UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2009
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 11-3117311
-------- ----------
(State of (I.R.S. Employer
incorporation) Identification No.)
One Old Country Road, Carle Place, New York 11514
-------------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or such shorter period that the registrant was required to
submit and post such files).
Yes ( ) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( ) Accelerated filer X
Non-accelerated filer ( ) (Do not check if a smaller reporting company)
Smaller reporting company ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes ( ) No (X)
The number of shares outstanding of each of the Registrant's classes of common
stock:
26,616,835
----------
(Number of shares of Class A common stock outstanding as of October 30, 2009)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of October 30, 2009)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 27, 2009
(Unaudited) and June 28, 2009 1
Consolidated Statements of Operations (Unaudited) -
Three Months Ended September 27, 2009 and
September 28, 2008 2
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 27, 2009 and
September 28, 2008 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 27
Part II. Other Information
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 28
Signatures 29
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 27, June 29,
2009 2009
---------------- -------------
(unaudited)
Assets
Current assets:
Cash and equivalents $2,977 $29,562
Receivables, net 20,554 11,335
Inventories 74,471 45,854
Deferred tax assets 13,026 12,666
Prepaid and other 6,255 4,580
Current assets of discontinued operations 21,419 18,100
---------------- -------------
Total current assets 138,702 122,097
Property, plant and equipment, net 52,850 54,770
Goodwill 41,233 41,205
Other intangibles, net 42,080 42,822
Deferred tax assets 11,902 11,725
Other assets 4,423 3,890
Non-current assets of discontinued operations 9,149 9,647
---------------- -------------
Total assets $300,339 $286,156
================ =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $49,170 $53,460
Current maturities of long-term debt and obligations under capital leases 52,222 22,337
Current liabilities of discontinued operations 3,752 2,633
---------------- -------------
Total current liabilities 105,144 78,430
Long-term debt and obligations under capital leases 64,061 70,518
Other liabilities 2,546 2,091
Non-current liabilities of discontinued operations 1,306 1,334
---------------- -------------
Total liabilities 173,057 152,373
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000 shares authorized 31,744,449
and 31,730,404 shares issued at September 27, 2009 and June 28, 2009,
respectively 317 317
Class B common stock, $.01 par value, 200,000,000 shares authorized 42,138,465
shares issued at September 27, 2009 and June 28, 2009 421 421
Additional paid-in capital 282,300 281,247
Retained deficit (123,531) (116,256)
Accumulated other comprehensive loss, net of tax (279) -
Treasury stock, at cost - 5,122,225 Class A shares and 5,280,000 Class B shares (31,946) (31,946)
---------------- -------------
Total stockholders' equity 127,282 133,783
---------------- -------------
Total liabilities and stockholders' equity 300,339 286,156
================ =============
See accompanying Notes to Consolidated Financial Statements.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
September 27, September 28,
2009 2008
---------------- ----------------
Net revenues $108,316 $135,438
Cost of revenues 64,562 83,242
---------------- ----------------
Gross profit 43,754 52,196
Operating expenses:
Marketing and sales 29,476 32,074
Technology and development 4,556 5,063
General and administrative 12,534 14,054
Depreciation and amortization 4,946 5,075
---------------- ----------------
Total operating expenses 51,512 56,266
---------------- ----------------
Operating loss (7,758) (4,070)
Other income (expense):
Interest income 14 89
Interest expense (1,546) (1,158)
Other, net 2 4
---------------- ----------------
Total other income (expense), net (1,530) (1,065)
---------------- ----------------
Loss from continuing operations before income taxes (9,288) (5,135)
Income tax benefit from continuing operations 3,622 2,017
---------------- ----------------
Loss from continuing operations (5,666) (3,118)
---------------- ----------------
Loss from discontinued operations before income taxes (2,638) (3,617)
Income tax benefit from discontinued operations 1,029 1,431
---------------- ----------------
Loss from discontinued operations (1,609) (2,186)
---------------- ----------------
Net loss ($7,275) ($5,304)
================ ================
Basic and diluted net loss per common share:
From continuing operations ($0.09) ($0.05)
From discontinued operations (0.03) (0.03)
---------------- ----------------
Net loss per common share ($0.11) ($0.08)
================ ================
Weighted average shares used in the calculation of basic and
diluted net loss per common share 63,472 63,518
================ ================
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
----------------------------------
September 27, September 28,
2009 2008
---------------- -----------------
Operating activities:
Net loss ($7,275) ($5,304)
Reconciliation of net loss to net cash used in operating activities:
Operating activities of discontinued operations (1,695) (10,159)
Depreciation and amortization 4,946 5,075
Deferred income taxes (360) -
Stock-based compensation 1,053 1,219
Bad debt expense 309 495
Other 84 (124)
Changes in operating items, excluding the effects of acquisitions:
Receivables (9,528) (20,367)
Inventories (28,617) (42,085)
Prepaid and other (1,675) (2,898)
Accounts payable and accrued expenses (4,290) 6,852
Other assets (86) 79
Other liabilities (2) 89
---------------- -----------------
Net cash used in operating activities (47,136) (67,128)
Investing activities:
Acquisitions, net of cash acquired - (9,297)
Capital expenditures (2,283) (6,697)
Purchase of investment (598) -
Other, net 39 85
Investing activities of discontinued operations (35) (415)
---------------- -----------------
Net cash used in investing activities (2,877) (16,324)
Financing activities:
Proceeds from employee stock options - 114
Proceeds from bank borrowings 29,000 83,000
Repayment of notes payable and bank borrowings (5,087) (6,192)
Debt issuance cost - (2,018)
Repayment of capital lease obligations (485) (2)
Financing activities of discontinued operations - (84)
---------------- -----------------
Net cash provided by financing activities 23,428 74,818
---------------- -----------------
Net change in cash and equivalents (26,585) (8,634)
Cash and equivalents:
Beginning of period 29,562 12,124
---------------- -----------------
End of period $2,977 $3,490
================ =================
See accompanying Notes to Consolidated Financial Statements.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended September 27, 2009 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 27, 2010.
The balance sheet information at June 28, 2009 has been derived from the audited
financial statements at that date.
The information in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 28, 2009.
References in this Quarterly Report on Form 10-Q to "authoritative guidance" are
to the Accounting Standards Codification issued by the Financial Accounting
Standards Board ("FASB") in June 2009.
Subsequent events have been evaluated through the filing date (November 6, 2009)
of these unaudited consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Comprehensive Income (loss)
For the three months ended September 27, 2009 and September 28, 2008, the
Company's comprehensive net losses were as follows:
Three Months Ended
-----------------------------------
September 27, September 28,
2009 2008
----------------- -----------------
(in thousands)
Net loss ($7,275) ($5,304)
Change in fair value of cash flow
hedge, net of tax (279) -
----------------- -----------------
Comprehensive loss ($7,554) ($5,304)
================= =================
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the FASB
Accounting Standards Codification (the "Codification") as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. The Codification, which changes the referencing
of financial standards, supersedes current authoritative guidance and is
effective for the Company's interim reporting for the quarter ended on September
27, 2009. The Codification is not intended to change or alter existing GAAP and
is not expected to result in a change in accounting practice for the Company.
In April 2009, the FASB issued authoritative guidance for business combinations
that amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from
contingencies in a business combination. This guidance requires such
contingencies be recognized at fair value on the acquisition date if fair value
can be reasonably estimated during the allocation period. Otherwise, entities
would typically account for the acquired contingencies in accordance with
authoritative guidance for contingencies. The guidance became effective for the
Company's business combinations for which the acquisition date is on or after
June 29, 2009. The Company did not complete any business combinations during the
three months ended September 27, 2009, and the effect on future periods will
depend on the nature and significance of business combinations subject to this
guidance.
