1 800 FLOWERS COM INC - Quarter Report: 2012 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the quarterly period ended September 30, 2012

 

or

 

 

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)

 

 

 

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 o

 

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 x No o

 

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.

 

 

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

 

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

 

28,031,726

(Number of shares of Class A common stock outstanding as of November 2, 2012)

 

36,858,465

(Number of shares of Class B common stock outstanding as of November 2, 2012)

 

 

Table of Contents

 

1-800-FLOWERS.COM, Inc.

 

TABLE OF CONTENTS

 

INDEX

 

			Page
Part I.		Financial Information
Item 1.		Consolidated Financial Statements:
		Consolidated Balance Sheets — September 30, 2012 (Unaudited) and July 1, 2012	1
		Consolidated Statements of Operations (Unaudited) — Three Months Ended September 30, 2012 and October 2, 2011	2
		Consolidated Statements of Comprehensive Income (Loss) (Unaudited) — Three Months Ended September 30, 2012 and October 2, 2011	3
		Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended September 30, 2012 and October 2, 2011	4
		Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.		Controls and Procedures	29
Part II.		Other Information
Item 1.		Legal Proceedings	30
Item 1A.		Risk Factors	30
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.		Defaults upon Senior Securities	31
Item 4.		Mine Safety Disclosures	31
Item 5.		Other Information	31
Item 6.		Exhibits	32
Signatures			33

 

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PART I. — FINANCIAL INFORMATION

ITEM 1. — CONSOLIDATED FINANCIAL STATEMENTS

 

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

Consolidated Balance Sheets

(in thousands, except share data)

 

		September 30, 2012			July 1, 2012
		(unaudited)
Assets
Current assets:
Cash and equivalents		$	5,829		$	28,854
Receivables, net		26,751			14,968
Inventories		85,182			55,744
Deferred tax assets		7,161			4,993
Prepaid and other		12,345			11,082
Current assets of discontinued operations		100			100
Total current assets		137,368			115,741
Property, plant and equipment, net		49,140			48,669
Goodwill		47,901			47,901
Other intangibles, net		41,357			41,838
Deferred tax assets		2,822			2,824
Other assets		9,555			7,875
Total assets		$	288,143		$	264,848
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	18,334		$	17,619
Accrued expenses		46,075			52,535
Current maturities of long-term debt and obligations under capital leases		53,503			15,756
Current liabilities of discontinued operations		110			110
Total current liabilities		118,022			86,020
Long-term debt and obligations under capital leases		9,000			13,500
Other liabilities		3,931			3,580
Total liabilities		130,953			103,100
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; 34,518,374 and 34,465,207 shares issued at September 30, 2012 and July 1, 2012, respectively		345			344
Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,138,465 shares issued at September 30, 2012 and July 1, 2012		421			421
Accumulated other comprehensive loss		—			(17		)
Additional paid-in capital		294,797			293,814
Retained deficit		(100,864		)	(96,258		)
Treasury stock, at cost — 7,014,136 and 6,767,166 Class A shares at September 30, 2012 and July 1, 2012, respectively, and 5,280,000 Class B shares		(37,509		)	(36,556		)
Total stockholders’ equity		157,190			161,748
Total liabilities and stockholders’ equity		$	288,143		$	264,848

 

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended
		September 30, 2012			October 2, 2011
Net revenues		$	120,868		$	117,198
Cost of revenues		71,231			70,636
Gross profit		49,637			46,562
Operating expenses:
Marketing and sales		32,990			32,282
Technology and development		5,415			4,752
General and administrative		13,221			12,359
Depreciation and amortization		4,458			4,902
Total operating expenses		56,084			54,295
Operating loss		(6,447		)	(7,733		)
Interest expense, net		302			822
Loss from continuing operations before income taxes		(6,749		)	(8,555		)
Income tax benefit from continuing operations		(2,143		)	(3,422		)
Loss from continuing operations		(4,606		)	(5,133		)
Loss from discontinued operations, net of tax		—			(85		)
Gain on sale of discontinued operations, net of tax		—			4,478
Income from discontinued operations		—			4,393
Net loss		$	(4,606	)	$	(740	)
Basic and diluted net income (loss) per common share:
From continuing operations		$	(0.07	)	$	(0.08	)
From discontinued operations		—			0.07
Net income (loss) per common share		$	(0.07	)	$	(0.01	)
Weighted average shares used in the calculation of net income (loss) per common share
Basic		64,505			64,218
Diluted		64,505			64,218

