UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 27, 2009
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State of (I.R.S. Employer
incorporation) Identification No.)
One Old Country Road, Carle Place, New York 11514
-------------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or such shorter period that the registrant was required to
submit and post such files). Yes ( ) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [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 number of shares outstanding of each of the Registrant's classes of common
stock:
26,655,662
----------
(Number of shares of Class A common stock outstanding as of February 1, 2010)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of February 1, 2010)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 27, 2009
(Unaudited) and June 28, 2009 1
Consolidated Statements of Operations (Unaudited) - Three
and Six Months Ended December 27, 2009 and December
28, 2008 2
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended December 27, 2009 and December
28, 2008 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 30
Part II. Other Information
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 5. Other Information 32
Item 6. Exhibits 32
Signatures 33
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
December 27, June 28,
2009 2009
------------ ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $46,389 $29,562
Receivables, net 35,467 11,335
Inventories 43,641 45,854
Deferred tax assets 8,415 12,666
Prepaid and other 6,810 4,580
Current assets of discontinued operations 12,325 18,100
------------ ------------
Total current assets 153,047 122,097
Property, plant and equipment, net 52,027 54,770
Goodwill 41,211 41,205
Other intangibles, net 41,358 42,822
Deferred tax assets 11,898 11,725
Other assets 5,496 3,890
Non-current assets of discontinued operations 6,840 9,647
------------ -------------
Total assets $311,877 $286,156
============ =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $73,276 $53,460
Current maturities of long-term debt and capital leases 24,086 22,337
Current liabilities of discontinued operations 9,545 2,633
------------ -------------
Total current liabilities 106,907 78,430
Long-term debt and capital leases 57,717 70,518
Other liabilities 2,552 2,091
Non-current liabilities of discontinued operations 1,288 1,334
-------------- ------------
Total liabilities 168,464 152,373
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 31,895,062 and
31,730,404 shares issued at December 27, 2009 and June 28, 2009, respectively 319 317
Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,138,465
shares issued at December 27, 2009 and June 28, 2009 421 421
Additional paid-in capital 283,461 281,247
Retained deficit (108,228) (116,256)
Accumulated other comprehensive loss, net of tax (276) -
Treasury stock, at cost - 5,226,443 and 5,122,225 Class A shares at December 27,
2009 and June 28, 2009, respectively and 5,280,000 Class B shares (32,284) (31,946)
------------ -------------
Total stockholders' equity 143,413 133,783
------------ -------------
Total liabilities and stockholders' equity $311,877 $286,156
============ =============
See accompanying Notes to Consolidated Financial Statements.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
---------------- ---------------- --------------- ----------------
Net revenues $238,454 $251,571 $346,770 $387,009
Cost of revenues 138,791 150,858 203,353 234,100
---------------- ---------------- --------------- ----------------
Gross profit 99,663 100,713 143,417 152,909
Operating expenses:
Marketing and sales 51,976 54,560 81,452 86,634
Technology and development 4,525 4,781 9,081 9,844
General and administrative 14,673 10,929 27,207 24,983
Depreciation and amortization 5,343 5,094 10,289 10,169
---------------- ---------------- --------------- ----------------
Total operating expenses 76,517 75,364 128,029 131,630
---------------- ---------------- --------------- ----------------
Operating income 23,146 25,349 15,388 21,279
Other income (expense):
Interest income 11 73 25 163
Interest expense (1,985) (2,507) (3,531) (3,666)
Other 13 14 15 18
---------------- ---------------- --------------- ----------------
Total other income (expense), net (1,961) (2,420) (3,491) (3,485)
---------------- ---------------- --------------- ----------------
Income from continuing operations before income taxes 21,185 22,929 11,897 17,794
Income tax expense from continuing operations 8,452 8,973 4,830 6,956
---------------- ---------------- --------------- ----------------
Income from continuing operations 12,733 13,956 7,067 10,838
---------------- ---------------- --------------- ----------------
Operating income (loss) from discontinued operations 3,795 18,559 1,157 (22,176)
(including loss on disposal of $3.3 million during the
three and six months ended December 27, 2009 and
impairment charges of $20.0 million during the three and
six months ended December 28, 2008)
Income tax expense (benefit) from discontinued operations 1,225 508 196 (923)
---------------- ---------------- --------------- ----------------
Income (loss) from discontinued operations 2,570 (19,067) 961 21,253
---------------- ---------------- --------------- ----------------
Net income (loss) $15,303 ($5,111) $8,028 ($10,415)
================ ================ =============== ================
Basic and diluted net income (loss) per common share:
From continuing operations $0.20 $0.22 $0.11 $0.17
From discontinued operations 0.04 (0.30) 0.02 (0.33)
---------------- ---------------- --------------- ----------------
Net Income (loss) per common share $0.24 ($0.08) $0.13 ($0.16)
================ ================ =============== ================
Weighted average shares used in the calculation
of net income (loss) per common share
Basic 63,555 63,631 63,514 63,574
================ ================ =============== ================
Diluted 64,070 64,180 63,969 64,396
================ ================ =============== ================
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
-----------------------------------
December 27, December 28,
2009 2008
---------------- ----------------
Operating activities:
Net income (loss) $8,028 ($10,415)
Reconciliation of net income (loss) to net cash provided by
operating activities:
Operating activities of discontinued operations 12,668 10,098
Depreciation and amortization 10,289 10,169
Deferred taxes 4,251 (60)
Loss on disposal of assets and other 3,289 (252)
Stock-based compensation 2,216 177
Bad debt expense 984 1,019
Other non-cash items 180 -
Impairment from discontinued operations - 20,036
Changes in operating items, excluding the effects of acquisitions:
Receivables (25,116) (28,167)
Inventories 2,213 (8,697)
Prepaid and other (2,230) (1,067)
Accounts payable and accrued expenses 19,816 20,182
Other assets (115) 230
Other liabilities 12 385
---------------- ----------------
Net cash provided by operating activities 36,485 13,638
Investing activities:
Acquisitions, net of cash acquired - (9,297)
Proceeds from sale of business - 25
Capital expenditures (6,070) (12,647)
Purchase of investment (598) -
Other, net (1,091) 110
Investing activities of discontinued operations (509) (969)
---------------- ----------------
Net cash used in investing activities (8,268) (22,778)
Financing activities:
Acquisition of treasury stock (338) (379)
Proceeds from employee stock options - 114
Proceeds from bank borrowings 49,000 120,000
Repayment of notes payable and bank borrowings (59,175) (69,373)
Debt issuance cost - (2,148)
Repayment of capital lease obligations (877) (8)
Financing activities of discontinued operations - (86)
---------------- ----------------
Net cash (used in) provided by financing activities (11,390) 48,120
---------------- ----------------
Net change in cash and equivalents 16,827 38,980
Cash and equivalents:
Beginning of period 29,562 12,124
---------------- ----------------
End of period $46,389 $51,104
================ ================
See accompanying Notes to Consolidated Financial Statements.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended December 27, 2009 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 27, 2010.
The balance sheet information at June 28, 2009 has been derived from the audited
financial statements at that date, but does not include all information or notes
necessary for a complete presentation.
Accordingly, the information in this Quarterly Report on Form 10-Q should be
read in conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended June 28, 2009.
References in this Quarterly Report on Form 10-Q to "authoritative guidance" are
to the Accounting Standards Codification issued by the Financial Accounting
Standards Board ("FASB") in June 2009.
Subsequent events have been evaluated through the filing date (February 5, 2010)
of these unaudited consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Comprehensive Income (Loss)
For the three and six months ended December 27, 2009 and December 28, 2008, the
Company's comprehensive income were as follows:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands)
Net income (loss) $15,303 ($5,111) $8,028 ($10,415)
Change in fair value of cash flow hedge, net
of tax 3 - (276) -
----------------- ---------------- ---------------- -----------------
Comprehensive income (loss) $15,306 ($5,111) $7,752 ($10,415)
================= ================ ================ =================
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the FASB
Accounting Standards Codification (the "Codification") as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. The Codification, which changes the referencing
of financial standards, supersedes current authoritative guidance and is
effective for the Company's interim reporting beginning June 29, 2009. The
Codification is not intended to change or alter existing GAAP and is not
expected to result in a change in accounting practice for the Company.
