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 June 29, 2008
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
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(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
Securities registered pursuant to Section 12(b) of the Act:
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. |X|
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 | |(Do not check if a smaller reporting company)
Smaller reporting company | |
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes | | No |X|
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price as of the last business
day of the registrant's most recently completed second fiscal quarter, December
28, 2007, was approximately $227,449,000. The registrant has no non-voting
common stock.
26,671,031
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(Number of shares of class A common stock outstanding as of September 4, 2008)
36,858,465
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(Number of shares of class B common stock outstanding as of September 4, 2008)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2008
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 June 29, 2008
INDEX
PART I
Item 1. Business 1
Item 1A. Risk Factors 12
Item 1B. Unresolved Staff Comments 20
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities 24
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 41
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 44
PART III
Item 10. Directors, Executive Officers and Corporate Governance 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 45
Item 13. Certain Relationships and Related Transactions, and
Director Independence 45
Item 14. Principal Accountant Fees and Services 45
Part IV
Item 15. Exhibits and Financial Statement Schedules 46
Signatures 48
PART I
Item 1. BUSINESS
The Company
1-800-FLOWERS.COM, Inc. is the world's leading florist and gift shop. For more
than 30 years, 1-800-FLOWERS.COM, Inc. has been providing customers with fresh
flowers and the finest selection of plants, gift baskets, gourmet foods,
confections, balloons and plush stuffed animals perfect for every occasion.
Named one of the top 50 online retailers by Internet Retailer, as well as 2008
Laureate Honoree by the Computerworld Honors Program and the recipient of ICMI's
2006 Global Call Center of the Year Award, 1-800-FLOWERS.COM(R) (1-800-356-9377
or www.1800flowers.com) offers the best of both worlds: exquisite arrangements
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers shipped overnight through our Fresh From Our
Growers(R) program. As always, 100% satisfaction and freshness are guaranteed.
The Company's BloomNet(R) (www.mybloomnet.net) international floral wire service
provides a broad range of quality products and value-added services designed to
help professional florists grow their businesses profitably. The
1-800-FLOWERS.COM, Inc. "Gift Shop" also includes gourmet gifts such as 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);
wine gifts from Ambrosia(R) (www.ambrosia.com or www.winetasting.com); gift
baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com) and DesignPac Giftssm
(www.designpac.com) as well as Home Decor and Children's Gifts from Plow &
Hearth(R) (1-800-627-1712 or www.plowandhearth.com), Wind & Weather(R)
(www.windandweather.com), HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com).
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ Global Select 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.
In order 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. The
Company has broadened its product offering to include products that a customer
could expect to find in a high-end florist shop, including a wide assortment of
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cut flowers and plants, candy, balloons, plush toys, giftware and gourmet gift
baskets. In addition, the Company has further expanded its product 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 gourmet food 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, Inc. 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,
premium chocolates and confections with the acquisition of Fannie May
Confections Brands, Inc. in May 2006, and most recently, gourmet gift baskets,
food towers and gift sets through the acquisition of DesignPac Gifts LLC in
April 2008.
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 express themselves and 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, wine gifts and gourmet gift
baskets. This extension of gift offerings helps our customers in all of their
celebratory occasions, and 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 eleven 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(R)" 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
2,600 varieties of fresh-cut flowers, floral arrangements and plants,
more than 7,000 SKUs of gifts, gourmet foods, cookies, chocolates and
wines, more than 10,000 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 four customer service
facilities and employs a network of home agents to provide helpful
assistance on everything from advice on product selection to the
monitoring of the fulfillment and delivery process.
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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 April 2008, the Company acquired DesignPac
Gifts LLC, a designer, assembler and distributor of gourmet gift baskets,
gourmet food towers and gift sets, including a broad range of branded and
private label components. Subsequent to year end, in July 2008, the Company
acquired selected assets of Napco Marketing Corp. Napco is a wholesale
merchandiser and marketer of products designed primarily for the floral
industry, and will complement the product line already offered by BloomNet. 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 to more fully develop its gourmet
food 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 strategic relationships, including Martha Stewart
for 1-800-FLOWERS.COM, a co-branded line of fresh, seasonal flower arrangements
and plants which was launched during the latter part of fiscal 2008, as well as
with Lenox(R), Waterford(R), Godiva(R) and Junior's Cheesecake(R). The Company
also continues to develop signature products with renowned celebrity floral
artisans and celebrity chefs in order to provide its customers with
differentiated 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 its
effectiveness.
Business Category Reorganization
With the addition of Fannie May Confections Brands, Inc. in May 2006, and the
growing importance of BloomNet to the Company's operating results, the Company
restructured its organization during 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 has provided results for its Consumer Floral,
Home & Children's Gifts, Gourmet Food and Gift Baskets, and BloomNet Wire
Service businesses (see Management Discussion and Analysis of Financial
Condition and Results of Operations section for details). The Consumer Floral
business category includes the operations of the Company's flagship brand,
1-800-Flowers.com, while the Home & Children's Gifts business category includes
the Company's Plow & Hearth, Wind & Weather, HearthSong and Magic Cabin brands.
The Gourmet Food and Gift Baskets category includes the operations of Fannie May
Confections Brands, Cheryl & Co., The Popcorn Factory, The Winetasting Network
and DesignPac. The BloomNet Wire Service includes the operations of BloomNet,
BloomNet Technologies, and beginning in fiscal 2009, Napco.
The Company's Products and Service Offerings
The Company offers a wide range of products including fresh-cut flowers, floral
arrangements and plants, gifts, popcorn, gourmet foods and gift baskets,
cookies, candy and wine, home and garden merchandise and unique toys and games
for children. In order to maximize sales opportunities, products are not
exclusive to certain brands, and may be sold across business categories. 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.
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The Company's differentiated and value-added product offerings create 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 gift baskets, 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 from our product offerings.
Over the course of a year, the Company's product selection consists of:
Flowers & Plants. The Company offers more than 2,000 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(R)
program, and its successful "celebrity" gift collections, including the unique
floral creations of Jane Carroll, Julie McCann Mulligan, Jane Packer and Preston
Bailey. The Company also offers approximately 500 varieties of popular plants to
brighten the home and/or office, and accent gardens and landscapes.
Gourmet Foods and Gift Baskets. The Company offers more than 1,000 premium
popcorn and specialty snack products from The Popcorn Factory brand, as well as
approximately 600 carefully selected gourmet food and sweet products from the
GreatFood.com brand. Additionally, the Company has more than 1,100 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 customers 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. Through the Company's Fannie May Confections
Brands, the Company offers more than 900 different selections of premium
chocolate and candy. Many of the Company's gourmet products can be packaged in
seasonal, occasion specific or decorative 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 300
specially selected gift items, including plush toys, balloons, bath and spa
items and gift baskets, candles, wreaths, ornaments, collectibles, home
accessories and giftware.
Home and Children's Gifts. Through the Company's Plow & Hearth and Wind &
Weather brands, the Company offers approximately 10,000 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 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 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.
BloomNet Products and Services
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, including the
industry's first on-line directory, (iii) communication services, by which
BloomNet florists are able to send and receive orders and communicate between
members, using Bloomlink(R), the Company's proprietary electronic communication
system, (iv) other services including web hosting and point of sale, and (v)
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. In order to
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further enhance the wholesale capability of BloomNet, in July 2008, the Company
acquired selected assets of Napco Marketing Corp., a wholesale merchandiser and
marketer of products designed primarily for the floral industry. 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. With the completion of the Company's BloomNet investment
phase in fiscal 2006, and following its strong operating results in fiscal 2007
and 2008, the company expects that its BloomNet operations will continue to
contribute an increasing level of profitability during fiscal 2009.
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
birthdays, anniversaries, weddings, and sympathy. Through customer panel
research, the 1-800-Flowers.com brand recently introduced a number of new
signature products designed to increase everyday purchases. From its celebrity
floral artisan collection, including the exclusive Martha Stewart for
1-800-FLOWERS.COM, a co-branded line of fresh, seasonal flower arrangements and
plants which was launched during the latter part of fiscal 2008, to the
successful introduction of its "Happy Hour" collection of margarita, martini and
daiquiri inspired floral arrangements, which are 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, the 1-800-Flowers.com brand
introduced its Fresh Rewards(R) loyalty program whereby customers earn credit
towards future purchases upon achieving targeted spending levels, while the
Fannie May Confections Brands expanded its bounce back programs during its key
holiday selling seasons. As of June 29, 2008, the Company's total database of
unique customers numbered approximately 34.4 million (14.4 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, American Express,
Bank of America, General Electric, Deloitte, IBM, Verizon, Honeywell, Microsoft,
Hewlett Packard, Sodexho, 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 corporate customers 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 corporate customers' 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
Company expects its trend of online growth to continue. In order to maximize the
value of this trend, the Company intends to continue to:
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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 73% 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 June 29, 2008, the Company mailed in
excess of 115 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, and Google.
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
Airlines, Delta Airlines, Starwood Hotels, Choice Hotels, Next Jump, Bank Of
America , SunTrust, American Express, MasterCard, Visa and Paypal, among others.
E-mails. The Company is able to capitalize on its customer database of
approximately 34.4 million unique customers (14.7 million of which have
transacted business with the Company within the past 36 months), 20.3 million of
which have transacted business with the Company on-line (10.5 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 and
Google, as well as thousands of its online affiliate program members. The
Company also offers home and garden products through Plow & Hearth
(www.plowandhearth.com), weather-themed gifts through Wind & Weather
(www.windandweather.com), premium chocolates and confections from Fannie May
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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 73% 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(R), 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, more recently, 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, manufacturing and warehouse management,
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, LFC's, and franchise stores), with the
Company-owned distribution centers and brand-name vendors who ship directly to
the Company's customers. While providing a significant competitive advantage in
7
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 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 Agreements 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. 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(R)
program, and by providing for a full array of products from bouquets to unique
floral celebrity expert designed products.
As of June 29, 2008, the Company operates 4 floral retail stores located in New
York and 1 fulfillment center. In addition, the Company has 104 franchised
stores, located primarily in California, Colorado, Florida, New Jersey, 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 and Gift Baskets. In order to take advantage of improved margins,
better control quality and to offer premium branded signature products in the
8
Gourmet Food and Gift Baskets product category, which was identified by the
Company as one of its fastest growing and most profitable product lines, the
Company has 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 176,000 square foot
baking and distribution center in Obetz, 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 and 42,000 square foot
fulfillment center in Albany, New York. 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. In April 2008, through the acquisition of DesignPac Gifts LLC, the
Company significantly improved its gift basket fulfillment capabilities.
Initially, DesignPac's confection and fulfillment, through its 249,000 square
foot distribution center located in Melrose Park, IL, will focus on wholesale
operations. During fiscal 2009, the Company will begin to leverage the
capabilities of DesignPac to enable it to handle its expanding
direct-to-consumer demand.
Home and Children's Gifts. The Company packages and ships its home and
children's gift products primarily from three locations; (i) a 300,000 square
foot distribution center located in Madison, Virginia, (ii) a 200,000 square
foot distribution center in Vandalia, Ohio and (iii) a 140,000 square foot
distribution center in Reno, Nevada. A smaller portion of the Company's home and
children's items are shipped by third-party product suppliers using next-day or
other delivery options selected by the customer.
Seasonality
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, the Thanksgiving through Christmas
holiday season, which falls within the Company's second fiscal quarter,
generates the highest proportion of the Company's annual revenues. In addition,
as the result of a number of major floral gifting occasions, including Mother's
Day and Administrative Professionals Week, revenues also rise during the
Company's fiscal fourth quarter. Finally, results during the Company's fiscal
first quarter are negatively impacted by the lack of major gift-giving holidays,
and the disproportionate amount of overhead incurred during this slow period.
Adjusting for its most recent acquisitions, during fiscal 2009, the Company's
fiscal second quarter, its largest in terms of revenues, is expected to account
for approximately 38-40% of sales, followed by its fiscal fourth quarter, which
is expected to account for 23-25% of sales, including the shift in the timing of
the Easter Holiday from Q3 during fiscal 2008 to Q4 during fiscal 2009. The
Company's fiscal third quarter is expected to account for approximately 21-23%
of sales, also adjusting for the timing of the Easter Holiday, while the
Company's fiscal first quarter is expected to account for approximately 14-16%
of sales.
Accordingly, a disproportionate amount of operating cash flows are generated in
the Company's fiscal second and fourth quarters. In preparation for the
Company's second quarter holiday season, the Company significantly increases its
inventories, and therefore, corresponding cash requirements, which traditionally
have been financed by cash flows from operations and bank lines of credit, are
highest during the latter part of the Company's fiscal first quarter, peaking
within its second fiscal quarter. The Company has historically repaid all
revolving bank lines of credit with cash generated from operations, prior to the
end of the Company's fiscal second quarter.
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:
9
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 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 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;
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.
10
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, www.harrylondon.com
and www.designpac.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.
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 June 29, 2008, the Company had a total of approximately 4,000 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.
11
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.
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;
12
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 continue
to deteriorate and the Company's customers have less disposable income,
consumers may spend less on its products and its quarterly operating results may
suffer.