In April 2009, the FASB issued authoritative guidance to increase the frequency
of fair value disclosures of financial instruments, thereby enhancing
consistency in financial reporting. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on a
company's balance sheet at fair value. Prior to the effective date of this
guidance, fair values for these assets and liabilities have only been disclosed
once a year. The guidance now requires these disclosures on a quarterly basis,
providing qualitative and quantitative information about fair value estimates
for all those financial instruments not measured on the balance sheet at fair
value. The disclosure requirement under this guidance is effective for the
Company's interim reporting period for the three months ended on September 27,
2009. The implementation did not have a material impact on the Company's
financial position, results of operations or cash flows as it is disclosure-only
in nature.
In April 2008, the FASB issued authoritative guidance for general intangibles
other than goodwill, amending factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This guidance is effective for the Company for
intangible assets acquired on or after June 29, 2009. The adoption did not have
a material impact on the Company's results of operations, financial position or
cash flows.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year. As a result of the Company's
decision to dispose of its Home & Children's Gifts businesses, this segment has
been accounted for as a discontinued operation and the prior periods have been
reclassified to conform to the current period presentation.
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period, and excludes the effect of dilutive potential common shares
(consisting of employee stock options and unvested restricted stock awards) for
the three months ended September 27, 2009 and September 28, 2008, 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 11 to the consolidated financial statements included in the
Company's 2009 Annual Report on Form 10-K, that provides for the grant to
eligible employees, consultants and directors of stock options, share
appreciation rights (SARs), restricted shares, restricted share units,
performance shares, performance units, dividend equivalents, and other
stock-based awards.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended
-----------------------------
September 27, September 28,
2009 2008
-------------- --------------
(in thousands)
Stock options $495 $360
Restricted stock awards 558 859
-------------- --------------
Total 1,053 1,219
Deferred income tax benefit 322 389
-------------- --------------
Stock-based compensation expense, net $731 $830
============== ==============
Stock-based compensation is recorded within the following line items of
operating expenses:
Three Months Ended
-----------------------------
September 27, September 28,
2009 2008
-------------- --------------
(in thousands)
Marketing and sales $458 $531
Technology and development 229 175
General and administrative 366 513
-------------- --------------
Total $1,053 $1,219
============== ==============
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 27, September 28,
2009 2008
-------------- --------------
Weighted average fair value of
options granted $1.63 $3.06
Expected volatility 62.0% 41.0%
Expected life 5.6 yrs 6.4 yrs
Risk-free interest rate 2.48% 2.84%
Expected dividend yield 0.0% 0.0%
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes stock option activity during the three months
ended September 27, 2009:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
-----------------------------------------------------------
Outstanding at June 28,2009 8,916,672 $7.52
Granted 125,000 $2.87
Exercised - -
Forfeited/expired (604,647) $18.35
--------------
Outstanding at September 27, 2009 8,437,025 $6.67 4.0 years $631
==============
Options vested or expected to vest at
September 27, 2009 8,183,667 $6.76 3.8 years $540
Exercisable at September 27, 2009 6,166,907 $7.51 2.8 years $9
As of September 27, 2009, the total future compensation cost related to
nonvested options, not yet recognized in the statement of income, was $3.3
million and the weighted average period over which these awards are expected to
be recognized was 2.6 years.
The Company grants shares of common stock to its employees that are subject to
restrictions on transfer and risk of forfeiture until fulfillment of applicable
service conditions (Restricted Stock Awards). The following table summarizes the
activity of non-vested restricted stock awards during the three months ended
September 27, 2009:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at June 28, 2009 1,700,912 $4.62
Granted 54,000 $2.87
Vested (14,045) $6.89
Forfeited (10,041) $6.55
-------------
Non-vested at September 27, 2009 1,730,826 $4.53
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of September 27, 2009, there was $3.9 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.
Note 4 - Acquisitions
The Company accounts for its business combinations using the purchase method of
accounting. Under the purchase method of accounting for business combinations,
the aggregate purchase price for the acquired business is allocated to the
assets acquired and liabilities assumed based on their estimated fair values at
the acquisition date. Operating results of the acquired entities are reflected
in the Company's consolidated financial statements from date of acquisition.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Acquisition of Napco Marketing Corp.
On July 21, 2008, the Company acquired selected assets of Napco Marketing Corp.
("Napco"), a wholesale merchandiser and marketer of products designed primarily
for the floral industry. The purchase price of approximately $9.4 million
included the acquisition of a fulfillment center located in Jacksonville, FL,
inventory, and certain other assets, as well as the assumption of certain
related liabilities, including their seasonal line of credit of approximately
$4.0 million. The acquisition was financed utilizing a combination of available
cash on hand and through borrowings under the Company's revolving credit
facility. The purchase price includes an up-front cash payment of $9.3 million,
net of cash acquired, and the expected portion of "earn-out" incentives, which
amounted to a maximum of $1.6 million through the years ending July 2, 2012,
upon achievement of specified performance targets. As of September 27, 2009, the
Company does not expect that any of the specified performance targets will be
achieved.
The following table summarizes the allocation of purchase price to the estimated
fair values of assets acquired and liabilities assumed at the date of the
acquisition of Napco:
Napco
Purchase
Price
Allocation
--------------------
(in thousands)
Current assets $5,119
Property, plant and equipment 3,929
Intangible assets 397
Other 74
--------------------
Total assets acquired 9,519
--------------------
Current liabilities 162
--------------------
Total liabilities assumed 162
--------------------
Net assets acquired $9,357
====================
Acquisition of Geerlings & Wade
On March 25, 2009, the Company acquired selected assets of Geerlings & Wade,
Inc., a retailer of wine and related products. The purchase price of
approximately $2.6 million included the acquisition of inventory, and certain
other assets (approximately $1.4 million of goodwill is deductible for tax
purposes), as well as the assumption of certain related liabilities. The
acquisition was financed utilizing available cash on hand.
The following table summarizes the preliminary allocation of purchase price to
the estimated fair values of assets acquired and liabilities assumed at the date
of the acquisition of Geerlings & Wade:
Geerlings
& Wade
Purchase
Price
Allocation
--------------------
(in thousands)
Current assets $990
Intangible assets 253
Goodwill 1,440
--------------------
Total assets acquired 2,683
--------------------
Current liabilities 77
--------------------
Total liabilities assumed 77
--------------------
Net assets acquired $2,606
====================
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Napco and Geerlings & Wade had taken place at
the beginning of fiscal year 2009. The following unaudited pro forma information
is not necessarily indicative of the results of operations in future periods or
results that would have been achieved had the acquisitions taken place at the
beginning of the periods presented.