In April 2009, the FASB issued authoritative guidance for business combinations
that amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from
contingencies in a business combination. This guidance requires such
contingencies be recognized at fair value on the acquisition date if fair value
can be reasonably estimated during the allocation period. Otherwise, entities
would typically account for the acquired contingencies in accordance with
authoritative guidance for contingencies. The guidance became effective for the
Company's business combinations for which the acquisition date is on or after
June 29, 2009. The Company did not complete any business combinations during the
three and six months ended December 27, 2009, and the effect on future periods
will depend on the nature and significance of business combinations subject to
this guidance.
In April 2009, the FASB issued authoritative guidance to increase the frequency
of fair value disclosures of financial instruments, thereby enhancing
consistency in financial reporting. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on a
company's balance sheet at fair value. Prior to the effective date of this
guidance, fair values for these assets and liabilities have only been disclosed
once a year. The guidance now requires these disclosures on a quarterly basis,
providing qualitative and quantitative information about fair value estimates
for all those financial instruments not measured on the balance sheet at fair
value. The Company adopted the disclosure requirements under this guidance with
an effective date of June 29, 2009. The implementation did not have a material
impact on the Company's financial position, results of operations or cash flows
as it is disclosure-only in nature.
In April 2008, the FASB issued authoritative guidance for general intangibles
other than goodwill, amending factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This guidance is effective for the Company for
intangible assets acquired on or after June 29, 2009. The adoption did not have
a material impact on the Company's results of operations, financial position or
cash flows.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year. As a result of the Company's
decision to dispose of its Home & Children's Gifts businesses, this segment has
been accounted for as a discontinued operation and the prior periods have been
reclassified to conform to the current period presentation. During the second
quarter of fiscal 2010, the Company launched its 1-800-Baskets brand. Products
within this business are now being managed within the Gourmet Food & Gift
Baskets segment, resulting in a change to our reportable segment structure. Gift
basket products, formerly included in the Consumer Floral reportable segment are
now included in the Gourmet Food & Gift Baskets segment. These changes have been
reflected in the Company's segment reporting for all periods presented.
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands except per share data)
Numerator:
Net income (loss) $15,303 ($5,111) $8,028 ($10,415)
================= =============== ================ =================
Denominator:
Weighted average shares outstanding 63,555 63,631 63,514 63,574
Effect of dilutive securities:
Employee stock options (1) 6 251 3 508
Employee restricted stock awards 509 298 452 314
----------------- --------------- ---------------- -----------------
515 549 455 822
----------------- --------------- ---------------- -----------------
Adjusted weighted-average shares and assumed
conversions 64,070 64,180 63,969 64,396
================= =============== ================ =================
Net income (loss) per common share (basic) $0.24 ($0.08) $0.13 ($0.16)
================== =============== ================ =================
Net income (loss) per common share (diluted) $0.24 ($0.08) $0.13 ($0.16)
================== =============== ================ =================
Basic net loss 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 of employee stock options and unvested restricted
stock awards) outstanding during the period.
(1) The effect of options to purchase 8.4 million and 8.5 million during
the three and six months ended December 27, 2009 and 7.0 million and
6.2 million shares during the three and six months ended December 28,
2008, respectively, were excluded from the calculation of net income
per share on a diluted basis as their effect is anti-dilutive.
Note 3 - Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully
described in Note 11 to the consolidated financial statements included in the
Company's 2009 Annual Report on Form 10-K, that provides for the grant to
eligible employees, consultants and directors of stock options, share
appreciation rights (SARs), restricted shares, restricted share units,
performance shares, performance units, dividend equivalents, and other
stock-based awards.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands)
Stock options $551 $369 $1,046 $729
Restricted stock awards 612 (1,411) 1,170 (552)
----------------- ---------------- ---------------- -----------------
Total 1,163 (1,042) 2,216 177
Deferred income tax benefit 380 453 702 (64)
----------------- ---------------- ---------------- -----------------
Stock-based compensation expense, net $783 ($589) $1,514 $241
================= ================ ================ =================
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During the three months ended December 28, 2008, as a result of the Company's
performance due to the weakness in the retail economy, the Company reversed
previously accrued long-term incentive equity awards as the goals that were
established in order to vest the awards were determined to be no longer
achievable.
Stock-based compensation is recorded within the following line items of
operating expenses:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands)
Marketing and sales $465 ($649) $923 ($118)
Technology and development 233 118 462 293
General and administrative 465 (511) 831 2
----------------- ---------------- ---------------- -----------------
Total $1,163 ($1,042) $2,216 $177
================= ================ ================ =================
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 granted during the respective periods were
as follows:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands)
Weighted average fair value of
options granted $1.89 $1.72 $1.75 $2.67
Expected volatility 63.0% 43.0% 62.0% 42.0%
Expected life 5.6 yrs 6.4 yrs 5.6 yrs 6.4 yrs
Risk-free interest rate 2.41% 2.75% 2.45% 2.85%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
The following table summarizes stock option activity during the three and six
months ended December 27, 2009:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
----------------------------------------------------------
Outstanding at June 28, 2009 8,916,672 $7.52
Granted 235,000 $3.07
Exercised - -
Forfeited (922,693) $16.08
-------------
Outstanding at December 27, 2009 8,228,978 $6.43 3.8 years $-
=============
Options vested or expected to vest at December 27, 2009 8,007,889 $6.51 3.7 years $-
Exercisable at December 27, 2009 6,147,511 $7.23 2.8 years $-
As of December 27, 2009, the total future compensation cost related to nonvested
options, not yet recognized in the statement of income, was $2.8 million and the
weighted average period over which these awards are expected to be recognized
was 2.5 years.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 (Restricted Stock Awards). The following table summarizes the
activity of non-vested restricted stock awards during the three and six months
ended December 27, 2009:
Weighted
Average Grant
Date Fair
Shares Value
------------ ---------------
Non-vested at June 28, 2009 1,700,912 $4.62
Granted 321,122 $4.48
Vested (164,658) $5.88
Forfeited (18,681) $6.88
-------------
Non-vested at December 27, 2009 1,838,695 $4.46
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of December 27, 2009, there was $4.4 million of
total unrecognized compensation cost related to non-vested restricted
stock-based compensation to be recognized over the weighted-average remaining
period of 2.0 years.
Note 4 - Acquisitions
The Company accounts for its business combinations using the purchase method of
accounting. Under the purchase method of accounting for business combinations,
the aggregate purchase price for the acquired business is allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the acquisition date. Operating results of the acquired entities are reflected
in the Company's consolidated financial statements from date of acquisition.
Acquisition of 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 $9.4 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 on hand and through borrowings under the Company's revolving credit
facility. The purchase price includes an up-front cash payment of $9.3 million,
net of cash acquired, and the expected portion of "earn-out" incentives, which
amounted to a maximum of $1.6 million through the years ending July 2, 2012,
upon achievement of specified performance targets. As of December 27, 2009, the
Company does not expect that any of the specified performance targets will be
achieved.
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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 Napco:
Napco
Purchase
Price
Allocation
--------------------
(in thousands)
Current assets $5,119
Property, plant and equipment 3,929
Intangible assets 397
Other 74
--------------------
Total assets acquired 9,519
--------------------
Current liabilities 162
--------------------
Total liabilities assumed 162
--------------------
Net assets acquired $9,357
====================
Acquisition of Geerlings & Wade
On March 25, 2009, the Company acquired selected assets of Geerlings & Wade,
Inc., a retailer of wine and related products. The purchase price of
approximately $2.6 million included the acquisition of inventory, and certain
other assets (approximately $1.4 million of goodwill is deductible for tax
purposes), as well as the assumption of certain related liabilities. The
acquisition was financed utilizing available cash on hand.