 

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

		Three Months Ended
		September 30, 2012			October 2, 2011
Net loss		$	(4,606	)	$	(740	)
Other comprehensive income		17			73
Comprehensive loss		$	(4,589	)	$	(667	)

 

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Three Months Ended
		September 30, 2012			October 2, 2011
Operating activities:
Net loss		$	(4,606	)	$	(740	)
Reconciliation of net loss to net cash provided by operations
Operating activities of discontinued operations		—			1,305
Gain on sale of discontinued operations		—			(8,953		)
Depreciation and amortization		4,458			4,902
Amortization of deferred financing costs		114			114
Deferred income taxes		(2,166		)	963
Bad debt expense		264			227
Stock-based compensation		989			1,169
Other non-cash items		5			58
Changes in operating items, excluding the effects of acquisitions:
Receivables		(12,047		)	(12,268		)
Inventories		(29,438		)	(30,304		)
Prepaid and other		(1,263		)	(2,665		)
Accounts payable and accrued expenses		(5,745		)	(6,215		)
Other assets		(525		)	(39		)
Other liabilities		351			(60		)
Net cash used in operating activities		(49,609		)	(52,506		)
Investing activities:
Acquisitions, net of cash acquired		—			(4,336		)
Proceeds from sale of business		—			12,010
Capital expenditures		(4,453		)	(3,792		)
Purchase of investment		(1,308		)	(1,111		)
Other, net		39			248
Net cash (used in) provided by investing activities		(5,722		)	3,019
Financing activities:
Acquisition of treasury stock		(953		)	—
Proceeds from exercise of employee stock options		12			—
Proceeds from bank borrowings		37,000			40,000
Repayment of notes payable and bank borrowings		(3,750		)	(5,750		)
Repayment of capital lease obligations		(3		)	(498		)
Net cash provided by financing activities		32,306			33,752
Net change in cash and equivalents		(23,025		)	(15,735		)
Cash and equivalents:
Beginning of period		28,854			21,442
End of period		$	5,829		$	5,707

 

See accompanying Notes to Consolidated Financial Statements.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1 — Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 due to seasonal and other factors.

 

The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates the highest proportion of the Company’s annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal fourth quarter.  The Easter Holiday was in the Company’s fourth quarter during fiscal 2012, but will fall in the third quarter of fiscal 2013.

 

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 July 1, 2012.

 

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.

 

Recently Adopted Accounting Pronouncements

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08 “Testing Goodwill for Impairment” (ASU No. 2011-08) which is intended to reduce the complexity and costs to test goodwill for impairment. The amendment allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will no longer be required to calculate the fair value of a reporting unit unless the entity determines, based on its qualitative assessment, that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The ASU also expands upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendment is effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year ending June 30, 2013. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial statements.

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05), which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminated the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted ASU 2011-05 in its first quarter of fiscal year 2013 by including the required disclosures in two separate but consecutive statements.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU No. 2012-02”), which allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test. Otherwise, the quantitative impairment test is not required. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of the provisions of ASU No. 2012-02 will not have a material impact on the Company’s financial position or results of operations.

 

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

 

Basic net loss per common share from continuing operations is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share from continuing operations is computed using the weighted-average number of common shares outstanding during the period, and excludes the dilutive potential common shares (consisting of employee stock options and unvested restricted stock awards) for the three months ended September 30, 2012 and October 2, 2011, respectively, as their inclusion would be antidilutive.

 

Note 3 — Stock-Based Compensation

 

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2012, 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
		September 30, 2012			October 2, 2011
		(in thousands)
Stock options		$	106		$	257
Restricted stock awards		883			912
Total		989			1,169
Deferred income tax expense (benefit) *		10			(438		)
Stock-based compensation expense, net		$	999		$	731

 

*     Tax expense during the three months ended September 30, 2012 reflects the impact of the expiration of non-qualified stock options.

