.
F-5
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading gift retailer,
providing a broad range of thoughtful gift products including flowers, plants,
gourmet foods, cookies, cakes, candies, wine, gift baskets, and other unique
gifts to our customers around the world. The 1-800-FLOWERS.COM family of brands
also includes Plow & Hearth, a direct marketer of home decor and garden
merchandise, GreatFood.com, a source for gourmet products, The Popcorn Factory,
a manufacturer and direct marketer of premium popcorn and specialty food gifts,
HearthSong and Magic Cabin, direct marketers of unique children's toys and
games, The Winetasting Network, a distributor and direct-to-consumer wine
marketer, Cheryl&Co., a manufacturer and direct marketer of premium cookies and
baked gift items and Fannie May Confections Brands, a manufacturer, direct
marketer and retailer of premium chocolates and confections. The Company
operates in one business segment, providing its customers with convenient,
multi-channel access via the Internet, telephone, catalogs and retail stores.
During fiscal 2006, approximately 61% of total revenues were derived from floral
and floral-related products.
Note 2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal years 2006 and 2004, which ended on July 2, 2006 and
June 27, 2004, respectively, consisted of 52 weeks, while fiscal 2005, which
ended on July 3, 2005, consisted of 53 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned subsidiaries (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Equivalents
Cash and equivalents consist of demand deposits with banks, highly liquid money
market funds, United States government securities, overnight repurchase
agreements and commercial paper with maturities of three months or less when
purchased.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated
depreciation. Depreciation expense is recognized over the assets' estimated
useful lives using the straight-line method. Amortization of leasehold
improvements and capital leases are calculated using the straight-line method
over the shorter of the lease terms, including renewal options expected to be
exercised, or estimated useful lives of the improvements. Estimated useful lives
are periodically reviewed, and where appropriate, changes are made
prospectively. The Company's property plant and equipment is depreciated using
the following estimated lives:
Buildings 40 years
Leasehold Improvements 3-10 years
Furniture, Fixtures and Equipment 3-10 years
Software 3-5 years
F-6
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated
annually in the Company's fiscal fourth quarter for impairment. To date, there
has been no impairment of these assets.
The cost of intangible assets with determinable lives is amortized to reflect
the pattern of economic benefits consumed, on a straight-line basis, over the
estimated periods benefited, ranging from 3 to 16 years.
Deferred Catalog Costs
The Company capitalizes the costs of producing and distributing its catalogs.
These costs are amortized in direct proportion with actual sales from the
corresponding catalog over a period not to exceed 26-weeks. Included within
other assets was $4.3 million and $3.7 million at July 2, 2006 and July 3, 2005,
respectively, relating to prepaid catalog costs.
Investments
The Company considers all of its debt and equity securities, for which there is
a determinable fair market value and no restrictions on the Company's ability to
sell within the next 12 months, as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. For the years ended July 2,
2006, July 3, 2005 and June 27, 2004, there were no significant unrealized gains
or losses. Realized gains and losses are included in other income. The cost
basis for realized gains and losses on available-for-sale securities is
determined on a specific identification basis.
Fair Values of Financial Instruments
The recorded amounts of the Company's cash and equivalents, short-term
investments, receivables, accounts payable, and accrued liabilities approximate
their fair values principally because of the short-term nature of these items.
The fair value of investments, including available-for-sale securities, is based
on quoted market prices where available. The fair value of the Company's
long-term obligations are estimated based on the current rates offered to the
Company for obligations of similar terms and maturities. Under this method, the
Company's fair value of long-term obligations was not significantly different
than the carrying values at July 2, 2006 and July 3, 2005.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and equivalents,
investments and accounts receivable. The Company maintains cash and equivalents
and investments with high credit, quality financial institutions. Concentration
of credit risk with respect to accounts receivable are limited due to the
Company's large number of customers and their dispersion throughout the United
States, and the fact that a substantial portion of receivables are related to
balances owed by major credit card companies. Allowances relating to consumer,
corporate and franchise accounts receivable ($2.3 million and $1.5 million at
July 2, 2006 and July 3, 2005, respectively) have been recorded based upon
previous experience and management's evaluation.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment. Shipping terms are FOB shipping point.
Cost of Revenues
Cost of revenues consists primarily of florist fulfillment costs (fees paid
directly to florists), the cost of floral and non-floral merchandise sold from
inventory or through third parties, and associated costs including inbound and
outbound shipping charges. Additionally, cost of revenues includes labor and
facility costs related to direct-to-consumer merchandise production operations.