---------------------------------------
Three Months Ended
---------------------------------------
September 27, September 28,
2009 2008
---------------------------------------
(in thousands,
except per share data)
Net revenues from continuing operations $108,316 $137,414
Operating loss from continuing operations (7,758) (3,881)
Net loss from continuing operations (5,666) (2,964)
Basic and diluted net loss per common share from
continuing operations $(0.09) $(0.05)
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 27, June 28,
2009 2009
--------------- -------------
(in thousands)
Finished goods $47,409 $23,759
Work-in-Process 20,445 16,619
Raw materials 6,617 5,476
--------------- -------------
$74,471 $45,854
=============== =============
Note 6 - Goodwill and Intangible Assets
The change in the carrying amount of goodwill is as follows:
1-800- Gourmet
Flowers.com BloomNet Food and
Consumer Wire Gift
Floral Service Baskets Total
----------------------------------------------------------------
(in thousands)
Balance at June 28, 2009 $5,728 $- $35,477 $41,205
Acquisition Adjustment - - 28 28
-------------- ------------- --------------- ---------------
Balance at September 27, 2009 $5,728 $- $35,505 $41,233
============== ============= =============== ===============
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company's other intangible assets consist of the following:
September 27, 2009 June 28, 2009
---------------------------------------- ----------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
--------------------------- --------------- ----------- ----------- --------------- ------------
(in thousands)
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $5,314 $4,942 $372 $5,314 $4,823 $491
Customer lists 3 - 10 years 15,695 5,198 10,497 15,695 4,673 11,022
Other 5 - 8 years 2,388 1,058 1,330 2,388 960 1,428
------------ --------------- ----------- ----------- --------------- ------------
23,397 11,198 12,199 23,397 10,456 12,941
Trademarks with
indefinite lives - 29,881 - 29,881 29,881 - 29,881
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $53,278 $11,198 $42,080 $53,278 $10,456 $42,822
============ =============== =========== =========== =============== ============
Future estimated amortization expense is as follows: remainder of fiscal 2010 -
$2.3 million, fiscal 2011 - $2.3 million, fiscal 2012 - $1.6 million, and fiscal
2013 - $1.5 million, and thereafter - $4.5 million.
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
September 27, June 28,
2009 2009
---------------- -----------
(in thousands)
Term loan (1) $82,264 $87,351
Revolving line of credit (1) 29,000 -
Obligations under capital leases (2) 5,019 5,504
----------- -----------
116,283 92,855
Less current maturities of long-term debt and obligations under
capital leases 52,222 22,337
----------- -----------
$64,061 $70,518
=========== ===========
(1) In order to fund the increase in working capital requirements
associated with DesignPac which was acquired on April 30, 2008, on
August 28, 2008, the Company entered into a $293.0 million Amended and
Restated Credit Agreement with JPMorgan Chase Bank N.A., as
administrative agent, and a group of lenders (the "2008 Credit
Facility"). The 2008 Credit Facility provided for borrowings of up to
$293.0 million, including: (i) a $165.0 million revolving credit
commitment, (ii) $60.0 million of new term loan debt, and (iii) $68.0
million of existing term loan debt associated with the Company's
previous credit facility.
On April 14, 2009, the Company entered into an amendment to the 2008
Credit Facility (the "Amended 2008 Credit Facility"). The Amended 2008
Credit Facility included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million
upon closing. In addition, the amendment reduced the Company's
revolving credit line from $165.0 million to a seasonally adjusted
line ranging from $75.0 to $125.0 million. The Amended 2008 Credit
Facility, effective March 29, 2009, also revises certain financial and
non-financial covenants, including maintenance of certain financial
ratios and eliminates the consolidated net worth covenant that had
been included in the previous agreement.
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined
margin, or (ii) the agent bank's prime rate plus a margin. The
applicable margins for the Company's term loans and revolving credit
facility will range from 3.00% to 4.50% for LIBOR loans and 2.00% to
3.50% for ABR loans with pricing based upon the Company's leverage
ratio. The repayment terms of the existing term loans were reduced, on
a pro-rata basis, for the $20.0 million prepayment. The obligations of
the Company and its subsidiaries under the Amended 2008 Credit
Facility are secured by liens on all personal property of the Company
and its subsidiaries.
(2) During March 2009, the Company obtained a $5.0 million equipment lease
line of credit with a bank and a $5.0 million equipment lease line of
credit with a vendor. Interest under these lines, which both mature in
April 2012, range from 2.99% to 7.48%. Borrowings under the bank line
are collateralized by the underlying equipment purchased, while the
equipment lease line with the vendor is unsecured. The borrowings are
payable in 36 monthly installments of principal and interest
commencing in April 2009.
The Company does not enter into derivative transactions for trading purposes,
but rather to hedge its exposure to interest rate fluctuations. The Company
manages its floating rate debt using interest rate swaps in order to reduce its
exposure to the impact of changing interest rates on its consolidated results of
operations and future cash outflows for interest.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss. The ineffective
portion, if any, is recorded within interest expense in the consolidated
statement of operations.
Note 8-Fair Value Measurements
Effective June 30, 2008, the Company adopted authoritative guidance for fair
value measurement and disclosure provisions of fair value measurements of
financial and non-financial assets and liabilities that were already subject to
fair value measurements under current accounting rules. This guidance also
required expanded disclosures related to fair value measurements.
On June 29, 2009, the Company adopted the newly issued accounting standard for
fair value measurements of all nonfinancial assets and nonfinancial liabilities
not recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company's non-financial assets, such as goodwill,
intangible assets, and property, plant and equipment, are recorded at cost and
are assessed for impairment when an event or circumstance indicates that an
other-than-temporary decline in value may have occurred.
Cash and cash equivalents, trade accounts receivable, income tax receivable,
trade accounts payable and accrued expenses are reflected in the consolidated
balance sheets at carrying value, which approximates fair value due to the
short-term nature of these instruments.
11
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The authoritative guidance for fair value measurements establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (level 1 measurements) and
the lowest priority to unobservable inputs (level 3 measurements). The three
levels of the fair value hierarchy under the guidance are described below:
Level 1 Valuations based on quoted prices in active markets for identical
assets or liabilities that the entity has the ability to access.
Level 2 Valuations based on quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or
other inputs that are observable or can be corroborated by
observable data for substantially the full term of the assets or
liabilities.
Level 3 Valuations based on inputs that are supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
In accordance with the fair value hierarchy described above, the following table
shows the fair value of the Company's interest rate swap which is included in
other liabilities in the consolidated balance sheet:
Fair Value Measurements
Assets (Liabilities)
------------------------------------------
Total as of
September 27, 2009 Level 1 Level 2 Level 3
------------------- ------------- ------------ -------------
(in thousands)
Interest rate swap (1) $(457) - $(457) -
(1) Included in other long-term liabilities on the consolidated balance
sheet.
The following presents the balances and net changes in the accumulated other
comprehensive loss related to this interest rate swap, net of income taxes.
------------------
Three Months Ended
------------------
September 27,
2009
------------------
(in thousands)
Balance at the beginning of period $-
Amount reclassified to interest expense,
net of tax benefit of $57 89
Net change in fair value of interest rate
swap, net of tax benefit of $235 (368)
------------------
Balance at end of period ($279)
==================
Note 9 - Income Taxes
At the end of each interim reporting period, the Company estimates its effective
income tax rate expected to be applicable for the full year. This estimate is
used in providing for income taxes on a year-to-date basis and may change in
subsequent interim periods. The Company's effective tax rate for the three
months ended September 27, 2009 was 39.0%, compared to 39.3% during the
comparative three months ended September 28, 2008. The Company's effective tax
rate for the three months ended September 27, 2009 and September 28, 2008
differed from the U.S. federal statutory rate of 35% primarily due to state
income taxes, partially offset by various tax credits.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The Company is currently under examination by the
Internal Revenue Service for its fiscal 2007 tax year, however fiscal 2006
through fiscal 2008 remain subject to examination, with the exception of certain
states where the statute remains open from fiscal 2004, due to non-conformity
with the federal statute of limitations for assessment. The Company does not
believe there will be any material changes in its unrecognized tax positions
over the next twelve months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense.