 

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

 

		Three Months Ended
		September 30, 2012			October 2, 2011
		(in thousands)
Marketing and sales		$	346		$	460
Technology and development		99			230
General and administrative		544			479
Total		$	989		$	1,169

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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
		September 30, 2012			October 2, 2011
Weighted average fair value of options granted		$	2.40		$	1.39
Expected volatility		72.1		%	71.5		%
Expected life		6.4 yrs			5.9 yrs
Risk-free interest rate		0.69		%	0.88		%
Expected dividend yield		0.0		%	0.0		%

 

The following table summarizes stock option activity during the three months ended September 30, 2012:

 

		Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (000s)
Outstanding at July 1, 2012		6,711,280		$	4.48
Granted		20,000		$	3.71
Exercised		(3,000	)	$	2.44
Forfeited		(1,118,673	)	$	6.28
Outstanding at September 30, 2012		5,609,607		$	4.12		5.3 years		$	4,507
Options vested at September 30, 2012		5,478,846		$	4.17		5.3 years		$	4,316
Exercisable at September 30, 2012		3,415,107		$	5.33		3.3 years		$	1,225

 

As of September 30, 2012, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $2.7 million and the weighted average period over which these awards are expected to be recognized was 6.1 years.

 

The Company grants shares of common stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions (Restricted Stock Awards). The following table summarizes the activity of non-vested restricted stock awards during the three months ended September 30, 2012:

 

		Shares		Weighted Average Grant Date Fair Value
Non-vested at July 1, 2012		3,855,320		$	2.37
Granted		—		$	—
Vested		(50,167	)	$	2.29
Forfeited		(57,696	)	$	3.09
Non-vested at September 30, 2012		3,747,457		$	2.36

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of September 30, 2012, there was $5.0 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 1.9 years.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 4 — Acquisitions and Dispositions

 

Sale and Franchise of Fannie May Retail Stores

 

On November 21, 2011, the Company and GB Chocolates LLC (GB Chocolates) entered into an agreement whereby the Company sold 17 existing Fannie May stores, to be operated as franchised locations by GB Chocolates, for $5.6 million, recognizing a gain on the sale of $3.8 million.  Upon completion of the sale, the Company also recognized initial franchise fees associated with these 17 stores in the amount of $0.5 million. In conjunction with the sale of stores, the Company and GB Chocolates entered into an area development agreement whereby GB Chocolates will open a minimum of 45 new Fannie May franchise stores by December 2014.  The agreement provides exclusive development rights for several Midwestern states, as well as specific cities in Florida and Ohio. The terms of the agreement include a non-refundable area development fee of $0.9 million, store opening fees of $0.5 million, assuming successful opening of 45 stores, and a non-performance promissory note in the amount of $1.2 million, which becomes due and payable only if GB Chocolates does not open all 45 stores as set forth in the development agreement.  The Company has deferred recognition of the $0.9 million area development fee associated with the 45 store area development agreement, and will recognize such fees in income on a pro-rata basis, when the conditions for revenue recognition under the area development agreement is met. Both store opening fees and area development fees are generally recognized upon the opening of a franchise store, or upon termination of the agreement between the Company and the franchisee. The Company recognized approximately $0.2 million, of the $1.2 million promissory note in the second quarter of fiscal 2012, based upon its assessment of the likelihood that the performance criteria under the agreement will be achieved.  The fair value of the promissory note is impacted by estimates relating to the possibility that GB Chocolates opening 45 stores, discounted for present value, and the risk associated with counterparty payment. Changes in these assumptions could result in an increase or decrease in fair value which would impact the income statement. There were no significant changes in these estimates during the first quarter of fiscal 2013.

 

Acquisition of Flowerama

 

On August 1, 2011, the Company completed the acquisition of Flowerama of America, Inc. (Flowerama), a franchisor and operator of retail flower shops under the Flowerama trademark, with annual revenue of approximately $6.1 million and annual operating income of $0.1 million in its most recent year end prior to acquisition.  The purchase price, which included the acquisition of receivables, inventory, eight retail store locations and certain other assets and related liabilities, was approximately $4.3 million. Of the acquired intangible assets, $2.1 million was assigned to amortizable investment in licenses, which is being amortized over the estimated useful life of 20 years, based upon the estimated remaining life of the franchise agreements. Approximately $2.4 million of purchase price was assigned to goodwill which is not deductible for tax purposes. The acquisition was financed utilizing available cash balances. Flowerama’s net revenues were $1.3 million and $1.0 million during the quarter ended September 30, 2012 and October 2, 2011, respectively, and its loss before income taxes was $0.1 million and $0.0 million during the quarter ended September 30, 2012 and October 2, 2011, respectively.

