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 January 1, 2006
___ 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 or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
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:
28,222,698
----------
(Number of shares of Class A common stock outstanding as of February 2, 2006)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of February 2, 2006)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - January 1, 2006
(Unaudited) and July 3, 2005 1
Consolidated Statements of Income (Unaudited) - Three
and Six Months Ended January 1, 2006 and December 26,
2004 2
Consolidated Statements of Cash Flows (Unaudited) - Three
and Six Months Ended January 1, 2006 and December 26,
2004 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
January 1, July 3,
2006 2005
-------------- ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $60,872 $ 39,961
Short-term investments - 6,647
Receivables, net 15,536 10,619
Inventories 38,967 28,675
Deferred income taxes 7,149 10,219
Prepaid and other 6,027 5,289
-------------- ------------
Total current assets 128,551 101,410
Property, plant and equipment, net 56,555 50,474
Goodwill 66,692 63,219
Other intangibles, net 15,580 14,215
Deferred income taxes 17,161 17,161
Other assets 6,647 5,473
------------- ------------
Total assets $291,186 $251,952
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $93,053 $ 57,121
Current maturities of long-term debt and obligations under capital leases 2,243 2,597
------------- ------------
Total current liabilities 95,296 59,718
Long-term debt and obligations under capital leases 2,388 3,347
Other liabilities 2,606 2,553
------------- ------------
Total liabilities 100,290 65,618
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, 29,781,118
and 29,888,603 shares issued at January 1, 2006 and July 3, 2005, respectively 298 300
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
and 42,144,465 shares issued at January 1, 2006 and July 3, 2005, respectively 421 421
Additional paid-in capital 259,910 258,848
Retained deficit (55,488) (59,198)
Deferred compensation - (1,116)
Treasury stock, at cost-1,562,850 and 1,380,850 Class A shares at January 1,
2006 and July 3, 2005, respectively and 5,280,000 Class B shares (14,245) (12,921)
------------- ------------
Total stockholders' equity 190,896 186,334
------------- ------------
Total liabilities and stockholders' equity $ 291,186 $251,952
============= ============
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
January 1, December 26, January 1, December 26,
2006 2004 2006 2004
---------------- ---------------- --------------- ----------------
Net revenues $277,829 $230,014 $390,594 $327,528
Cost of revenues 152,837 127,402 219,576 185,344
---------------- ---------------- --------------- ----------------
Gross profit 124,992 102,612 171,018 142,184
Operating expenses:
Marketing and sales 87,874 72,841 126,098 102,733
Technology and development 4,797 3,292 9,566 6,396
General and administrative 10,357 7,954 20,993 15,556
Depreciation and amortization 3,809 3,770 7,333 7,666
---------------- ---------------- --------------- ----------------
Total operating expenses 106,837 87,857 163,990 132,351
---------------- ---------------- --------------- ----------------
Operating income 18,155 14,755 7,028 9,833
Other income (expense):
Interest income 141 275 356 657
Interest expense (113) (124) (197) (265)
Other (143) 21 (137) 25
---------------- ---------------- --------------- ----------------
Total other income (expense), net (115) 172 22 417
---------------- ---------------- --------------- ----------------
Income before income taxes 18,040 14,927 7,050 10,250
Income taxes (7,704) (6,223) (3,340) (4,256)
---------------- ---------------- --------------- ----------------
Net income $10,336 $8,704 $3,710 $5,994
================ ================ =============== ================
Basic and diluted net income per common share $0.16 $0.13 $0.06 $0.09
================ ================ =============== ================
Weighted average shares used in the calculation
of net income per common share
Basic 65,065 66,061 65,076 66,135
================ ================ =============== ================
Diluted 66,395 67,637 66,395 67,627
================ ================ =============== ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
--------------------------------
January 1, December 26,
2006 2004
--------------- --------------
Operating activities:
Net income $3,710 $5,994
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 7,333 7,666
Deferred income taxes 3,070 4,256
Stock based compensation 1,997 -
Bad debt expense 160 146
Other non-cash items 166 -
Changes in operating items, excluding the effects of acquisitions:
Receivables (4,455) (11,078)
Inventories (8,190) (7,719)
Prepaid and other 264 (620)
Accounts payable and accrued expenses 33,334 15,765
Other assets (1,576) 1,592
Other liabilities 54 296
--------------- --------------
Net cash provided by operating activities 35,867 16,298
Investing activities:
Purchase of investments - (32,866)
Sale of investments 6,695 40,903
Acquisition, net of cash acquired (4,959) (9,674)
Capital expenditures, net of non-cash expenditures (13,083) (5,653)
Other 86 2
--------------- --------------
Net cash used in investing activities (11,261) (7,288)
Financing activities:
Acquisition of treasury stock (1,324) (2,175)
Proceeds from employee stock options/purchase plan 179 645
Repayment of notes payable and bank borrowings (1,815) (654)
Payment of capital lease obligations (735) (856)
--------------- --------------
Net cash used in financing activities (3,695) (3,040)
--------------- --------------
Net change in cash and equivalents 20,911 5,970
Cash and equivalents:
Beginning of period 39,961 80,824
--------------- --------------
End of period $60,872 $86,794
=============== ==============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six months ended January 1, 2006 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 2, 2006.
