Table of Contents

 

 

 

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 March 31, 2013

 

or

 

o

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)

GRAPHIC

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a 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 o    No x

 

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

 

26,979,233

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

 

36,858,465

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

 

 

 



Table of Contents

 

1-800-FLOWERS.COM, Inc.

 

TABLE OF CONTENTS

 

INDEX

 

 

 

Page

 

 

 

Part I.

Financial Information

 

 

 

 

Item 1.

Consolidated Financial Statements:

 

 

 

 

 

Consolidated Balance Sheets — March 31, 2013 (Unaudited) and July 1, 2012

1

 

 

 

 

Consolidated Statements of Operations (Unaudited) — Three and Nine Months Ended March 31, 2013 and April 1, 2012

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended March 31, 2013 and April 1, 2012

3

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended March 31, 2013 and April 1, 2012

4

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

Item 4.

Controls and Procedures

33

 

 

 

Part II.

Other Information

 

 

 

 

Item 1.

Legal Proceedings

34

 

 

 

Item 1A.

Risk Factors

34

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35

 

 

 

Item 3.

Defaults upon Senior Securities

35

 

 

 

Item 4.

Mine Safety Disclosures

35

 

 

 

Item 5.

Other Information

35

 

 

 

Item 6.

Exhibits

36

 

 

 

Signatures

 

37

 



Table of Contents

 

PART I. — FINANCIAL INFORMATION

ITEM 1. — CONSOLIDATED FINANCIAL STATEMENTS

 

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

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31,
2013

 

July 1,
2012

 

 

 

(unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and equivalents

 

$

17,004

 

$

28,854

 

Receivables, net

 

24,706

 

14,968

 

Inventories

 

59,877

 

55,744

 

Deferred tax assets

 

6,332

 

4,993

 

Prepaid and other

 

6,221

 

8,447

 

Current assets of discontinued operations

 

 

100

 

Total current assets

 

114,140

 

113,106

 

 

 

 

 

 

 

Property, plant and equipment, net

 

51,365

 

48,669

 

Goodwill

 

47,901

 

47,901

 

Other intangibles, net

 

43,944

 

41,838

 

Deferred tax assets

 

2,822

 

2,824

 

Other assets

 

9,353

 

7,875

 

Total assets

 

$

269,525

 

$

262,213

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

20,537

 

$

17,619

 

Accrued expenses

 

55,412

 

49,900

 

Current maturities of long-term debt and obligations under capital leases

 

18,000

 

15,756

 

Current liabilities of discontinued operations

 

 

110

 

Total current liabilities

 

93,949

 

83,385

 

 

 

 

 

 

 

Long-term debt and obligations under capital leases

 

 

13,500

 

Other liabilities

 

5,242

 

3,580

 

Total liabilities

 

99,191

 

100,465

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued

 

 

 

Class A common stock, $.01 par value, 200,000,000 shares authorized; 36,121,677 and 34,465,207 shares issued at March 31, 2013 and July 1, 2012, respectively

 

361

 

344

 

Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,138,465 shares issued at March 31, 2013 and July 1, 2012

 

421

 

421

 

Accumulated other comprehensive loss

 

 

(17

)

Additional paid-in capital

 

297,243

 

293,814

 

Retained deficit

 

(82,215

)

(96,258

)

Treasury stock, at cost — 9,142,444 and 6,767,166 Class A shares at March 31, 2013 and July 1, 2012, respectively, and 5,280,000 Class B shares at March 31, 2013 and July 1, 2012

 

(45,476

)

(36,556

)

Total stockholders’ equity

 

170,334

 

161,748

 

Total liabilities and stockholders’ equity

 

$

269,525

 

$

262,213

 

 

See accompanying Notes to Consolidated Financial Statements.

 

1



Table of Contents

 

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

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

Net revenues

 

$

192,624

 

$

179,659

 

$

566,508

 

$

536,702

 

Cost of revenues

 

112,221

 

106,620

 

331,983

 

316,775

 

Gross profit

 

80,403

 

73,039

 

234,525

 

219,927

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Marketing and sales

 

51,836

 

48,598

 

139,727

 

133,900

 

Technology and development

 

5,624

 

5,646

 

16,415

 

15,252

 

General and administrative

 

13,998

 

13,766

 

40,898

 

39,057

 

Depreciation and amortization

 

4,849

 

4,874

 

13,838

 

14,705

 

Total operating expenses

 

76,307

 

72,884

 

210,878

 

202,914

 

Gain on sale of stores

 

 

 

 

3,789

 