During peak periods, the Company utilizes temporary employees and outsourced
staff, who may not be as well-trained or committed to its customers as its
permanent employees, and if they fail to provide the Company's customers with
high quality customer service the customers may not return, which could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows. The Company depends on its customer service
department to respond to its customers should they have questions or problems
with their orders. During peak periods, the Company relies on its permanent
employees, as well as temporary employees and outsourced staff to respond to
customer inquiries. These temporary employees and outsourced staff may not have
the same level of commitment to the Company's customers or be as well trained as
its permanent employees. If the Company's customers are dissatisfied with the
quality of the customer service they receive, they may not shop with the Company
again, which could have a material adverse effect on its business, financial
condition, results of operations and cash flows.
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
13
relationships may decrease or remain flat. There continues to be strong
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 by either party 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 number 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, Nevada, Ohio and Virginia. The
Company has established relationships with Federal Express, UPS 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.
14
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 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 United
States and the price of the Company's floral products. If the supply of flowers
available for sale is limited due to weather conditions, farm closures, economic
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
15
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.
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.
The Company's business could be injured by significant credit card or debit card
fraud. Customers typically pay for their on-line or telephone orders with debit
or credit cards. The Company's revenues and gross margins could decrease if it
experienced significant credit card or debit card fraud. Failure to adequately
detect and avoid fraudulent credit card or debit card transactions could cause
the Company to lose its ability to accept credit cards or debit cards as forms
of payment and result in charge-backs of the fraudulently charged amounts.
Furthermore, widespread credit card or debit card fraud may lessen the Company's
customers' willingness to purchase products through the Company's web sites or
toll-free telephone numbers. For this reason, such failure could have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
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.
16
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
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.
17
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 has been unable to register certain of its intellectual
property in some foreign countries, including, "1-800-Flowers.com",
"1-800-Flowers" and "800-Flowers". The Company cannot be certain that any of its
intellectual property and 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 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 ecommerce channel has
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 and/or implementing 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 as well as the results of the Company to suffer . The Company has
opportunistically acquired a number of companies over the past several years.
Additionally the Company may look to acquire additional companies in the future.
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 or property damage. 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.
18
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.
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 uses UPS and FedEx to deliver its wine shipments. If UPS or FedEx 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 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
19
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 June 29, 2008 that remain unresolved.
20
Item 2. PROPERTIES
Square
Location Type Principal Use Footage Ownership
----------------------- -------------------- ------------------------------------------------ ------------------ ----------------
Office and Distribution, administrative and customer
Napa, CA warehouse service 68,000 leased
Chicago, IL Office Administrative and customer service 18,000 leased
Lake Forest, IL Office, plant and Manufacturing, distribution and administrative
warehouse 148,000 leased
Office and
Melrose Park, IL warehouse Distribution, administrative and customer 249,000 leased
service
Reno, NV Warehouse Distribution 140,000 leased
Alamogordo, NM Office Customer service 23,000 owned
Albany, NY Warehouse Distribution 42,000 leased
Carle Place, NY Office Headquarters and customer service 92,000 leased
Akron, OH Office, plant and Manufacturing, distribution and administrative
warehouse 200,000 leased
Bethpage, NY Warehouse Distribution 44,000 leased
Obetz, OH Warehouse Distribution 176,000 leased
Vandalia, OH Warehouse Distribution 200,000 owned
Office and
Westerville, OH warehouse Distribution and customer service 21,000 leased
Westerville, OH Office, plant and Manufacturing, distribution and administrative
warehouse 44,000 owned
Ardmore, OK (*) Office Customer service 24,000 leased
Office and
Madison, VA warehouse Distribution, administrative and customer 300,000 owned
service
(*) Facility was closed during July 2008.
(**) In July 2008, the Company acquired selected assets of Napco Marketing
Corp. (Napco), a wholesale merchandiser and marketer of products designed
primarily for the floral industry. The purchase price of approximately
$9.5 million included the acquisition of a 180,000 square foot
administrative and fulfillment center located in Jacksonville, FL.
In addition to the above properties, the Company leases approximately 315,000
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 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.
In the Company's Form 10Q for the quarterly period ended March 30, 2008, the
Company disclosed that in October 2007, 1-800-Flowers.Com., Inc. and its
subsidiary, 1-800-Flowers Retail, Inc., (collectively "the Company"), were
served with a purported nationwide class action lawsuit filed in the United
States District Court, in and for the Southern District of Florida (Grabein v.
1-800-Flowers.Com., Inc., et al; Case No. 07-22235). The Complaint alleged
violation of the Federal Fair and Accurate Credit Transaction Act ("FACTA")
based upon the allegation that the Company printed/provided receipts to
consumers at the point of sale or transaction on which receipts appeared more
than the last five digits of customers' credit or debit card numbers and/or the
expiration dates of such cards. The Complaint did not specify any actual damages
for any member of the purported class. However, the Complaint sought statutory
damages of $100 to $1,000 for each alleged willful violation of the statute, as
well as, attorneys' fees, costs, punitive damages and a permanent injunction.
The Company vigorously defended the action and on June 13, 2008, the presiding
Judge issued a Final Order of Dismissal whereby the case was dismissed with
prejudice and no payment of any kind was made by the Company or its subsidiary.
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 June 29, 2008.
21
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals were serving as executive officers of the Company and
certain of its subsidiaries on September 4, 2008:
Name Age Position with the Company
------------------------------------------------ ------ ----------------------------------------------------------
James F. McCann........................... 57 Chairman of the Board and Chief Executive Officer
Christopher G. McCann..................... 47 Director and President
Gerard M. Gallagher....................... 55 Senior Vice President of Business Affairs,
General Counsel, and Corporate Secretary
Thomas G. Hartnett........................ 45 Chief Operating Officer of Consumer Floral
Tim Hopkins............................... 54 President of Madison Brands
Stephen J. Bozzo.......................... 53 Senior Vice President and Chief Information Officer
William E. Shea........................... 49 Senior Vice President, Treasurer, and
Chief Financial Officer
David Taiclet............................. 45 Chief Executive Officer - Fannie May Confection Brands, Inc.
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
Lottomatica S.p.A and Willis Holdings Group. 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 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.
Timothy J. Hopkins has been President of the Madison Brands division since
January 2007 and prior to that served as President of Specialty Brands since
joining the Company in March 2005. Immediately before joining the Company, Mr.
Hopkins consulted for various retail companies after serving as Chief Executive
Officer and Director of Sur La Table, Inc., a multi-channel upscale specialty
retailer of gourmet culinary and serveware products where he was employed from
22
2001-2004. From 2000-2001 he was the CEO at LeGourmet Chef, a specialty retailer
of housewares and from 1995-2000, Mr. Hopkins was President, Corporate
Merchandising and Logistics Worldwide for BORDERS Group, Inc, a multi-channel
retailer of books and multi-media. Before this position Mr. Hopkins held other
senior level positions in the multi-channel retailing sector.
Stephen J. Bozzo has been our Chief Information Officer since May 2007. Prior to
joining the Company, Mr. Bozzo served as Chief Information Officer for the
International Division of MetLife Insurance Company since 2001. Mr. Bozzo's
business background includes senior executive positions at Bear Stearns Inc. as
Managing Director Principal, AIG as Senior Vice President Telecommunications and
Technical Services and Chase Manhattan Bank, where he was Senior Vice President
Global Telecommunications.
David Taiclet has been our Chief Executive Officer of the Fannie May Confections
Brands since April 2006, upon our acquisition of the company. Prior thereto and
commencing in January 1995, Mr. Taiclet was a Co-Founder of a business that
ultimately became known as 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. From May 1991 to
January 1995, Mr. Taiclet served in a variety of management positions with
Cargill, Inc. including the Strategy and Business Development Group. 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.
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.
23
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 June 29, 2008 and July 1, 2007.
High Low
-------------- --------------
Year ended June 29, 2008
July 2, 2007 - September 30, 2007 $ 12.38 $ 8.47
October 1, 2007 - December 30, 2007 $ 13.42 $ 8.66
December 31, 2007 - March 30, 2008 $ 9.00 $ 6.35
March 31, 2008 - June 29, 2008 $ 9.26 $ 6.51
Year ended July 1, 2007
July 3, 2006 - October 1, 2006 $ 6.10 $ 4.33
October 2, 2006 - December 31, 2006 $ 6.35 $ 4.94
January 1, 2007 - April 1, 2007 $ 8.00 $ 5.84
April 2, 2007 - July 1, 2007 $ 9.47 $ 7.66
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 4, 2008, there were approximately 271 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 4, 2008,
there were approximately 22 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.
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
36,923,032 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 4, 2008, all of such shares of
24
the Company's common stock could be sold in the public market pursuant to and
subject to the limits set forth in Rule 144. Sales of a large number of these
shares could have an adverse effect on the market price of the Company's Class A
common stock by increasing the number of shares available on the public market.
Purchases of Equity Securities by the Issuer
On January 21, 2008, the Company's Board of Directors authorized an increase to
its stock repurchase plan which, when added to the $8.7 million remaining on its
earlier authorization, increased the amount available for repurchase to $15.0
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 June 29, 2008, $14.0 remains authorized but unused.
Under this program, as of June 29, 2008, the Company had repurchased 1,660,786
shares of common stock for $12.3 million, of which $1.1 million (133,609
shares), $0.2 million (24,627 shares) and $1.3 million (182,000 shares) were
repurchased during the fiscal years ending June 29, 2008, July, 1 2007 and July
2, 2006, respectively. In a separate transaction, during fiscal 2007, the
Company's Board of Directors authorized the repurchase of 3,010,740 shares from
an affiliate. The purchase price was $15,689,000 or $5.21 per share. The
repurchase was approved by the disinterested members of the Company's Board of
Directors and was in addition to the Company's existing stock repurchase
authorization.
25
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended June 29,
2008, July 1, 2007 and July 2, 2006 and the consolidated balance sheet data as
of June 29, 2008 and July 1, 2007, 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 July 3, 2005 and June 27, 2004, and the selected consolidated balance
sheet data as of July 2, 2006, July 3, 2005 and June 27, 2004, 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 DesignPac Gifts LLC in April 2008,
Fannie May Confections Brands, Inc. in May 2006, Wind & Weather in October 2005,
Cheryl & Co. in March 2005 and The Winetasting Network in November 2004. 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.
Years ended (1),(2)
----------------------------------------------------------------------
June 29, July 1, July 2, July 3, June 27,
2008 2007 2006 2005 2004
------------- -------------- ------------- ------------ --------------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net revenues:
E-commerce $ 749,857 $ 749,238 $ 706,001 $ 620,831 $ 570,509
Other 169,535 163,360 75,740 49,848 33,469
------------- -------------- ------------- ------------ --------------
Total net revenues 919,392 912,598 781,741 670,679 603,978
Cost of revenues 525,638 520,132 456,097 395,028 351,111
------------- -------------- ------------- ------------ --------------
Gross profit 393,754 392,466 325,644 275,651 252,867
Operating expenses:
Marketing and sales 256,604 262,303 239,573 198,935 172,251
Technology and development 21,539 21,316 19,819 14,757 13,799
General and administrative 57,881 56,017 43,978 35,572 30,415
Depreciation and amortization 20,363 17,837 15,765 14,489 14,992
------------- -------------- ------------- ------------ --------------
Total operating expenses 356,387 357,473 319,135 263,753 231,457
------------- -------------- ------------- ------------ --------------
Operating income 37,367 34,993 6,509 11,898 21,410
Other income (expense), net (3,997) (5,984) (141) 1,349 320
------------- -------------- ------------- ------------ --------------
Income before income taxes 33,370 29,009 6,368 13,247 21,730
Income tax expense (benefit) 12,316 11,891 3,181 5,398 (19,174)
------------- -------------- ------------- ------------ --------------
Net income $21,054 $17,118 $ 3,187 $ 7,849 $ 40,904
============= ============== ============= ============ ==============
Net income per common share:
Basic $0.33 $0.27 $0.05 $0.12 $0.62
============= ============== ============= ============ ==============
Diluted $0.32 $0.26 $0.05 $0.12 $0.60
============= ============== ============= ============ ==============
Shares used in the calculation of net income
per common share:
Basic 63,074 63,786 65,100 66,038 65,959
============= ============== ============= ============ ==============
Diluted 65,458 65,526 66,429 67,402 68,165
============= ============== ============= ============ ==============
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 June 29, 2008, July 1, 2007, July
2, 2006 and June 27, 2004 consisted of 52 weeks, while the fiscal years 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.
26
As of
-------------- ------------- -------------- --------------- --------------
June 29, 2008 July 1, 2007 July 2, 2006 July 3, 2005 June 27, 2004
-------------- ------------- -------------- --------------- --------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short-term investments $ 12,124 $ 16,087 $ 24,599 $ 46,608 $ 103,374
Working capital 33,416 51,419 44,250 44,739 83,704
Investments-non current - - - - 8,260
Total assets 371,338 352,507 346,634 251,952 261,552
Long-term liabilities 63,739 78,911 79,221 5,281 8,874
Total stockholders' equity 231,465 201,031 193,183 186,334 186,390
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A) is intended to provide an understanding of our financial
condition, change in financial condition, cash flow, liquidity and results of
operations. The following MD&A discussion should be read in conjunction with the
consolidated financial statements and notes to those statements that appear
elsewhere in this Form 10-K. The following discussion contains forward-looking
statements that reflect the Company's plans, estimates and beliefs. The
Company's actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to any
differences include, but are not limited to, those discussed under the caption
"Forward-Looking Information" and under Item 1A -- "Risk Factors".