The balance sheet information at July 3, 2005 has been derived from the audited
financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 2005.
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
For the three and six months ended January 1, 2006 and December 26, 2004, the
Company's comprehensive income was equal to the respective net income for each
of the periods presented.
Note 2 - Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income
per common share:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
January 1, December 26, January 1, December 26,
2006 2004 2006 2004
----------------- --------------- ---------------- ----------------
(in thousands, except per share data)
Numerator:
Net income $10,336 $8,704 $3,710 $5,994
================= =============== ================ ================
Denominator:
Weighted average shares outstanding 65,065 66,061 65,076 66,135
Effect of dilutive securities:
Employee stock options 1,297 1,576 1,294 1,492
Employee restricted stock awards 33 - 25 -
----------------- --------------- ---------------- ----------------
1,330 1,576 1,319 1,492
----------------- --------------- ---------------- ----------------
Adjusted weighted-average shares and assumed
conversions 66,395 67,637 66,395 67,627
================= =============== ================ ================
Net income per common share:
Basic and diluted $0.16 $0.13 $0.06 $0.09
================= =============== ================ ================
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 3 - Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully
described in Note 9 of the Company's 2005 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
share-based awards.
Prior to July 4, 2005, as permitted under SFAS No. 123, the Company accounted
for its stock option plans following the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no stock-based
compensation had been reflected in net income for stock options, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant and the related number of shares granted was fixed at
that point in time.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (R), "Share-Based Payment." This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method).
Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
Under this transition method, compensation cost recognized in the three and six
months ended January 1, 2006 includes amounts of: (a) compensation cost of all
stock-based payments granted prior to, but not yet vested as of, July 4, 2005
(based on grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and previously presented in the pro-forma footnote
disclosures), and (b) compensation cost for all stock-based payments granted
subsequent to July 3, 2005 (based on the grant-date fair value estimated in
accordance with the new provision of SFAS No. 123(R)). In accordance with the
modified prospective method, results for prior periods have not been restated.
Prior to the Company's adoption of SFAS No. 123(R), benefits of tax deduction in
excess of recognized compensation costs were reported as operating cash flows.
SFAS No. 123(R) requires excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid. There were no significant
excess tax benefits for the six-month period ended January 1, 2006.
The following table summarizes the effect of adopting SFAS No. 123(R) as of July
4, 2005:
Three Months Six Months
Ended Ended
January 1, 2006 January 1, 2006
-------------------- ------------------
Stock-option compensation expense recognized (*): (in thousands, except per share data)
Marketing and sales $332 $630
Technology and development 142 269
General and administrative 473 898
----------- -----------
Total 947 1,797
Related deferred income tax expense 196 371
----------- ----------
Decrease in net income $751 $1,426
=========== ==========
Impact on basic and diluted net income per common share ($0.01) ($0.02)
=========== ==========
(*) excludes the amortization of restricted stock awards in the
amount of $113 and $200 for the three and six months ended
January 1, 2006, respectively. ($68 and $120, net of tax for
the three and six months ended January 1, 2006, respectively).
Compensation expense related to the amortization of restricted stock
awards was recognized prior to the implementation of SFAS No. 123(R).
Total stock based compensation expense, which includes both expense from
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
stock options and restricted stock awards, totaled $1.1 million and $2.0 million
($0.8 million and $1.5 million, net of tax) during the three and six months
ended January 1, 2006, respectively.
Under the modified prospective application method, results for prior periods
have not been restated to reflect the effects of implementing SFAS No. 123(R).
The following pro-forma information, as required by SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123," is presented for comparative purposes and illustrates the
effect on net income and net income per common share for the periods presented
as if the Company had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation prior to July 4, 2005:
Three Months Six Months
Ended Ended
December 26, December 26,
2004 2004
--------------- --------------
(in thousands except per share
data)
Net income - As reported $8,704 $5,994
Less: Stock option compensation expense (*) 1,996 3,690
--------------- --------------
Net income - Pro forma $6,708 $2,304
=============== ==============
Net income per share:
Basic and diluted - As reported $0.13 $0.09
===== =====
Basic and diluted - Pro forma $0.10 $0.03
===== =====
(*) no restricted stock awards were made prior to January 2005
The weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model were as follows:
Three Months Ended Six Months Ended
------------------------------- -----------------------------
January 1, December 26, January 1, December 26,
2006 2004 2006 2004
--------------- --------------- -------------- --------------
Weighted average fair value of
options granted $3.09 $4.65 $3.11 $4.66
Expected volatility 46% 61% 46% 62%
Expected life 5.3 yrs 5.0 yrs 5.3 yrs 5.0 yrs
Risk-free interest rate 4.47% 3.86% 4.45% 3.79%
Expected dividend yield 0.00% 0.00% 0.00% 0.00%
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. The expected life of options
granted in fiscal 2005 was based on the Company's historical share option
exercise experience. Due to minimal exercising of stock options, in fiscal 2006,
the Company estimated the expected life of options granted to be the average of
the Company's historical expected term from vest date and the midpoint between
the average vesting term and the contractual term. The risk-free interest rate
is determined using the yield available for zero-coupon U.S. government issues
with a remaining term equal to the expected life of the option. The Company has
never paid a dividend, and as such the dividend yield is 0.0%.