F-7
Marketing and Sales
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search expenses, retail store and
fulfillment operations (other than costs included in cost of revenues), and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities.
The Company expenses all advertising costs, with the exception of catalog costs
(see Deferred Catalog Costs above) at the time the advertisement is first shown.
Advertising expense was $127.4 million, $107.8 million and $91.1 million for the
years ended July 2, 2006, July 3, 2005 and June 27, 2004, respectively.
Technology and Development
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, content development and maintenance and
support costs related to the Company's order entry, customer service,
fulfillment and database systems. Costs associated with the acquisition or
development of software for internal use are capitalized if the software is
expected to have a useful life beyond one year and amortized over the software's
useful life, typically three years. Costs associated with repair, maintenance or
the development of Web site content are expensed as incurred as the useful lives
of such software modifications are less than one year.
Stock-Based Compensation
The Company's employee stock based compensation plans are described more fully
in Note 9. Prior to July 4, 2005, as permitted under SFAS No. 123, the Company
accounted for its stock option plans following the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly, no
stock-based compensation had been reflected in net income for stock options, as
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant and the related number of shares
granted was fixed at that point in time.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123(R), "Share-Based Payment." This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method).
Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
Under this transition method, compensation cost recognized on a straight-line
basis during the year ended July 2, 2006 includes amounts of: (a) compensation
cost of all stock-based payments granted prior to, but not yet vested as of,
July 4, 2005 (based on grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and previously presented in the pro-forma
footnote disclosures), and (b) compensation cost for all stock-based payments
granted subsequent to July 3, 2005 (based on the grant-date fair value estimated
in accordance with the new provision of SFAS No. 123(R)). In accordance with the
modified prospective method, results for prior periods have not been restated.
Prior to the Company's adoption of SFAS No. 123(R), benefits of tax deduction in
excess of recognized compensation costs were reported as operating cash flows.
SFAS No. 123(R) requires excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid. There were no significant
excess tax benefits for the year ended July 2, 2006.
F-8
The following table summarizes the effect of adopting SFAS No. 123(R) as of
July 4, 2005:
Year ended July 2, 2006
--------------------------------
Stock-option compensation expense recognized (*): (in thousands, except per
share data)
Marketing and sales $1,301
Technology and development 556
General and administrative 1,853
---------
Total 3,710
Related deferred income tax expense 869
---------
Increase in net loss/decrease in net income $2,841
=========
Impact on basic and diluted net (loss) income per common
share $(0.04)
=========
(*) Excludes the amortization of restricted stock awards in the
amount of $0.6 million during the year ended July 2, 2006
($0.4 million, net of tax).
Compensation expense related to the amortization of restricted stock awards was
recognized prior to the implementation of SFAS No. 123(R). Total stock based
compensation expense, which includes both expense from stock options and
restricted stock awards, totaled $4.3 million ($3.2 million, net of tax, or
$0.05 per diluted share) during the year ended July 2, 2006.
Under the modified prospective application method, results for prior periods
have not been restated to reflect the effects of implementing SFAS No. 123(R).
The following pro-forma information, as required by SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123," is presented for comparative purposes and illustrates the
effect on net income and net income per common share for the periods presented
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation prior to July 4, 2005:
Year Ended Year Ended
July 3, June 27,
2005 2004
(1) (2)
---------- ------------
(in thousands, except
per share data)
Net income (loss) - As reported $7,849 $40,904
Less: Stock option compensation expense 10,499 1,339
---------- ------------
Net income (loss) - Pro forma $(2,650) $39,565
========== ============
Net income (loss) per share:
Basic - As reported $0.12 $0.62
Basic - Pro forma $(0.04) $0.60
Diluted - As reported $0.12 $0.60
Diluted - Pro forma $(0.04) $0.58
F-9
(1) During fiscal 2005, the Company accelerated the vesting of all unvested
stock options awarded to employees and officers which had an exercise
price greater than $10.00 per share. Options to purchase approximately
0.8 million shares became exercisable immediately as a result of the
vesting acceleration. The Company sought to balance the benefit of
eliminating the requirement to recognize compensation expense in future
periods with the need to continue to motivate employee performance
through previously issued, but currently unvested, stock option grants.