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 Geerlings & Wade:
Geerlings &
Wade
Purchase
Price
Allocation
--------------------
(in thousands)
Current assets $990
Intangible assets 253
Goodwill 1,440
--------------------
Total assets acquired 2,683
--------------------
Current liabilities 77
--------------------
Total liabilities assumed 77
--------------------
Net assets acquired $2,606
====================
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Napco and Geerlings & Wade had taken place at
the beginning of fiscal year 2009. The following unaudited pro forma information
is not necessarily indicative of the results of operations in future periods or
results that would have been achieved had the acquisitions taken place at the
beginning of the periods presented.
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
----------------- ---------------- ---------------- -----------------
(in thousands, except per share data)
Net revenues from continuing operations $238,454 $253,033 $346,770 $389,418
Operating income from continuing operations 23,146 25,644 15,388 21,680
Income from continuing operations 12,733 14,210 7,067 11,163
Income per common share from continuing
operations
Basic $0.20 $0.22 $0.11 $0.18
Diluted $0.20 $0.22 $0.11 $0.17
Note 5 - Inventory
The Company's inventory, stated at cost, which is not in excess of market,
includes purchased and manufactured finished goods for resale, packaging
supplies, raw material ingredients for manufactured products and associated
manufacturing labor, and is classified as follows:
December 27, June 28,
2009 2009
---------------- -----------
(in thousands)
Finished goods $21,956 $23,759
Work-in-process 15,511 16,619
Raw materials 6,174 5,476
----------- -----------
$43,641 $45,854
=========== ===========
Note 6 - Goodwill and Intangible Assets
The change in the carrying amount of goodwill is as follows:
1-800-
Flowers.com Gourmet
Consumer BloomNet Food and
Floral Wire Service Gift Baskets Total
------------------------------------------------------------------
(in thousands)
Balance at June 28, 2009 $5,728 $- $35,477 $41,205
Acquisition adjustment - - 6 6
-------------- ------------- ------------- --------------
Balance at December 27, 2009 $5,728 $- $35,483 $41,211
============== ============= ============= ==============
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company's other intangible assets consist of the following:
December 27, 2009 June 28, 2009
---------------------------------------- ----------------------------------------
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 $5,314 $5,062 $252 $5,314 $4,823 $491
Customer lists 3 - 10 years 15,695 5,722 9,973 15,695 4,673 11,022
Other 5 - 8 years 2,388 1,156 1,232 2,388 960 1,428
------------ --------------- ----------- ----------- --------------- ------------
23,397 11,940 11,457 23,397 10,456 12,941
Trademarks with
indefinite lives - 29,901 - 29,901 29,881 - 29,881
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $53,298 $11,940 $41,358 $53,278 $10,456 $42,822
============ =============== =========== =========== =============== ============
Future estimated amortization expense is as follows: remainder of fiscal 2010 -
$1.8 million, fiscal 2011 - $2.2 million, fiscal 2012 - $1.6 million, and fiscal
2013 - $1.4 million, and thereafter - $4.5 million.
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
December 27, June 28,
2009 2009
---------------- -----------
(in thousands)
Term loan (1) $77,177 $87,351
Revolving line of credit (1) - -
Obligations under capital leases (2) 4,626 5,504
----------- -----------
81,803 92,855
Less current maturities of long-term debt and obligations under
capital leases 24,086 22,337
----------- -----------
$57,717 $70,518
=========== ===========
(1) In order to fund the increase in working capital requirements
associated with DesignPac which was acquired on April 30, 2008, 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 provided 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.
11
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
On April 14, 2009, the Company entered into an amendment to the 2008
Credit Facility (the "Amended 2008 Credit Facility"). The Amended 2008
Credit Facility included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million
upon closing. In addition, the amendment reduced the Company's
revolving credit line from $165.0 million to a seasonally adjusted
line ranging from $75.0 to $125.0 million. The Amended 2008 Credit
Facility, effective March 29, 2009, also revises certain financial and
non-financial covenants, including maintenance of certain financial
ratios and eliminates the consolidated net worth covenant that had
been included in the previous agreement.
Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined
margin, or (ii) the agent bank's prime rate plus a margin. The
applicable margins for the Company's term loans and revolving credit
facility will range from 3.00% to 4.50% for LIBOR loans and 2.00% to
3.50% for ABR loans with pricing based upon the Company's leverage
ratio. The repayment terms of the existing term loans were reduced, on
a pro-rata basis, for the $20.0 million prepayment. The obligations of
the Company and its subsidiaries under the Amended 2008 Credit
Facility are secured by liens on all personal property of the Company
and its subsidiaries.
(2) During March 2009, the Company obtained a $5.0 million equipment lease
line of credit with a bank and a $5.0 million equipment lease line of
credit with a vendor. Interest under these lines, which both mature in
April 2012, range from 2.99% to 7.48%. Borrowings under the bank line
are collateralized by the underlying equipment purchased, while the
equipment lease line with the vendor is unsecured. The borrowings are
payable in 36 monthly installments of principal and interest
commencing in April 2009.
The Company does not enter into derivative transactions for trading purposes,
but rather to hedge its exposure to interest rate fluctuations. The Company
manages its floating rate debt using interest rate swaps in order to reduce its
exposure to the impact of changing interest rates on its consolidated results of
operations and future cash outflows for interest.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss. The ineffective
portion, if any, is recorded within interest expense in the consolidated
statement of operations.
Note 8-Fair Value Measurements
Effective June 30, 2008, the Company adopted authoritative guidance for fair
value measurement and disclosure provisions of fair value measurements of
financial and nonfinancial assets and liabilities that were already subject to
fair value measurements under current accounting rules. This guidance also
required expanded disclosures related to fair value measurements.
On June 29, 2009, the Company adopted the newly issued accounting standard for
fair value measurements of all non-financial assets and liabilities not
recognized or disclosed at fair value in the financial statements on a recurring
basis. The Company's non-financial assets, such as goodwill, intangible assets,
and property, plant and equipment, are recorded at cost and are assessed for
impairment when an event or circumstance indicates that an other-than-temporary
decline in value may have occurred. Goodwill and indefinite lived intangibles
are also tested for impairment annually, as required under the accounting
standards.
12
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Cash and cash equivalents, trade accounts receivable, income tax receivable,
trade accounts payable and accrued expenses are reflected in the consolidated
balance sheets at carrying value, which approximates fair value due to the
short-term nature of these instruments.
The authoritative guidance for fair value measurements establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy under the guidance are described below:
Level 1 Valuations based on quoted prices in active markets for identical
assets or liabilities that the entity has the ability to access.
Level 2 Valuations based on quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable
data for substantially the full term of the assets or liabilities.
Level 3 Valuations based on inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
In accordance with the fair value hierarchy described above, the following table
shows the fair value of the Company's interest rate swap, which is included in
other liabilities in the consolidated balance sheet:
Fair Value Measurements
Assets (Liabilities)
------------------------------------------
Total as of Level 1 Level 2 Level 3
December 27, 2009
------------------ ------------- ------------ -------------
(in thousands)
Interest rate swap (1) $(448) - $(448) -
(1) Included in other long-term liabilities on the consolidated balance
sheet.
The following presents the balances and net changes in the accumulated other
comprehensive loss related to this interest rate swap, net of income taxes.
Interest Rate
Swap
-------------
(in thousands)
Balance at the beginning of the period $ -
Amount reclassified to interest expense, net of tax benefit of $63 89
Net change in fair value of interest rate swap, net of tax benefit of $235 (365)
-----------------
Balance at end of period $ (276)
-----------------
13
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 9 - Income Taxes
At the end of each interim reporting period, the Company estimates its effective
income tax rate expected to be applicable for the full year. This estimate is
used in providing for income taxes on a year-to-date basis and may change in
subsequent interim periods. The Company's effective tax rates from continuing
operations for the three and six months ended December 27, 2009 was 39.9% and
40.6%, respectively, compared to 39.1% in the prior year periods. These
effective rates differed from the U.S. federal statutory rate of 35% primarily
due to state income taxes, partially offset by various tax credits.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is currently under examination by the
Internal Revenue Service for its fiscal 2007 tax year, however fiscal 2006
through fiscal 2008 remain subject to examination, with the exception of certain
states where the statute remains open from fiscal 2004, due to non-conformity
with the federal statute of limitations for assessment. 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.