6
The following table summarizes stock option activity during the six months ended
January 1, 2006:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Options Exercise Price Term Value (000s)
-----------------------------------------------------------
Outstanding at July 3, 2005 9,477,461 $8.35
Granted 837,500 $6.58
Exercised (42,047) $5.32
Forfeited (255,856) $10.41
-------------
Outstanding at January 1, 2006 10,017,058 $8.15 6.2 years $7,222
=============
Options vested or expected to vest at January 1, 2006 9,536,239 $8.15 6.2 years $6,875
Exercisable at January 1, 2006 6,494,805 $8.79 5.2 years $7,220
As of January 1, 2006, the total future compensation cost related to nonvested
options not yet recognized in the statement of income was $7.8 million and the
weighted average period over which these awards are expected to be recognized
was 2.4 years.
The Company grants shares of Common Stock to its employees that are subject to
restrictions on transfer and risk of forfeiture until fulfillment of applicable
service conditions and, in certain cases, holding periods (Restricted Stock). In
fiscal 2005, the Company recorded the grant date fair value of unvested shares
of Restricted Stock as unearned stock-based compensation ("Deferred
Compensation"). In accordance with SFAS No. 123(R), in fiscal 2006, the Company
reclassified the balance of Deferred Compensation against additional paid-in
capital, and reduced its shares of Class A Common Stock issued accordingly.
The following table summarizes the activity of non-vested restricted stock
during the six months ended January 1, 2006:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 3, 2005 155,919 $8.39
Granted 150,649 $6.71
Vested - -
Forfeited (8,313) $8.41
-------------
Non-vested at January 1, 2006 298,255 $7.54
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of January 1, 2006, there was $1.6 million of total
unrecognized compensation cost related to non-vested restricted stock-based
compensation to be recognized over a weighted-average period of 3.3 years.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 4 - Acquisitions
The Company accounts for its business combinations in accordance with SFAS No.
141, "Business Combinations," which addresses financial accounting and reporting
for business combinations and requires that all such transactions be accounted
for using the purchase method. Under the purchase method of accounting for
business combinations, the aggregate purchase price for the acquired business is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Operating results of the acquired
entities are reflected in the Company's consolidated financial statements from
date of acquisition.
Acquisition of Wind & Weather
On October 31, 2005, the Company acquired Wind & Weather, a Fort Bragg,
California based direct marketer of weather-themed gifts, with annual revenues
of approximately $14.4 million during its most recent year ended March 31, 2005.
The purchase price of approximately $5.2 million, including acquisition costs,
was funded utilizing the Company's line of credit which was repaid during the
quarter utilizing cash generated from operations, and excludes the assumption of
Wind & Weather's $1.2 million balance on its seasonal working capital line. The
Company is currently relocating the operations of Wind & Weather to its Madison,
Virginia facility.
The Company is in the process of obtaining independent appraisals for the
purpose of allocating the purchase price to individual assets acquired and
liabilities assumed. This will result in potential adjustments to the carrying
value of Wind & Weather's recorded assets and liabilities, the establishment of
certain additional intangible assets, revisions of useful lives of intangible
assets, some of which will have indefinite lives not subject to amortization,
and the determination of any residual amount that will be allocated to goodwill.
The preliminary allocation of the purchase price included in the current period
balance sheet is based on the best estimates of management and is subject to
revision based on final determination of asset fair values and useful lives. The
following table summarizes the preliminary allocation of purchase price to the
estimated fair values of assets acquired and liabilities assumed at the date of
acquisition:
Wind & Weather
Purchase Price
Allocation
(Preliminary)
--------------------
(in thousands)
Current assets $4,014
Property, plant and equipment 68
Intangible assets 1,750
Goodwill 3,246
Other non-current assets 20
--------------------
Total assets acquired 9,098
--------------------
Current liabilities 3,810
Non-current liabilities 39
--------------------
Total liabilities assumed 3,849
--------------------
Net assets acquired $5,249
====================
Of the $1.8 million of acquired intangible assets related to the Wind & Weather
acquisition, $1.0 million was assigned to trademarks that are not subject to
amortization, while the remaining acquired intangibles of $0.8 million were
allocated primarily to customer lists which are being amortized over the assets'
preliminarily determinable useful life of 5 years.
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Acquisition of Cheryl & Co.
On March 28, 2005, the Company acquired all of the outstanding common stock of
Cheryl & Co., a Westerville, Ohio-based manufacturer and direct marketer of
premium cookies and related baked gift items, with annual revenues of
approximately $33 million during its most recent year ended January 29, 2005.
The purchase price of approximately $41.1 million, including acquisition costs,
was funded utilizing the Company's available cash and investment balance, and
included $6.3 million used to retire Cheryl & Co.'s outstanding debt.