With those factors being considered, management determined it to be
appropriate to accelerate only those unvested stock options where the
strike price was reasonably in excess of the Company's then current
stock price.
The effect of the acceleration was an increase in pro-forma stock based
employee compensation expense for the year ended July 3, 2005 of $3.0
million ($0.05 per basic and diluted share). The decision to accelerate
the vesting of the identified stock options will reduce the Company's
share-based compensation expense of approximately $2.1 million in
fiscal 2006 and $0.9 million in fiscal 2007.
(2) During fiscal 2004, FAS 123 stock based compensation is net of the
income tax benefit of $6.1 million, associated with the removal of the
valuation allowance on deferred tax assets arising from employee stock
option exercises.
Comprehensive Income
For the years ended July 2, 2006, July 3, 2005 and June 27, 2004, the Company's
comprehensive income was equal to the respective net income for each of the
periods presented.
Net Income Per Share
Basic net income per common share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares (consisting primarily of employee stock options and restricted
stock awards) outstanding during the period.
Recent Accounting Pronouncements
In July 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.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
F-10
Note 3 - Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income
per common share:
Years Ended
----------------------------------------------------------
July 2, 2006 (1) July 3, 2005 June 27, 2004 (2)
----------------- ------------------ ---------------------
(in thousands, except per share data)
Numerator:
Net income $3,187 $7,849 $40,904
================= ================== =====================
Denominator:
Weighted average shares outstanding 65,100 66,038 65,959
Effect of dilutive securities:
Employee stock options (3) 1,282 1,364 2,206
Employee restricted stock awards 47 - -
----------------- ------------------ ---------------------
1,329 1,364 2,206
----------------- ------------------ ---------------------
Adjusted weighted-average shares and assumed
conversions 66,429 67,402 68,165
================= ================= =====================
Net income per common share:
Basic $0.05 $0.12 $0.62
================= ================= =====================
Diluted $0.05 $0.12 $0.60
================= ================= =====================
Note (1): Effective July 4, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R) using the modified
prospective application method. The impact of the adoption,
which reduced net income per common share for the fiscal year ended
July 2, 2006 by $0.05 is described in further detail in Note 2.
Note (2): During the fiscal year ended June 27,2004, the Company
recorded an income tax benefit of $19.2 million ($0.28 per diluted
share)due to the removal of the Company's valuation allowance on its
deferred tax assets which consisted primarily of net operating loss
carry forwards.
Note (3): The effect of options to purchase 5.9 million, 3.8 million
and 3.5 million shares for the years ended July 2, 2006, July 3,
2005 and June 27, 2004, respectively were excluded from the
calculation of net income per share on a diluted basis as their
effect is anti-dilutive.
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.
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. (hereafter referred to as "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 $91.9 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.
F-11
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.
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 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. 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:
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 62,752 2,703
Other 156 20
------------------ --------------------
Total assets acquired 101,727 9,364
------------------ --------------------
Current liabilities 4,929 3,810
Deferred tax liability 4,485 265
Other 399 39
------------------ --------------------
Total liabilities assumed $9,813 4,114
Net assets acquired $91,914 $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.
F-12
Acquisition of Cheryl & Co.
On March 28, 2005, the Company acquired all of the outstanding common stock of
Cheryl & Co., a Westerville, Ohio-based manufacturer and direct marketer of
premium cookies and related baked gift items, with annual revenues of
approximately $33 million during its then most recent year ended January 29,
2005. The purchase price of approximately $41.1 million, including acquisition
costs, was funded utilizing the Company's available cash and investment balance,
and included $6.3 million used to retire Cheryl & Co.'s outstanding debt.
Acquisition of The Winetasting Network
On November 15, 2004, the Company acquired all of the outstanding common stock
of The Winetasting Network, a Napa, California based distributor and
direct-to-consumer wine marketer. The purchase price of approximately $9.7
million, including acquisition costs was funded utilizing the Company's
available cash and investment balance and included $2.4 million used to retire
The Winetasting Network's long-term debt.
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, Wind &
Weather, Cheryl & Co. and The Winetasting Network had taken place at the
beginning of fiscal year 2005. 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.