12
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 10 - Business Segments
The Company's management reviews the results of the Company's operations by the
following three business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service; and
o Gourmet Food and Gift Baskets
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. The Company has classified the results of operations of its Home &
Children's Gifts segment, which includes Home Decor and Children's Gifts from
Plow & Hearth(R), Wind & Weather(R), HearthSong(R) and Magic Cabin(R), as
discontinued operations for all periods presented.
Category performance is measured based on contribution margin, which includes
only the direct controllable revenue and operating expenses of the categories.
As such, management's measure of profitability for these categories does not
include the effect of corporate overhead (see (*) below), which are operated
under a centralized management platform, providing services throughout the
organization, nor does it include stock-based compensation, depreciation and
amortization, other income (net), and income taxes. Assets and liabilities are
reviewed at the consolidated level by management and not accounted for by
category.
Three Months Ended
----------------------------
September 27, September 28,
Net revenues 2009 2008
------------- -------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $70,003 $83,482
BloomNet Wire Service 13,785 15,381
Gourmet Food & Gift Baskets 24,740 36,762
Corporate (*) 126 204
Intercompany eliminations (338) (391)
------------- -------------
Total net revenues $108,316 $135,438
============= =============
Three Months Ended
----------------------------
September 27, September 28,
Operating Loss 2009 2008
------------- -------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $7,673 $10,587
BloomNet Wire Service 4,105 4,340
Gourmet Food & Gift Baskets (3,210) (940)
------------- -------------
Category Contribution Margin Subtotal $8,568 $13,987
Corporate (*) (11,380) (12,982)
Depreciation and amortization (4,946) (5,075)
------------- -------------
Operating Loss ($7,758) ($4,070)
============= =============
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among others, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center which are allocated directly to the above
categories based upon usage, are included within corporate expenses, as
they are not directly allocable to a specific category.
13
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 11. Discontinued Operations
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. Consequently, the Company has classified the results of operations
of its Home & Children's Gifts segment as discontinued operations for all
periods presented.
Results for discontinued operations are as follows:
-----------------------------------------
Three Months Ended
-----------------------------------------
September 27, September 28,
2009 2008
-----------------------------------------
(in thousands)
Net revenues from discontinued operations $17,354 $22,595
Operating loss from discontinued operations (2,638) (3,617)
Income tax benefit from discontinued operations (1,029) (1,431)
Loss from discontinued operations (1,609) (2,186)
Assets and liabilities of discontinued operations are as follows:
September 27, June 28,
2009 2009
----------------- -----------------
(in thousands)
Assets of discontinued operations
Receivables, net $ 627 $692
Inventories 15,685 15,529
Prepaid and other 5,107 1,878
----------------- -----------------
Current assets of discontinued operations 21,419 18,100
Property, plant and equipment, net 8,387 8,871
Other intangibles, net 666 666
Other assets 96 110
----------------- -----------------
Non-current assets of discontinued operations 9,149 9,647
----------------- -----------------
Total assets of discontinued operations $30,568 $27,747
================= =================
Liabilities of discontinued operations
Accounts payable and accrued expenses $3,752 $2,633
----------------- -----------------
Current liabilities of discontinued operations 3,752 2,633
Non-current liabilities of discontinued operations 1,306 1,334
----------------- -----------------
Total liabilities of discontinued operations $5,058 $3,967
================= =================
Note 12 - Commitments and Contingencies
Legal Proceedings
There are various claims, lawsuits, and pending actions against the Company and
its subsidiaries incident to the operations of its businesses. It is the opinion
of management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
14
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 in the forward-looking statements.
Factors that could cause or contribute to any differences include, but are not
limited to, those discussed or referred to under the caption "Forward-Looking
Information" and under Part II, Item 1A -- "Risk Factors".
Overview
1-800-FLOWERS.COM, Inc. is the world's leading florist and gift shop. For more
than 30 years, 1-800-FLOWERS.COM, Inc. has been providing customers with fresh
flowers and the finest selection of plants, gift baskets, gourmet foods,
confections, balloons and plush stuffed animals perfect for every occasion.
1-800-FLOWERS.COM(R) (1-800-356-9377 or www.1800flowers.com), was listed as a
Top 50 Online Retailer by Internet Retailer in 2006, as well as 2008 Laureate
Honoree by the Computerworld Honors Program and the recipient of ICMI's 2006
Global Call Center of the Year Award. 1-800-FLOWERS.COM offers the best of both
worlds: exquisite arrangements created by some of the nation's top floral
artists and hand-delivered the same day, and spectacular flowers shipped
overnight Fresh From Our Growers(R). As always, 100% satisfaction and freshness
are guaranteed. The Company's BloomNet(R) international floral wire service
provides (www.mybloomnet.net) a broad range of quality products and value-added
services designed to help professional florists grow their businesses.
The 1-800-FLOWERS.COM, Inc. "Gift Shop" also includes gourmet gifts such as
popcorn and specialty treats from The Popcorn Factory(R) (1-800-541-2676 or
www.thepopcornfactory.com); cookies and baked gifts from Cheryl&Co.(R)
(1-800-443-8124 or www.cherylandco.com); premium chocolates and confections from
Fannie May(R) Confections Brands (www.fanniemay.com and www.harrylondon.com);
wine gifts from Ambrosia(R) (www.ambrosia.com) and Geerlings&WadeSM
(www.geerwade.com); gift baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com)
and DesignPac Gifts(TM) (www.designpac.com) and Celebrations(R)
(www.celebrations.com), a new premier online destination for fabulous party
ideas and planning tips.
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. The Company has classified the results of operations of its Home &
Children's Gifts segment, which includes Home Decor and Children's Gifts from
Plow & Hearth(R) (1-800-627-1712 or www.plowandhearth.com), Wind & Weather(R)
(www.windandweather.com), HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com), as discontinued operations for all periods presented.
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market,
ticker symbol: FLWS.
15
Category Information
The following table presents the contribution of net revenues, gross profit and
category contribution margin or category "EBITDA" (earnings before interest,
taxes, depreciation and amortization) from each of the Company's business
categories. (As noted previously, the Company's Home & Children's Gifts segment
has been classified as discontinued operations and therefore excluded from
category information below).
Three Months Ended
-----------------------------------------
September 27, September 28,
2009 2008 % Change
-------------- ------------- ----------
(in thousands)
Net Revenues from continuing
operations:
1-800-Flowers.com Consumer Floral $70,003 $83,482 (16.1%)
BloomNet Wire Service 13,785 15,381 (10.4%)
Gourmet Food & Gift Baskets 24,740 36,762 (32.7%)
Corporate (*) 126 204 (38.2%)
Intercompany eliminations (338) (391) 13.6%
-------------- -------------
Total net revenues from continuing
operations $108,316 $135,438 (20.0%)
============== =============
Three Months Ended
-----------------------------------------
September 27, September 28,
2009 2008 % Change
-------------- ------------- ----------
(in thousands)
Gross Profit from continuing
operations:
1-800-Flowers.com Consumer Floral $25,847 $31,690 (18.4%)
36.9% 38.0%
BloomNet Wire Service 8,022 8,340 (3.8%)
58.2% 54.2%
Gourmet Food & Gift Baskets 9,791 12,032 (18.6%)
39.6% 32.7%
Corporate (*) 94 157 (40.1%)
74.6% 77.0%
Intercompany eliminations - (23)
-------------- -------------
Total gross profit from continuing
operations $43,754 $52,196 (16.2%)
============== =============
40.4% 38.5%
============== =============
Three Months Ended
------------------------------------------
September 27, September 28,
2009 2008 % Change
-------------- ------------- -----------
EBITDA (**) from continuing operations: (in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $7,673 $10,587 (27.5%)
BloomNet Wire Service 4,105 4,340 (5.4%)
Gourmet Food & Gift Baskets (3,210) (940) (241.5%)
-------------- -------------
Category Contribution Margin Subtotal 8,568 13,987 (38.7%)
Corporate (*) (11,380) (12,982) 12.3%
-------------- -------------
EBITDA from continuing operations ($2,812) $1,005 (379.8%)
============== ==============
Three Months Ended
-----------------------------------------
September 27, September 28,
2009 2008 % Change
-------------- ------------- ----------
Discounted operations: (in thousands)
Net Revenues from discontinued
operations $17,354 $22,595 (23.2%)
Gross profit from discontinued operations 7,548 9,626 (21.6%)
EBITDA from discontinued operations (2,119) (3,016) 29.7%
16
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among other items, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center, which are allocated directly to the above
categories based upon usage, are included within corporate expenses as they
are not directly allocable to a specific category.