 

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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 Flowerama:

 

		Flowerama Purchase Price Allocation
		(in thousands)
Current assets		$	1,090
Intangible assets		2,106
Goodwill		2,440
Property, plant and equipment		76
Total assets acquired		5,712
Current liabilities		620
Other liabilities assumed		756
		1,376
Net assets acquired		$	4,336

 

Pro forma Results of Operation

 

The following unaudited pro forma consolidated financial information has been prepared as if the acquisition of Flowerama had taken place at the beginning of fiscal year 2012. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results. The adjustments primarily include amortization expense associated with acquired identifiable intangible assets. This information has not been adjusted to reflect any changes in the operations of the businesses subsequent to its acquisition by the Company. Changes in operations of the acquired businesses include, but are not limited to, discontinuation of products, integration of systems and personnel, changes in manufacturing processes or locations, and changes in marketing and advertising programs. Had any of these changes been implemented by the former managements of the business acquired prior to acquisition by the Company, the sales and net income information might have been materially different than the actual results achieved and from the pro forma information provided. The following unaudited pro forma information is not necessarily indicative of the results of operations in future periods or results that would have been achieved had the acquisitions taken place at the beginning of the periods presented.

 

		Three Months Ended October 2, 2011
		(in thousands, except per share data)
Net revenues from continuing operations		$	117,584
Operating loss from continuing operations		$	(7,725	)
Loss from continuing operations		$	(5,126	)
Basic and diluted net loss per common share from continuing operations		$	(0.08	)

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 5 — Inventory

 

The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for resale, packaging supplies, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:

 

		September 30, 2012			July 1, 2012
		(in thousands)
Finished goods		$	51,228		$	26,557
Work-in-process		10,403			10,466
Raw materials		23,551			18,721
		$	85,182		$	55,744

 

Note 6 — Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and other indefinite lived intangibles are subject to an assessment for impairment, which must be performed annually, or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired.

 

The carrying amount of goodwill is as follows:

 

		Consumer Floral			BloomNet Wire Service			Gourmet Food and Gift Baskets			Total
		(in thousands)
Balance at September 30, 2012 and July 1, 2012		$	9,709		$	—		$	38,192		$	47,901

 

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

 

				September 30, 2012									July 1, 2012
		Amortization Period		Gross Carrying Amount			Accumulated Amortization			Net			Gross Carrying Amount			Accumulated Amortization			Net
		(in thousands)
Intangible assets with determinable lives Investment in licenses		14 - 16 years		$	7,420		$	5,436		$	1,984		$	7,420		$	5,401		$	2,019
Customer lists		3 - 10 years		16,019			10,306			5,713			16,019			9,961			6,058
Other		5 - 8 years		2,538			2,274			264			2,538			2,173			365
				25,977			18,016			7,961			25,977			17,535			8,442
Trademarks with indefinite lives		—		33,396			—			33,396			33,396			—			33,396
Total identifiable intangible assets				$	59,373		$	18,016		$	41,357		$	59,373		$	17,535		$	41,838

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Future estimated amortization expense is as follows: remainder of fiscal 2013 - $1.4 million, fiscal 2014 - $1.4 million, fiscal 2015 - $1.3 million, fiscal 2016 - $1.2 million, fiscal 2017 - $0.7 million and thereafter - $2.0 million.

 

Note 7 — Investments

 

Investments are accounted for using the equity method if the investment provides the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records these investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. The book value of investments that the Company accounted for under the equity method of accounting was $3.7 million as of September 30, 2012 and $3.6 million as of July 1, 2012. This amount is comprised of the Company’s 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made an investment in on May 31, 2012, and is included in Other assets within the Consolidated Balance Sheet. Operating results of Flores Online for the quarter ended September 30, 2012, in the amount of $0.1mm, are included within the Consolidated Statement of Operations within the line item “Interest expense, net.”

 

All other equity investments, which consist of investments for which the Company does not possess the ability to exercise significant influence, are accounted for under the cost method as they are privately held. Cost method investments are originally recorded at cost, and are included within Other Assets in the Company’s Consolidated Balance Sheets. The aggregate carrying amount of the Company’s cost method investments was $2.8 million as of September 30, 2012 and $1.7 million as of July 1, 2012. In addition, the Company had notes receivable from a company it maintains an investment in of $1.7 million as of September 30, 2012 and $0.9 million as of July 1, 2012.