Overview
1-800-FLOWERS.COM, Inc. is the world's leading florist and gift shop. For more
than 30 years, 1-800-FLOWERS.COM, Inc. has been providing customers with fresh
flowers and the finest selection of plants, gift baskets, gourmet foods,
confections, balloons and plush stuffed animals perfect for every occasion.
1-800-FLOWERS.COM(R) (1-800-356-9377 or www.1800flowers.com), was named as one
of the top 50 online retailers by Internet Retailer, as well as 2008 Laureate
Honoree by the Computerworld Honors Program and the recipient of ICMI's 2006
Global Call Center of the Year Award. 1-800-FLOWERS.COM offers the best of both
worlds: exquisite arrangements created by some of the nation's top floral
artists and hand-delivered the same day, and spectacular flowers shipped
overnight under our Fresh From Our Growers(R) program. As always, 100%
satisfaction and freshness are guaranteed. The Company's BloomNet(R)
international floral wire service (www.mybloomnet.net) provides a broad range of
quality products and value-added services designed to help professional florists
grow their businesses profitably.
The 1-800-FLOWERS.COM, Inc. "Gift Shop" also includes gourmet gifts such as
popcorn and specialty treats from The Popcorn Factory(R) (1-800-541-2676 or
www.thepopcornfactory.com); 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(R) (www.fanniemay.com and www.harrylondon.com);
gourmet foods from Greatfood.com(R) (www.greatfood.com); wine gifts from
Ambrosia(R) (www.ambrosia.com or www.winetasting.com); gift baskets from
1-800-BASKETS.COM(R) (www.1800baskets.com) and DesignPac Gifts(TM)
(www.designpac.com) as well as Home Decor and Children's Gifts from Plow &
Hearth(R) (1-800-627-1712 or www.plowandhearth.com), Wind & Weather(R)
(www.windandweather.com), HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com).
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market
under ticker symbol FLWS.
Category Information
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The following table presents the contribution
27
of net revenues, gross profit and "EBITDA" (earnings before interest, taxes,
depreciation and amortization) from each of the Company's business categories.
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
Net revenues 2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $491,696 0.1% $491,404 8.7% $452,188
BloomNet Wire Service 53,488 20.5% 44,379 48.5% 29,884
Gourmet Food & Gift Baskets 196,298 1.9% 192,698 83.5% 105,002
Home & Children's Gifts 180,181 (3.6%) 186,948 (5.1%) 196,919
Corporate (*) 2,431 47.2% 1,652 19.0% 1,388
Intercompany eliminations (4,702) (4.9%) (4,483) (23.2%) (3,640)
------------ ------------- -------------
Total net revenues $919,392 0.7% $912,598 16.7% $781,741
============ ============= =============
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
Gross Profit 2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Gross profit:
1-800-Flowers.com Consumer Floral $190,259 (1.4%) $192,921 13.2% $170,352
38.7% 39.3% 37.7%
BloomNet Wire Service 30,080 21.1% 24,844 55.4% 15,989
56.2% 56.0% 53.5%
Gourmet Food & Gift Baskets 91,713 4.0% 88,207 85.9% 47,442
46.7% 45.8% 45.2%
Home & Children's Gifts 81,459 (5.2%) 85,899 (6.2%) 91,555
45.2% 45.9% 46.5%
Corporate (*) 970 27.0% 764 38.7% 551
39.9% 46.2% 39.7%
Intercompany eliminations (727) (169) (245)
------------ ------------- -------------
Total gross profit $393,754 0.3% $392,466 20.5% $325,644
============= ============= ==============
42.8% 43.0% 41.7%
============= ============= ==============
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
EBITDA(**) 2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $62,967 (3.4%) $65,166 40.1% $46,518
BloomNet Wire Service 18,509 30.7% 14,162 99.3% 7,106
Gourmet Food & Gift Baskets 24,593 (6.8%) 26,377 286.4% 6,827
Home & Children's Gifts 3,438 383.0% (1,215) (117.0%) 7,134
------------ ------------- -------------
Category Contribution Margin Subtotal 109,507 4.8% 104,490 54.6% 67,585
Corporate (*) (51,777) (0.2%) (51,660) (14.0%) (45,311)
------------ ------------- -------------
EBITDA $57,730 9.3% $52,830 137.2% $22,274
============ ============= =============
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among other items, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
28
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center, which are allocated directly to the above
categories based upon usage, are included within corporate expenses as they
are not directly allocable to a specific category.
(**) Performance is measured based on category contribution margin or category
EBITDA, reflecting only the direct controllable revenue and operating
expenses of the categories. As such, management's measure of profitability
for these categories does not include the effect of corporate overhead,
described above, nor does it include depreciation and amortization, other
income (net), and income taxes. Management utilizes EBITDA as a performance
measurement tool because it considers such information a meaningful
supplemental measure of its performance and believes it is frequently used
by the investment community in the evaluation of companies with comparable
market capitalization. The Company also uses EBITDA as one of the factors
used to determine the total amount of bonuses available to be awarded to
executive officers and other employees. The Company's credit agreement uses
EBITDA (with additional adjustments) to measure compliance with covenants
such as interest coverage and debt incurrence. EBITDA is also used by the
Company to evaluate and price potential acquisition candidates. EBITDA has
limitations as an analytical tool, and should not be considered in
isolation or as a substitute for analysis of the Company's results as
reported under GAAP. Some of these limitations are: (a) EBITDA does not
reflect changes in, or cash requirements for, the Company's working capital
needs; (b) EBITDA does not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal payments, on
the Company's debts; and (c) although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized may have to be
replaced in the future, and EBITDA does not reflect any cash requirements
for such capital expenditures. Because of these limitations, EBITDA should
only be used on a supplemental basis combined with GAAP results when
evaluating the Company's performance.
Reconciliation of Net Income to EBITDA:
Years Ended
-------------------------------------------
June 29, July 1, July 2,
2008 2007 2006
------------- ------------- -------------
(in thousands)
Net income $21,054 $17,118 $3,187
Add:
Interest expense 5,081 7,390 1,407
Depreciation and amortization 20,363 17,837 15,765
Income tax expense 12,316 11,891 3,181
Less:
Interest income 999 1,381 1,260
Other income 85 25 6
------------- ------------- -------------
EBITDA $57,730 $52,830 $22,274
============= ============= =============
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 2008, 2007 and 2006, which ended on June 29,
2008, July 1, 2007 and July 2, 2006, respectively, consisted of 52 weeks.
Net Revenues
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
E-Commerce $749,857 0.1% $749,238 6.1% $706,001
Other 169,535 3.8% 163,360 115.7% 75,740
------- ------ ------
$919,392 0.7% $912,598 16.7% $781,741
======== ======== ========
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits.
29
The Company's revenue growth of 0.7% during the fiscal year ended June 29, 2008
was primarily attributable to the continued expansion of the Company's BloomNet
Wire Service business, which increased 20.5% over the prior fiscal year, as well
as growth from the Gourmet Food & Gift Basket business, which increased 1.9%
over the same period of the prior year, partially offset by a decline in the
Home and Children's Gifts business as a result of the discontinuation of
non-performing catalog titles in order to improve the overall operating results
within this category. During this challenging consumer environment, which was
characterized by cautious consumer spending and aggressive promotional activity
by competitors across the gifting industry, the Company made the decision not to
chase revenue growth in its direct-to-consumer businesses, instead focusing on
achieving its primary goal of leveraging its business platform to drive
profitable growth while reducing its operating expense ratio. As a result,
despite the difficult retail consumer environment experienced during the year,
the Company was able to achieve EBITDA growth of 9.3%, on more modest revenue
growth, and despite the negative contribution from DesignPac (acquired on April
30, 2008), due to the highly seasonal nature of its business.
The Company's revenue growth of 16.7% during the fiscal year ended July 1, 2007
was due to a combination of organic growth, as well as the acquisitions of
Fannie May Confections Brands, a manufacturer and retailer of premium chocolates
and other confections, acquired on May 1, 2006 and Wind & Weather, a direct
marketer of weather-themed gifts, acquired on October 31, 2005. Organic revenue
growth, including post acquisition growth of the aforementioned acquisitions,
adjusted for the disposition of certain Company owned floral retail stores,
during fiscal 2007 was approximately 8%.
The Company fulfilled approximately 11.5 million, 11.6 million and 11.3 million
orders through its e-commerce (combined online and telephonic) sales channel
during fiscal 2008, 2007 and 2006, respectively. The Company's e-commerce
(combined online and telephonic) sales channel average order value increased
1.3% to $65.21 during fiscal 2008, and 3.2% to $64.37 during fiscal 2007,
primarily as a result of increased service and shipping charges (in line with
industry norms) to partially offset the impact of increased fuel costs passed on
from freight carriers.
Other revenues for the fiscal years ended June 29, 2008 and July 1, 2007,
increased in comparison to the same periods of the prior year due the continued
revenue growth of the Company's BloomNet Wire Service category. Also
contributing to the increase in other revenues during fiscal 2007 was the
increase from the retail/wholesale component of Fannie May Confections Brands,
which was acquired in May 2006.
The 1-800-Flowers.com Consumer Floral category includes the 1-800-Flowers brand
operations which derives revenue from the sale of consumer floral products
through its e-commerce sales channels (telephonic and online sales) and
company-owned and operated retail floral stores, as well as royalties and rental
income from its franchise operations. Net revenues during the fiscal years ended
June 29, 2008 and July 1, 2007, increased by 0.1% and 8.7% over the respective
prior year periods, primarily from an increased average order value from its
e-commerce sales channel, offset in part by lower retail sales from its
company-owned floral stores due to the planned transition of Company stores to
franchise ownership. Fiscal 2007 net revenues were also favorably affected by
increased order volume from its e-commerce sales channel.
The BloomNet Wire Service category includes revenues from membership fees as
well as other service and product offerings to florists. Net revenues during the
fiscal years ended June 29, 2008 and July 1, 2007 increased by 20.5% and 48.5%
over the respective prior year periods, primarily as a result of increased
florists' membership fees, expanded product and service offerings, and pricing
initiatives. During fiscal 2007, net revenues were also favorably affected by
the introduction of BloomNet's Floral Selection Guide, which is published once
every three years.
The Gourmet Food & Gift Basket category includes the operations of the Cheryl &
Co., Fannie May Confections Brands, The Popcorn Factory, The Winetasting Network
and DesignPac Gifts brands. Revenue is derived from the sale of cookies, baked
gifts, premium chocolates and confections, gourmet popcorn, wine gifts and
gourmet gift baskets through its E-commerce sales channels (telephonic and
online sales) and company-owned and operated retail stores under the Cheryl &
Co. and Fannie May Confections brands, as well as wholesale operations. Net
revenue for the fiscal year ended June 29, 2008 increased 1.9% compared to the
prior fiscal year as a result of increased direct-to-consumer order volume from
Cheryl & Co. and Fannie May Confections brands. Revenues from DesignPac, which
was acquired on April 30, 2008, were immaterial during fiscal 2008 due to the
highly seasonal nature of its business. Net revenue during the fiscal year ended
30
July 1, 2007 increased by 83.5% over the prior year period, as a result of the
contribution of Fannie May Confections Brands, which was acquired in May 2006,
and strong organic growth from Cheryl & Co.
The Home & Children's Gifts category includes revenues from the Plow & Hearth,
Wind & Weather, Problem Solvers, Madison Place, HearthSong and Magic Cabin
brands. Revenue is derived from the sale of home decor and children's gifts
through its e-commerce sales channels (telephonic and online sales) or
company-owned and operated retail stores operated under the Plow & Hearth brand.
Net revenue during the fiscal year ended June 29, 2008 decreased by 3.6% over
the prior year period due to the planned elimination of the Madison Place and
Problem Solvers catalog titles, which were launched during fiscal 2007.
Excluding these titles, fiscal 2008 net revenue for the Home & Children's Gifts
category was relatively consistent with the prior year period. Net revenue
during the fiscal year ended July 1, 2007 decreased by 5.1% over the prior year
period due to a lack of new "hit" products and an overall macro decline in
customer demand within this category. During the second quarter of fiscal 2007,
efforts to expand titles outside of the core Plow & Hearth brand did not attract
the level of customer demand to justify the increase in marketing costs. In
response to the poor results, during the third quarter of fiscal 2007,
management implemented several changes to improve the performance within this
category: (i) revised the aforementioned plans to expand and add titles, (ii)
strengthened the management team, (iii) improved the creative look and feel of
the catalogs and (iv) revised the circulation plans for all titles to place more
focus on the category's existing customer base. As a result, during fiscal 2008,
category contribution margin within this category improved by $4.6 million, from
a loss of $1.2 million, to contribution of $3.4 million.
While the Company does not anticipate any significant improvement in the current
economic environment during fiscal 2009, it expects to achieve revenue growth in
excess of 10 percent compared with the prior year period. Revenue growth is
expected to come from a combination of organic initiatives and contributions
from its recent acquisitions. Among the organic initiatives that the Company
believes will help drive profitable growth are (i) the first year benefit from
the exclusive relationship with Martha Stewart Living Omnimedia for both
1-800-FLOWERS.COM and BloomNet; (ii) BloomNet's expanded products and service
offerings, designed to deepen its relationship with florists and increase market
share gains; (iii) Fannie May's continued strong ecommerce channel growth; (iv)
Cheryl & Co.'s new product introductions, increased customization capabilities
and improved website functionality; as well as (v) continued focus on
cross-marketing and merchandising across all enterprise brands.