(**) Performance is measured based on category contribution margin or category
EBITDA, reflecting only the direct controllable revenue and operating
expenses of the categories. As such, management's measure of profitability
for these categories does not include the effect of corporate overhead,
described above, nor does it include depreciation and amortization, other
income (net), and income taxes. Management utilizes EBITDA as a performance
measurement tool because it considers such information a meaningful
supplemental measure of its performance and believes it is frequently used
by the investment community in the evaluation of companies with comparable
market capitalization. The Company also uses EBITDA as one of the factors
used to determine the total amount of bonuses available to be awarded to
executive officers and other employees. The Company's credit agreement uses
EBITDA (with additional adjustments) to measure compliance with covenants
such as the interest coverage ratio and consolidated leverage ratio. EBITDA
is also used by the Company to evaluate and price potential acquisition
candidates. EBITDA has limitations as an analytical tool, and should not be
considered in isolation or as a substitute for analysis of the Company's
results as reported under GAAP. Some of these limitations are: (a) EBITDA
does not reflect changes in, or cash requirements for, the Company's
working capital needs; (b) EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to service interest or
principal payments, on the Company's debts; and (c) although depreciation
and amortization are non-cash charges, the assets being depreciated and
amortized may have to be replaced in the future, and EBITDA does not
reflect any cash requirements for such capital expenditures. Because of
these limitations, EBITDA should only be used on a supplemental basis
combined with GAAP results when evaluating the Company's performance.
Reconciliation of Net Loss from Continuing Operations to EBITDA from Continuing
Operations:
Three Months Ended
-------------------------------
September 27, September 28,
2009 2008
--------------- ---------------
(in thousands)
Net loss from continuing operations ($5,666) ($3,118)
Add:
Interest expense 1,546 1,158
Depreciation and amortization 4,946 5,075
Less:
Income tax benefit 3,622 2,017
Interest income 14 89
Other income 2 4
--------------- ---------------
EBITDA from continuing operations ($2,812) $1,005
=============== ===============
Results of Operations
Net Revenues
Three Months Ended
-----------------------------------------------
September 27, September 28,
2009 2008 % Change
--------------- ---------------- --------------
(in thousands)
Net revenues:
E-Commerce $74,840 $87,896 (14.9%)
Other 33,476 47,542 (29.6%)
--------------- ----------------
Total net revenues $108,316 $135,438 (20.0%)
=============== ================
During the three months ended September 27, 2009, revenues declined by 20.0%
over the prior year, resulting from continued weakness in the retail economy
which contributed to lower wholesale order volume from DesignPac Gifts, which is
included within the Company's Gourmet Food & Gift Baskets business, combined
with lower demand within the consumer floral business and from weakness in
wholesale product sales within the BloomNet WireService business. Approximately
$8.0 million of the reduction in the Gourmet Food & Gift Baskets business was
attributable to a shift in DesignPac customer shipments into the upcoming second
quarter of fiscal 2010.
17
The Company fulfilled approximately 1,232,100 orders through its E-commerce
sales channels (online and telephonic sales) during the three months ended
September 27, 2009, a decrease of 10.5% over the prior year period, reflecting a
continued decline in consumer spending, primarily within the 1-800-Flowers.com
Consumer Floral category. The Company's E-commerce average order value of $60.74
decreased 4.8% over the prior year period.
Other revenues decreased as a result of the aforementioned decline within the
Gourmet Food & Gifts business, primarily related to DesignPac, approximately
$8.0 million of which was due to the movement of several large shipments into
the Company's second quarter, as well as lower revenue from floral product sales
within the Company's BloomNet Wire Service category.
The 1-800-Flowers.com Consumer Floral category includes the operations of the
1-800-Flowers brand which derives revenue from the sale of consumer floral
products through its E-Commerce sales channels (telephonic and online sales) and
company-owned and operated retail floral stores, as well as royalties from its
franchise operations. Net revenues during the three months ended September 27,
2009 decreased by 16.1% over the prior year period, as a result of lower order
volume and average order value as a result of the continued decline in demand
throughout the consumer sector caused by the weak economy.
The BloomNet Wire Service category includes revenues from membership fees as
well as other product and service offerings to florists. Net revenues during the
three months ended September 27, 2009 decreased by 10.4% over the prior year
period, primarily as a result of decreased wholesale product revenues as
florists scaled back and delayed purchases.
The Gourmet Food & Gift Basket category includes the operations of the Cheryl &
Co., Fannie May, The Popcorn Factory, The Winetasting Network and DesignPac
businesses. Revenue is derived from the sale of cookies, baked gifts, premium
chocolates and confections, gourmet popcorn, wine gifts and gift baskets through
its E-commerce sales channels (telephonic and online sales) and company-owned
and operated retail stores under the Cheryl & Co. and Fannie May brands, as well
as wholesale operations. Net revenue during the three months ended September 27,
2009 decreased by 32.7% over the prior year period, primarily reflecting reduced
orders from DesignPac wholesale customers, including the shift of approximately
$8.0 million of wholesale orders into the Company's second fiscal quarter.
The Company expects economic conditions for consumers will continue to be very
challenging. Based on this outlook, the Company anticipates that revenues for
fiscal year 2010 will be consistent to down approximately 5 percent compared
with the prior year.
Gross Profit
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
-------------- --------------- -------------
(in thousands)
Gross profit $43,754 $52,196 (16.2%)
Gross margin % 40.4% 38.5%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (primarily fees paid directly to
florists), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and associated costs including inbound and outbound
shipping charges. Additionally, cost of revenues include labor and facility
costs related to direct-to-consumer and wholesale production operations.
Gross profit decreased during the three months ended September 27, 2009, due
primarily to the decline in revenues described above, while gross margin
percentage increased 190 basis points as a result of product mix, primarily
reflecting the impact of lower wholesale revenues from DesignPac.
The 1-800-Flowers.com Consumer Floral category gross profit and gross profit
margin percentage decreased by 18.4% and 110 basis points, respectively, as a
result of a lower sales volume and increased promotional pricing during the
early part of the quarter. During the latter part of the quarter, initiatives to
reduce promotional pricing and shipping costs began to take hold, and the
Company expects to see the benefits of these efforts, in the form of improved
gross profit margins, beginning in the second quarter and throughout the
remainder of fiscal 2010.
18
The BloomNet Wire Service category gross profit decreased by 3.8% over the prior
year period as a result of the aforementioned decline of wholesale product
revenue, while gross profit margins increased by 400 basis points, reflecting
the impact of product mix and pricing initiatives.