Acquisition of The Winetasting Network
On November 15, 2004, the Company acquired all of the outstanding common stock
of The Winetasting Network, a Napa, California based distributor and
direct-to-consumer wine marketer. The purchase price of approximately $9.7
million, including acquisition costs, was funded utilizing the Company's
available cash and investment balance and included $2.4 million used to retire
The Winetasting Network's long-term debt.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Wind & Weather, Cheryl & Co. and The
Winetasting Network had taken place at the beginning of each fiscal year
presented. The following unaudited pro forma information is not necessarily
indicative of the results of operations in future periods or results that would
have been achieved had the acquisitions taken place at the beginning of the
periods presented.
Three Months Ended Six Months Ended
------------------------------- -----------------------------
January 1, December 26, January 1, December 26,
2006 2004 2006 2004
--------------- --------------- -------------- --------------
Net revenues $278,863 $262,276 $393,428 $365,414
Operating income $18,158 $21,825 $6,844 $15,890
Net income $10,327 $12,464 $3,577 $9,039
Net income per common share
Basic $0.16 $0.19 $0.05 $0.14
Diluted $0.16 $0.18 $0.05 $0.13
Note 5 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
January 1, 2006
-----------------
(in thousands)
Goodwill - beginning of year $63,219
Acquisition of Wind and Weather 3,246
Other 227
-----------
Goodwill - end of period $66,692
===========
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:
January 1, 2006 July 3, 2005
---------------------------------------- ----------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ------------- --------------- ----------- ----------- --------------- ------------
(in thousands)
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $3,600 $1,327 $4,927 $3,438 $1,489
Customer lists 3 - 6 years $5,390 1,412 3,978 4,640 1,145 3,495
Other 5 - 8 years 555 194 361 555 170 385
------------ --------------- ----------- ----------- --------------- ------------
10,872 5,206 5,666 10,122 4,753 5,369
Trademarks with
indefinite lives 9,914 - 9,914 8,846 - 8,846
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $20,786 $5,206 $15,580 $18,968 $4,753 $14,215
============ =============== =========== =========== =============== ============
Estimated amortization expense is as follows: remainder of fiscal 2006 - $0.7
million, fiscal 2007 - $1.2 million, fiscal 2008 - $1.1 million, fiscal 2009 -
$1.1 million, fiscal 2010 - $1.0 million, fiscal 2011 - $0.5 million and
thereafter - $0.1 million.
Note 6 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
January 1, July 3,
2006 2005
-------------- -----------
(in thousands)
Commercial notes and revolving credit lines $3,610 $4,152
Seller financed acquisition obligations 23 46
Obligations under capital leases 998 1,746
-------------- -----------
4,631 5,944
Less current maturities of long-term debt and obligations under
capital leases 2,243 2,597
-------------- -----------
$2,388 $3,347
============== ===========
In order to fund working capital requirements during its most recent holiday
selling season and to support outstanding letters of credit, as well as
temporarily finance the acquisition of Wind & Weather referred to in Note 4, on
October 27, 2005, the Company established a second line of credit in the amount
of $20.0 million, bringing its total available credit facilities to $25.0
million. The credit facilities, which are collateralized by the Company's
working capital, bear interest equal to the applicable LIBOR Index plus 1.50%
per annum. At January 1, 2006, there were no amounts outstanding under its
credit facilities.
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 7 - 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 and
six months ending January 1, 2006 was 42.7% and 47.4%, respectively, compared to
41.7% and 41.5% during the comparative three and six month periods ended
December 26, 2004, respectively. The effective tax rate during the three and six
months ended January 1, 2006 includes the impact of stock-based compensation
recognized in accordance with SFAS No. 123(R), and resulted in an increase in
the effective annual income tax rate of approximately 5.5%, resulting primarily
from the associated book/tax differences in accounting for incentive stock
options.
Note 8 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. 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 consolidated financial position,
results of operations or liquidity.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choicesm" -
has been providing customers around the world with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers shipped from our growers to your door fresh.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. Gift advisors are available 24/7, and fast
and reliable delivery is offered same day, any day. As always, 100 percent
satisfaction and freshness is guaranteed. The 1-800-FLOWERS.COM collection of
brands also includes home decor and garden merchandise from Plow & Hearth(R)
(1-800-627-1712 or www.plowandhearth.com); premium popcorn and specialty treats
from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com);
exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or
www.cherylandco.com); gourmet foods from GreatFood.com(R) (www.greatfood.com);
children's gifts from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com) and wine gifts from the WineTasting Network(R)
(www.ambrosiawine.com and www.winetasting.com). 1-800-FLOWERS.COM, Inc. stock is
traded on the NASDAQ market under ticker symbol FLWS.
Results of Operations
Net Revenues
Three Months Ended Six Months Ended
----------------------------------------------- ---------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
--------------- ---------------- -------------- --------------- -------------- --------------
(in thousands)
Net revenues:
Online $133,362 $107,686 23.8% $195,635 $160,772 21.7%
Telephonic 125,122 109,570 14.2% 163,504 147,156 11.1%
Retail/fulfillment 19,345 12,758 51.6% 31,455 19,600 60.5%
--------------- ---------------- --------------- -------------
Total net revenues $277,829 $230,014 20.8% $390,594 $327,528 19.3%
=============== ================ =============== =============
Net revenues consist primarily of the selling price of the merchandise,
service or outbound shipping charges, less discounts, returns and credits.