Gross Profit
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Gross profit $393,754 0.3% $392,466 20.5% $325,644
Gross margin % 42.8% 43.0% 41.7%
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 and wholesale production operations.
Gross profit increased during the fiscal years ended June 29, 2008 and July 1,
2007, in comparison to the same periods of the prior years, primarily as a
result of the revenue growth described above. Gross margin percentage during the
fiscal year ended June 29, 2008 decreased 20 basis points, primarily as a result
of increased promotional activity and higher fuel surcharges from third party
shippers. During fiscal 2007, gross profit percentage increased by 130 basis
points as a result of product mix and pricing initiatives, as well as continued
improvements in customer service, and fulfillment, as a result of improved
outbound shipping rates, and merchandising programs.
31
The 1-800-Flowers.com Consumer Floral category gross profit and gross profit
margin percentage decreased by 1.4% and 60 basis points, respectively during
fiscal 2008, as a result of increased promotional activity and higher fuel
surcharges from third party shippers. During fiscal 2007, gross profit and gross
margin percentage increased 13.2% and 160 basis points, respectively, as a
result of the aforementioned increase in net revenue, as well improvements in
sourcing, reduced outbound shipping rates, and pricing initiatives.
The BloomNet Wire Service category gross profit for the fiscal years ended June
29, 2008 and July 1, 2007, increased by 21.1% and 55.4% over the respective
prior year periods as a result of the above mentioned revenue growth resulting
from an increase in membership services and pricing initiatives.
The Gourmet Food & Gift Basket category gross profit for the fiscal year ended
June 29, 2008 increased by 4.0% over the prior year period as a result of higher
revenues and higher gross margin percentage, which increased 90 basis points to
46.7%, as a result of manufacturing efficiencies, and sales channel mix. During
fiscal 2007, gross profit increased 85.9% primarily as a result of the
incremental revenue generated by Fannie May Confections Brands and strong
organic growth within the Cheryl & Co. brand, combined with an increase in gross
margin percentage of 60 basis points, to 45.8%, as a result of improvements in
outbound shipping rates and merchandising programs across all brands within the
category.
The Home & Children's Gift category gross profit for the fiscal years ended June
29, 2008 and July 1, 2007 decreased by 5.2% and 6.2% over the respective prior
year periods as a result of the aforementioned revenue decline, combined with
lower gross margin percentages. The gross margin percentage during fiscal 2008
declined 70 basis points to 45.2%, due to promotional offers designed to
re-engage core customers who had left the brand during fiscal 2007 when it had
unsuccessfully moved away from its traditional product offerings, as well as
from higher fuel surcharges on its outbound shipments. During fiscal 2007, the
gross margin percentage declined 60 basis points to 45.9%, due to sales mix and
markdowns to move inventory.
During fiscal year 2009, the Company expects its gross margin percentage will
decline slightly as a result of the acquisition of DesignPac, which carries a
lower wholesale gross margin, but a strong overall contribution margin due to
its efficient high volume packaging and distribution operations. This mix
decline is expected to be partially offset by anticipated gross margin
improvements in most of its existing businesses through a combination of product
sourcing, fulfillment improvements and pricing initiatives.
Marketing and Sales Expense
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Marketing and sales $256,604 (2.2%) $262,303 9.5% $239,573
Percentage of sales 27.9% 28.7% 30.6%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search costs, 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.
During fiscal 2008, marketing and sales expenses decreased by 2.2% from the
prior year, and declined from 28.7% of net revenues to 27.9% of net revenues as
a result of improved operating leverage from a number of cost-saving
initiatives, including catalog printing and e-mail pricing improvements, and
planned reductions in catalog prospecting and the discontinuation of the Madison
Place and Problem Solvers titles within the Home & Children's category, as well
as continued growth and operating improvements within the BloomNet Wire Service
category.
32
During fiscal 2007, marketing and sales expense increased over the prior year
period by 9.5% as a result of several factors, including: (i) incremental
expenses associated with the acquisition of Fannie May Confections Brands in May
2006, (ii) incremental variable costs to accommodate higher sales volumes, and
(iii) personnel associated with the expansion of the BloomNet Wire Service
business. However, marketing and sales expenses decreased from 30.6% to 28.7% of
net revenues, reflecting improved operating leverage from cost-saving
initiatives and the completion of the investment phase of BloomNet, including
the absorption of incremental personnel to expand membership, increase product
and service offerings, and increased BloomNet Technologies penetration. This
leverage was achieved through significant improvement within the Company's
1-800-Flowers Consumer Floral, BloomNet Wire Service and Gourmet Food & Gift
Baskets categories. As efforts to grow the Home & Children's Gifts businesses
through the introduction of titles outside the core Plow & Hearth brand did not
attract the necessary level of consumer demand to justify the costs, as noted
above, non-productive titles were discontinued during the latter half of fiscal
2007, resulting in improved contribution margin during fiscal 2008.
During the fiscal year ended June 29, 2008 the Company added approximately 3.4
million new e-commerce customers, compared to 3.5 million and 3.6 million in
fiscal 2007 and fiscal 2006, respectively. Of the 6.8 million total customers
who placed e-commerce orders during the fiscal 2008, approximately 50% were
repeat customers, compared to 48% and 46% in fiscal 2007 and fiscal 2006,
respectively, reflecting the Company's ongoing focus on deepening the
relationship with its existing customers as their trusted source for gifts and
services for all of their celebratory occasions.
During fiscal 2009, the Company expects that marketing and sales expense will
continue to decrease as a percentage of net revenue in comparison to the prior
years, in part due to the acquisition of DesignPac which, as noted above,
carries a lower wholesale gross margin, but a strong overall contribution margin
due to its cost efficient, high volume product assembly and distribution
operations, as well as Company initiatives which will gain further leverage
within existing operations.
Technology and Development Expense
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Technology and development $21,539 1.0% $21,316 7.6% $19,819
Percentage of sales 2.3% 2.3% 2.5%
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.
During fiscal 2008, technology and development expense increased 1.0%, in
comparison to the prior year period as a result of increased labor costs, but
was consistent as a percentage of net revenues. The increased labor costs were
necessary to support the Company's technology platform, and were offset in part
by savings derived from renegotiating various technology maintenance and license
agreements.
During fiscal 2007, technology and development expense decreased 20 basis points
to 2.3% of net revenue, reflecting improved operating leverage, however,
technology and development expense increased by 7.6% over the prior year period,
as a result of the incremental expenses associated with Fannie May Confections
Brands, as well as for increases in the cost of maintenance and license
agreements required to support the Company's technology platform.
During the fiscal years ended June 29, 2008, July 1, 2007, and July 2, 2006 the
Company expended $35.3 million, $32.3 million, and $33.6 million, respectively,
on technology and development, of which $13.8 million, $11.0 million, and $13.8
million, respectively, has been capitalized.
33
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives, and as such, the Company expects
that its spending for the fiscal 2009 will be consistent, as a percentage of net
revenues, in comparison to the prior year.
General and Administrative Expenses
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
General and administrative $57,881 3.3% $56,017 27.4% $43,978
Percentage of sales 6.3% 6.1% 5.6
%
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 3.3% during the fiscal year ended
June 29, 2008 and by 20 basis points as a percentage of net revenues in
comparison to the prior year, due to increased professional fees and corporate
initiatives. The benefit of these increased costs are reflected in the
improvements within the Company's overall operating expense ratios, in
comparison to the same period of the prior year.
During the fiscal year ended July 1, 2007 general and administrative expense
increased 27.4% and by 50 basis points as a percentage of net revenues in
comparison to the prior year period, primarily as a result of: (i) incremental
expenses associated with the acquisitions of Fannie May Confections Brands in
May 2006, (ii) increased legal and professional fees, and (iii) the achievement
of certain performance related bonus targets in fiscal 2007 which were not
earned in the prior fiscal year.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements and drive
operating leverage, the Company expects that its fiscal 2009 general and
administrative expenses will be consistent, as a percentage of net revenue, with
fiscal 2008.
Depreciation and Amortization
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Depreciation and amortization $20,363 14.2% $17,837 13.1% $15,765
Percentage of sales 2.2% 2.0% 2.0%
Depreciation and amortization expense increased by 14.2% during the fiscal 2008
in comparison to the prior year as a result of capital additions for technology
platform improvements and the incremental amortization expense related to the
intangibles established as a result of the acquisition of DesignPac, which was
acquired on April 30, 2008.
Depreciation and amortization expense increased by 13.1% during the fiscal year
ended July 1, 2007 in comparison to the prior year period primarily as a result
of the incremental amortization expense as a result of the acquisitions of
Fannie May Confections Brands and Wind & Weather in fiscal 2006, as well as
depreciation associated with completed technology projects designed to provide
improved order/warehouse management functionality across the enterprise.
The Company believes that continued investment in its infrastructure, primarily
in the areas of technology and development, including the improvement of the
technology platforms are critical to attaining its strategic objectives. As a
result of these improvements, and the increase in amortization expense
associated with intangibles established as a result of recent acquisitions, the
Company expects that depreciation and amortization for the fiscal 2009 will
increase slightly as a percentage of net revenues in comparison to the prior
year.
34
Other Income (Expense)
Years Ended
----------------------------------------------------------------------
June 29, July 1, July 2,
2008 % Change 2007 % Change 2006
------------ --------------- ------------- ------------- -------------
(in thousands)
Interest income $ 999 (27.7)% $1,381 9.6% $1,260
Interest expense (5,081) 31.2% (7,390) (425.2)% (1,407)
Other, net 85 240.0% 25 316.7 6
------------ ------------- -------------
$(3,997) 33.2% $(5,984) (4,144.0)% $(141)
============ ============= =============
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 long-term debt, and revolving line of
credit.
Net borrowing costs declined during fiscal 2008, in comparison to fiscal 2007,
as a result of declining interest rates and a reduction in outstanding debt.
Net borrowing costs increased during fiscal 2007, in comparison to fiscal 2006,
due to the interest expense incurred in order to finance the acquisition of
Fannie May Confections Brands, Inc. on May 1, 2006. 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, as amended, included an $85.0 million term
loan and a $75.0 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.
On August 28, 2008, the Company entered into a $293.0 million Amended and
Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative
agent, and a group of lenders (the "2008 Credit Facility"). The 2008 Credit
Facility provides for borrowings of up to $293.0 million, including: (i) a
$165.0 million revolving credit commitment, (ii) $60.0 million of new term loan
debt, and (iii) $68.0 million of existing term loan debt associated with the
Company's 2006 Credit Facility. Interest is at LIBOR plus 1.5% to 2.5% for the
Company's existing term loan and revolving credit facility, and LIBOR plus 2.0%
to 3.0%, for the Company's new term loan, with pricing based upon the Company's
leverage ratio. At closing of the 2008 Credit Facility, the Company utilized the
proceeds of the new term loan to pay down amounts outstanding under its previous
revolving credit facility.
Income Taxes
During the fiscal years ended June 29, 2008, July 1, 2007 and July 2, 2006, the
Company recorded income tax expense of $12.3 million, $11.9 million and $3.2
million, respectively. The Company's effective tax rate for the fiscal years
ended June 29, 2008, July 1, 2007 and July 2, 2006 was 36.9%, 41.0% and 50.0%,
respectively. The decrease in the effective tax rate during the fiscal year
ended June 29, 2008 resulted primarily from lower state taxes, as well as
various tax credits programs. The decrease in the effective tax rate during the
fiscal year ended July 1, 2007 resulted from the dilution of the impact of
stock-based compensation recognized in accordance with SFAS No. 123(R), over an
increased level of income before taxes in comparison the prior fiscal year. The
Company's effective tax rate for the fiscal years ended June 29, 2008, July 1,
2007 and July 2, 2006 differed from the U.S. federal statutory rate of 35%
primarily due to state income taxes, partially offset by various tax credits.
At June 29, 2008, the Company's federal net operating loss carryforwards were
approximately $4.5 million, which, if not utilized, will begin to expire in
fiscal year 2025.