The Gourmet Food & Gift Basket category gross profit decreased by 18.6% over the
prior year period as a result of the lower wholesale revenue from DesignPac.
Gross margin percentage increased by 690 basis points, reflecting the impact of
the decline in lower margin DesignPac sales volume, as well as improved margins
resulting from reduced promotional pricing and manufacturing efficiencies across
all other businesses within the category.
During the remainder of fiscal 2010, the Company expects its gross margin
percentage will improve slightly in comparison to fiscal 2009 as a result of a
positive shift in product mix and anticipated gross margin improvements in most
of its businesses resulting from product sourcing and supply chain initiatives,
which are expected to reduce reliance on promotional activity.
Marketing and Sales Expense
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
------------------ --------------- ----------
(in thousands)
Marketing and sales $29,476 $32,074 (8.1%)
Percentage of net revenues 27.2% 23.7%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search costs, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities.
During the three months ended September 27, 2009, marketing and sales expense
decreased by 8.1% as a result of a number of cost-reduction initiatives,
including savings in catalog printing and co-mailing costs, planned reductions
in customer prospecting, as well as overall reductions in advertising programs
as their efficacy declines during periods of soft consumer demand and the
reduction in variable costs associated with the decline in revenue. During the
three months ended September 27, 2009 the Company added approximately 392,000
new E-commerce customers. Of the 625,000 total customers who placed E-commerce
orders during the three months ended September 27, 2009, approximately 61.5%
were repeat customers, compared to 63.0% during the prior year.
During the remainder of fiscal 2010, the Company expects that marketing and
sales expense will continue to decrease in comparison to the prior year, and
while varying from quarter to quarter due to the seasonal nature of the
Company's business, will be consistent as a percentage of net revenues during
fiscal 2010 due to the expectation of a slight decline in sales resulting from
anticipated weakness in the economy through the fiscal 2010 holiday season.
Technology and Development Expense
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
------------------ --------------- ----------
(in thousands)
Technology and development $4,556 $5,063 (10.0%)
Percentage of net revenues 4.2% 3.7%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems.
During the three months ended September 27, 2009, technology and development
expense decreased by 10% in comparison to the prior year period as a result of
decreased labor/consulting costs as a result of re-sizing initiatives, as well
19
as a reduction in the number of hosting sites and footprint. During the three
months ended September 27, 2009 and September 28, 2008, the Company expended
$6.3 million and $10.6 million, respectively, on technology and development, of
which $1.7 million and $5.6 million, respectively, has been capitalized.
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives, and expects that its spending
for the remainder of fiscal 2010 will decrease both in terms of dollars spent,
and as a percentage of net revenues, in comparison to the prior year.
General and Administrative Expense
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
------------------ --------------- ----------
(in thousands)
General and administrative $12,534 $14,054 (10.8%)
Percentage of net revenues 11.6% 10.4%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses.
General and administrative expense decreased by 10.8% during the three months
ended September 27, 2009 in comparison to the prior year period as result of
decreased labor costs related to the Company's re-sizing initiatives implemented
during fiscal 2009.
As a result of cost reduction initiatives, the Company expects that its general
and administrative expenses for fiscal 2010 will decrease slightly as a
percentage of net revenues in comparison to the prior year.
Depreciation and Amortization Expense
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
------------------ --------------- ----------
(in thousands)
Depreciation and amortization $4,946 $5,075 (2.5%)
Percentage of net revenues 4.6% 3.7%
Depreciation and amortization expense decreased by 2.5% during the three months
ended September 27, 2009 in comparison to the prior year as a result of a
reduction in capital spending and reduced amortization associated with
amortizable intangibles that were written down in the prior year.
The Company believes that continued investment in its infrastructure, primarily
in the areas of technology and development, including the improvement of the
technology platforms, are critical to attaining its strategic objectives.
However, the Company is committed to reducing its capital expenditures and
expects that depreciation and amortization for fiscal 2010 will decrease in
comparison to the prior year.
Other Income (Expense)
Three Months Ended
---------------------------------------------
September 27, September 28,
2009 2008 % Change
------------------ --------------- ----------
(in thousands)
Interest income $14 $89 (84.3%)
Interest expense (1,546) (1,158) (33.5%)
Other 2 4 (50.0%)
-------------- ---------------
$(1,530) $(1,065) (43.7%)
============== ===============
20
Other income (expense) consists primarily of interest expense and amortization
of deferred financing costs, primarily attributable to the Company's long-term
debt and revolving line of credit, partially offset by income earned on the
Company's available cash balances.
Net borrowing costs increased during the three months ended September 27, 2009,
in comparison to the prior year period, primarily as a result of higher interest
rates and financing costs associated with the Company's credit facility (as
defined below).
In order to fund the increase in working capital requirements associated with
DesignPac, on August 28, 2008, the Company entered into a $293.0 million Amended
and Restated Credit Agreement with JPMorgan Chase Bank N.A., as administrative
agent, and a group of lenders (the "2008 Credit Facility"). The 2008 Credit
Facility provided for borrowings of up to $293.0 million, including: (i) a
$165.0 million revolving credit commitment, (ii) $60.0 million of new term loan
debt, and (iii) $68.0 million of existing term loan debt associated with the
Company's previous credit facility.
On April 14, 2009, the Company entered into an amendment to the 2008 Credit
Facility (the "Amended 2008 Credit Facility"). The Amended 2008 Credit Facility,
effective March 29, 2009, included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million upon
closing. In addition, the amendment reduced the Company's revolving credit line
from $165.0 million to a seasonally adjusted line ranging from $75.0 to $125.0
million. Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined margin, or
(ii) the agent bank's prime rate plus a margin. The applicable margins for the
Company's term loans and revolving credit facility will range from 3.00% to
4.50% for LIBOR loans and 2.00% to 3.50% for ABR loans with pricing based upon
the Company's leverage ratio. The repayment terms of the existing term loans
were reduced, on a pro-rata basis, for the $20.0 million prepayment.
During March 2009, the Company obtained a $5.0 million equipment lease line of
credit with a bank and a $5.0 million equipment lease line of credit with a
vendor. Interest under these lines, which both mature in April 2012, range from
2.99% to 7.48%. The borrowings are payable in 36 monthly installments of
principal and interest commencing in April 2009.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss.
Income Taxes
During the three months ended September 27, 2009 and September 28, 2008, the
Company recorded an income tax benefit from continuing operations of $3.6
million and $2.0 million, respectively. The Company's effective tax rates from
continuing operations for the three months ended September 27, 2009 and
September 28, 2008 was 39.0% and 39.3%, respectively. These effective rates
differed from the U.S. federal statutory rate of 35% primarily due to state
income taxes, partially offset by various tax credits.
Discontinued Operations
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. Consequently, the Company has classified the results of operations
of its Home & Children's Gifts segment as discontinued operations for all
periods presented.
21
Results for discontinued operations are as follows:
Three Months Ended
-----------------------------------------
September 27 September 28, % Change
Discontinued operations: 2009 2008
------------- -------------- ------------
(in thousands)
Net revenues from discontinued operations $17,354 $22,595 (23.2%)
Gross profit from discontinued operations 7,548 9,626 (21.6%)
Operating loss from discontinued operations (2,638) (3,617) 27.3%
Loss from discontinued operations (1,609) (2,186) 26.4%
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, HearthSong and Magic Cabin brands. Revenue is derived from the sale
of home decor and children's gifts through its E-commerce sales channels
(telephonic and online sales) and company-owned and operated retail stores under
the Plow & Hearth brand.