Years Ended
-------------------------------
July 2, 2006 July 3, 2005
--------------- ---------------
(in thousands, except per
share data)
Net revenues $854,333 $780,199
Operating income $14,844 $22,124
Net income $ 4,518 $11,443
Basic and diluted net income per common share $ 0.07 $ 0.17
Note 5. Inventory
The Company's inventory, stated at cost, which is not in excess of market,
includes purchased and manufactured finish goods for resale, packaging supplies,
raw material ingredients for manufactured products and associated manufacturing
labor, and is classified as follows:
July 2, 2006 July 3, 2005
--------------- --------------
(in thousands)
Finished goods $36,689 $21,094
Work-in-process 3,370 -
Raw materials 12,895 7,581
-------------- -------------
$52,954 $28,675
============== =============
Note 6. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
July 2, 2006 July 3, 2005
--------------- --------------
(in thousands)
Goodwill - beginning of year $63,219 $34,529
Acquisition of Wind & Weather 2,703 -
Acquisition of Fannie May Confections Brands 62,752 -
Acquisition of Cheryl & Co. 2,461 20,245
Acquisition of The Winetasting Network - 8,202
Other 6 243
--------------- --------------
Goodwill - end of year $131,141 $63,219
=============== ==============
F-13
The Company's intangible assets consist of the following:
July 2, 2006 July 3, 2005
-----------------------------------------------------------------------------
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 $3,762 $1,165 $4,927 $3,438 $1,489
Customer lists 3 - 6 years 18,500 2,231 16,269 4,640 1,145 3,495
Other 5 - 8 years 1,754 252 1,502 555 137 385
----------- ---------------- ---------- ------------ -------------- ---------
25,181 6,245 18,936 10,122 4,753 5,369
Trademarks with
indefinite lives - 10,886 - 10,886 8,846 - 8,846
----------- ---------------- ---------- ------------ -------------- ---------
Total intangible
assets $36,067 $6,245 $29,822 $18,968 $4,753 $14,215
============ =============== ========== ============ ============== =========
The amortization of intangible assets for the years ended July 2, 2006, July 3,
2005 and June 27, 2004 was $1.6 million, $0.8 million, and $0.6 million,
respectively. Future estimated amortization expense is as follows: 2007 - $4.0
million, 2008 - $4.0 million, 2009 - $3.9 million, 2010 - $3.8 million, and 2011
- $2.9 million, and thereafter - $0.3 million.
Note 7. Property, Plant and Equipment
July 2, July 3,
2006 2005
------------- -------------
(in thousands)
Land $2,516 $2,516
Building and building improvements 16,409 16,255
Leasehold improvements 20,474 16,891
Furniture and fixtures 5,182 3,971
Equipment 18,346 14,979
Computer equipment 51,449 44,796
Telecommunication equipment 8,344 7,008
Software 51,086 43,872
------------- -------------
173,806 150,288
Accumulated depreciation and amortization 114,074 99,814
------------- -------------
$59,732 $50,474
============= =============
F-14
Note 8. Long-Term Debt
July 2, 2006 July 3, 2005
-------------- --------------
(in thousands)
Term loan and revolving credit line (1) $85,000 $-
Commercial note (2) 2,942 4,152
Other 23 46
Obligations under capital leases (see Note 14) 458 1,746
-------------- --------------
88,423 5,944
Less current maturities of long-term debt and obligations under
capital leases 10,360 2,597
-------------- --------------
$78,063 $3,347
============== ==============
(1) Term loan and revolving credit line - 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 (5.33%) plus 0.625% to 1.125%,
with pricing based upon the Company's leverage ratio (5.96% at July 2,
2006). 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. The 2006 Credit Facility
contains various conditions to borrowing, and affirmative and negative
financial covenants. Concurrent with the establishment of the 2006
Credit Facility, the Company's previous $25.0 million revolving
credit facilities were terminated. The obligations of the Company
and its subsidiaries under the 2006 Credit Facility are secured by
liens on all personal property of the Company and its subsidiaries. No
amounts were outstanding under the revolving credit facility at July
2, 2006.
(2) Commercial note - Bank note relating to obligations arising from,
and collateralized by, the underlying assets of the Company's Plow &
Hearth facility in Madison, Virginia. The note, dated June 27, 2003,
in the amount of $6.6 million, bears interest at 5.44% per annum, and
resulted from the consolidation and refinancing of a series of fixed
and variable rate mortgage and equipment notes. The note is payable in
60 equal monthly installments of principal and interest commencing
August 1, 2003, of which $2.9 million is outstanding at July 2, 2006.