35
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2008 and 2007. 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
--------------------------------------------------------------------------------------
Jun.29, Mar.30, Dec.30, Sep.30, Jul. 1, Apr. 1, Dec.31, Oct. 1
2008 2008 2007 2007 2007 2007 2006 2006
--------- --------- ---------- ----------- --------- ---------- ---------- -----------
(in thousands, except per share data)
Net revenues:
Ecommerce (telephonic/online) $183,710 $177,476 $274,168 $114,503 $194,228 $175,592 $270,159 $109,259
Other 36,103 42,091 60,034 31,307 37,593 38,187 59,707 27,873
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total net revenues 219,813 219,567 334,202 145,810 231,821 213,779 329,866 137,132
Cost of revenues 128,501 130,062 181,146 85,929 132,833 127,092 177,889 82,318
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Gross profit 91,312 89,505 153,056 59,881 98,988 86,687 151,977 54,814
Operating expenses:
Marketing and sales 59,644 60,587 93,594 42,779 61,873 59,023 99,037 42,370
Technology and development 5,370 5,515 5,419 5,235 5,485 5,469 5,201 5,161
General and administrative 14,064 13,151 15,448 15,218 14,545 14,198 13,931 13,343
Depreciation and amortization 5,515 5,011 4,967 4,870 4,812 4,447 3,834 4,744
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total operating expenses 84,593 84,264 119,428 68,102 86,715 83,137 122,003 65,618
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Operating income (loss) 6,719 5,241 33,628 (8,221) 12,273 3,550 29,974 (10,804)
Other income (expense), net (533) (685) (1,430) (1,349) (979) (1,347) (2,178) (1,480)
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Income (loss) before income taxes 6,186 4,556 32,198 (9,570) 11,294 2,203 27,796 (12,284)
Income tax expense (benefit) 1,888 1,266 12,942 (3,780) 4,732 1,150 10,874 (4,865)
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Net income (loss) $4,298 $3,290 $19,256 ($5,790) $6,562 $1,053 $16,922 ($7,419)
========= ========= ========== =========== ========= ========== ========== ==========
Net income (loss) per share:
Basic $0.07 $0.05 $0.31 ($0.09) $0.10 $0.02 $0.26 ($0.11)
========= ========= ========== =========== ========= ========== ========== ==========
Diluted $0.07 $0.05 $0.29 ($0.09) $0.10 $0.02 $0.26 ($0.11)
========== ======== ========== =========== ========= ========== ========== ==========
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, including the recent acquisition
of DesignPac Gifts LLC, which was acquired in May 2008, 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. For fiscal 2008, however,
the Easter holiday occurred in the Company's fiscal third quarter, thus moving
revenue from the Company's fiscal fourth quarter to its fiscal third quarter.
For fiscal 2009, the Easter Holiday returns to the Company's fiscal fourth
quarter.
Liquidity and Capital Resources
At June 29, 2008 the Company had working capital of $33.4 million, including
cash and equivalents of $12.1 million, compared to working capital of $51.4
million, including cash and equivalents of $16.1 million, at July 1, 2007.
36
Net cash provided by operating activities of $57.9 million for the fiscal year
ended June 29, 2008 was primarily attributable to net income, adjusted to add
back non-cash charges for depreciation and amortization, deferred income taxes
and stock-based compensation, offset in part by increases in inventory (due
primarily to the recently acquired DesignPac business).
Net cash used in investing activities of $57.7 million for the fiscal year ended
June 29, 2008 was primarily attributable to the payment of Fannie May
Confections Brands "earn-out" incentives ($4.4 million), as well as capital
expenditures, primarily related to the Company's technology and distribution
infrastructure, and the acquisition of DesignPac ($33.3 million) on April 30,
2008. DesignPac is a designer, assembler and distributor of gourmet gift
baskets, gourmet food towers and gift sets, including a broad range of branded
and private label components, based in Melrose Park, IL. The purchase price of
approximately $33.3 million in cash, net of cash acquired, is subject to
"earn-out" incentives which amount to a maximum of $2.0 million through the
years ending June 27, 2010, upon achievement of specified performance targets.
Net cash used in financing activities of $4.2 million for the fiscal year ended
June 29, 2008 was primarily due to the scheduled repayments (net) of the
Company's debt and bank borrowings against the Company's 2006 Credit Facility
and the repurchase of 133,609 shares of treasury stock, offset in part by
proceeds from employee stock option exercises and the related excess tax
benefits.
In order to fund the increase in working capital requirements associated with
DesignPac, and to provide operating flexibility, on August 28, 2008, the Company
entered into a $293.0 million Amended and Restated Credit Agreement with
JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders (the
"2008 Credit Facility"). The 2008 Credit Facility provides for borrowings of up
to $293.0 million, including: (i) a $165.0 million revolving credit commitment,
(ii) $60.0 million of new term loan debt, and (iii) $68.0 million of existing
term loan debt associated with the Company's previous credit facility. Interest
is at LIBOR plus 1.5% to 2.5% for the Company's existing term loan and revolving
credit facility, and LIBOR plus 2.0% to 3.0%, for the Company's new term loan,
with pricing based upon the Company's leverage ratio. At closing of the 2008
Credit Facility, the Company utilized the proceeds of the new term loan to pay
down amounts outstanding under its previous revolving credit facility. The
repayment terms of the existing term loan remain unchanged, while the new term
loan is required to be repaid in equal quarterly installments of $3.0 million
beginning in December 2008, with the final installment payment due on August 28,
2013. The 2008 Credit Facility contains various conditions to borrowing, and
affirmative and negative financial covenants. The obligations of the Company and
its subsidiaries under the 2008 Credit Facility are secured by liens on all
personal property of the Company and its subsidiaries.
The Company expects to borrow against its 2008 Credit Facility to fund working
capital requirements related to pre-holiday manufacturing and inventory
purchases. At June 29, 2008, the Company had no outstanding amounts under its
revolving credit facility. However, it anticipates borrowing against the
facility prior to the end of its first quarter. The Company anticipates that
such borrowings will peak during its fiscal second quarter, before being repaid
prior to the end of that quarter.
On January 21, 2008, the Company's Board of Directors authorized an increase to
its stock repurchase plan which, when added to the funds remaining on its
earlier authorization, increased the amount available for repurchase to $15.0
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 June 29, 2008, $14.0 million remains authorized but unused.
Under this program, as of June 29, 2008, the Company had repurchased 1,660,786
shares of common stock for $12.3 million, of which, $1.1 million (133,609
shares), $0.2 million (24,627 shares) and $1.3 million (182,000 shares) were
repurchased during the fiscal years ending June 29, 2008, July 1, 2007 and July
2, 2006, respectively. In a separate transaction, during fiscal 2007, the
Company's Board of Directors authorized the repurchase of 3,010,740 shares of
common stock from an affiliate. The purchase price was $15,689,000, or $5.21 per
share. The repurchase was approved by the disinterested members of the Company's
Board of Directors and was in addition to the Company's then existing stock
repurchase authorization.
37
At June 29, 2008, the Company's contractual obligations consist of:
Payments due by period
----------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than
Total year years years 5 years
----------- -------------- ---------- ------------ -------------
Long-term debt
(including interest)(*)1 $ 78,498 $16,830 $35,167 $26,501 $ -
Capital lease obligations 52 13 21 18 -
Operating lease obligations 70,217 12,048 18,863 15,121 24,185
Sublease obligations 8,507 2,814 3,324 1,483 886
Purchase commitments (**)2 82,783 72,783 10,000 - -
----------- -------------- ---------- ------------ -------------
Total $240,057 $104,488 $67,375 $43,123 $25,071
=========== =============== ========== ============ =============
(*)1 On August 28, 2008, the Company entered into a $293.0 million Amended and
Restated Credit Agreement (the "2008 Credit Facility"). The 2008 Credit Facility
provides for borrowings of up to $293.0 million, including: (i) a $165.0 million
revolving credit commitment, (ii) $60.0 million of new term loan debt, and (iii)
$68.0 million of existing term loan debt associated with the Company's previous
credit facility. The repayment terms of the existing term loan remain unchanged,
while the new term loan is required to be repaid in equal quarterly installments
of $3.0 million beginning in December 2008, with the final installment payment
due on August 28, 2013.
(**)2 Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition,
inventory and long-lived assets, including goodwill and other intangible assets
related to acquisitions. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/wholesale) 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. Net
revenues generated by the Company's BloomNet Wire Service operations include
membership fees as well as other products and service offerings to florists.
Membership fees are recognized monthly in the period earned, and products sales
are recognized upon product shipment with shipping terms of 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
38
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.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Stock-based Compensation
SFAS No. 123R requires the measurement of stock-based compensation expense based
on the fair value of the award on the date of grant. The Company determines the
fair value of stock options issued by using the Black-Scholes option-pricing
model. The Black-Scholes option-pricing model considers a range of assumptions
related to volatility, dividend yield, risk-free interest rate and employee
exercise behavior. Expected volatilities are based on historical volatility of
the Company's stock price. The dividend yield is based on historical experience
and future expectations. The risk-free interest rate is derived from the US
Treasury yield curve in effect at the time of grant. The Black-Scholes model
also incorporates expected forfeiture rates, based on historical behavior.
Determining these assumptions are subjective and complex, and therefore, a
change in the assumptions utilized could impact the calculation of the fair
value of the Company's stock options.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
It is the Company's policy to provide for uncertain tax positions and the
related interest and penalties based upon management's assessment of whether a
tax benefit is more-likely-than-not to be sustained upon examination by taxing
authorities. To the extent that the Company prevails in matter for which a
liability for an unrecognized tax benefit is established or is required to pay
amounts in the excess of the liability, the Company's effective tax rate in a
given financial statement period may be affected.
39
Recent Accounting Pronouncements
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162"). SFAS No. 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles.
SFAS No. 162 will become effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." The Company does not anticipate the adoption of SFAS No. 162 will
have a material impact on its results of operations, cash flows or financial
condition.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life
of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No.142, Goodwill and Other Intangible Asset. FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on its consolidated results of operation, cash flows or
financial condition.
In March 2008, the FASB issued Statement No.161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirements of Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities and it requires qualitative
disclosures about objectives and strategies for using derivatives and
quantitative disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
Company does not anticipate the adoption of SFAS No. 161 will have a material
impact on its results of operations, cash flows or financial condition.
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R establishes principles and
requirements for how the acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any controlling interest in the business and the goodwill
acquired. SFAS No. 141R further requires that acquisition-related costs and
costs associated with restructuring or exiting activities of an acquired entity
will be expensed as incurred. SFAS No. 141R also establishes disclosure
requirements that will require disclosure of the nature and financial effects of
the business combination. SFAS No. 141R will impact business combinations for
the Company that may be completed on or after June 29, 2009. The Company cannot
anticipate whether the adoption of SFAS No. 141R will have a material impact on
its results of operations and financial condition as the impact is solely
dependent on the terms of any business combination entered into by the Company
after June 29, 2009 and the terms of such transactions.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. This statement
provides companies with an option to measure selected financial assets and
liabilities at fair value. The Company does not expect the adoption of SFAS No.
159 to have a material impact on its consolidated results of operations, cash
flows or financial condition.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS 157") which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. In February
2008, the FASB issued FASB Staff Position (FSP) No. 157-2, delaying the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value on a
nonrecurring basis. The delayed portions of SFAS 157 will be adopted by the
Company beginning in its fiscal year ending June 27, 2010, while all other
portions of the standard will be adopted by the Company beginning in its fiscal
year ending June 28, 2009, as required. The Company does not expect that SFAS
157 will have a material impact on its consolidated results of operations, cash
flows or financial condition.
40
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, as well as from
outstanding debt. As of June 29, 2008, the Company's outstanding
debt, including current maturities, approximated $68.1 million, of
which $68.0 million was variable rate debt. Each 25 basis point
change in interest rates would have a corresponding effect on our
interest expense of approximately $0.2 million as of June 29, 2008.
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
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and
procedures, as defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as of June 29, 2008. Based on that
evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls
and procedures were effective as of June 29, 2008.
41
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 effectuated 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 June 29, 2008. 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 June 29,
2008 the Company's internal control over financial reporting is
effective.
The Company acquired DesignPac Gifts LLC on April 30, 2008, and has
excluded the acquired company from its assessment of and conclusion on
the effectiveness of internal control over financial reporting. The
acquired business constituted approximately 10.0% of total assets as
of June 29, 2008, and less than one percent of revenues for the fiscal
year then ended.
Ernst & Young LLP, the Company's independent registered public
accounting firm, has issued a report on the effectiveness of the
Company's internal control over financial reporting, as of June 29,
2008; their report is included below.
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of 1-800-FLOWERS.COM, Inc. and
Subsidiaries
We have audited 1-800-FLOWERS.COM, Inc. and Subsidiaries (the
"Company") internal control over financial reporting as of June 29,
2008, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company'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 included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk, 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.
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, management's assessment of and
conclusion on the effectiveness of internal control over financial
reporting did not include the internal controls of DesignPac Gifts
LLC, which is included in the fiscal 2008 consolidated financial
statements of the Company and constituted approximately 10.0% of total
assets as of June 29, 2008 and less than one percent of revenues for
the fiscal year then ended. Our audit of internal control over
financial reporting of the Company also did not include an evaluation
of the internal control over financial reporting of DesignPac Gifts
LLC.
In our opinion, 1-800-FLOWERS.COM, Inc. and Subsidiaries maintained,
in all material respects, effective internal control over financial
reporting as of June 29, 2008, 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 June
29, 2008 and July 1, 2007, and the related consolidated statements of
43
income, stockholders' equity, and cash flows for each of the three
years in the period ended June 29, 2008 and our report dated September
10, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
September 10, 2008
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
during the fiscal quarter ended June 29, 2008 that have materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item 9B. OTHER INFORMATION
None.
44
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth in the Proxy Statement for the 2008 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., One Old Country Road, Suite 500, Carle Place,
New York 11514.
Item 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement for the 2008 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 2008 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information set forth in the Proxy Statement for the 2008 Annual
Meeting of Stockholders is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in the Proxy Statement for the 2008 Annual
Meeting of Stockholders is incorporated herein by reference.
45
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 June 29, 2008 and July 1, 2007 F-2
Consolidated Statements of Income for the years ended June 29, 2008,
July 1, 2007 and July 2, 2006 F-3
Consolidated Statements of Stockholders' Equity for the years ended
June 29, 2008, July 1, 2007 and July 2, 2006 F-4
Consolidated Statements of Cash Flows for the years ended June 29, 2008,
July 1, 2007 and July 2, 2006 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 in 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
------- -----------
*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
(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.