During the three months ended September 27, 2009 net revenues from discontinued
operations decreased by 23.2% as a result of lower E-commerce sales volume, due
to a combination of reduced consumer spending, particularly in the home decor
product category, and a planned reduction in catalog circulation. Further
contributing to the revenue decline were lower retail store sales, compared to
the same period of the prior year, due to a store closure and decline in
customer traffic.
Gross profit from discontinued operations during the three months ended
September 27, 2009 decreased by 21.6% over the prior year period as a result of
the aforementioned revenue declines, while gross margin percentage improved 90
basis points to 43.5%, benefiting from enhanced product sourcing and shipping
initiatives.
As a result of the decline in revenues, offset by the improved gross margins and
reduced operating expenses of approximately $3.0 million, primarily related to
reduced catalog circulation costs, operating loss of discontinued operations
improved $1.0 million to $(2.6) million.
Liquidity and Capital Resources
At September 27, 2009, the Company had working capital of $33.6 million,
including cash and equivalents of $3.0 million, compared to working capital of
$43.7 million, including cash and equivalents of $29.6 million, at June 28,
2009.
Net cash used in operating activities of $47.1 million for the quarter ended
September 27, 2009 was primarily related to the net loss for the quarter as well
as seasonal changes in working capital, including increases in inventory and
receivables related to the upcoming holiday season. Net cash used in operating
activities includes cash used in operating activities of discontinued operations
of $1.7 million.
Net cash used in investing activities of $2.9 million for the quarter ended
September 27, 2009 was attributable to capital expenditures, primarily related
to the Company's technology infrastructure.
Net cash provided by financing activities of $23.4 million for the quarter ended
September 27, 2009 was primarily from revolving credit borrowings required to
fund seasonal working capital needs, net of the repayment of bank borrowings on
outstanding debt and long-term capital lease obligations. The Company expects
that all borrowings under its revolver, which amounted to $29.0 million at
September 27, 2009, will be repaid by the end of its fiscal second quarter.
In order to fund the increase in working capital requirements associated with
DesignPac, on August 28, 2008, the Company entered into a $293.0 million Amended
and Restated Credit Agreement with JPMorgan Chase Bank N.A., as administrative
agent, and a group of lenders (the "2008 Credit Facility"). The 2008 Credit
Facility provided for borrowings of up to $293.0 million, including: (i) a
$165.0 million revolving credit commitment, (ii) $60.0 million of new term loan
debt, and (iii) $68.0 million of existing term loan debt associated with the
Company's previous credit facility.
On April 14, 2009, the Company entered into an amendment to the 2008 Credit
Facility (the "Amended 2008 Credit Facility"). The Amended 2008 Credit Facility,
effective March 29, 2009, included a prepayment of $20.0 million, reducing the
Company's outstanding term loans under the facility to $92.4 million upon
closing. In addition, the amendment reduced the Company's revolving credit line
22
from $165.0 million to a seasonally adjusted line ranging from $75.0 to $125.0
million. Outstanding amounts under the Amended 2008 Credit Facility will bear
interest at the Company's option at either: (i) LIBOR plus a defined margin, or
(ii) the agent bank's prime rate plus a margin. The applicable margins for the
Company's term loans and revolving credit facility will range from 3.00% to
4.50% for LIBOR loans and 2.00% to 3.50% for ABR loans with pricing based upon
the Company's leverage ratio. The repayment terms of the existing term loans
were reduced, on a pro-rata basis, for the $20.0 million prepayment.
During March 2009, the Company obtained a $5.0 million equipment lease line of
credit with a bank and a $5.0 million equipment lease line of credit with a
vendor. Interest under these lines, which both mature in April 2012, range from
2.99% to 7.48%. The borrowings are payable in 36 monthly installments of
principal and interest commencing in April 2009.
On January 21, 2008, the Company's Board of Directors authorized an increase to
its stock repurchase plan which, when added to the funds remaining on its
earlier authorization, increased the amount available for repurchase to $15.0
million. Any such purchases could be made from time to time in the open market
and through privately negotiated transactions, subject to general market
conditions. The repurchase program will be financed utilizing available cash. As
of September 27, 2009, $13.2 million remains authorized but unused.
At September 27, 2009, the Company's contractual obligations from continuing
operations consist of:
Payments due by period
---------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 2 3 - 5 More than 5
Total year years years years
------------ --------------- ------------- ------------- ----------------
Long-term debt, including interest $117,502 $54,474 $55,389 $7,639 $-
Capital lease obligations,
including interest 5,651 2,264 3,381 6 -
Operating lease obligations 48,678 11,441 19,078 13,873 4,286
Sublease obligations 7,624 2,455 3,406 1,469 294
Marketing agreement 6,654 3,154 3,500 - -
Purchase commitments (*) 29,739 29,739 - - -
------------- --------------- ------------- ------------- ---------------
Total $215,848 $103,527 $84,754 $22,987 $4,580
============= =============== ============== ============= ===============
(*) Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition,
inventory and long-lived assets, including goodwill and other intangible assets
related to acquisitions. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/wholesale) and
primarily consist of the selling price of merchandise, service or outbound
shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment. Shipping terms are FOB shipping point. Net
revenues generated by the Company's BloomNet Wire Service operations include
membership fees as well as other products and service offerings to florists.
Membership fees are recognized monthly in the period earned, and product sales
are recognized upon product shipment with shipping terms of FOB shipping point.
23
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers or franchisees to make required
payments. If the financial condition of the Company's customers or franchisees
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
Goodwill is reviewed for impairment utilizing a two-step process.The first step
requires us to compare the fair value of each reporting unit to the respective
carrying value, which includes goodwill.If the fair value of the reporting unit
exceeds its carrying value, the goodwill is not considered impaired.If the
carrying value is greater than the fair value, there is an indication that an
impairment may exist and the second step is required. In step two, the implied
fair value of the goodwill is calculated as the excess of the fair value of a
reporting unit over the fair values assigned to its assets and liabilities.If
the implied fair value of goodwill is less than the carrying value of the
reporting unit's goodwill, the difference is recognized as an impairment loss.
The impairment test process requires valuation of the respective reporting unit,
which we estimate using a discounted five year forecasted cash flow with a
year-five residual value based upon a comparative market Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA) multiple. The
assumptions about future cash flows and growth rates are based on each reporting
unit's long-term forecast and are subject to review and approval by senior
management. The market EBITDA multiple is based on market transactions in the
reporting unit's industry. The discount rate is based on our weighted average
cost of capital, which the Company believes approximates the rate from a market
participant's perspective. The estimated fair value could be impacted by changes
in interest rates, growth rates, costs, pricing, capital expenditures and market
conditions.
Impairment testing during fiscal 2009 indicated the fair value of our Home &
Children's Gifts and Gourmet Food & Gift Basket reporting units was less than
their respective carrying values, and after performing step two, the Company
recorded impairment charges in both reporting units. Although our businesses
continue to be impacted by the economic downturn, the Company's market
capitalization remains above its book value and evaluations of our reporting
units indicated that it was unlikely the fair value of any reporting unit fell
below its carrying value. Accordingly, we have not performed an interim
goodwill impairment test subsequent to the fiscal 2009 annual impairment test.