The Company's revenue growth of 20.8% and 19.3% during the three and six
months ended January 1, 2006 resulted primarily from the acquisitions
of Cheryl & Co., a manufacturer and direct marketer of cookies and baked
gifts, which was acquired in fiscal April 2005, and Wind & Weather, a direct
marketer of weather-themed gifts, acquired in fiscal November 2005. Revenue
growth excluding the impact of acquisitions, was 6.0% and 7.0%, during
the three and six months ended January 1, 2006, reflecting: (i) the
Company's strong brand name recognition, (ii) continued leveraging of its
12
existing customer base, and (iii) increased spending on its marketing and
selling programs, designed to improve customer acquisition and accelerate
top-line growth.
The Company fulfilled approximately 4,285,000 and 5,881,000 orders through its
combined telephonic and online sales channels during the three and six months
ended January 1, 2006, an increase of 17.9 % and 16.7% respectively over the
prior year periods. Order volume through the Company's online sales channel,
which contributed 51.6% and 54.5% of total combined telephonic and online
revenues during the three and six months ended January 1, 2006, compared to
49.6% and 52.2% in the prior year period, increased by 23.8% and 21.7%
respectively, as a result of additional marketing efforts through search engines
and affiliates, and the continued migration of customers from the Company's
telephonic sales channel. During the three and six months ended January 1, 2006,
revenue generated through the Company's telephonic sales channel increased by
14.2% and 11.1% respectively, driven primarily by the sales of Cheryl & Co.,
which was acquired in fiscal April 2005 and Wind & Weather, which was acquired
in fiscal November 2005. The Company's combined telephonic and online average
order value of $60.33 and $61.08 during the three and six months ended January
1, 2006, was consistent with the same periods of the prior year.
During the three and six months ended January 1, 2006, non-floral gift products
accounted for 70.3% and 61.2% respectively of total combined telephonic and
online net revenues, compared to 66.3% and 57.8% during the same period of the
prior year, primarily as a result of the shift in product mix due to the
Company's recent acquisitions.
Retail and fulfillment revenues for the three and six months ended January 1,
2006 increased in comparison to the same period of the prior year, primarily as
a result of: (i) the retail and wholesale bakery product revenue from Cheryl &
Co., (ii) incremental winery services revenue generated by The Winetasting
Network, acquired in November 2004 and (iii) increased membership and sales of
product and service offerings to the Company's BloomNet(TM) network.
During the second half of fiscal 2005, the Company implemented plans designed to
extend the Company's leadership position in the floral and thoughtful gift
marketplace, through increased marketing spend intended to drive customer
acquisition, particularly in the floral gift category, and to further extend its
popular gourmet and sweetshop offerings through internal growth and acquisition
of complementary product lines. Over the last several quarters, the Company has
seen the success of these programs, driving revenue growth through both organic
growth and through the expansion of its Food, Wine and Gift Basket collections,
providing our customers with a broad range of gifting options necessary to
compete in an increasingly fast paced online world. The second half of the
Company's fiscal year features far more floral gifting holidays which will
enable the Company to achieve continued strong growth for the balance of the
year, during which time, the Company will continue its expanded level of media
presence and depth of its marketing programs, and further expand its BloomNet
business-to-business floral operations. While the Company believes that these
investments have impacted the Company's earnings growth over the short term,
over the longer term, the Company believes that this strategy will enable it to
achieve sustainable double digit revenue growth and provide further leverage
within its business model and therefore improved profitability.
Gross Profit
Three Months Ended Six Months Ended
--------------------------------------------- ----------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
-------------- --------------- ------------- --------------- --------------- -------------
(in thousands)
Gross profit $124,992 $102,612 21.8% $171,018 $142,184 20.3%
Gross margin % 45.0% 44.6% 43.8% 43.4%
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 merchandise operations, as well as facility
costs on properties that are sublet to the Company's franchisees. Gross profit
increased during the three and six months ended January 1, 2006, in comparison
to the same period of the prior year, as a result of increased revenues across
all sales channels, as well as improved gross margin percentage, up 40 basis
points over the prior year. This improvement, despite higher carrier fuel
surcharges and increased promotional pricing due to the competitive nature of
the year-end holiday shopping period, was the result of pricing initiatives and
product mix, which was favorably impacted by the additions of the Cheryl & Co.
and Wind & Weather product lines, which have higher gross margins.
13
During fiscal 2006, although varying by quarter due to seasonal changes in
product mix, the Company expects that its gross margin percentage will continue
to improve, primarily through the growth of its higher margin non-floral gifts
lines, including the recent acquisitions of Cheryl & Co. and Wind & Weather, as
well as through improved product sourcing, pricing initiatives and customer
service and fulfillment enhancements which are expected to mitigate continued
pressure on shipping costs.