*10.3 1997 Stock Option Plan, as amended. (Registration Statement on Form
S-1 (no. 333-78985) filed on May 21, 1999, Exhibit 10.10)
46
*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. (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. (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 2, 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)
10.12 Offer letter to Julie McCann Mulligan
10.13 Offer letter to Timothy J. Hopkins (quarterly report on Form 10Q,
filed on November 8, 2007, Exhibit 10.3)
10.14 Offer letter to Stephen Bozzo (quarterly report on Form 10Q, filed on
November 8, 2007, Exhibit 10.4)
10.15 Form of Restricted Share Agreement under 2003 Long Term Incentive and
Share Award Plan
10.16 Form of Incentive Stock Option Agreement under 2003 Long Term
Incentive and Share Award Plan
10.17 Form of Non-Statutory Stock Option Agreement under 2003 Long Term
Incentive and Share Award Plan
10.18 Amended and Restated Credit Agreement dated as of August 28, 2008
among 1-800-Flowers.com, Inc., The Subsidiary Borrowers Party Hereto,
The Guarantors Party Hereto, The Lenders Party Hereto and JP Morgan
Chase Bank, N.A. as Administrative Agent.
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.
-----------------------------
47
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 12, 2008 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 12, 2008 By: /s/ James F. McCann
-------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 12, 2008 By: /s/ William E. Shea
--------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
48
Dated: September 12, 2008 By: /s/ Christopher G. McCann
-------------------------------
Christopher G. McCann
Director, President
Dated: September 12, 2008 By: /s/ Lawrence Calcano
-------------------------------
Lawrence Calcano
Director
Dated: September 12, 2008 By: /s/ James A. Cannavino
-------------------------------
James A. Cannavino
Director
Dated: September 12, 2008 By: /s/ John J. Conefry, Jr.
-------------------------------
John J. Conefry, Jr.
Director
Dated: September 12, 2008 By: /s/ Leonard J. Elmore
-------------------------------
Leonard J. Elmore
Director
Dated: September 12, 2008 By: /s/ Jan L. Murley
-------------------------------
Jan L. Murley
Director
Dated: September 12, 2008 By: /s/ Jeffrey C. Walker
-------------------------------
Jeffrey C. Walker
Director
49
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of June 29, 2008 and
July 1, 2007, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended June 29,
2008. 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 June 29, 2008 and July 1, 2007, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 29, 2008, 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 9 to the consolidated financial statements the Company
adopted FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," effective July 2, 2007.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), 1-800-FLOWERS.COM, Inc. and
Subsidiaries' internal control over financial reporting as of June 29, 2008,
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 10, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
September 10, 2008
F-1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
June, 29 July 1,
2008 2007
------------- ------------
Assets
Current assets:
Cash and equivalents $ 12,124 $ 16,087
Receivables, net 13,443 17,010
Inventories 67,283 62,051
Deferred income taxes 7,977 19,260
Prepaid and other 8,723 9,576
------------- ------------
Total current assets 109,550 123,984
Property, plant and equipment, net 65,737 62,561
Goodwill 124,164 112,131
Other intangibles, net 68,760 52,750
Other assets 3,127 1,081
------------- ------------
Total assets $371,338 $352,507
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $63,248 $62,433
Current maturities of long-term debt and obligations under capital leases 12,886 10,132
------------- ------------
Total current liabilities 76,134 72,565
Long-term debt and obligations under capital leases 55,250 68,000
Deferred income taxes 5,527 8,230
Other liabilities 2,962 2,681
------------- ------------
Total liabilities 139,873 151,476
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, 31,368,241
and 30,298,019 shares issued in 2008 and 2007, respectively 314 303
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
shares issued in 2008 and 2007 421 421
Additional paid-in capital 279,718 269,270
Retained deficit (17,839) (38,893)
Treasury stock, at cost,4,724,326 and 4,590,717 Class A shares in 2008 and 2007,
respectively, and 5,280,000 Class B shares (31,149) (30,070)
------------- ------------
Total stockholders' equity 231,465 201,031
------------- ------------
Total liabilities and stockholders' equity $371,338 $352,507
============= ============
See accompanying notes.
F-2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
Years ended
--------------------------------------------
June 29, July 1, July 2,
2008 2007 2006
-------------- -------------- -------------
Net revenues 919,392 $912,598 $781,741
Cost of revenues 525,638 520,132 456,097
-------------- -------------- -------------
Gross profit 393,754 392,466 325,644
Operating expenses:
Marketing and sales 256,604 262,303 239,573
Technology and development 21,539 21,316 19,819
General and administrative 57,881 56,017 43,978
Depreciation and amortization 20,363 17,837 15,765
-------------- -------------- -------------
Total operating expenses 356,387 357,473 319,135
-------------- -------------- -------------
Operating income 37,367 34,993 6,509
Other income (expense):
Interest income 999 1,381 1,260
Interest expense (5,081) (7,390) (1,407)
Other, net 85 25 6
-------------- -------------- -------------
Total other income (expense), net (3,997) (5,984) (141)
-------------- -------------- -------------
Income before income taxes 33,370 29,009 6,368
Income tax expense 12,316 11,891 3,181
-------------- -------------- -------------
Net income 21,054 $17,118 $3,187
============== ============== =============
Net income per common share:
Basic $0.33 $0.27 $0.05
============== ============== =============
Diluted $0.32 $0.26 $0.05
============== ============== =============
Weighted average shares used in the calculation of net income
per common share:
Basic 63,074 63,786 65,100
============== ============== =============
Diluted 65,458 65,526 66,429
============== ============== =============
See accompanying notes.
F-3
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended June 29, 2008, July 1, 2007 and July 2, 2006
(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
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
resricted stock 133,499 1 - - 649 - - - - 650
Stock-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
Exercise of
employee stock
options and vesting
of restricted stock 425,836 4 - - 2,003 - - - - 2,007
Stock-based
compensation - - - - 4,600 - - - - 4,600
Stock repurchase
program - - - - - - - 3,035,367 (15,877) (15,877)
Net Income - - - - - 17,118 - - - 17,118
---------- -------- ----------- -------- ---------- ----------- ------------ ----------- ---------- -----------
Balance at July 1,
2007 30,298,019 303 42,138,465 421 269,270 (38,893) - 9,870,717 (30,070) 201,031
Exercise of
employee stock
options and vesting
of restricted stock 1,070,222 11 - - 4,718 - - - - 4,729
Stock-based
compensation - - - - 3,534 - - - - 3,534
Excess tax benefit
from stock based
compensation - - - - 2,196 - - - - 2,196
Stock repurchase
program - - - - - - - 133,609 (1,079) (1,079)
Net Income - - - - - 21,054 - - - 21,054
---------- -------- ----------- -------- ---------- ----------- ------------ ---------- ---------- ------------
Balance at
June 29, 2008 31,368,241 $314 42,138,465 $421 $279,718 $(17,839) - 10,004,326 $(31,149) $231,465
See accompanying notes.
F-4
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Years ended
------------------------------------------------
June 29, 2008 July 1, 2007 July 2, 2006
--------------- --------------- ---------------
Operating activities:
Net income $21,054 $17,118 $3,187
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 20,363 17,837 15,765
Deferred income taxes 8,581 10,325 2,175
Bad debt expense 2,203 1,880 476
Stock-based compensation 3,534 4,600 4,336
Excess tax benefits from stock based compensation (2,196) - -
Other non-cash items 810 (791) 125
Changes in operating items, excluding the effects of
acquisitions:
Receivables 1,422 (5,737) 1,316
Inventories (4,410) (9,800) (9,106)
Prepaid and other 889 771 5,513
Accounts payable and accrued expenses 7,284 (5,562) (1,046)
Other assets (1,926) 177 (6,208)
Other liabilities 294 1,523 (1,795)
--------------- --------------- ---------------
Net cash provided by operating activities 57,902 32,341 14,738
Investing activities:
Capital expenditures (19,942) (18,043) (20,491)
Acquisitions, net of cash acquired (37,849) (347) (96,874)
Dispositions 463 1,463 -
Proceeds from sales of investments - - 6,647
Other (387) 242 2
--------------- --------------- ---------------
Net cash used in investing activities (57,715) (16,685) (110,716)
Financing activities:
Acquisition of treasury stock (1,079) (15,877) (1,324)
Excess tax benefits from stock based compensation 2,196 - -
Proceeds from employee stock options 4,729 2,007 558
Proceeds from bank borrowings and revolving line of 110,000 110,000 105,000
credit
Repayment of notes payable and bank borrowings (119,966) (119,913) (22,482)
Repayment of capital lease obligations (30) (385) (1,228)
Other - - 92
--------------- --------------- ---------------
Net cash (used in) provided by financing activities (4,150) (24,168) 80,616
--------------- --------------- ---------------
Net change in cash and equivalents (3,963) (8,512) (15,362)
Cash and equivalents:
Beginning of year 16,087 24,599 39,961
--------------- --------------- ---------------
End of year $12,124 $16,087 $24,599
=============== =============== ===============
Supplemental Cash Flow Information:
- Interest paid amounted to $5,081, $7,390, and $1,407 for the years ended June
29, 2008, July 1, 2007 and July 2, 2006, respectively.
- The Company paid income taxes of approximately $2,141, $1,429 and $23, net of
tax refunds received, for the years ended June 29, 2008, July 1, 2007, and
July 2, 2006, respectively.
See accompanying notes.
F-5
Notes to Consolidated Financial Statements
Note 1. Description of Business
For more than 30 years, 1-800-FLOWERS.COM, Inc. has been providing customers
with fresh flowers and the finest selection of plants, gift baskets, gourmet
foods, confections, balloons and plush stuffed animals perfect for every
occasion. 1-800-FLOWERS.COM(R) offers the best of both worlds: exquisite
arrangements individually created by some of the nation's top floral artists and
hand-delivered the same day, and spectacular flowers shipped overnight under our
Fresh From Our Growers(R) program. As always, 100 percent satisfaction and
freshness are guaranteed. The Company's BloomNet(R) (www.mybloomnet.net)
international floral wire service provides a broad range of quality products and
value-added services designed to help professional florists to grow their
businesses profitably. The 1-800-FLOWERS.COM, Inc. "Gift Shop" also includes
gourmet gifts such as 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); wine gifts from Ambrosia(R) (www.ambrosia.com or
www.winetasting.com); gift baskets from 1-800-BASKETS.COM(R)
(www.1800baskets.com) and DesignPac Giftssm (www.designpac.com) as well as Home
Decor and Children's Gifts from Plow & Hearth(R) (1-800-627-1712 or
www.plowandhearth.com), Wind & Weather(R) (www.windandweather.com),
HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com).
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ Global Select Market under
ticker symbol FLWS.
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 2008, 2007 and 2006, which ended on June 29,
2008, July 1, 2007 and July 2, 2006, respectively, consisted of 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM,
Inc. 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:
F-6
Buildings 40 years
Leasehold Improvements 3-10 years
Furniture, Fixtures and Equipment 3-10 years
Software 3-5 years
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated
annually for impairment. The Company performs its 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. 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
prepaid and other current assets was $3.4 million and $4.3 million at June 29,
2008 and July 1, 2007, respectively, relating to prepaid catalog expenses.
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 June 29,
2008, July 1, 2007 and July 2, 2006, 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, the majority of which are carried at a variable rate of
interest, 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 June 29, 2008 and July 1, 2007.
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 ($1.4 million at June 29, 2008 and
July 1, 2007) have been recorded based upon previous experience and management's
evaluation.
F-7
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/wholesale) 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 and do not include sales tax. Shipping terms
are FOB shipping point. Net revenues generated by the Company's BloomNet Wire
Service operations include membership fees as well as other products and service
offerings to florists. Membership fees are recognized monthly in the period
earned, and products sales are recognized upon product shipment with shipping
terms of 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 manufacturing and production operations.
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 $127.2 million, $133.2 million and $127.4 million for
the years ended June 29, 2008, July 1, 2007 and July 2, 2006, 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 to five 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 records compensation expense associated with stock options and other
forms of equity compensation in accordance with SFAS No. 123(R), "Share-Based
Payment." The Company adopted the modified prospective application method
provided for under SFAS 123(R) and consequently did not retroactively adjust
results from prior periods. Under this transition method, compensation cost
associated with stock options and awards recognized in the fiscal years ended
June 29, 2008, July 1, 2007 and July 2, 2006, includes: (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 (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)).
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 liabilites are realized or settled. During fiscal
2008, the Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48") prescribes a recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. There was no material
impact on the Company's consolidated financial position or results of operations
as a result of the adoption of the provisions of FIN 48.
Comprehensive Income
For the years ended June 29, 2008, July 1, 2007 and July 2, 2006, the Company's
comprehensive income was equal to the respective net income for each of the
periods presented.
F-8
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 May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS No. 162"). SFAS No. 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles.
SFAS No. 162 will become effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." The Company does not anticipate the adoption of SFAS No. 162 will
have a material impact on its results of operations, cash flows or financial
condition.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life
of Intangible Assets" ("FSP FAS 142-3"). FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No.142, Goodwill and Other Intangible Asset. FSP FAS 142-3 also requires
expanded disclosure related to the determination of intangible asset useful
lives. FSP FAS 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The Company is currently evaluating the impact that the adoption of FSP
FAS 142-3 will have on its consolidated results of operation, cash flows or
financial condition.