As of July 2, 2006, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
Debt
Year Maturities
---- -------------
(in thousands)
2007 $9,913
2008 9,967
2009 12,835
2010 12,750
2011 17,000
Thereafter 25,500
-------------
$87,965
=============
F-15
Note 9. Income Taxes
Significant components of the income tax provision (benefit) are as follows:
Years ended
---------------------------------------------
July 2, 2006 July 3, 2005 June 27, 2004
------------- -------------- --------------
(in thousands)
Current provision:
Federal $351 $308 $677
State 655 388 923
------------- -------------- ---------------
1,006 696 1,600
Deferred provision (benefit):
Federal 2,120 3,313 (15,796)
State 55 1,389 (4,980)
------------- -------------- ---------------
2,175 4,702 (20,776)
------------- -------------- ---------------
Income tax provision (benefit) $3,181 $5,398 $(19,174)
============= ============== ===============
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate is as follows:
Years ended
---------------------------------------------
July 2, 2006 July 3, 2005 June 27, 2004
------------- -------------- --------------
(in thousands)
Tax at U.S. statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 7.3 8.7 2.8
Non-deductible share-based compensation 8.5 - -
Non-deductible goodwill amortization 2.2 1.5 .5
Tax credits (5.0) - -
Tax settlements - - 2.7
Change in tax rates - - 4.2
Change in valuation allowance - - (140.1)
Other, net 2.0 (4.5) 6.7
------------- -------------- --------------
50.0% 40.7% (88.2)%
============= ============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred income tax assets (liabilities) are as
follows:
Years ended
---------------------------------------------
July 2, 2006 July 3, 2005 June 27, 2004
------------- -------------- --------------
(in thousands)
Deferred income tax assets:
Net operating loss carryforwards $25,963 $23,742 $27,878
Accrued expenses and reserves 7,423 3,965 3,463
Deferred income tax liabilities:
Other intangibles (9,285) - -
Installment sales (25) (34) (39)
Tax in excess of book depreciation (425) (293) (1,291)
------------- -------------- --------------
Net deferred income tax assets $23,651 $27,380 $30,011
============= ============== ==============
F-16
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred income tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it is more likely than not that the deferred income tax assets
would be realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred income tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises.
At July 2, 2006, the Company's federal and state net operating loss
carryforwards were approximately $63.4 million, which, if not utilized, will
begin to expire in fiscal year 2020.
Note 10. Capital Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
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 July 2, 2006, the
Company had repurchased 1,510,050 shares of common stock for $11.1 million, $1.3
million (182,000 shares) of which was repurchased during the fiscal year ending
July 2, 2006, and $9.8 million (1,328,050 shares) was repurchased during the
fiscal year ending July 3, 2005.
Note 11. Stock Based Compensation
In December 2003, the Company's Board of Directors and shareholders approved the
1-800-FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the "Plan").
The Plan is a broad-based, long-term incentive program that is intended to
attract, retain and motivate employees, consultants and directors to achieve the
Company's long-term growth and profitability objectives, and therefore align
stockholder and employee interests. The Plan provides for the grant to eligible
employees, consultants and directors of stock options, share appreciation rights
("SARs"), restricted shares, restricted share units, performance shares,
performance units, dividend equivalents, and other share-based awards
(collectively "Awards"). The Plan reserves 7,500,000 shares of Common Stock,
which is approximately the amount of shares which had been previously available
for issuance under the Company's 1999 Stock Incentive Plan. No further awards
will be issued under the 1999 Stock Incentive Plan. During a calendar year i)
the maximum number of shares with respect to which options and SARs may be
granted to an eligible participant under the Plan will be 1,000,000 shares, and
ii) the maximum number of shares with respect to which Awards intended to
qualify as performance-based compensation other than options and SARs may be
granted to an eligible participant under the Plan will be 500,000 shares.
The Plan is administered by the Compensation Committee or such other Board
committee (or the entire Board) as may be designated by the Board (the
"Committee"). Unless otherwise determined by the Board, the Committee will
consist of two or more members of the Board who are non-employee directors
within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and
"outside directors" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986, as amended. The Committee will determine which eligible employees,
consultants and directors receive awards, the types of awards to be received and
the terms and conditions thereof. The Chief Executive Officer shall have the
power and authority to make Awards under the Plan to employees and consultants
not subject to Section 16 of the Exchange Act, subject to limitations imposed by
the Committee.