Marketing and Sales Expense
Three Months Ended Six Months Ended
---------------------------------------------- ----------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
--------------- --------------- ------------- -------------- --------------- --------------
(in thousands)
Marketing and sales $87,874 $72,841 20.6% $126,098 $102,733 22.7%
Percentage of net revenues 31.6% 31.7% 32.3% 31.4%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal and search agreements, 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. Although the Company's revenues grew by 20.8% during the three
months ended January 1, 2006, the Company spent behind a higher growth target,
particularly in its floral gift category due to increasing competition from last
minute providers of non-floral gifts. During the three and six months ended
January 1, 2006, marketing and sales expenses increased over the prior year, as
a result of: (i) the Company's efforts to increase new customer acquisition and
accelerate top-line growth through increased marketing efforts both online and
through broadcast advertising, (ii) personnel required to expand its
BloomNet(TM) business-to-business floral operations, (iii) incremental costs
associated with the recent acquisitions, including the Winetasting Network,
Cheryl & Co. and Wind & Weather, which, while contributing to revenue growth and
achieving higher gross product margins, also incur higher marketing costs, and
(iv) the impact of adopting SFAS No. 123(R), "Share-Based Payment" - refer below
to Recent Accounting Pronouncements for further details. During the three and
six month periods ended January 1, 2006, the Company added 1,332,000 and
1,839,000 new customers, increases of 8.8% and 9.2% over the same periods of the
prior year. Customer retention efforts resulted in 1,369,000 and 1,896,000
existing customers placing orders during the three and six months ended January
1, 2006, representing increases of 6.1% and 7.0%, respectively, in comparison to
the same periods of the prior year. Of the 2,701,000 and 3,735,000 customers who
placed orders during the three and six months ended January 1, 2006,
approximately 50.7% were repeat customers, compared to 51.3% in the prior year
periods.
During the remainder of fiscal 2006, the Company expects to maintain its higher
level of marketing and sales spending in order to continue its higher rate of
new customer acquisition, while also leveraging its already significant customer
base through cost effective, customer retention initiatives. Such spending will
continue to be in online search and affiliate relationships, as well as in
direct marketing and broadcast advertising programs. In addition, the Company
plans to continue to add personnel to grow its BloomNet(TM) membership and
support the anticipated growth of its recently acquired businesses. As a result,
over the short term the Company expects that marketing and sales expense, as a
percentage of revenue, will remain consistent when compared to the prior year.
Technology and Development Expense
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
-------------- --------------- -------------- -------------- --------------- -------------
(in thousands)
Technology and development $4,797 $3,292 45.7% $9,566 $6,396 49.6%
Percentage of net revenues 1.7% 1.4% 2.4% 2.0%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. During the three and six months ended January
1, 2006, technology and development expense increased as a result of the
incremental expenses associated with the acquisitions of the Winetasting
Network, Cheryl & Co., and Wind & Weather, as well as for increases in the cost
14
of maintenance and license agreements required to support the Company's
technology platform, and the impact of adopting SFAS No. 123(R), "Share-Based
Payment" - refer below to Recent Accounting Pronouncements for further details.
During the three and six months ended January 1, 2006, the Company expended $8.8
million and $18.0 million respectively, on technology and development, of which
$4.0 million and $8.4 million, has been capitalized.
Although over the longer term, the Company believes that it will continue to
demonstrate its ability to leverage its IT platforms, during the remainder of
fiscal 2006, the Company intends to improve the technology infrastructure of its
wine gift business, and cookies and baked gifts business, as well as integrate
its Wind & Weather product line into its existing technology platforms, and
therefore expects that technology and development spending as a percentage of
net revenues will be consistent with, or increase slightly over the prior year.
General and Administrative Expense
Three Months Ended Six Months Ended
---------------------------------------------- ---------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
---------------- --------------- ----------- -------------- --------------- ------------
(in thousands)
General and administrative $10,357 $7,954 30.2% $20,993 $15,556 35.0%
Percentage of net revenues 3.7% 3.5% 5.4% 4.7%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. General and administrative expense increased
during the three and six months ended January 1, 2006 in comparison to the prior
year, primarily as a result of the following: (i) incremental expenses
associated with the Company's acquired businesses, (ii) expenses associated with
the Company's corporate headquarters relocation, which was completed in the
second quarter of fiscal 2006, (iii) increased costs associated with the
Company's BloomNet business-to-business expansion, and (iv) the impact of
adopting SFAS No. 123(R), "Share-Based Payment" - refer below to Recent
Accounting Pronouncements for further details.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements and drive
operating leverage, as a result of the incremental expenses associated with the
acquisitions Cheryl & Co. and Wind & Weather and the seasonal nature of these
businesses, this leverage is largely offset for the remainder of fiscal 2006. As
such, the Company expects that its general and administrative expenses as a
percentage of net revenue during the remainder of fiscal 2006 will be consistent
with fiscal 2005.
Depreciation and Amortization Expense
Three Months Ended Six Months Ended
-------------------------------------------- -----------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
-------------- --------------- ------------ --------------- --------------- ------------
(in thousands)
Depreciation and amortization $3,809 $3,770 1.0% $7,333 $7,666 (4.3%)
Percentage of net revenues 1.4% 1.6% 1.9% 2.3%
Depreciation and amortization expense during the three months and six months
ended January 1, 2006 decreased as a percentage of revenue in comparison to
their respective prior year periods, reflecting the impact of the Company's
declining rate of capital additions, and the leverage of the Company's existing
infrastructure.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, including the improvement
of the technology platform of the Company's wine and cookies businesses, are
critical to attaining its strategic objectives, the Company expects that
depreciation and amortization for the remainder of fiscal 2006 will continue to
decrease as a percentage of net revenues in comparison to prior years.