 

The Company holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”) whose fair values can be readily determined.

 

Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment.

 

Note 8 — Long-Term Debt

 

The Company’s long-term debt and obligations under capital leases consist of the following:

 

		September 30, 2012			July 1, 2012
		(in thousands)
Term loan (1)		$	25,500		$	29,250
Revolving line of credit (1)		37,000			—
Obligations under capital leases (2)		3			6
		62,503			29,256
Less current maturities of long-term debt and obligations under capital leases		53,503			15,756
		$	9,000		$	13,500

 

(1)               On April 14, 2009, the Company amended its 2008 Credit Facility with JPMorgan Chase Bank N.A., as administrative agent, and a group of lenders (the “Amended 2008 Credit Facility”). The Amended 2008 Credit Facility provided for term loan debt of $92.4 million and a seasonally adjusted revolving credit line ranging from $75.0 to $125.0 million. The Amended 2008 Credit Facility, effective March 28, 2009, also revised certain financial and non-financial covenants.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

On April 16, 2010, the Company entered into a Second Amended and Restated Credit Agreement (the “2010 Credit Facility”). The 2010 Credit Facility included a prepayment of approximately $12.1 million, comprised primarily of the proceeds from the sale of the Home & Children’s Gifts segment in January 2010, and thereby reducing the Company’s outstanding term loan under the facility to $60 million upon closing.  The term loan, which matures on March 30, 2014, is payable in sixteen quarterly installments of principal and interest beginning in June 2010, with escalating principal payments at the rate of 20% in year one, 25% in years two and three and 30% in year four.

 

In addition, the 2010 Credit Facility extended the Company’s revolving credit line through April 16, 2014, and reduced available borrowings from a seasonally adjusted limit which ranged from $75.0 million to $125.0 million to a seasonally adjusted limit ranging from $40.0 to $75.0 million. The 2010 Credit Facility also revised certain financial and non-financial covenants, including maintenance of certain financial ratios. The obligations of the Company and its subsidiaries under the 2010 Credit Facility are secured by liens on all personal property of the Company and its domestic subsidiaries.

 

Outstanding amounts under the 2010 Credit Facility bear interest at the Company’s option of 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 range from 3.00% to 3.75% for LIBOR loans and 2.00% to 2.75% for ABR loans with pricing based upon the Company’s leverage ratio.

 

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 matured on July 25, 2012. The Company designated this swap as a cash flow hedge of the interest rate risk attributable to forecasted variable interest (LIBOR) payments at inception. The effective portion of the after tax fair value gains or losses on this swap is included as a component of accumulated other comprehensive income.  The ineffective portion, if any, is recorded within interest expense in the consolidated statement of operations.

 

(2)             Equipment leases with certain manufacturing equipment vendors.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 9-Fair Value Measurements

 

The Company’s financial assets and liabilities are measured and recorded at fair value, except for the Company’s investments in certain privately-held companies, which are accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s 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 circumstances indicate that an other-than-temporary decline in value may have occurred.  Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently if impairment indicators are present, as required under the accounting standards.

 

Cash and cash equivalents, receivables, 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. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value, due to its variable nature.

 

The authoritative guidance for fair value establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

 

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

 

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

 

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

 

The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis as of September 30, 2012:

 

					Fair Value Measurements Assets (Liabilities)
		Total			Level 1			Level 2			Level 3
								(in thousands)
Assets:
Cash equivalents (money market accounts)		$	5,829		$	5,829
Trading securities held in a “rabbi trust” (1)		1,290			1,290
Fair value of non-performance promissory note (2)		205									$	205
		$	7,324		$	7,119		$	—		$	205

 

(1)         Trading securities held in a rabbi trust are included in Other assets in the consolidated balance sheets (Note 14 — Employee Retirement Plans, in the Company’s Annual Report on Form 10-K).  The Company established a Non-qualified Deferred Compensation Plan for certain members of senior management in fiscal 2009. Deferred compensation is invested in mutual funds held in a “rabbi trust” and are restricted for payment to participants of the NQDC Plan.