In March 2008, the FASB issued Statement No.161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and
expands the disclosure requirements of Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and requires qualitative
disclosures about objectives and strategies for using derivatives and
quantitative disclosures about credit-risk-related contingent features in
derivative agreements. SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
Company does not anticipate the adoption of SFAS No. 161 will have a material
impact on its results of operations, cash flows or financial condition.
In December 2007, the FASB issued Statement No. 141 (revised 2007), "Business
Combinations" ("SFAS No. 141R"). SFAS No. 141R establishes principles and
requirements for how the acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any controlling interest in the business and the goodwill
acquired. SFAS No. 141R further requires that acquisition-related costs and
costs associated with restructuring or exiting activities of an acquired entity
will be expensed as incurred. SFAS No. 141R also establishes disclosure
requirements that will require disclosure of the nature and financial effects of
the business combination. SFAS No. 141R will impact business combinations for
the Company that may be completed on or after June 29, 2009. The Company cannot
anticipate whether the adoption of SFAS No. 141R will have a material impact on
its results of operations and financial condition as the impact is solely
dependent on the terms of any business combination entered into by the Company
after June 29, 2009.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007. This statement
provides companies with an option to measure selected financial assets and
liabilities at fair value. The Company does not expect the adoption of SFAS No.
159 to have a material impact on its consolidated results of operations, cash
flows or financial condition.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS 157") which defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value measurements. In February
F-9
2008, the FASB issued FASB Staff Position (FSP) No. 157-2, delaying the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value on a
nonrecurring basis. The delayed portions of SFAS 157 will be adopted by the
Company beginning in its fiscal year ending June 27, 2010, while all other
portions of the standard will be adopted by the Company beginning in its fiscal
year ending June 28, 2009, as required. The Company does not expect that SFAS
157 will have a material impact on its consolidated results of operations, cash
flows or financial condition.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
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
----------------------------------------------------------
June 29, 2008 July 1, 2007 July 2, 2006
----------------- ------------------ ---------------------
(in thousands, except per share data)
Numerator:
Net income $21,054 $17,118 $ 3,187
================= ================== =====================
Denominator:
Weighted average shares outstanding 63,074 63,786 65,100
Effect of dilutive securities:
Employee stock options (1) 1,808 1,282 1,282
Employee restricted stock awards 576 458 47
------------------ ----------------- -------------------
2,384 1,740 1,329
------------------ ----------------- -------------------
Adjusted weighted-average shares and assumed
conversions 65,458 65,526 66,429
================== ================= ===================
Net income per common share:
Basic $0.33 $0.27 $0.05
================== ================= ===================
Diluted $0.32 $0.26 $0.05
================== ================= ===================
Note (1): The effect of options to purchase 3.2 million, 5.8
million and 5.9 million shares for the years ended June 29, 2008,
July 1, 2007, and July 2, 2006, 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 DesignPac Gifts LLC
On April 30, 2008, the Company acquired all of the membership interest in
DesignPac Gifts LLC (DesignPac), a designer, assembler and distributor of
gourmet gift baskets, gourmet food towers and gift sets, including a broad range
of branded and private label components, based in Melrose Park, IL. The
acquisition, for approximately $33.3 million in cash, net of cash acquired, was
financed utilizing a combination of available cash generated from operations and
through borrowings against the Company's revolving credit facility. The purchase
price is subject to "earn-out" incentives which amount to a maximum of $2.0
million through the years ending June 27, 2010, upon achievement of specified
performance targets. In its most recently completed year ended December 31,
2007, prior to the acquisition, DesignPac generated revenues of approximately
$53.3 million.
F-10
As described further under "Subsequent Events" in order to fund the increase in
working capital requirements associated with DesignPac, and to provide for
additional operational flexibility, on August 28, 2008, the Company entered into
a $293.0 million Amended and Restated Credit Agreement with JPMorgan Chase Bank
N.A., as administrative agent, and a group of lenders (the "2008 Credit
Facility"). The 2008 Credit Facility provides for borrowings of up to $293.0
million, including: (i) a $165.0 million revolving credit commitment, (ii) $60.0
million of new term loan debt, and (iii) $68.0 million of existing term loan
debt associated with the Company's previous credit facility. Interest is at
LIBOR plus 1.5% to 2.5% for the Company's existing term loan and revolving
credit facility, and LIBOR plus 2.0% to 3.0%, for the Company's new term loan,
with pricing based upon the Company's leverage ratio.
The Company is in the process of finalizing its allocation of the purchase price
to individual assets acquired and liabilities assumed as a result of the
acquisition of DesignPac. This will result in potential adjustments to the
carrying value of DesignPac's 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 the
acquisition of DesignPac:
DesignPac
Purchase
Price
Allocation
--------------------
(in thousands)
Current assets $1,287
Property, plant and equipment 1,172
Intangible assets 18,908
Goodwill 12,085
Other 81
--------------------
Total assets acquired 33,533
--------------------
Current liabilities 184
--------------------
Total liabilities assumed 184
--------------------
Net assets acquired $33,349
====================
Although not finalized, of the $18.9 million of acquired intangible assets
related to the DesignPac acquisition, $6.4 million was assigned to trademarks
that are not subject to amortization, while the remaining acquired intangibles
of $12.5 million were allocated primarily to customer related intangibles which
are being amortized over the assets' determinable useful life of 10 years.
Approximately $12.1 million of goodwill is deductible for tax purposes.
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 $96.6 million in cash, including the achievement of certain
"earn-out" incentives and transaction costs, included a 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 was subject to "earn-out" incentives which amounted to a maximum
of $6.0 million (of which $4.4 million was achieved), upon achievement of
specified earnings targets.
F-11
In order to finance the Fannie May Confections Brands 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, as amended, which was
subsequently amended and restated on August 28, 2008 (refer to "Subsequent
Events"), included an $85.0 million term loan and a $75.0 million revolving
facility, which carried 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 then existing line of credit which was repaid during the Company's
second quarter of fiscal 2006 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.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of DesignPac, Fannie May Confections Brands and
Wind & Weather had taken place at the beginning of fiscal year 2006. 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
---------------------------------------------
June 29, 2008 July 1, 2007 July 2, 2006
--------------- ------------- ---------------
(in thousands, except per share data)
Net revenues $973,140 $963,620 $900,321
Operating income $ 44,227 $ 39,608 $ 18,601
Net income $ 24,250 $ 18,751 $ 5,734
Net income per common share
Basic $ 0.38 $ 0.29 $ 0.09
Diluted $ 0.37 $ 0.29 $ 0.09
F-12
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:
June 29, 2008 July 2, 2007
--------------- --------------
(in thousands)
Finished goods $48,986 $43,113
Work-in-process 3,442 3,911
Raw materials 14,855 15,027
--------------- --------------
$67,283 $62,051
=============== ==============
Note 6. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows (in thousands):
1-800-
Flowers.com BloomNet Gourmet Home and
Consumer Wire Food and Children's
Floral Service Gift Baskets Gifts Total
---------------------------------------------------------------------------------
Balance at July 2, 2006 $6,652 $- $105,935 $18,554 $131,141
Acquisition of
Wind & Weather - - - (54) (54)
Acquisition of Fannie May
Confections Brands - - 6,023 - 6,023
Purchase Price Allocation of
Fannie May Confections-
Reclassification of goodwill to
intangible assets - - (24,679) - (24,679)
Other (300) - - - (300)
-------------- ------------- ------------- ------------- --------------
Balance at July 1, 2007 6,352 - 87,279 18,500 112,131
Acquisition of DesignPac - - 12,085 - 12,085
Other (187) - 373 (238) (52)
-------------- ------------- ------------- ------------- --------------
Balance at June 29, 2008 $6,165 $- $99,737 $18,262 $124,164
============== ============= ============= ============= ==============
The Company's intangible assets consist of the following:
June 29, 2008 July 1, 2007
-----------------------------------------------------------------------------
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 $4,408 $519 $ 4,927 $4,085 $842
Customer lists 3 - 10 years 25,570 6,042 19,528 14,260 3,919 10,341
Other 5 - 8 years 3,868 1,208 2,660 2,639 748 1,891
------------ -----------------------------------------------------------------------
34,365 11,658 22,707 21,826 8,752 13,074
Trademarks with
indefinite lives 46,053 - 46,053 39,676 - 39,676
------------ -----------------------------------------------------------------------
Total intangible
assets $80,418 $11,658 $68,760 $61,502 $8,752 $52,750
============ =======================================================================
F-13
The amortization of intangible assets for the years ended June 29, 2008, July 1,
2007 and July 2, 2006 was $2.9 million, $2.5 million, and $1.6 million,
respectively. Future estimated amortization expense is as follows: 2009 - $4.0
million, 2010 - $3.9 million, 2011 - $3.4 million, 2012 - $2.2 million, and 2013
- $2.0 million, and thereafter - $7.2 million.
Note 7. Property, Plant and Equipment
June 29, July 1,
2008 2007
------------ ------------
(in thousands)
Land $2,516 $2,516
Building and building improvements 15,944 16,209
Leasehold improvements 21,051 19,087
Furniture and fixtures 6,032 5,637
Equipment 26,258 21,278
Computer equipment 57,832 54,942
Telecommunication equipment 9,331 9,106
Software 69,158 57,763
-------------- -------------
208,122 186,538
Accumulated depreciation and amortization 142,385 123,977
-------------- -------------
$ 65,737 $62,561
============== =============
Note 8. Long-Term Debt
June 29, July 1,
2008 2007
-------------- ------------
(in thousands)
Term loan and revolving credit line (1) $68,000 $76,500
Commercial note (2) 84 1,553
Obligations under capital leases (see Note 14) 52 79
-------------- ------------
68,136 78,132
Less current maturities of long-term debt and obligations under
capital leases 12,886 10,132
-------------- ------------
$55,250 $68,000
============== ============
(1) Term loan and revolving credit line - In order to finance the acquisition
of Fannie May Confections Brands, Inc. on May 1, 2006, the Company entered
into a 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, as amended, includes an $85.0 million term
loan and a $75.0 million revolving facility, which bear interest at LIBOR
(2.4% at June 29, 2008) plus 0.625% to 1.125%, with pricing based upon the
Company's leverage ratio (3.2% at June 29, 2008). 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 June 29,
2008.
As described further under "Subsequent Events" in order to fund the
F-14
increase in working capital requirements associated with DesignPac, and to
provide for additional operational flexibility, on August 28, 2008, the
Company entered into a $293.0 million Amended and Restated Credit Agreement
with JPMorgan Chase Bank N.A., as administrative agent, and a group of
lenders (the "2008 Credit Facility"). The 2008 Credit Facility provides for
borrowings of up to $293.0 million, including: (i) a $165.0 million
revolving credit commitment, (ii) $60.0 million of new term loan debt, and
(iii) $68.0 million of existing term loan debt associated with the
Company's previous credit facility. Interest is at LIBOR plus 1.5% to 2.5%
for the Company's existing term loan and revolving credit facility, and
LIBOR plus 2.0% to 3.0%, for the Company's new term loan, with pricing
based upon the Company's leverage ratio.
(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
$0.1 million is outstanding at June 29, 2008.
As of June 29, 2008, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
Debt
Year Maturities
---- --------------
(in thousands)
2009 $12,886
2010 12,750
2011 17,000
2012 25,500
$68,136
==============
Note 9. Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, or
FIN 48, on July 2, 2007. The Company did not have any significant unrecognized
tax benefits and there was no material effect on its financial condition or
results of operations as a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The tax years that remain subject to examination
are fiscal 2003 through fiscal 2006. The Company does not believe there will be
any material changes in its unrecognized tax positions over the next twelve
months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, the Company did not have any material accrued interest or
penalties associated with any unrecognized tax benefits, nor was any material
interest expense recognized during the year.
Significant components of the income tax provision are as follows:
Years ended
------------------------------------------
June 29, July 1, July 2,
2008 2007 2006
------------- -------------- -------------
(in thousands)
Current provision:
Federal $2,207 $(275) $351
State 1,528 1,841 655
------------- -------------- -------------
3,735 1,566 1,006
Deferred provision:
Federal 8,767 9,082 2,120
State (186) 1,243 55
------------- -------------- -------------
8,581 10,325 2,175
------------- -------------- -------------
Income tax provision $12,316 $11,891 $3,181
============= ============== =============
F-15
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate is as follows:
Years ended
------------------------------------------
June 29, July 1, July 2,
2008 2007 2006
------------- -------------- -------------
(in thousands)
Tax at U.S. statutory rates 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit 3.1 6.9 7.3
Non-deductible stock-based compensation 0.1 1.7 8.5
Non-deductible goodwill amortization 0.3 0.4 2.2
Tax credits (0.8) (0.4) (5.0)
Tax settlements (0.4) (3.1) -
Other, net (0.4) 0.5 2.0
------------- -------------- --------------
36.9% 41.0% 50.0%
============= ============== ==============
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
significant components of the Company's deferred income tax assets
(liabilities) are as follows:
Years ended
------------------------------------------
June 29, July 1, July 2,
2008 2007 2006
------------- -------------- -------------
(in thousands)
Deferred income tax assets:
Net operating loss carryforwards $3,483 $12,944 $25,963
Accrued expenses and reserves 5,876 6,318 6,325
Stock-based compensation 3,407 2,529 1,098
Deferred income tax liabilities:
Other intangibles (8,834) (9,112) (9,285)
Installment sales - - (25)
Tax in excess of book depreciation (1,482) (1,649) (425)
------------- -------------- -------------
Net deferred income tax assets $2,450 $11,030 $23,651
============= ============== =============
At June 29, 2008, the Company's federal net operating loss carryforwards were
approximately $4.5 million, which, if not utilized, will begin to expire in
fiscal year 2025.