Operating income

 

4,096

 

155

 

23,647

 

20,802

 

Interest expense, net

 

227

 

319

 

1,088

 

1,990

 

Income (loss) from continuing operations before income taxes

 

3,869

 

(164

)

22,559

 

18,812

 

Income tax expense (benefit) from continuing operations

 

1,231

 

(215

)

8,516

 

7,318

 

Income from continuing operations

 

2,638

 

51

 

14,043

 

11,494

 

Operating loss from discontinued operations, net of tax

 

 

 

 

(22

)

Gain (loss) on sale of discontinued operations, net of tax

 

 

(136

)

 

4,342

 

Income (loss) from discontinued operations

 

 

(136

)

 

4,320

 

Net income (loss)

 

$

2,638

 

$

(85

)

$

14,043

 

$

15,814

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.04

 

$

0.00

 

$

0.22

 

$

0.18

 

From discontinued operations

 

0.00

 

0.00

 

0.00

 

0.07

 

Net income per common share

 

$

0.04

 

$

0.00

 

$

0.22

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share:

 

 

 

 

 

 

 

 

 

From continuing operations

 

$

0.04

 

$

0.00

 

$

0.21

 

$

0.17

 

From discontinued operations

 

0.00

 

0.00

 

0.00

 

0.07

 

Net income per common share

 

$

0.04

 

$

0.00

 

$

0.21

 

$

0.24

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in the calculation of net income per common share

 

 

 

 

 

 

 

 

 

Basic

 

64,256

 

64,988

 

64,528

 

64,683

 

Diluted

 

66,111

 

66,299

 

66,647

 

66,257

 

 

See accompanying Notes to Consolidated Financial Statements.

 

2



Table of Contents

 

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

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,638

 

$

(85

)

$

14,043

 

$

15,814

 

Other comprehensive income

 

 

32

 

17

 

132

 

Comprehensive income

 

$

2,638

 

$

(53

)

$

14,060

 

$

15,946

 

 

See accompanying Notes to Consolidated Financial Statements.

 

3



Table of Contents

 

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

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

Operating activities:

 

 

 

 

 

Net income

 

$

14,043

 

$

15,814

 

Reconciliation of net income to net cash provided by operations

 

 

 

 

 

Operating activities of discontinued operations

 

(10

)

1,927

 

Gain on sale of discontinued operations

 

 

(8,733

)

Depreciation and amortization

 

13,839

 

14,705

 

Amortization of deferred financing costs

 

343

 

343

 

Deferred income taxes

 

(1,337

)

5,720

 

Bad debt expense

 

762

 

692

 

Stock-based compensation

 

3,397

 

3,736

 

Other non-cash items

 

213

 

(22

)

Changes in operating items, excluding the effects of acquisitions:

 

 

 

 

 

Receivables

 

(10,500

)

(9,709

)

Inventories

 

(4,133

)

(7,670

)

Prepaid and other

 

2,226

 

804

 

Accounts payable and accrued expenses

 

7,694

 

2,489

 

Other assets

 

(464

)

1,604

 

Other liabilities

 

662

 

1,187

 

Net cash provided by operating activities

 

26,735

 

22,887

 

Investing activities:

 

 

 

 

 

Acquisitions, net of cash acquired

 

(2,000

)

(4,336

)

Proceeds from sale of business

 

 

12,826

 

Capital expenditures

 

(15,118

)

(11,986

)

Purchase of investment

 

(1,337

)

(1,111

)

Other, net

 

22

 

(271

)

Net cash used in investing activities

 

(18,433

)

(4,878

)

Financing activities:

 

 

 

 

 

Acquisition of treasury stock

 

(8,921

)

(1,925

)

Proceeds from exercise of employee stock options

 

67

 

 

Proceeds from bank borrowings

 

47,000

 

56,000

 

Repayment of notes payable and bank borrowings

 

(58,250

)

(67,250

)

Repayment of capital lease obligations

 

(48

)

(1,400

)

Net cash used in financing activities

 

(20,152

)

(14,575

)

Net change in cash and equivalents

 

(11,850

)

3,434

 

Cash and equivalents:

 

 

 

 

 

Beginning of period

 

28,854

 

21,442

 

End of period

 

$

17,004

 

$

24,876

 

 

See accompanying Notes to Consolidated Financial Statements.

 

4



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1 — Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X.  They do not include all of the information and notes required by accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 due to seasonal and other factors.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended July 1, 2012.