(2)         Refer to Note 4. Acquisitions and Dispositions — Sale and Franchise of Fannie May Retail Stores. Included in Other assets on the consolidated balance sheet

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis as of July 1, 2012:

 

					Fair Value Measurements Assets (Liabilities)
		Total			Level 1			Level 2			Level 3
								(in thousands)
Assets (liabilities):
Cash equivalents (money market accounts)		$	27,276		$	27,276
Trading securities held in a “rabbi trust” (1)		1,143			1,143
Fair value of non-performance promissory note (2)		205									$	205
Interest rate swap (3)		(7		)				$	(7	)
		$	28,617		$	28,419		$	(7	)	$	205

 

(1)         Trading securities held in a rabbi trust are included in Other assets in the consolidated balance sheets (Note 14 — Employee Retirement Plans, in the Company’s Annual Report on Form 10-K).  The Company established a Non-qualified Deferred Compensation Plan for certain members of senior management in fiscal 2009. Deferred compensation is invested in mutual funds held in a “rabbi trust” and is restricted for payment to participants of the NQDC Plan.

(2)         Refer to Note 4. Acquisitions and Dispositions — Sale and Franchise of Fannie May Retail Stores. Included in Other assets on the consolidated balance sheet

(3)         Included in Other liabilities on the consolidated balance sheet.

 

Note 10 — Income Taxes

 

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from continuing operations for the three months ended September 30, 2012 was 31.8%, compared to 40.0% in the prior year period.  The effective rates for fiscal 2013 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and other permanent non-deductible items, including the impact of expiring non-qualified stock options, 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 federal examination by the Internal Revenue Service for fiscal year 2011, however, has concluded its federal examination for its fiscal years 2007 through 2009. Fiscal 2010 remains subject to federal examination. Due to non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At September 30, 2012 and July 1, 2012, the Company has an unrecognized tax position of approximately $0.5 million, including accrued interest and penalties of $0.1 million. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 11 — Business Segments

 

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

 

·                  Consumer Floral,

·                  BloomNet Wire Service, and

·                  Gourmet Food and Gift Baskets

 

On September 6, 2011, the Company, through its Winetasting Network subsidiary, completed the sale of certain assets of its wine fulfillment services business, which was previously included within its Gourmet Foods & Gift Baskets segment. Consequently, the Company has classified the results of operations of its wine fulfillment services business as a discontinued operation for all periods presented.

 

		Three Months Ended
Net revenues		September 30, 2012			October 2, 2011
		(in thousands)
Segment Net Revenues:
Consumer Floral		$	72,777		$	70,140
BloomNet Wire Service		19,767			18,505
Gourmet Food & Gift Baskets		28,406			28,625
Corporate (**)		194			187
Intercompany eliminations		(276		)	(259		)
Total net revenues		$	120,868		$	117,198

 

		Three Months Ended
Operating Loss		September 30, 2012			October 2, 2011
		(in thousands)
Segment Contribution Margin (*):
Consumer Floral		$	6,886		$	5,967
Bloomnet Wire Service		5,796			4,593
Gourmet Food & Gift Baskets		(2,487		)	(1,926		)
Segment Contribution Margin Subtotal		10,195			8,634
Corporate (**)		(12,184		)	(11,465		)
Depreciation and amortization		(4,458		)	(4,902		)
Operating loss		$	(6,447	)	$	(7,733	)

 

(*)  Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include corporate overhead, which includes stock-based compensation, (see footnote (**) below), depreciation and amortization, net interest expense and income taxes. Assets and liabilities are reviewed at the consolidated level by management and are not accounted for by segment.

 

(**)  The Company’s enterprise shared service cost centers include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions.  In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above segments based upon usage, are included within corporate expenses, which includes stock-based compensation, as they are not directly allocable to a specific segment.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 12-Discontinued Operations

 

On September 6, 2011, the Company, through its subsidiary The Winetasting Network, completed the sale of certain assets of its wine fulfillment services business in order to focus on its core Direct-to-Consumer wine business. The sales price consisted of $12.0 million of cash proceeds at closing, with the potential for an additional $1.5 million upon achieving specified revenue targets during the two year period following the closing date.  (Based upon preliminary revenue reports provided by the buyer, the Company does not believe that the first annual specified revenue target will be achieved.)