At July 2, 2006, the Company has reserved approximately 15.1 million shares of
common stock for issuance, including options previously authorized for issuance
under the 1999 Stock Incentive Plan.
F-17
Stock Options Plans
The weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model, were as follows:
Years ended
--------------------------------------------
July 2, 2006 July 3, 2005 June 27, 2004
------------- -------------- --------------
Weighted average fair value of options granted $3.16 $4.44 $5.99
Expected volatility 46% 61% 68%
Expected life (in years) 5.3 5.0 5.0
Risk-free interest rate 4.6% 3.8% 3.6%
Expected dividend yield 0.0% 0.0% 0.0%
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. The expected life of options
granted in fiscal 2005 was based on the Company's historical share option
exercise experience. Due to minimal exercising of stock options, in fiscal 2006,
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 U.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 year ended July
2, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Price Contractual Intrinsic
Options Term Value (000s)
-----------------------------------------------------------
Outstanding at July 3, 2005 9,477,461 $8.35
Granted 1,312,500 $6.65
Exercised (124,162) $4.50
Forfeited/Expired (562,308) $9.90
--------------
Outstanding at July 2, 2006 10,103,491 $8.09 5.8 years $5,255
==============
Options vested or expected to vest at July 2, 2006 9,850,505 $8.12 0.5 years $5,254
Exercisable at July 2, 2006 6,480,678 $8.74 4.7 years $5,253
The aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the company's closing stock price on the
last trading day of fiscal 2006 and the exercise price, multiplied by the number
of in-the-money options) that would have been received by the option holders had
all option holders exercised their options on July 2, 2006. This amount changes
based on the fair market value of the company's stock. The total intrinsic value
of options exercised for the year ended July 2, 2006 and July 3, 2005 was $0.3
million and $0.7 million, respectively.
F-18
The following table summarizes information about stock options outstanding at
July 2, 2006:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
------------------- -------------- ------------------ --------------- --------------- ---------------
$1.61 - 4.50 2,708,547 3.9 years $3.83 2,708,547 $3.83
$5.50 - 6.52 2,463,695 7.3 years $6.42 355,303 $6.40
$6.53 - 8.45 2,020,650 8.1 years $7.42 517,369 $6.84
$8.47 - 12.87 2,256,003 5.2 years $12.17 2,244,863 $12.18
$12.95 - 21.00 654,596 3.3 years $19.97 654,596 $19.97
-------------- ---------------
10,103,491 5.8 years $8.09 6,480,678 $8.73
============== ===============
As of July 2, 2006, the total future compensation cost related to nonvested
options not yet recognized in the statement of income was $7.2 million and the
weighted average period over which these awards are expected to be recognized
was 1.5 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). In
fiscal 2005, the Company recorded the grant date fair value of unvested shares
of Restricted Stock as unearned stock-based compensation ("Deferred
Compensation"). In accordance with SFAS No. 123(R), in fiscal 2006, the Company
reclassified the balance of Deferred Compensation against additional paid-in
capital, and reduced its shares of Class A Common Stock issued accordingly.
The following table summarizes the activity of non-vested restricted stock
during the year ended July 2, 2006:
Weighted
Average Grant
Date Fair
Shares Value
------------- --------------
Non-vested at July 3, 2005 155,919 $8.39
Granted 168,399 $6.59
Vested (9,500) $7.09
Forfeited (21,137) $9.23
-------------
Non-vested at April 2, 2006 293,681 $7.44
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of July 2, 2006, there was $1.2 million of total
unrecognized compensation cost related to non-vested restricted stock-based
compensation to be recognized over a weighted-average period of 2.5 years.
Note 12. Employee Stock Purchase Plan
In December 2000, the Company's Board of Director's approved the
1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a
non-compensatory employee stock purchase plan under Section 423 of the Internal
Revenue Code, to provide substantially all employees who have completed six
months of service, an opportunity to purchase shares of the Company's Class A
common stock. Employees may contribute a maximum of 15% of eligible
compensation, but in no event can an employee purchase more than 500 shares on
any purchase date. Offering periods have a duration of six months, and the
purchase price per share will be the lower of: (i) 85% of the fair market value
of a share of Class A common stock on the last trading day of the applicable
offering period, or (ii) 85% of the fair market value of a share of Class A
common stock on the last trading day before the commencement of the offering
period. The ESPP was terminated effective as of June 30, 2005.