Note 10 - Business Segments
The Company's management reviews the results of the Company's operations by the
following three business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service; and
o Gourmet Food and Gift Baskets
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. On January 25, 2010, the Company completed the sale of these
businesses; refer to the footnote "Subsequent Event" below for a further
discussion. Consequently, the Company has classified the results of operations
of its Home & Children's Gifts segment, which includes Home Decor and Children's
Gifts from Plow & Hearth(R), Wind & Weather(R), HearthSong(R) and Magic
Cabin(R), as discontinued operations for all periods presented.
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, goodwill and intangible impairment, other income (net), and income
taxes. Assets and liabilities are reviewed at the consolidated level by
management and not accounted for by category.
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 27, December 28, December 27, December 28,
Net revenues 2009 2008 2009 2008
------------- -------------- -------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $85,890 $90,113 $155,893 $173,595
BloomNet Wire Service 14,753 15,143 28,538 30,524
Gourmet Food & Gift Baskets 138,207 147,787 162,947 184,549
Corporate (*) 126 597 252 801
Intercompany eliminations (522) (2,069) (860) (2,460)
------------- -------------- -------------- --------------
Total net revenues $238,454 $251,571 $346,770 $387,009
============= ============== ============== ==============
14
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 27, December 28, December 27, December 28,
Operating Income 2009 2008 2009 2008
-------------- ------------- -------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $7,578 $7,975 $15,251 $18,562
Bloomnet Wire Service 4,691 4,753 8,796 9,093
Gourmet Food & Gift Baskets 28,616 26,743 25,406 25,803
-------------- ------------- -------------- --------------
Category Contribution Margin Subtotal 40,885 39,471 49,453 53,458
Corporate (*) (12,396) (9,028) (23,776) (22,010)
Depreciation and amortization (5,343) (5,094) (10,289) (10,169)
-------------- ------------- -------------- --------------
Operating income (loss) $23,146 $25,349 $15,388 $21,279
============== ============= ============== ==============
(*) 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.
Note 11. Discontinued Operations
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. On January 25, 2010, the Company completed the sale of these
businesses; refer to the footnote "Subsequent Event" below for a further
discussion. Consequently, the Company has classified the results of operations
of its Home & Children's Gifts segment as discontinued operations for all
periods presented.
Results for discontinued operations are as follows:
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
---------------- ---------------- ---------------- ----------------
(in thousands)
Net revenues from discontinued operations $64,334 $77,757 $81,688 $100,352
Operating income (loss) from discontinued
operations 3,795 18,559 1,157 (22,176)
(including loss on disposal of $3.3 million
during the three and six months ended December
27, 2009 and impairment charges of $20.0 million
during the three and six months ended December
28, 2008)
Income tax expense (benefit) from discontinued
operations 1,225 508 196 (923)
Income (loss) from discontinued operations 2,570 (19,067) 961 (21,253)
15
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets and liabilities of discontinued operations are as follows:
December 27, June 28,
2009 2009
----------------- -----------------
(in thousands)
Assets of discontinued operations
Receivables, net $2,118 $693
Inventories 7,930 15,529
Prepaid and other 2,277 1,878
----------------- -----------------
Current assets of discontinued operations 12,325 18,100
Property, plant and equipment, net 6,079 8,871
Other intangibles, net 666 666
Other assets 95 110
----------------- -----------------
Non-current assets of discontinued operations 6,840 9,647
----------------- -----------------
Total assets of discontinued operations $19,165 $27,747
================= =================
Liabilities of discontinued operations
Accounts payable and accrued expenses $9,545 $2,633
----------------- -----------------
Current liabilities of discontinued operations 9,545 2,633
Non-current liabilities of discontinued operations 1,288 1,334
----------------- -----------------
Total liabilities of discontinued operations $10,833 $3,967
================= =================
Note 12 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business.
On December 21, 2007, Plaintiff, Thomas Molnar, on behalf of himself and a
putative class, filed suit against the Company claiming false advertising,
unfair business practices, and unjust enrichment seeking unspecified monetary
damages. The Company has admitted no wrongdoing with respect to this matter, but
has chosen to enter into a settlement agreement with the parties to this matter
in order to avoid protracted litigation. The presiding trial Judge has given
preliminary approval to the settlement, and the Company has sent out the
applicable notices to the class members. As a result, the Company has accrued
for the estimated cost of the settlement of approximately $0.9 million within
its general and administrative expenses during the three months ended December
27, 2009.
Note 13 - Subsequent Event
Sale of Home & Children's Gifts Business
On January 25, 2010, the Company completed the sale of the assets and certain
related liabilities of its Home & Children's Gifts business to PH International,
LLC. Included in the sale were the Plow & Hearth, Problem Solvers, Wind &
Weather, HearthSong and Magic Cabin brands, as well as the administrative and
distribution center in Madison, VA, and a distribution center in Vandalia, OH.
The sales price of the assets was $17.0 million, subject to adjustments for
changes in working capital. During the three months ended December 27, 2009, the
Company recorded a loss of $3.3 million, including transaction, severance and
transition obligations, which is in addition to the $14.7 million write-down
that the Company recorded during the three months ended June 28, 2009.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" (MD&A) is intended to provide an understanding of our financial
condition, change in financial condition, cash flow, liquidity and results of
operations. The following MD&A discussion should be read in conjunction with the
consolidated financial statements and notes to those statements that appear
elsewhere in this Form 10-Q and in the Company's Annual Report on Form 10-K. The
following discussion contains forward-looking statements that reflect the
Company's plans, estimates and beliefs. The Company's actual results could
differ materially from those discussed or referred to in the forward-looking
statements. Factors that could cause or contribute to any differences include,
but are not limited to, those discussed under the caption "Forward-Looking
Information and Factors That May Affect Future Results" and under Part II, 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(R) (1-800-356-9377 or www.1800flowers.com) 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. As always, 100% satisfaction is guaranteed. 1-800-
FLOWERS.COM has earned the 2009 Gold Award in the Online Flower Delivery
category from Top Ten REVIEWS; was listed as a TOP TEN MOBILE RETAILER by
Internet Retailer magazine in 2009; and was recognized by Computerworld magazine
as a Premier 100 IT Leader for 2010. 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(R) confections brands (www.fanniemay.com and www.harrylondon.com);
wine gifts from Ambrosia(R) (www.ambrosia.com) and Geerlings&Wadesm
(www.geerwade.com); gift baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com)
as well as Celebrations(R) (www.celebrations.com), a new premier online
destination for fabulous party ideas and planning tips. 1-800-FLOWERS.COM, Inc.
is involved in a broad range of corporate social responsibility initiatives
including continuous expansion and enhancement of its environmentally-friendly
"green" programs, various philanthropic and charitable efforts and special
private-sector skills training programs for military veterans.
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. On January 25, 2010, the Company completed the sale of these
businesses; refer to Note 13 to the Consolidated Financial Statements
"Subsequent Event" for a further discussion. Consequently, the Company has
classified the results of operations of its Home & Children's Gifts segment,
which includes 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), as discontinued operations for all periods presented.
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market,
ticker symbol: FLWS.
17
Category Information
The following table presents the contribution of net revenues, gross profit and
category contribution margin or category "EBITDA" (earnings before interest,
taxes, depreciation and amortization, and goodwill and intangible impairment)
from each of the Company's business categories. (As noted previously, the
Company's Home & Children's Gifts segment has been classified as discontinued
operations and therefore excluded from category information below).