15
Other Income (Expense)
Three Months Ended Six Months Ended
-------------------------------------------- ---------------------------------------------
January 1, December 26, January 1, December 26,
2006 2004 % Change 2006 2004 % Change
-------------- --------------- ----------- --------------- --------------- ------------
(in thousands)
Interest income $141 $275 (48.7%) $356 $657 (45.8%)
Interest expense (113) (124) 8.9% (197) (265) 25.7%
Other (143) 21 (781.0%) (137) 25 (648.0%)
------------- ------------- --------------- ---------------
($115) $172 (166.9%) $22 $417 (94.7%)
============= ============= =============== ===============
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt,
as well as its revolving line of credit. The decrease in other income (expense)
during the three and six months ended January 1, 2006 was primarily attributable
to lower interest income, resulting from a decrease in average cash balances,
due to the acquisitions of the Winetasting Network in November 2004, Cheryl &
Co. in fiscal April 2005 and most recently Wind & Weather in fiscal November
2005, as well as the Company's stock buy-back programs and losses resulting from
the closure of several retail floral stores, offset in part by lower interest
expense due to maturing debt and capital lease obligations.
Income Taxes
During the three and six months ended January 1, 2006, the Company recorded
income taxes of $7.7 million and $3.3 million, respectively. The Company's
effective tax rate for the three and six months ending January 1, 2006 was 42.7%
and 47.4%, respectively, compared to 41.7% and 41.5% during the comparative
periods of the prior year. The effective tax rate during the three and six
months ended January 1, 2006 includes the impact of stock-based compensation
recognized in accordance with SFAS No. 123(R), and resulted in an increase in
the effective annual income tax rate of approximately 5.5%, resulting primarily
from the associated book/tax differences in accounting for incentive stock
options.
Liquidity and Capital Resources
At January 1, 2006, the Company had working capital of $33.3 million, including
cash and equivalents of $60.9 million, compared to working capital of $41.7
million, including cash and equivalents and short-term investments of $46.6
million, at July 3, 2005.
Net cash provided by operating activities of $35.9 million for the six months
ended January 1, 2006 was primarily attributable to the Company's net income and
non-cash charges of depreciation and amortization, deferred income taxes and
stock-based compensation as well as changes in working capital, including
increase in accounts payable and accrued expenses, as a result of timing of
vendor payments related to the Christmas holiday, offset in part by increases in
accounts receivable due to the timing of the Christmas holiday, as well as
increases in inventories due to purchases for the upcoming floral Holidays.
Net cash used in investing activities of $11.3 million for the six months ended
January 1, 2006 was primarily attributable to capital expenditures related to
the Company's technology infrastructure as well as the acquisition of Wind &
Weather in fiscal November 2005, offset in part by net proceeds from the sale of
the Company's short-term investments.
Net cash used in financing activities of $3.7 million for the six months ended
January 1, 2006, resulted primarily from cash used to repurchase 182,000 shares
of the Company's Class A common stock, which were placed in treasury, for
approximately $1.3 million, as well as the repayment of amounts outstanding
under the Company's credit facilities and long-term capital lease obligations,
offset in part by the net proceeds received upon the exercise of employee stock
options.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. In order to fund working capital requirements during its most recent
holiday selling season and to support outstanding letters of credit, as well as
temporarily finance the acquisition of Wind & Weather, on October 27, 2005, the
Company established a second line of credit in the amount of $20.0 million,
bringing its total available credit facilities to $25.0 million. The credit
facilities, which are collateralized by the Company's working capital, bear
16
interest equal to the applicable LIBOR Index plus 1.50% per annum. At January 1,
2006, there were no amounts outstanding under its credit facilities, and based
upon its current business, the Company does not expect to draw down on the
facility except during its fiscal second quarter as required by pre-holiday
inventory requirements.
At January 1, 2006, the Company's contractual obligations consist of:
Payments due by period
----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
------------ --------------- ------------ ------------- --------------
Long-term debt $3,943 $1,540 $1,518 $885 $-
Capital lease obligations 1,090 932 158 - -
Operating lease obligations 61,241 8,818 16,083 8,915 27,425
Sublease obligations 8,027 2,277 3,375 1,601 774
Purchase commitments (*) 14,025 12,525 1,500 - -
----------- --------------- ------------ ------------- ----------------
Total $88,326 $26,092 $22,634 $11,401 $28,199
=========== =============== ============ ============= ================
(*) Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 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 January 1, 2006, the
Company had repurchased 1.5 million shares of common stock for $11.1 million, of
which 182,000 shares of common stock for $1.3 million was repurchased during the
six months ending January 1, 2006.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues 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, affects the Company's more significant judgments and estimates
used in preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations 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.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
17
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses are
impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Stock-based Compensation
With the implementation of SFAS No. 123(R) effective July 4, 2005, stock-based
compensation changes our financial statements as detailed in Note 3 to the
financial statements. Determining the amount and distribution of expense for
stock-based compensation, as well as the associated impact to the balance sheet
and statement of cash flows, requires the Company to develop estimates of the
fair value of stock-based compensation expenses. The most significant factors of
that expense require estimates or projections including the expected volatility,
expected lives and estimate forfeiture rates of employee stock options, and are
determined based on historical measurements and expected outcomes, and the
Company's interpretation of regulatory guidance.