F-19
Note 13. Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all of its
eligible employees. All full-time employees who have attained the age of 21 are
eligible to participate upon completion of one year of service. Participants may
elect to make voluntary contributions to the 401(k) plan in amounts not
exceeding federal guidelines. On an annual basis the Company, as determined by
its board of directors, may make certain discretionary contributions. Employees
are vested in the Company's contributions based upon years of service. The
Company made contributions of $0.4 million, $0.3 million, and $0.3 million, for
the years ended July 2, 2006, July 3, 2005 and June 27, 2004, respectively.
Note 14. Commitments and Contingencies
Leases
The Company currently leases office, store facilities, and equipment under
various operating leases through fiscal 2019. As these leases expire, it can be
expected that in the normal course of business they will be renewed or replaced.
Most lease agreements contain renewal options and rent escalation clauses and
require the Company to pay real estate taxes, 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. All leases and subleases
with an initial term of greater than one year are accounted for under SFAS No.
13, Accounting for Leases. These leases are classified as either capital leases,
operating leases or subleases, as appropriate.
The Company leases certain computer, telecommunication and related equipment
under capital leases, which are included in property and equipment with a
capitalized cost of approximately $18.0 million and $17.9 million at July 2,
2006 and July 3, 2005, respectively, and accumulated amortization of $17.9
million and $17.1 million, respectively. In addition, the Company subleases land
and buildings (which are leased from third parties) to certain of its
franchisees. Certain of the leases, other than land leases which have been
classified as operating leases, are classified as capital leases and have
initial lease terms of approximately 20 years (including option periods in some
cases).
During fiscal 2001, the Company entered into a $5.0 million equipment lease line
of credit with a bank. Interest under this line, which is renewable annually, is
determined on the date of each commitment to borrow and is based on the bank's
base rate on such date. At July 2, 2006, approximately $0.3 million is
outstanding, and no further borrowings are permitted under this lease line
unless it is renewed by the Company and the lending bank. The borrowings, which
bear interest at rates ranging from 5.39% to 6.36% annually, are payable in 60
monthly installments of principal and interest commencing in February 2001.
Borrowings under the line are collateralized by the underlying equipment
purchased and an equal amount of pledged investments.
As of July 2, 2006, future minimum payments under non-cancelable capital lease
obligations and operating leases with initial terms of one year or more consist
of the following:
Obligations
Under
Capital Operating
Leases Leases
------------ ------------
(in thousands)
2007 $409 $9,666
2008 23 8,734
2009 13 7,040
2010 13 4,908
2011 13 4,436
Thereafter 18 27,653
------------ ------------
Total minimum lease payments $489 $62,437
============
Less amounts representing interest (31)
------------
Present value of net minimum lease payments $458
============
F-20
At July 2, 2006, the aggregate future sublease rental income under long-term
operating sub-leases for land and buildings and corresponding rental expense
under long-term operating leases were as follows:
Sublease Sublease
Income Expense
-------------- --------------
(in thousands)
2007 $2,120 $2,120
2008 1,546 1,546
2009 1,234 1,234
2010 808 808
2011 494 494
Thereafter 574 574
-------------- --------------
$6,776 $6,776
============== ==============
Rent expense was approximately $13.7 million, $9.7 million, and $8.9 million for
the years ended July 2, 2006, July 3, 2005 and June 27, 2004, respectively.
Litigation
There are various claims, lawsuits, and pending actions against the Company and
its subsidiaries incident to the operations of its businesses. It is the opinion
of management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
F-21
1-800-FLOWERS.COM, INC.
Schedule II - Valuation and Qualifying Accounts
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs Other Deductions- End of
of Period and Accounts- Describe (a) Period
Description Expenses Describe(b)
-------------- ------------- ------------ ----------- -------------- -----------
Reserves and
allowances
deducted
from asset
accounts:
Reserve for
estimated
doubtful
accounts-
accounts/notes
receivable
Year Ended
July 2, 2006 $1,537,000 $537,000 $694,000 $(678,000) $2,090,000
Year Ended
July 3, 2005 $1,449,000 $270,000 $ - $(182,000) $1,537,000
Year Ended
June 27, 2004 $1,277,000 $437,000 $ - $(265,000) $1,449,000
-----------------------------------
(a) Reduction in reserve due to write-off of accounts/notes receivable balances.
(b) Amount represents opening balances from acquired businesses.
S-1