1 800 FLOWERS COM INC - Quarter Report: 2013 March (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the quarterly period ended March 31, 2013

 

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:

 

26,979,233

(Number of shares of Class A common stock outstanding as of May 1, 2013)

 

36,858,465

(Number of shares of Class B common stock outstanding as of May 1, 2013)

 

 

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 — March 31, 2013 (Unaudited) and July 1, 2012	1
	Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended March 31, 2013 and April 1, 2012	2
	Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended March 31, 2013 and April 1, 2012	3
	Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended March 31, 2013 and April 1, 2012	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	33
Part II.	Other Information
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults upon Senior Securities	35
Item 4.	Mine Safety Disclosures	35
Item 5.	Other Information	35
Item 6.	Exhibits	36
Signatures		37

 

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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)

 

		March 31, 2013			July 1, 2012
		(unaudited)
Assets
Current assets:
Cash and equivalents		$	17,004		$	28,854
Receivables, net		24,706			14,968
Inventories		59,877			55,744
Deferred tax assets		6,332			4,993
Prepaid and other		6,221			8,447
Current assets of discontinued operations		—			100
Total current assets		114,140			113,106
Property, plant and equipment, net		51,365			48,669
Goodwill		47,901			47,901
Other intangibles, net		43,944			41,838
Deferred tax assets		2,822			2,824
Other assets		9,353			7,875
Total assets		$	269,525		$	262,213
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	20,537		$	17,619
Accrued expenses		55,412			49,900
Current maturities of long-term debt and obligations under capital leases		18,000			15,756
Current liabilities of discontinued operations		—			110
Total current liabilities		93,949			83,385
Long-term debt and obligations under capital leases		—			13,500
Other liabilities		5,242			3,580
Total liabilities		99,191			100,465
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; 36,121,677 and 34,465,207 shares issued at March 31, 2013 and July 1, 2012, respectively		361			344
Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,138,465 shares issued at March 31, 2013 and July 1, 2012		421			421
Accumulated other comprehensive loss		—			(17		)
Additional paid-in capital		297,243			293,814
Retained deficit		(82,215		)	(96,258		)
Treasury stock, at cost — 9,142,444 and 6,767,166 Class A shares at March 31, 2013 and July 1, 2012, respectively, and 5,280,000 Class B shares at March 31, 2013 and July 1, 2012		(45,476		)	(36,556		)
Total stockholders’ equity		170,334			161,748
Total liabilities and stockholders’ equity		$	269,525		$	262,213

 

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						Nine Months Ended
		March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Net revenues		$	192,624		$	179,659		$	566,508		$	536,702
Cost of revenues		112,221			106,620			331,983			316,775
Gross profit		80,403			73,039			234,525			219,927
Operating expenses:
Marketing and sales		51,836			48,598			139,727			133,900
Technology and development		5,624			5,646			16,415			15,252
General and administrative		13,998			13,766			40,898			39,057
Depreciation and amortization		4,849			4,874			13,838			14,705
Total operating expenses		76,307			72,884			210,878			202,914
Gain on sale of stores		—			—			—			3,789
Operating income		4,096			155			23,647			20,802
Interest expense, net		227			319			1,088			1,990
Income (loss) from continuing operations before income taxes		3,869			(164		)	22,559			18,812
Income tax expense (benefit) from continuing operations		1,231			(215		)	8,516			7,318
Income from continuing operations		2,638			51			14,043			11,494
Operating loss from discontinued operations, net of tax		—			—			—			(22		)
Gain (loss) on sale of discontinued operations, net of tax		—			(136		)	—			4,342
Income (loss) from discontinued operations		—			(136		)	—			4,320
Net income (loss)		$	2,638		$	(85	)	$	14,043		$	15,814
Basic net income per common share:
From continuing operations		$	0.04		$	0.00		$	0.22		$	0.18
From discontinued operations		0.00			0.00			0.00			0.07
Net income per common share		$	0.04		$	0.00		$	0.22		$	0.24
Diluted net income per common share:
From continuing operations		$	0.04		$	0.00		$	0.21		$	0.17
From discontinued operations		0.00			0.00			0.00			0.07
Net income per common share		$	0.04		$	0.00		$	0.21		$	0.24
Weighted average shares used in the calculation of net income per common share
Basic		64,256			64,988			64,528			64,683
Diluted		66,111			66,299			66,647			66,257

 

See accompanying Notes to Consolidated Financial Statements.