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 January 21, 2008, the Company's Board of Directors authorized an increase to
its stock repurchase plan which, when added to the $8.7 million remaining on its
earlier authorization, increased the amount available for repurchase to $15.0
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 June 29, 2008, $14.0 remains authorized but unused.
Under this program, as of June 29, 2008, the Company had repurchased 1,660,786
shares of common stock for $12.3 million, of which $1.1 million (133,609
shares), $0.2 million (24,627 shares) and $1.3 million (182,000 shares) were
F-16
repurchased during the fiscal years ending June 29, 2008, July, 1 2007 and July
2, 2006, respectively. In a separate transaction, during fiscal 2007, the
Company's Board of Directors authorized the repurchase of 3,010,740 shares from
an affiliate. The purchase price was $15,689,000 or $5.21 per share. The
repurchase was approved by the disinterested members of the Company's Board of
Directors and was in addition to the Company's existing stock repurchase
authorization.
Note 11. Stock Based Compensation
The Company has stock options and restricted stock awards outstanding to
participants under the 1-800-FLOWERS.COM 2003 Long Term Incentive and Share
Award Plan (the "Plan"). Options are also outstanding under the Company's 1999
Stock Incentive Plan, but no further options may be granted under this 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 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 June 29, 2008, the Company has reserved approximately 14.2 million shares of
common stock for issuance, including options previously authorized for issuance
under the 1999 Stock Incentive Plan.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Years Ended
-------------------------------------
June 29, July 1, July 2,
2008 2007 2006
---------- -------------------------
(in thousands, except per share data)
Stock options $1,416 $2,736 $3,710
Restricted stock awards 2,118 1,864 626
---------- -------------------------
Total 3,534 4,600 4,336
Deferred income tax benefit 1,333 1,353 1,120
---------- -------------------------
Stock-based compensation expense, net $2,201 $3,247 $3,216
========== =========================
F-17
Stock based compensation expense is recorded within the following line items of
operating expenses:
Years Ended
-------------------------------------
June 29, July 1, July 2,
2008 2007 2006
---------- ------------ -------------
(in thousands)
Marketing and sales $1,051 $1,605 $1,504
Technology and development 546 690 642
General and administrative 1,937 2,305 2,190
---------- ------------- ------------
Total 3,534 $4,600 $4,336
========== ============= ============
Stock-based compensation expense has not been allocated between business
segments, but is reflected in Corporate. (Refer to Note 13 - Business Segments.)
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
-------------------------------------
June 29, July 1, July 2,
2008 2007 2006
---------- ------------ -------------
Weighted average fair value of options granted $4.36 $3.29 $3.16
Expected volatility 45% 46% 46%
Expected life (in years) 5.3 5.3 5.3
Risk-free interest rate 4.1% 4.6% 4.6%
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 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 June
29, 2008:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Options Exercise Price Term Value (000s)
---------------------------------------------------------
Outstanding - beginning of period 9,152,665 $8.10
Granted 201,000 $9.50
Exercised (1,049,839) $4.50
Forfeited/Expired (431,482) $9.65
-------------
Outstanding - end of period 7,872,344 $8.47 4.0 years $5,364
=============
Options vested or expected to vest at end of period 7,669,842 $8.49 3.9 years $5,336
Exercisable at end of period 6,731,372 $8.63 3.5 years $5,208
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 2008 and the exercise price, multiplied by the number
F-18
of in-the-money options) that would have been received by the option holders had
all option holders exercised their options on June 29, 2008. This amount changes
based on the fair market value of the company's stock. The total intrinsic value
of options exercised for the years ended June 29, 2008, July 1, 2007 and July 2,
2006 was $5.9 million, $1.0 million, and $0.3 million, respectively.
The following table summarizes information about stock options outstanding at
June 29, 2008:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
------------------- -------------- ------------------ --------------- --------------- ---------------
$2.00 - 4.50 1,722,735 2.1 years $4.03 1,722,735 $4.03
$5.25 - 6.52 1,940,662 5.2 years $6.39 1,537,162 $6.40
$6.58 - 8.45 1,713,463 6.0 years $7.42 1,118,451 $7.26
$8.56 - 12.87 1,947,438 3.5 years $12.04 1,804,978 $12.21
$13.05 - 21.00 548,046 1.2 years $20.33 548,046 $20.33
-------------- ---------------
7,872,344 4.0 years $8.47 6,731,372 $8.63
============== ===============
As of June 29, 2008, the total future compensation cost related to nonvested
options not yet recognized in the statement of income was $2.4 million and the
weighted average period over which these awards are expected to be recognized
was 1.6 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 June 29, 2008:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested - beginning of period 1,101,982 $5.70
Granted 665,399 $11.40
Vested (18,677) $7.44
Forfeited (473,551) $8.57
-------------
Non-vested - end of period 1,275,153 $7.58
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of June 29, 2008, there was $4.4 million of total
unrecognized compensation cost related to non-vested restricted stock-based
compensation to be recognized over a weighted-average period of 1.7 years.
Note 12. Profit Sharing Plan
The Company has a 401(k) Profit Sharing Plan covering substantially all of its
eligible employees. All full-time employees who have attained the age of 21 are
eligible to participate upon completion of one year of service. Participants may
elect to make voluntary contributions to the 401(k) plan in amounts not
exceeding federal guidelines. On an annual basis the Company, as determined by
its board of directors, may make certain discretionary contributions. Employees
are vested in the Company's contributions based upon years of service. The
Company made contributions of $0.7 million, $0.5 million, and $0.4 million, for
the years ended June 29, 2008, July 1, 2007 and July 2, 2006, respectively.
During fiscal 2008, the Company adopted a nonqualified supplemental deffered
compensation plan for certain executives pursuant to Section 409A of the
Internal Revenue Code. Participants can defer from 1% up to a maximum of 100% of
salary and performance and non-performance based bonus. The Company will match
50% of the deferrals made by each paricipant during the applicable period, up to
a maximum of $2,500. Employees are vested in the Company's contributions based
upon years of participation in the plan. Distributions will be made to
Participants upon termination of employment or death in a lump sum, unless
installments are selected.
F-19
Note 13. Business Segments
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The Company's management reviews the results
of the Company's operations by the following four business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service;
o Gourmet Food and Gift Baskets; and
o Home and Children's Gifts.
Category performance is measured based on contribution margin, which includes
only the direct controllable revenue and operating expenses of the categories.
As such, management's measure of profitability for these categories does not
include the effect of corporate overhead (see * below), which are operated under
a centralized management platform, providing services throughout the
organization, nor does it include stock-based compensation, depreciation and
amortization, other income (net), and income taxes. Assets and liabilities are
reviewed at the consolidated level by management and not accounted for by
category.
Years ended
-------------------------------------------
June 29, July 1, July 2,
Net revenues 2008 2007 2006
------------- -------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $491,696 $491,404 $452,188
BloomNet Wire Service 53,488 44,379 29,884
Gourmet Food & Gift Baskets 196,298 192,698 105,002
Home & Children's Gifts 180,181 186,948 196,919
Corporate (*) 2,431 1,652 1,388
Intercompany eliminations (4,702) (4,483) (3,640)
------------- -------------- --------------
Total net revenues $919,392 $912,598 $781,741
============= ============== ==============
Years ended
-------------------------------------------
June 29, July 1, July 2,
Operating Income 2008 2008 2006
------------- -------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $62,967 $64,580 $46,518
BloomNet Wire Service 18,509 14,169 7,106
Gourmet Food & Gift Baskets 24,593 26,377 6,827
Home & Children's Gifts 3,438 (1,215) 7,134
------------- -------------- --------------
Category Contribution Margin Subtotal 109,507 103,911 67,585
Corporate (*) (51,777) (51,081) (45,311)
Depreciation and amortization (20,363) (17,837) (15,765)
------------- -------------- --------------
Operating income (loss) $37,367 $34,993 $6,509
============= ============== ==============
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among others, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center which are allocated directly to the above
categories based upon usage, are included within corporate expenses, as
they are not directly allocable to a specific category.
F-20
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.
As of June 29, 2008 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)
2009 $14 $14,863
2010 13 11,906
2011 13 10,279
2012 13 8,938
2013 6 7,666
Thereafter - 25,070
------------ -------------
Total minimum lease payments $59 $78,722
=============
Less amounts representing interest (7)
------------
Present value of net minimum lease payments $52
============
At June 29, 2008, 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)
2009 $2,814 $2,814
2010 1,940 1,940
2011 1,384 1,384
2012 933 933
2013 550 550
Thereafter 886 886
-------------- --------------
$8,507 $8,507
============== ==============
Rent expense was approximately $19.8 million, $18.9 million, and $13.7 million
for the years ended June 29, 2008, July 1, 2007 and July 2, 2006, respectively.
F-21
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.
In the Company's Form 10Q for the quarterly period ended March 30, 2008, the
Company disclosed that in October 2007, 1-800-Flowers.Com., Inc. and its
subsidiary, 1-800-Flowers Retail, Inc., (collectively "the Company"), were
served with a purported nationwide class action lawsuit filed in the United
States District Court, in and for the Southern District of Florida (Grabein v.
1-800-Flowers.Com., Inc., et al; Case No. 07-22235). The Complaint alleged
violation of the Federal Fair and Accurate Credit Transaction Act ("FACTA")
based upon the allegation that the Company printed/provided receipts to
consumers at the point of sale or transaction on which receipts appeared more
than the last five digits of customers' credit or debit card numbers and/or the
expiration dates of such cards. The Complaint did not specify any actual damages
for any member of the purported class. However, the Complaint sought statutory
damages of $100 to $1,000 for each alleged willful violation of the statute, as
well as, attorneys' fees, costs, punitive damages and a permanent injunction.
The Company vigorously defended the action and on June 13, 2008, the presiding
Judge issued a Final Order of Dismissal whereby the case was dismissed with
prejudice and no payment of any kind was made by the Company or its subsidiary.
Note 15. Subsequent Events
Acquisition of Napco Marketing Corp.
On July 21, 2008, the Company acquired selected assets of Napco Marketing Corp.
(Napco), a wholesale merchandiser and marketer of products designed primarily
for the floral industry. The purchase price of approximately $9.5 million
included the acquisition of a fulfillment center located in Jacksonville, FL,
inventory, and certain other assets, as well as the assumption of certain
related liabilities, including their seasonal line of credit of approximately
$4.0 million. The acquisition was financed utilizing a combination of available
cash generated from operations and through borrowings against the Company's
revolving credit facility, which as described below, was subsequently amended by
the Company's 2008 Credit Facility. The purchase price is subject to "earn-out"
incentives which amount to a maximum of $1.6 million through the years ending
July 2, 2012, upon achievement of specified performance targets.
2008 Credit Facility
On August 28, 2008, the Company entered into a $293.0 million Amended and
Restated Credit Agreement with JPMorgan Chase Bank, N.A., as administrative
agent, and a group of lenders (the "2008 Credit Facility"). The 2008 Credit
Facility provides for borrowings of up to $293.0 million, including: (i) a
$165.0 million revolving credit commitment, (ii) $60.0 million of new term loan
debt, and (iii) $68.0 million of existing term loan debt associated with the
Company's previous credit facility. Interest is at LIBOR plus 1.5% to 2.5% for
the Company's existing term loan and revolving credit facility, and LIBOR plus
2.0% to 3.0%, for the Company's new term loan, with pricing based upon the
Company's leverage ratio. At closing of the 2008 Credit Facility, the Company
utilized the proceeds of the new term loan to pay down amounts outstanding under
its previous revolving credit facility. The repayment terms of the existing term
loan remain unchanged, while the new term loan is required to be repaid in equal
quarterly installments of $3.0 million beginning in December 2008, with the
final installment payment due on August 28, 2013. The 2008 Credit Facility
contains various conditions to borrowing, and affirmative and negative financial
covenants. The obligations of the Company and its subsidiaries under the 2008
Credit Facility are secured by liens on all personal property of the Company and
its subsidiaries.
F-22
1-800-FLOWERS.COM, INC.
Schedule II - Valuation and Qualifying Accounts
Additions
---------------------------
Description Balance at Charged to Charged to Balance at
Beginning Costs Other Deductions- End of
of Period and Accounts- Describe (a) Period
Expenses Describe (b)
--------------------------- -------------- ------------ --------------- ------------- --------------
Reserves and allowances
deducted from asset
accounts:
Reserve for estimated
doubtful accounts-
accounts/notes
receivable
Year Ended June 29, 2008
$1,113,000 $1,000,000 $ - $(727,000) $1,386,000
Year Ended July 1, 2007
$2,090,000 $1,040,000 $ - $(2,017,000) $1,113,000
Year Ended July 2, 2006
$1,537,000 $537,000 $694,000 $(678,000) $2,090,000
(a) Reduction in reserve due to write-off of accounts/notes receivable balances.
(b) Amount represents opening balances from acquired businesses.
S-1