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -------------
(in thousands)
Net revenues from continuing operations:
1-800-Flowers.com Consumer Floral $85,890 $90,113 (4.7%) $155,893 $173,595 (10.2%)
BloomNet Wire Service 14,753 15,143 (2.6%) 28,538 30,524 (6.5%)
Gourmet Food & Gift Baskets 138,207 147,787 (6.5%) 162,947 184,549 (11.7%)
Corporate (*) 126 597 (78.9%) 252 801 (68.5%)
Intercompany eliminations (522) (2,069) 74.8% (860) (2,460) 65.0%
-------------- -------------- -------------- -------------
Total net revenues from continuing operations $238,454 $251,571 (5.2%) $346,770 $387,009 (10.4%)
============== ============== ============== =============
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -------------
(in thousands)
Gross Profit:
1-800-Flowers.com Consumer Floral $32,856 $33,416 (1.7%) $58,703 $65,106 (9.8%)
38.3% 37.1% 37.7% 37.5%
BloomNet Wire Service 8,569 8,766 (2.2%) 16,591 17,106 (3.0%)
58.1% 57.9% 58.1% 56.0%
Gourmet Food & Gift Baskets 58,132 58,816 (1.2%) 67,923 70,848 (4.1%)
42.1% 39.8% 41.7% 38.4%
Corporate (*) 106 168 (36.9%) 200 325 (38.5%)
84.1% 28.1% 79.4% 40.6%
Intercompany eliminations - (453) - (476)
-------------- -------------- -------------- -------------
Total gross profit $99,663 $100,713 (1.0%) $143,417 $152,909 (6.2%)
============== ============== ============== =============
41.8% 40.0% 41.4% 39.5%
============= ============== ============== ==============
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -------------
(in thousands)
EBITDA (**) from continuing operations:
1-800-Flowers.com Consumer Floral $7,578 $7,975 (5.0%) $15,251 $18,562 (17.8%)
BloomNet Wire Service 4,691 4,753 (1.3%) 8,796 9,093 (3.3%)
Gourmet Food & Gift Baskets 28,616 26,743 7.0% 25,406 25,803 (1.5%)
-------------- -------------- -------------- -------------
Category Contribution Margin Subtotal 40,885 39,471 3.6% 49,453 53,458 (7.5%)
Corporate (*) (12,396) (9,028) (37.3%) (23,776) (22,010) (8.0%)
-------------- -------------- -------------- -------------
EBITDA from continuing operations $28,489 $30,443 (6.4%) $25,677 $31,448 (18.4%)
============== ============= ============== =============
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -------------
(in thousands)
Discontinued Operations:
Net revenues from discontinued operations $64,334 $77,757 (17.3%) $81,688 $100,352 (18.6%)
Gross Profit from discontinued operations 31,158 37,579 (17.1%) 38,706 47,205 (18.0%)
Operating expense of discontinued operations,
excluding depreciation and amortization 23,577 35,406 (33.4%) 33,244 48,048 (30.8%)
Contribution margin from discontinued operations 7,581 2,173 248.9% 5,462 (843) 747.9%
18
(*) 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 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, goodwill and intangible impairment, 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 the interest coverage ratio and
consolidated leverage ratio. 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 from Continuing Operations to EBITDA from
continuing operations:
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 27, December 28, December 27, December 28,
Operating Income 2009 2008 2009 2008
-------------- ------------- -------------- --------------
(in thousands)
Net income from continuing operations $12,733 $13,956 $7,067 $10,838
Add:
Interest expense 1,985 2,507 3,531 3,666
Depreciation and amortization 5,343 5,094 10,289 10,169
Income tax expense 8,452 8,973 4,830 6,956
Less:
Interest income 11 73 25 163
Other income (expense) 13 14 15 18
-------------- --------------- --------------- -------------
EBITDA from continuing operations $28,489 $30,443 $25,677 $31,448
============== =============== =============== =============
Results of Operations
Net Revenues
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(in thousands)
Net revenues:
E-Commerce $151,660 $157,085 (3.5%) $226,500 $244,981 (7.5%)
Other 86,794 94,486 (8.1%) 120,270 142,028 (15.3%)
-------------- -------------- -------------- -------------
Total net revenues $238,454 $251,571 (5.2%) $346,770 $387,009 (10.4%)
============== ============== ============== =============
During the three and six months ended December 27, 2009, revenues declined by
5.2% and 10.4% over the respective prior year periods, resulting from continued
weakness in the retail economy which contributed to lower wholesale order volume
from DesignPac Gifts, which is included within the Company's Gourmet Food & Gift
19
Baskets business, combined with lower demand within the 1-800-Flowers Consumer
Floral business and from weakness in wholesale product sales within the BloomNet
WireService business.
The Company fulfilled approximately 2,960,000 and 4,192,000 orders through its
E-commerce sales channels (online and telephonic sales) during the three and six
months ended December 27, 2009, representing growth of 0.4% and a decline of
3.1%, in comparison to the same periods of the prior year. The Company's
E-commerce average order value of $51.23 and $54.03 during the three and six
months ended December 27, 2009, respectively, decreased by 3.8% and 4.6% over
the respective prior year periods, reflecting the consumers' preference for
lower price-point product.
Other revenues decreased during the three and six months ended December 27, 2009
primarily as a result of the aforementioned decline related to DesignPac's lower
wholesale orders, as well as lower revenue from floral wholesale product sales
within the Company's BloomNet Wire Service category.
The 1-800-Flowers.com Consumer Floral category includes the operations of the
1-800-Flowers brand 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 from its
franchise operations. Net revenues during the three and six months ended
December 27, 2009 decreased by 4.7% and 10.2% over the respective prior year
periods, as a result of lower order volume due to soft consumer demand caused by
the weakened economy. Although the Company continued to experience declines
within the consumer floral category, trends are improving as revenue within the
segment declined 4.7% during the fiscal second quarter, after several
consecutive quarters of double-digit declines.
The BloomNet Wire Service category includes revenues from membership fees as
well as other product and service offerings to florists. Net revenues during the
three and six months ended December 27, 2009 decreased by 2.6% and 6.5% over the
respective prior year periods, primarily as a result of decreased wholesale
product revenues as florists scaled back purchases as a result of the weakness
in the retail economy.
The Gourmet Food & Gift Basket category includes the operations of
1-800-Baskets, Cheryl & Co., Fannie May, The Popcorn Factory, The Winetasting
Network and DesignPac businesses. Revenue is derived from the sale of cookies,
baked gifts, premium chocolates and confections, gourmet popcorn, wine gifts and
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 brands, as well as wholesale operations. During the fiscal second quarter,
the Company launched a new co-branded website which featured the
1-800-BASKETS.COM(R) brand, a re-merchandised collection of gourmet gift baskets
confected by DesignPac. Prior year revenues from gourmet gift baskets, which
were previously included within the 1-800-Flowers.com Consumer Floral category,
have been reclassified to conform with current year presentation. Net revenue
during the three and six months ended December 27, 2009 decreased by 6.5% and
11.7% over the respective prior year periods, primarily reflecting reduced
wholesale orders for DesignPac's wholesale baskets.
The Company expects continued cautious spending by consumers. Based on this
outlook and the decline during the first half of fiscal 2010, the Company
anticipates that revenues for fiscal year 2010 will be down approximately five
to ten percent compared with the prior year.
Gross Profit
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(In thousands)
Gross profit $99,663 $100,713 (1.0%) $143,417 $152,909 (6.2%)
Gross margin % 41.8% 40.0% 41.4% 39.5%
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 decreased during the three and six months ended December 27, 2009,
due to the decline in revenues described above, while gross margin percentage
increased 180 and 190 basis points, respectively as a result of reduced reliance
on promotional pricing, and product mix, reflecting the impact of lower
wholesale revenues from DesignPac, as well as improved manufacturing and supply
chain operating efficiencies.
20
The 1-800-Flowers.com Consumer Floral category gross profit decreased during the
three and six months ended December 27, 2009 by 1.7% and 9.8%, respectively,
over the prior year periods, as a result of a lower sales volume, while the
gross profit margin percentage increased 120 and 20 basis points, respectively,
driven primarily by supply chain improvements, pricing mix, and more strategic
use of promotional pricing during the fiscal second quarter.
The BloomNet Wire Service category gross profit decreased during the three and
six months ended December 27, 2009 by 2.2% and 3.0%, respectively, over the
prior year periods, as a result of the aforementioned decline of wholesale
product revenue, while gross profit margins increased by 20 and 210 basis
points, respectively, reflecting the impact of product mix and pricing
initiatives.