 

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

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

		Three Months Ended						Nine Months Ended
		March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
		(in thousands)
Net income		$	2,638		$	(85	)	$	14,043		$	15,814
Other comprehensive income		—			32			17			132
Comprehensive income		$	2,638		$	(53	)	$	14,060		$	15,946

 

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)

 

		Nine Months Ended
		March 31, 2013			April 1, 2012
Operating activities:
Net income		$	14,043		$	15,814
Reconciliation of net income to net cash provided by operations
Operating activities of discontinued operations		(10		)	1,927
Gain on sale of discontinued operations		—			(8,733		)
Depreciation and amortization		13,839			14,705
Amortization of deferred financing costs		343			343
Deferred income taxes		(1,337		)	5,720
Bad debt expense		762			692
Stock-based compensation		3,397			3,736
Other non-cash items		213			(22		)
Changes in operating items, excluding the effects of acquisitions:
Receivables		(10,500		)	(9,709		)
Inventories		(4,133		)	(7,670		)
Prepaid and other		2,226			804
Accounts payable and accrued expenses		7,694			2,489
Other assets		(464		)	1,604
Other liabilities		662			1,187
Net cash provided by operating activities		26,735			22,887
Investing activities:
Acquisitions, net of cash acquired		(2,000		)	(4,336		)
Proceeds from sale of business		—			12,826
Capital expenditures		(15,118		)	(11,986		)
Purchase of investment		(1,337		)	(1,111		)
Other, net		22			(271		)
Net cash used in investing activities		(18,433		)	(4,878		)
Financing activities:
Acquisition of treasury stock		(8,921		)	(1,925		)
Proceeds from exercise of employee stock options		67			—
Proceeds from bank borrowings		47,000			56,000
Repayment of notes payable and bank borrowings		(58,250		)	(67,250		)
Repayment of capital lease obligations		(48		)	(1,400		)
Net cash used in financing activities		(20,152		)	(14,575		)
Net change in cash and equivalents		(11,850		)	3,434
Cash and equivalents:
Beginning of period		28,854			21,442
End of period		$	17,004		$	24,876

 

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 for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X.  They do not include all of the information and notes required by accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 2013 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.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended July 1, 2012.

 

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, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarter.  The Easter Holiday, which was in the Company’s fourth quarter during fiscal 2012, is in the third quarter of fiscal 2013.

 

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 is not expected to have a material impact on the Company’s financial position or results of operations.

 

Note 2 — Net Income Per Common Share from Continuing Operations

 

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

 

		Three Months Ended						Nine Months Ended
		March 31,  2013			April 1, 2012			March 31,  2013			April 1, 2012
		(in thousands, except per share data)
Numerator:
Income from continuing operations		$	2,638		$	51		$	14,043		$	11,494
Denominator:
Weighted average shares outstanding		64,256			64,988			64,528			64,683
Effect of dilutive securities:
Employee stock options (1)		769			65			610			20
Employee restricted stock awards		1,086			1,246			1,509			1,554
		1,855			1,311			2,119			1,574
Adjusted weighted-average shares and assumed conversions		66,111			66,299			66,647			66,257
Net income per common share from continuing operations
Basic		$	0.04		$	0.00		$	0.22		$	0.18
Diluted		$	0.04		$	0.00		$	0.21		$	0.17

 

Basic net income per common share from continuing operations is computed using the weighted average number of common shares outstanding during the period. Diluted net income from continuing operations 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 1.8 million and 3.2 million shares during the three and nine months ended March 31, 2013 and 5.5 million and 5.6 million shares during the three and nine months ended April 1, 2012, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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, restricted shares, and other stock-based awards.

 

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

 

		Three Months Ended						Nine Months Ended
		March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
		(in thousands)
Stock options		$	116		$	316		$	353		$	866
Restricted stock		977			1,040			3,044			2,870
Total		1,093			1,356			3,397			3,736
Deferred income tax benefit*		301			502			1,210			1,373
Stock-based compensation expense, net		$	792		$	854		$	2,187		$	2,363

 

*     Tax benefit during the three and nine months ended March 31, 2013, reflects the net 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						Nine Months Ended
		March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
		(in thousands)
Marketing and sales		$	383		$	474		$	1,189		$	1,364
Technology and development		109			136			340			489
General and administrative		601			746			1,868			1,883
Total		$	1,093		$	1,356		$	3,397		$	3,736

 

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					Nine Months Ended
		March 31, 2013 (1)		April 1, 2012			March 31, 2013			April 1, 2012
Weighted average fair value of options granted		n/a		$	2.01		$	2.40		$	1.84
Expected volatility		n/a		72.1		%	72.1		%	72.1		%
Expected life		n/a		8.0 yrs			6.4 yrs			8.0 yrs
Risk-free interest rate		n/a		0.90		%	0.69		%	0.90		%
Expected dividend yield		n/a		0.0		%	0.0		%	0.0		%

 

(1)         no options were granted during the three months ended March 31, 2013.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table summarizes stock option activity during the nine months ended March 31, 2013:

 

		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		(53,266	)	$	2.03
Forfeited		(1,782,093	)	$	6.23
Outstanding at March 31, 2013		4,855,921		$	3.85		5.3 years		$	8,653
Options vested at March 31, 2013		4,719,434		$	3.90		5.2 years		$	8,286
Exercisable at March 31, 2013		3,634,087		$	5.10		3.6 years		$	3,777

 

As of March 31, 2013, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $2.4 million and the weighted average period over which these awards are expected to be recognized was 5.7 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 nine months ended March 31, 2013:

 

		Shares		Weighted Average Grant Date Fair Value
Non-vested at July 1, 2012		3,855,320		$	2.37
Granted		1,668,490		$	3.55
Vested		(1,603,204	)	$	2.48
Forfeited		(442,431	)	$	3.21
Non-vested at March 31, 2013		3,478,378		$	2.78

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of March 31, 2013, there was $7.4 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.6 years.