 

Results for discontinued operations are as follows:

 

		Three Months Ended
		September 30, 2012			October 2, 2011
		(in thousands)
Net revenues from discontinued operations		$	—		$	2,003
Operating loss from discontinued operations		$	—		$	(85	)
Gain on sale of discontinued operations, net of tax		$	—		$	4,478
Income from discontinued operations		$	—		$	4,393

 

Note 13 — 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 November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company’s subsidiaries previously engaged in with certain third-party vendors.  On March 6, 2012 and March 15, 2012, two additional purported class action complaints were filed in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants in actions purporting to assert claims substantially similar to those asserted in the lawsuit filed on November 10, 2010.  In each case, plaintiffs seek to have the respective case certified as a class action and seek restitution and other damages, each in an amount in excess of $5.0 million. On April 26, 2012, the two Connecticut cases were consolidated with a third case previously pending in the United States District Court for the District of Connecticut in which the Company is not a party. The Company intends to defend each of these actions vigorously.

 

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

 

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

 

Forward Looking Statements

 

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

 

Overview

 

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 30 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. 1-800-FLOWERS.COM’s Mobile Flower & Gift Center was named winner of the Mobile Shopping Summit’s “Best Mobile Site of 2011.” 1-800-FLOWERS.COM was also rated number one vs. competitors for customer satisfaction by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service. 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 100: America’s Best Retail Web Sites” for 2011. The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably.

 

The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); delicious cut-fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); wine gifts from Winetasting.com® (www.winetasting.com); ultra- premium meats from Stockyards.com (www.stockyards.com); as well as exquisite, customizable invitations and personal stationery from FineStationery.com (www.finestationery.com). The Company’s Celebrations® brand (www.celebrations.com) is 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 as well as various philanthropic and charitable efforts.

 

On September 6, 2011, the Company, through its Winetasting Network subsidiary, completed the sale of certain assets of its non-strategic wine fulfillment services business in order to focus on its core Direct-to-Consumer wine business. The Company has classified the results of operations of its wine fulfillment services business, which had previously been included within its Gourmet Foods & Gift Baskets segment, 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.

 

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Segment Information

 

The following table presents the contribution of net revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated EBITDA and Adjusted EBITDA. As noted previously, the Company’s wine fulfillment services business, which had previously been included within its Gourmet Foods & Gift Baskets segment has been classified as discontinued operations and therefore excluded from segment information below.

 

		Three Months Ended
		September 30, 2012			October 2, 2011			% Change
		(dollars in thousands)
Net revenues from continuing operations:
Consumer Floral		$	72,777		$	70,140		3.8	%
BloomNet Wire Service		19,767			18,505			6.8	%
Gourmet Food & Gift Baskets		28,406			28,625			(0.8	)%
Corporate (*)		194			187			3.7	%
Intercompany eliminations		(276		)	(259		)	(6.6	)%
Total net revenues from continuing operations		$	120,868		$	117,198		3.1	%

 

		Three Months Ended
		September 30, 2012			October 2, 2011			% Change
		(dollars in thousands)
Gross profit from continuing operations:
Consumer Floral		$	28,292		$	26,689		6.0	%
		38.9		%	38.1		%
BloomNet Wire Service		9,800			8,529			14.9	%
		49.6		%	46.1		%
Gourmet Food & Gift Baskets		11,205			11,215			(0.1	)%
		39.4		%	39.2		%
Corporate (*)		340			129			163.6	%
		175.3		%	68.9		%
Total gross profit from continuing operations		$	49,637		$	46,562		6.6	%
		41.1		%	39.7		%

 

		Three Months Ended
		September 30, 2012			October 2, 2011			% Change
		(dollars in thousands)
EBITDA from continuing operations and EBITDA from continuing operations, excluding stock-based compensation:
Segment Contribution Margin (**)
Consumer Floral		$	6,886		$	5,967		15.4	%
BloomNet Wire Service		5,796			4,593			26.2	%
Gourmet Food & Gift Baskets		(2,487		)	(1,926		)	29.1	%
Segment Contribution Margin Subtotal		10,195			8,634			18.1	%
Corporate (*)		(12,184		)	(11,465		)	(6.3	)%
EBITDA from continuing operations		(1,989		)	(2,831		)	29.7	%
Add: Stock-based compensation		989			1,169			15.4	%
EBITDA from continuing operations, excluding stock-based compensation		$	(1,000	)	$	(1,662	)	39.8	%

 

18