The Gourmet Food & Gift Basket category gross profit decreased during the three
and six months ended December 27, 2009 by 1.2% and 4.1%, respectively, over the
prior year periods, as a result of the aforementioned lower wholesale basket
revenue from DesignPac. Gross margin percentage increased by 230 and 330 basis
points, respectively, reflecting the reduction in lower margin DesignPac sales
volume, as well as improved gross margins resulting from manufacturing
efficiencies and reduced promotional pricing across all other businesses within
the category.
During the remainder of fiscal 2010, the Company expects its gross margin
percentage will improve slightly in comparison to fiscal 2009 as a result of a
shift in product mix and anticipated gross margin improvements in most of its
businesses resulting from product sourcing, supply chain improvements and
manufacturing and operating efficiencies.
Marketing and Sales Expense
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(In thousands)
Marketing and sales $51,976 $54,560 (4.7%) $81,452 $86,634 (6.0%)
Percentage of net revenues 21.8% 21.7% 23.5% 22.4%
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 the three and six months ended December 27, 2009, marketing and sales
expense decreased by 4.7% and 6.0% respectively, as a result of a number of
cost-reduction initiatives, including savings in catalog printing and co-mailing
costs, planned reductions in customer prospecting, as well as overall reductions
in advertising programs as their effectiveness declines during periods of soft
consumer demand and the reduction in variable costs associated with the decline
in revenue. Marketing and selling expense increased as a percentage of sales
during the three and six months ended December 27, 2009, primarily as a result
of sales mix caused by the reduction of wholesale basket products by DesignPac
which earn lower product margins, but also operate with a low level of marketing
and sales expense, and the accrual of performance based compensation expense
during the current quarter compared with the reversal of previously accrued
performance based compensation expense during the prior year periods.
During the three and six months ended December 27, 2009 the Company added
approximately 656,000 and 1,007,000 new E-commerce customers, respectively. Of
the 656,000 and 2,447,000 total customers who placed E-commerce orders during
the three and six months ended December 27, 2009, approximately 60.4% and 58.9%,
respectively, represented repeat customers, compared to 59.7% and 58.0% during
the respective prior year periods.
During the remainder of fiscal 2010, the Company expects that marketing and
sales expense, while varying from quarter to quarter due to the seasonal nature
of the Company's business, will increase slightly in comparison to the prior
year, but will remain relatively consistent with prior year as a percentage of
net revenues.
21
Technology and Development Expense
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(In thousands)
Technology and development $4,525 $4,781 (5.4%) $9,081 $9,844 (7.8%)
Percentage of net revenues 1.9% 1.9% 2.6% 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 the three and six months ended December 27, 2009, technology and
development expense decreased by 5.4% and 7.8%, respectively, as compared to the
prior year periods, as a result of decreased labor/consulting costs due to
re-sizing initiatives, as well as a reduction in the number of hosting sites and
footprint. During the three and six months ended December 27, 2009, the Company
expended $7.0 million and $13.3 million, respectively, on technology and
development, of which $2.5 million and $4.2 million, respectively, has been
capitalized.
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives, however, based on reduced
hosting and other costs expects that its spending for the remainder of fiscal
2010 will decrease both in terms of dollars spent, and as a percentage of net
revenues, in comparison to the prior year.
General and Administrative Expense
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(In thousands)
General and administrative $14,673 $10,929 34.3% $27,207 $24,983 8.9%
Percentage of net revenues 6.2% 4.3% 7.8% 6.5%
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 during the three and six months ended
December 27, 2009 increased by 34.3% and 8.9%, respectively, compared to the
prior year periods, as a result of several factors including: (i) increased
labor cost due to the accrual of performance based compensation expense during
the current quarter compared with the reversal of previously accrued performance
based compensation expense during the prior year periods, (ii) increased health
insurance costs, and (iii) increased professional fees due to a charge of
approximately $0.9 million during the fiscal second quarter to settle a proposed
class action litigation, for which the Company has admitted no wrongdoing, but
chose to settle to avoid protracted litigation, partially offset by reduced
labor and operating costs related to the Company's re-sizing initiatives
implemented during fiscal 2009.
The Company expects that its general and administrative expenses for the
remainder of fiscal 2010 will be consistent with the prior year and decrease
slightly as a percentage of net revenues.
22
Depreciation and Amortization Expense
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- -----------
(In thousands)
Depreciation and amortization $5,343 $5,094 4.9% $10,289 $10,169 1.2%
Percentage of net revenues 2.2% 2.0% 3.0% 2.6%
Depreciation and amortization expense increased by 4.9% and 1.2% during the
three and six months ended December 27, 2009, respectively, compared to the
prior year periods, as a result of recent capital additions for technology
improvements, including the Company's newly launched co-branded 1-800-Baskets
website and back-end platforms, offset in part by reduced amortization
associated with amortizable intangibles that were written down in the prior
year.
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.
Although the Company is committed to reducing its capital expenditures, certain
key strategic technology initiatives were implemented during fiscal 2010 and,
therefore, the Company, expects that depreciation and amortization for the
remainder of fiscal 2010 will increase slightly in comparison to the prior year.
Other Income (Expense)
Three Months Ended Six Months Ended
-------------------------------- ----------------------------------
December 27, December 28, December 27, December 28,
2009 2008 2009 2008
-------------------------------- ----------------------------------
(in thousands)
Interest income $11 $73 $25 $163
Interest expense (1,985) (2,507) (3,531) (3,666)
Other 13 14 15 18
--------------- --------------- ----------------- ----------------
($1,961) ($2,420) ($3,491) ($3,485)
=============== =============== ================= ================
Other income (expense) consists primarily of interest expense and amortization
of deferred financing costs, partially offset by income earned on the Company's
available cash balances.
Interest expense decreased during the three and six months ended December 27,
2009 compared to the prior year periods, as a result of scheduled paydowns and
prepayments (see below) of amounts outstanding under the Company's term loans,
as well as reduced working capital borrowings.
In order to fund the increase in working capital requirements associated with
DesignPac, 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 provided 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.
On April 14, 2009, the Company entered into an amendment to the 2008 Credit
Facility (the "Amended 2008 Credit Facility"). The Amended 2008 Credit Facility,
effective March 29, 2009, included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million upon
closing. In addition, the amendment reduced the Company's revolving credit line
from $165.0 million to a seasonally adjusted line ranging from $75.0 to $125.0
million. Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined margin, or
(ii) the agent bank's prime rate plus a margin. The applicable margins for the
Company's term loans and revolving credit facility will range from 3.00% to
4.50% for LIBOR loans and 2.00% to 3.50% for ABR loans with pricing based upon
the Company's leverage ratio. The repayment terms of the existing term loans
were reduced, on a pro-rata basis, for the $20.0 million prepayment.
During March 2009, the Company obtained a $5.0 million equipment lease line of
credit with a bank and a $5.0 million equipment lease line of credit with a
23
vendor. Interest under these lines, which both mature in April 2012, range from
2.99% to 7.48%. The borrowings are payable in 36 monthly installments of
principal and interest commencing in April 2009.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss.
Income Taxes
During the three and six months ended December 27, 2009 the Company recorded
income taxes from continuing operations of $8.5 million and $4.8 million,
respectively, compared to $9.0 million and $7.0 million in the respective prior
year periods. The Company's effective tax rates from continuing operations for
the three and six months ended December 27, 2009 was 39.9% and 40.6%,
respectively, as compared to the 39.1% in the prior year periods. These
effective rates differed from the U.S. federal statutory rate of 35% primarily
due to state income taxes, partially offset by various tax credits.
Discontinued Operations
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. On January 25, 2010, the Company completed the sale of these
businesses. Consequently, the Company has classified the results of operations
of its Home & Children's Gifts segment as discontinued operations for all
periods presented.