A prolonged economic downturn resulting in lower EBITDA multiples, lower
long-term growth rates and reduced long-term profitability may reduce the fair
value of our reporting units. Industry specific events or circumstances that
have a negative impact to the valuation assumptions may also reduce the fair
value of our reporting units. Should such events occur and it becomes more
likely than not that a reporting unit's fair value has fallen below its carrying
value, we will perform an interim goodwill impairment test(s), in addition to
the annual impairment test. Future impairment tests may result in a goodwill
impairment, depending on the outcome of both step one and step two of the
impairment review process. A goodwill impairment would be reported as a non-cash
charge to earnings.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
24
Stock-based Compensation
The FASB authoritative guidance requires the measurement of stock-based
compensation expense based on the fair value of the award on the date of grant.
The Company determines the fair value of stock options issued by using the
Black-Scholes option-pricing model. The Black-Scholes option-pricing model
considers a range of assumptions related to volatility, dividend yield,
risk-free interest rate and employee exercise behavior. Expected volatilities
are based on historical volatility of the Company's stock price. The dividend
yield is based on historical experience and future expectations. The risk-free
interest rate is derived from the US Treasury yield curve in effect at the time
of grant. The Black-Scholes model also incorporates expected forfeiture rates,
based on historical behavior. Determining these assumptions are subjective and
complex, and therefore, a change in the assumptions utilized could impact the
calculation of the fair value of the Company's stock options.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
It is the Company's policy to provide for uncertain tax positions and the
related interest and penalties based upon management's assessment of whether a
tax benefit is more-likely-than-not to be sustained upon examination by taxing
authorities. To the extent that the Company prevails in matters for which a
liability for an unrecognized tax benefit is established or is required to pay
amounts in excess of the liability, the Company's effective tax rate in a given
financial statement period may be affected.
Recent Accounting Pronouncements
In June 2009, the FASB issued authoritative guidance to establish the FASB
Accounting Standards Codification (the "Codification") as the source of
authoritative accounting principles and the framework for selecting the
principles used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles in the United States. The Codification, which changes the referencing
of financial standards, supersedes current authoritative guidance and is
effective for the Company's interim reporting for the quarter ended on September
27, 2009. The Codification is not intended to change or alter existing GAAP and
is not expected to result in a change in accounting practice for the Company.
In April 2009, the FASB issued authoritative guidance for business combinations
that amends the provisions related to the initial recognition and measurement,
subsequent measurement and disclosure of assets and liabilities arising from
contingencies in a business combination. This guidance requires such
contingencies be recognized at fair value on the acquisition date if fair value
can be reasonably estimated during the allocation period. Otherwise, entities
would typically account for the acquired contingencies in accordance with
authoritative guidance for contingencies. The guidance became effective for the
Company's business combinations for which the acquisition date is on or after
June 29, 2009. The Company did not complete any business combinations during the
three months ended September 27, 2009, and the effect on future periods will
depend on the nature and significance of business combinations subject to this
guidance.
In April 2009, the FASB issued authoritative guidance to increase the frequency
of fair value disclosures of financial instruments, thereby enhancing
consistency in financial reporting. The guidance relates to fair value
disclosures for any financial instruments that are not currently reflected on a
company's balance sheet at fair value. Prior to the effective date of this
guidance, fair values for these assets and liabilities have only been disclosed
once a year. The guidance now requires these disclosures on a quarterly basis,
providing qualitative and quantitative information about fair value estimates
for all those financial instruments not measured on the balance sheet at fair
value. The disclosure requirement under this guidance is effective for the
Company's interim reporting period for the three months ended on September 27,
2009. The implementation did not have a material impact on the Company's
financial position, results of operations or cash flows as it is disclosure-only
in nature.
In April 2008, the FASB issued authoritative guidance for general intangibles
other than goodwill, amending factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. This guidance is effective for the Company for
intangible assets acquired on or after June 29, 2009. The adoption did not have
a material impact on the Company's results of operations, financial position or
cash flows.
25
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking information
about the Company's financial results and estimates, business prospects that
involve substantial risks and uncertainties. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historic or current facts. They use words such as
"will," "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "target," "forecast" and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, future
performance, new products and product categories, the outcome of contingencies,
such as legal proceedings, and financial results. Among the factors that could
cause actual results to differ materially are the following:
o the Company's ability:
o to achieve revenue and profitability;
o to reduce costs and enhance its profit margins;
o to manage the increased seasonality of its business;
o to effectively integrate and grow acquired companies;
o to cost effectively acquire and retain customers;
o to compete against existing and new competitors;
o to manage expenses associated with sales and marketing and
necessary general and administrative and technology investments;
o to cost efficiently manage inventories; and
o to leverage its operating infrastructure;
o general consumer sentiment and economic conditions that may affect
levels of discretionary customer purchases of the Company's products;
and
o competition from existing and potential new competitors.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from past results and those anticipated, estimated or projected.
Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Our Annual Report on Form 10-K filing for the fiscal year ended June
28, 2009 listed various important factors that could cause actual results to
differ materially from expected and historic results. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
Readers can find them in Part I, Item 1A, of that filing under the heading
"Cautionary Statements Under the Private Securities Litigation Reform Act of
1995". We incorporate that section of that Form 10-K in this filing and
investors should refer to it. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities, as well as from outstanding debt. As of September 27, 2009, the
Company's outstanding debt, including current maturities, approximated $116.3
million.
The Company does not enter into derivative transactions for trading purposes,
but rather to hedge its exposure to interest rate fluctuations. The Company
manages its floating rate debt using interest rate swaps in order to reduce its
exposure to the impact of changing interest rates on its consolidated results of
operations and future cash outflows for interest.
In July 2009, the Company entered into a $45.0 million notional amount swap
agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate
of interest over the term of the agreement. This swap matures on July 25, 2012.
The Company has designated this swap as a cash flow hedge of the interest rate
risk attributable to forecasted variable interest (LIBOR) payments. The
effective portion of the after tax fair value gains or losses on these swaps is
included as a component of accumulated other comprehensive loss. If in the
future the interest rate swap agreements were determined to be ineffective or
were terminated before the contractual termination dates, or if it became
probable that the hedged variable cash flows associated with the variable-rate
borrowings would stop, the Company would be required to reclassify into earnings
all or a portion of the unrealized losses on cash flow hedges included in
accumulated other comprehensive income (loss).
Inclusive of the impact of the Company's interest rate swap agreement, each 50
basis point change in interest rates would have a corresponding effect on our
interest expense of approximately $0.1 million during the three months ended
September 27, 2009.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, these disclosure controls and procedures
are effective in alerting them in a timely manner to material information
required to be disclosed in the Company's periodic reports filed with the SEC.
There were no changes in our internal control over financial reporting (as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three
months ended September 27, 2009 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
27
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 1A. RISK FACTORS.
There were no material changes to the Company's risk factors as discussed in
Item 1A-Risk Factors in the Company's Annual Report on Form 10-K for the year
ended June 28, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company had no purchases of common stock during the three months ended
September 27, 2009 which includes the period June 29, 2009 through September 27,
2009.
On January 21, 2008, the Company's Board of Directors authorized an increase to
its stock repurchase plan which, when added to the $8.7 million remaining on its
earlier authorization, increased the amount available for repurchase to $15.0
million. Any such purchases could be made from time to time in the open market
and through privately negotiated transactions, subject to general market
conditions. The repurchase program will be financed utilizing available cash. As
of September 27, 2009, $13.2 million remains authorized but unused.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
-----------------------------------
(Registrant)
Date: November 6, 2009 /s/ James F. McCann
-------------------------- ----------------------------------
James F. McCann
Chief Executive Officer and
Chairman of the Board of Directors
Date: November 6, 2009 /s/ William E. Shea
--------------------------- -----------------------------------
William E. Shea
Senior Vice President of Finance
and Administration and Chief
Financial Officer