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 the Company will be able to
generate sufficient taxable income so that these assets will be realized. The
factors that the Company considers 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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (R), "Share-Based Payment." This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method).
Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
Under this transition method, compensation cost recognized in the three and six
months ended January 1, 2006, includes amounts of: (a) compensation cost of all
stock-based payments granted prior to, but not yet vested as of, July 4, 2005
(based on grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and previously presented in the pro-forma footnote
disclosures), and (b) compensation cost for all stock-based payments granted
subsequent to July 3, 2005 (based on the grant-date fair value estimated in
accordance with the new provision of SFAS No. 123(R)). In accordance with the
modified prospective method, results for prior periods have not been restated.
Prior to the Company's adoption of SFAS No. 123(R), benefits of tax deduction in
excess of recognized compensation costs were reported as operating cash flows.
SFAS No. 123(R) requires excess tax benefits be reported as a financing cash
inflow rather than as a reduction of taxes paid. There was no significant excess
tax benefits for the six-month period ended January 1, 2006
18
The following table summarizes the effect of adopting SFAS No. 123(R) as of
July 4, 2005:
Three months Six months
ended ended
January 1, 2006 January 1, 2006
------------------- ------------------
Stock-option compensation expense recognized (*): (in thousands, except per share data)
Marketing and sales $332 $630
Technology and development 142 269
General and administrative 473 898
----------- -----------
Total 947 1,797
Related deferred income tax expense 196 371
----------- -----------
Decrease in net income $751 $1,426
=========== ===========
Impact on basic and diluted net income per common share ($0.01) ($0.02)
=========== ===========
(*) excludes the amortization of restricted stock awards in the
amount of $113 and $200 for the three and six months ended
January 1, 2006, respectively.($68 and $120, net of tax for
the three and six months ended January 1, 2006, respectively).
Compensation expense related to the amortization of restricted stock awards was
recognized prior to the implementation of SFAS No. 123(R). Total stock based
compensation expense, which includes both expense from stock options and
restricted stock awards, totaled $1.1 million and $2.0 million for the three and
six months respectively, ($0.8 million and $1.5 million, net of tax) during the
three and six months ended January 1, 2006.
Refer to Note 3 - Stock-Based Compensation for further information regarding
disclosure required in accordance with SFAS No. 123(R).
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
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
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. 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 six months ended January 1, 2006 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
19
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the first half of fiscal 2006 which includes the period
July 4, 2005 through January 1, 2006.
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs Programs
-----------------------------------------------------------------------------------------------------------------
(in thousands, except average price paid per share)
7/4/05 - 7/31/05 120.5 $7.19 120.5 $9,315
8/1/05 - 8/28/05 61.5 $7.31 61.5 $8,863
8/29/05 - 10/2/05 - $- - $8,863
10/3/05 - 10/30/05 - $- - $8,863
10/31/05 - 11/27/05 - $- - $8,863
11/28/05 - 1/1/06 - $- - $8,863
---------------- ----------------- ---------------------
Total 182.0 $7.23 182.0
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. All share purchases
were made in open-market transactions. The average price paid per share is
calculated on a settlement basis and excludes commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on December 2,
2005.
The following nominees were elected as directors, each to serve until
the 2008 Annual Meeting or until their respective successors shall have
been duly elected and qualified, by the vote set forth below:
Nominee For Withheld
---------------------------- ----------------------------------- ------------------------------------------
James F. McCann 350,106,539 186,888
Christopher G. McCann 350,156,077 137,350
The following Directors who were not nominees for election at this
Annual Meeting will continue to serve on the Board of Directors of the
Company: John J. Conefry, Jr., Leonard J. Elmore, Kevin O'Connor, Mary
Lou Quinlan, Deven Sharma and Jeffrey Walker.
The proposal to ratify the selection of Ernst & Young LLP, independent
public accountants, as auditors of the Company for the fiscal year
ending July 3, 2006 was approved by the vote set forth below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
350,017,537 270,981 4,909
20
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
(a) Exhibits.
10.34 Lease Agreement dated May 20, 2005 by and among Treeline
Mineola, LLC and 1-800-FLOWERS.COM, INC. ("Company") for the
Company's corporate headquarters located at One Old Country
Road, Carle Place, New York 11514.
10.35 First Modification to the Lease Agreement dated November 16,
2005 by and among Treeline Mineola, LLC and 1-800-FLOWERS.COM,
INC. ("Company") for the Company's corporate headquarters
located at One Old Country Road, Carle Place, New York 11514.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800-FLOWERS.COM, Inc.
(Registrant)
Date: February 10, 2006 /s/ James F. McCann
----------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: February 10, 2006 /s/ William E. Shea
----------------------- -----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)