Results for discontinued operations are as follows:
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
December 27, December 28, December 27, December 28,
2009 2008 % Change 2009 2008 % Change
-------------- -------------- ---------- -------------- ------------- ----------
(In thousands)
Discontinued Operations:
Net revenues from discontinued operations $64,334 $77,757 (17.3%) $81,688 $100,352 (18.6%)
Gross Profit from discontinued operations 31,158 37,579 (17.1%) 38,706 47,205 (18.0%)
Operating expenses of discontinued
operations, excluding depreciation and 23,577 35,406 (33.4%) 33,244 48,048 (30.8%)
amortization
Contribution margin from discontinued
operations 7,581 2,173 248.9% 5,462 (843) 747.9%
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, 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) and company-owned and operated retail stores under
the Plow & Hearth brand.
During the three and six months ended December 27, 2009 net revenues from
discontinued operations decreased by 17.3% and 18.6% respectively as a result of
lower E-commerce sales volume, due to a combination of reduced consumer
spending, particularly in the home decor product category, and a planned
reduction in catalog circulation. Further contributing to the revenue decline
were lower retail store sales, compared to the same period of the prior year,
due to a store closure and decline in customer traffic.
Gross profit from discontinued operations during the three and six months ended
December 27, 2009 decreased by 17.1% and 18.0%, respectively as a result of the
aforementioned revenue declines. Gross margin percentage during the three and
six months ended December 27, 2009 improved 10 and 40 basis points,
respectively, in comparison to the same period of the prior year as a result of
enhanced product sourcing and shipping initiatives.
Despite the aforementioned decline in revenues, during the three and six months
ended December 27, 2009 contribution margin from discontinued operations
improved significantly as compared to the respective prior year periods, driven
by the above mentioned gross margin improvements as well as the significant
reduction in operating expenses, primarily related to reduced catalog
circulation costs and other operating cost reduction initiatives.
24
As a result of the decline in revenues, offset by reduced operating expenses of
$11.8 million and $14.8 million during the three and six months ended December
27, 2009, respectively, contribution margin from discontinued operations
improved $5.4 million, to $7.6 million and $6.3 million, to $5.4 million, in
comparison to the same periods of the prior year.
On January 25, 2010, the Company completed the sale of the assets and certain
related liabilities of its Home & Children's Gifts business to PH International,
LLC. The sales price of the assets was $17.0 million, subject to adjustments for
changes in working capital. Based upon the carrying value of the assets held for
sale, the Company recorded a loss of $3.3 million during the three months ended
December 27, 2009, including transaction, severance and transition obligations,
which is in addition to the $14.7 million write-down that the Company recorded
during the three months ended June 28, 2009.
Liquidity and Capital Resources
At December 27, 2009, the Company had working capital of $46.1 million,
including cash and equivalents of $46.4 million, compared to working capital of
$43.7 million, including cash and equivalents of $29.6 million, at June 28,
2009.
Net cash provided by operating activities of $36.5 million for the six months
ended December 27, 2009 was primarily related to net income, adjusted for
non-cash charges for depreciation and amortization and deferred income taxes,
operating activities of discontinued operations ($12.7 million), as well as
seasonal changes in working capital from continuing operations, including a
decrease in inventory and increases in accounts payables and accrued expenses
related to the previous and upcoming holiday season, offset by an increase in
accounts receivable related to the timing of customers' payments related to the
holiday season.
Net cash used in investing activities of $8.3 million for the six months ended
December 27, 2009 was primarily attributable to capital expenditures, primarily
related to the Company's technology infrastructure.
Net cash used in financing activities of $11.4 million for the six months ended
December 27, 2009 was primarily for the repayment of bank borrowings on
outstanding debt and long-term capital lease obligations. All borrowings under
the Company's revolving credit facility were repaid by the end of the fiscal
second quarter.
In order to fund the increase in working capital requirements associated with
DesignPac, 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 provided 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.
On April 14, 2009, the Company entered into an amendment to the 2008 Credit
Facility (the "Amended 2008 Credit Facility"). The Amended 2008 Credit Facility,
effective March 29, 2009, included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million upon
closing. In addition, the amendment reduced the Company's revolving credit line
from $165.0 million to a seasonally adjusted line ranging from $75.0 to $125.0
million. Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined margin, or
(ii) the agent bank's prime rate plus a margin. The applicable margins for the
Company's term loans and revolving credit facility will range from 3.00% to
4.50% for LIBOR loans and 2.00% to 3.50% for ABR loans with pricing based upon
the Company's leverage ratio. The repayment terms of the existing term loans
were reduced, on a pro-rata basis, for the $20.0 million prepayment.
During March 2009, the Company obtained a $5.0 million equipment lease line of
credit with a bank and a $5.0 million equipment lease line of credit with a
vendor. Interest under these lines, which both mature in April 2012, range from
2.99% to 7.48%. The borrowings are payable in 36 monthly installments of
principal and interest commencing in April 2009.
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 December 27, 2009, $12.8 million remains authorized but unused.
25
At December 27, 2009, the Company's contractual obligations from continuing
operations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1-2 More than 5
Total year years 3 - 5 years years
----------- --------------- ------------ ------------- ----------------
Long-term debt, including interest $89,914 $26,567 $54,089 9,258 $-
Capital lease obligations, including
interest 5,193 2,264 2,923 6 -
Operating lease obligations 47,250 11,441 19,078 13,873 2,858
Sublease obligations 7,526 2,455 3,406 1,469 196
Marketing agreement 6,476 2,976 3,500 - -
Purchase commitments (*) 13,665 13,665 - - -
----------- --------------- ------------ ------------- ----------------
Total $170,024 $59,368 $82,996 $24,606 $3,054
=========== =============== ============ ============= ================
(*) 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
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.
26
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 during its fiscal fourth quarter,
or earlier if indicators of potential impairment exist, to evaluate goodwill.
Goodwill is reviewed for impairment utilizing a two-step process. The first step
requires us to compare the fair value of each reporting unit to the respective
carrying value, which includes goodwill. If the fair value of the reporting unit
exceeds its carrying value, the goodwill is not considered impaired. If the
carrying value is greater than the fair value, there is an indication that an
impairment may exist and the second step is required. In step two, the implied
fair value of the goodwill is calculated as the excess of the fair value of a
reporting unit over the fair values assigned to its assets and liabilities. If
the implied fair value of goodwill is less than the carrying value of the
reporting unit's goodwill, the difference is recognized as an impairment loss.
The impairment test process requires valuation of the respective reporting unit,
which we estimate using a discounted five year forecasted cash flow with a
year-five residual value based upon a comparative market Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) multiple. The
assumptions about future cash flows and growth rates are based on each reporting
unit's long-term forecast and are subject to review and approval by senior
management. The market EBITDA multiple is based on market transactions in the
reporting unit's industry. The discount rate is based on our weighted average
cost of capital, which the Company believes approximates the rate from a market
participant's perspective. The estimated fair value could be impacted by changes
in interest rates, growth rates, costs, pricing, capital expenditures and market
conditions.
Impairment testing during fiscal 2009 indicated the fair value of our Home &
Children's Gifts and Gourmet Food & Gift Basket reporting units was less than
their respective carrying values, and after performing step two, the Company
recorded impairment charges in both reporting units. Although our businesses
continue to be impacted by the economic downturn, the Company's market
capitalization remains above its book value and evaluations of our reporting
units indicated that it was unlikely the fair value of any reporting unit fell
below its carrying value. Accordingly, we have not performed an interim goodwill
impairment test subsequent to the fiscal 2009 annual impairment test.
A prolonged economic downturn resulting in lower EBITDA multiples, lower
long-term growth rates and reduced long-term profitability may reduce the fair
value of our reporting units. Industry specific events or circumstances that
have a negative impact to the valuation assumptions may also reduce the fair
value of our reporting units. Should such events occur and it becomes more
likely than not that a reporting unit's fair value has fallen below its carrying
value, we will perform an interim goodwill impairment test(s), in addition to
the annual impairment test. Future impairment tests may result in a goodwill
impairment, depending on the outcome of both step one and step two of the
impairment review process. A goodwill impairment would be reported as a non-cash
charge to earnings.
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
The FASB authoritative guidance 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.