 

Note 4 — Acquisitions and Dispositions

 

Acquisition of 1-800-Flowers’ European trademarks

 

On March 11, 2013, the Company acquired the European rights to various derivations of the 1-800-Flowers’ tradename, trademark, URL’s and telephone numbers from Flowerscorp Pty Ltd. for a purchase price of $4.0 million. The purchase agreement requires payment of $2.0 million on March 11, 2013, and $1.0 million on each of the first and second anniversary dates of the acquisition.

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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 $0.7 million, of the original $0.9 million area development fee associated with the 45 store area development agreement, based upon the number of stores opened by GB Chocolates as of March 31, 2013. The Company will recognize the remaining deferred revenue of $0.7 million on a pro-rata basis, when the conditions for revenue recognition under the area development agreement are 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 probability that GB Chocolates will open 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 through the third 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 $4.1 million during the nine months ended March 31, 2013, compared to $4.2 million during the nine months ended April 1, 2012, and its earnings before income taxes was $0.2 million during the nine months ended March 31, 2013 and April 1, 2012.

 

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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.

 

		Nine Months Ended April 1, 2012
		(in thousands, except per share data)
Net revenues from continuing operations		$	537,175
Operating income from continuing operations		$	20,603
Income from continuing operations		$	11,374
Net income per common share from continuing operations:
Basic		$	0.18
Diluted		$	0.17

 

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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:

 

		March 31, 2013			July 1, 2012
		(in thousands)
Finished goods		$	32,395		$	26,557
Work-in-process		8,317			10,466
Raw materials		19,165			18,721
		$	59,877		$	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 & Gift Baskets (1)			Total
		(in thousands)
Balance at March 31, 2013 and July 1, 2012		$	9,709		$	—		$	38,192		$	47,901

 

(1)         The total carrying amount of goodwill for all periods in the table above is reflected net of $71.1 million of accumulated impairment charges, which were recorded in the GFGB segment during fiscal 2009.

 

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

 

				March 31, 2013									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		$	5,489		$	1,931		$	7,420		$	5,401		$	2,019
Customer lists		3 - 10 years		15,989			10,993			4,996			16,019			9,961			6,058
Other		5 - 8 years		2,538			2,475			63			2,538			2,173			365
				25,947			18,957			6,990			25,977			17,535			8,442
Trademarks with indefinite lives		—		36,954			—			36,954			33,396			—			33,396
Total identifiable intangible assets				$	62,901		$	18,957		$	43,944		$	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 - $0.4 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 March 31, 2013 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 three and nine months ended March 31, 2013 were not material.

 

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 March 31, 2013 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 $1.8 million as of March 31, 2013 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:

 

		March 31, 2013			July 1,  2012
		(in thousands)
Term loan (1)		$	18,000		$	29,250
Revolving line of credit (1)		—			—
Obligations under capital leases (2)		—			6
		18,000			29,256
Less current maturities of long-term debt and obligations under capital leases		18,000			15,756
Long-term debt and obligations under capital leases		$	0		$	13,500

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

(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.

 

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.

 

On April 10, 2013, the Company entered into a Third Amended and Restated Credit Agreement (the “2013 Credit Facility”). The 2013 Credit Facility consists of a revolving line of credit with a seasonally adjusted limit ranging from $150.0 to $200.0 million and a working capital sublimit ranging from $25.0 to $75.0 million. The 2013 Credit Facility also revises certain financial and non-financial covenants, including the maintenance of certain financial ratios. Outstanding amounts under the 2013 Credit Facility, which matures on April 10, 2018, will bear interest at the Company’s option at either: (i) LIBOR, plus a spread of between 150 and 225 basis points, as determined by the Company’s leverage ratio, or (ii) the agent bank’s prime rate plus a margin.  On April 10, 1023, the Company borrowed approximately $19.0 million against the 2013 Credit Facility to repay the $18.0 million balance outstanding under its term loan and to pay related financing costs.

 

(2)             Equipment leases with certain manufacturing equipment vendors.

 

13

 

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 March 31, 2013:

 

					Fair Value Measurements Assets (Liabilities)
		Total			Level 1			Level 2			Level 3
					(in thousands)
Assets:
Cash equivalents (money market accounts)		$	12,265		$	12,265
Trading securities held in a “rabbi trust” (1)		1,573			1,573
Fair value of non-performance promissory note (2)		205									$	205
		$	14,043		$	13,838		$	—		$	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 for more detail, including the valuation techniques used to calculate fair value. Included in Other assets on the consolidated balance sheet.

 

14