27
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 matters for which a
liability for an unrecognized tax benefit is established or is required to pay
amounts in excess of the liability, the Company's effective tax rate in a given
financial statement period may be affected.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the FASB
Accounting Standards Codification (the "Codification") as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. The Codification, which changes the referencing
of financial standards, supersedes current authoritative guidance and is
effective for the Company's interim reporting beginning June 29, 2009. The
Codification is not intended to change or alter existing GAAP and is not
expected to result in a change in accounting practice for the Company.
In April 2009, the FASB issued authoritative guidance for business combinations
that amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from
contingencies in a business combination. This guidance requires such
contingencies be recognized at fair value on the acquisition date if fair value
can be reasonably estimated during the allocation period. Otherwise, entities
would typically account for the acquired contingencies in accordance with
authoritative guidance for contingencies. The guidance became effective for the
Company's business combinations for which the acquisition date is on or after
June 29, 2009. The Company did not complete any business combinations during the
three and six months ended December 27, 2009, and the effect on future periods
will depend on the nature and significance of business combinations subject to
this guidance.
In April 2009, the FASB issued authoritative guidance to increase the frequency
of fair value disclosures of financial instruments, thereby enhancing
consistency in financial reporting. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on a
company's balance sheet at fair value. Prior to the effective date of this
guidance, fair values for these assets and liabilities have only been disclosed
once a year. The guidance now requires these disclosures on a quarterly basis,
providing qualitative and quantitative information about fair value estimates
for all those financial instruments not measured on the balance sheet at fair
value. The Company adopted the disclosure requirements under this guidance with
an effective date of June 29, 2009. The implementation did not have a material
impact on the Company's financial position, results of operations or cash flows
as it is disclosure-only in nature.
In April 2008, the FASB issued authoritative guidance for general intangibles
other than goodwill, amending factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This guidance is effective for the Company for
intangible assets acquired on or after June 29, 2009. The adoption did not have
a material impact on the Company's results of operations, financial position or
cash flows.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements represent the Company's current expectations or
beliefs concerning future events and can generally be identified by the use of
statements that include words such as "estimate," "project," "believe,"
"anticipate," "intend," "plan," "foresee," "likely," "will," "goal," "target" or
similar words or phrases. These forward-looking statements are subject to
28
risks, uncertainties and other factors, many of which are outside of the
Company's control, that could cause actual results to differ materially from the
results expressed or implied in the forward-looking statements, including among
others:
o the Company's ability:
o to achieve revenue and profitability;
o to leverage its operating platform and reduce operating expenses;
o to grow its 1-800-Baskets.com business;
o to manage the increased seasonality of its business;
o to cost effectively acquire and retain customers;
o to effectively integrate and grow acquired companies;
o to reduce working capital requirements and capital expenditures;
o to compete against existing and new competitors;
o to manage expenses associated with sales and marketing and
necessary general and administrative and technology investments;
and
o to cost efficiently manage inventories;
o the outcome of contingencies, including legal proceedings in the
normal course of business; and
o general consumer sentiment and economic conditions that may affect
levels of discretionary customer purchases of the Company's products.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from past results and those anticipated, estimated or projected.
Investors should bear this in mind as they consider forward-looking
statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Our Annual Report on Form 10-K filing for the fiscal year ended June
28, 2009 listed various important factors that could cause actual results to
differ materially from expected and historic results. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
Readers can find them in Part I, Item 1A, of that filing under the heading
"Cautionary Statements Under the Private Securities Litigation Reform Act of
1995". We incorporate that section of that Form 10-K in this filing and
investors should refer to it. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities, as well as from outstanding debt. As of December 27, 2009, the
Company's outstanding debt, including current maturities, approximated $81.8
million.
The Company does not enter into derivative transactions for trading purposes,
but rather to hedge its exposure to interest rate fluctuations. The Company
manages its floating rate debt using interest rate swaps in order to reduce its
exposure to the impact of changing interest rates on its consolidated results of
operations and future cash outflows for interest.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss. If in the
29
future the interest rate swap agreements were determined to be ineffective or
were terminated before the contractual termination dates, or if it became
probable that the hedged variable cash flows associated with the variable-rate
borrowings would stop, the Company would be required to reclassify into earnings
all or a portion of the unrealized losses on cash flow hedges included in
accumulated other comprehensive income (loss).
Inclusive of the impact of the Company's interest rate swap agreement, each 50
basis point change in interest rates would have had a corresponding effect on
our interest expense of approximately $0.1 million and $0.2 million during the
three and six months ended December 27, 2009, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, these disclosure controls and procedures
are effective in alerting them in a timely manner to material information
required to be disclosed in the Company's periodic reports filed with the SEC.
There were no changes in our internal control over financial reporting (as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three
months ended December 27, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
30
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business.
On December 21, 2007, Plaintiff, Thomas Molnar, on behalf of himself and a
putative class, filed suit against the Company claiming false advertising,
unfair business practices, and unjust enrichment seeking unspecified monetary
damages. The Company has admitted no wrongdoing with respect to this matter, but
has chosen to enter into a settlement agreement with the parties to this matter
in order to avoid protracted litigation. The presiding trial Judge has given
preliminary approval to the settlement, and the Company has sent out the
applicable notices to the class members. As a result, the Company has accrued
for the estimated cost of the settlement of approximately $0.9 million within
its general and administrative expenses during the three months ended December
27, 2009.
ITEM 1A. RISK FACTORS.
There were no material changes to the Company's risk factors as discussed in
Item 1A-Risk Factors in the Company's Annual Report on Form 10-K for the year
ended June 28, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the first six months of fiscal 2010, which includes the
period June 29, 2009 through December 27, 2009:
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs Programs
----------------------------------------------------------------------------------------------------------------------------
(in thousands, except average price paid per share)
6/29/09 - 7/26/09 0.9 $1.83 0.9 $13,154
7/27/09 - 8/23/09 4.5 $2.62 4.5 $13,142
8/24/09 - 9/27/09 - $- - $13,142
9/28/09 - 10/25/09 48.1 $4.15 48.1 $12,943
10/26/09 - 11/22/09 3.7 $4.82 3.7 $12,925
11/23/09 - 12/27/09 47.0 $2.25 47.0 $12,818
-------------------- ----------------- ---------------------
Total 104.2 $3.23 104.2
==================== ================= =====================
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 December 27, 2009, $12.8 million remains authorized but unused.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on December 3,
2009.
31
The following nominees were elected as directors, each to serve until
the 2012 Annual Meeting or until their respective successors shall have
been duly elected and qualified, by the vote set forth below:
Nominee For Withhold
---------------------------- ----------------------------------- ------------------------------------------
Jeffrey C. Walker 321,130,473 11,126,292
Lawrence Calcano 329,611,798 2,664,967
James Cannavino 329,479,938 2,776,827
The following Directors, who were not nominees for election at this
Annual Meeting, will continue to serve on the Board of Directors of the
Company: James F. McCann, Christopher G. McCann, John J. Conefry, Jr.,
Leonard J. Elmore and Jan L. Murley.
The proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent registered public accounting firm for the fiscal
year ending June 27, 2010 was approved by the vote set forth below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
329,905,029 2,298,639 53,097
The Company's 2003 Long Term Incentive and Share Award Plan as Amended
and Restated as of October 22, 2009 was approved by the vote set forth
below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
320,130,238 8,065,925 11,065
The Company's Section 16 Executive Officers Bonus Plan as Amended and
Restated as of October 22, 2009 was approved by the vote set forth
below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
327,934,830 218,559 10,776
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.22 2003 Long Term Incentive and Share Award Plan (as amended and
restated as of October 22, 2009) (incorporated by reference to
Definitive Proxy filed on October 23, 2009 (No. 000-26841),
Annex A).
10.23 Section 16 Executive Officer's Bonus Plan (as amended and
restated as of October 22, 2009) (incorporated by reference to
Definitive Proxy filed on October 23, 2009 (No. 000-26841),
Annex B).
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.*
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
-----------------------
(Registrant)
Date: February 5, 2010 /s/ James F. McCann
----------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
Date: February 5, 2010 /s/ William E. Shea
----------------------- -----------------------------------
William E. Shea
Senior Vice President of Finance
and Administration and Chief
Financial Officer