 

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

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Recently Adopted Accounting Pronouncements

 

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

 

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

 

5



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Recent Accounting Pronouncements

 

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

 

Note 2 — Net Income Per Common Share from Continuing Operations

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
 2013

 

April 1,
2012

 

March 31,
 2013

 

April 1,
2012

 

 

 

(in thousands, except per share data)

 

Numerator:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

2,638

 

$

51

 

$

14,043

 

$

11,494

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

64,256

 

64,988

 

64,528

 

64,683

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options (1)

 

769

 

65

 

610

 

20

 

Employee restricted stock awards

 

1,086

 

1,246

 

1,509

 

1,554

 

 

 

1,855

 

1,311

 

2,119

 

1,574

 

 

 

 

 

 

 

 

 

 

 

Adjusted weighted-average shares and assumed conversions

 

66,111

 

66,299

 

66,647

 

66,257

 

 

 

 

 

 

 

 

 

 

 

Net income per common share from continuing operations

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.00

 

$

0.22

 

$

0.18

 

Diluted

 

$

0.04

 

$

0.00

 

$

0.21

 

$

0.17

 

 

Basic net income per common share from continuing operations is computed using the weighted average number of common shares outstanding during the period. Diluted net income from continuing operations per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting of employee stock options and unvested restricted stock awards) outstanding during the period.

 

(1)         The effect of options to purchase 1.8 million and 3.2 million shares during the three and nine months ended March 31, 2013 and 5.5 million and 5.6 million shares during the three and nine months ended April 1, 2012, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive.

 

6



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 3 — Stock-Based Compensation

 

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 1, 2012, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

$

116

 

$

316

 

$

353

 

$

866

 

Restricted stock

 

977

 

1,040

 

3,044

 

2,870

 

Total

 

1,093

 

1,356

 

3,397

 

3,736

 

Deferred income tax benefit*

 

301

 

502

 

1,210

 

1,373

 

Stock-based compensation expense, net

 

$

792

 

$

854

 

$

2,187

 

$

2,363

 

 

*     Tax benefit during the three and nine months ended March 31, 2013, reflects the net impact of the expiration of non-qualified stock options.

 

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

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Marketing and sales

 

$

383

 

$

474

 

$

1,189

 

$

1,364

 

Technology and development

 

109

 

136

 

340

 

489

 

General and administrative

 

601

 

746

 

1,868

 

1,883

 

Total

 

$

1,093

 

$

1,356

 

$

3,397

 

$

3,736

 

 

The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model granted during the respective periods were as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013 (1)

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

 

 

 

 

 

 

 

 

Weighted average fair value of options granted

 

n/a

 

$

2.01

 

$

2.40

 

$

1.84

 

Expected volatility

 

n/a

 

72.1

%

72.1

%

72.1

%

Expected life

 

n/a

 

8.0 yrs

 

6.4 yrs

 

8.0 yrs

 

Risk-free interest rate

 

n/a

 

0.90

%

0.69

%

0.90

%

Expected dividend yield

 

n/a

 

0.0

%

0.0

%

0.0

%

 

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

 

7



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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

 

 

 

Options

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term

 

Aggregate
Intrinsic
Value (000s)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at July 1, 2012

 

6,711,280

 

$

4.48

 

 

 

 

 

Granted

 

20,000

 

$

3.71

 

 

 

 

 

Exercised

 

(53,266

)

$

2.03

 

 

 

 

 

Forfeited

 

(1,782,093

)

$

6.23

 

 

 

 

 

Outstanding at March 31, 2013

 

4,855,921

 

$

3.85

 

5.3 years

 

$

8,653

 

 

 

 

 

 

 

 

 

 

 

Options vested at March 31, 2013

 

4,719,434

 

$

3.90

 

5.2 years

 

$

8,286

 

Exercisable at March 31, 2013

 

3,634,087

 

$

5.10

 

3.6 years

 

$

3,777

 

 

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

 

The Company grants shares of common stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions (Restricted Stock Awards). The following table summarizes the activity of non-vested restricted stock awards during the nine months ended March 31, 2013:

 

 

 

Shares

 

Weighted
Average Grant
Date Fair
Value

 

 

 

 

 

 

 

Non-vested at July 1, 2012

 

3,855,320

 

$

2.37

 

Granted

 

1,668,490

 

$

3.55

 

Vested

 

(1,603,204

)

$

2.48

 

Forfeited

 

(442,431

)

$

3.21

 

Non-vested at March 31, 2013

 

3,478,378

 

$

2.78

 

 

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

 

Note 4 — Acquisitions and Dispositions

 

Acquisition of 1-800-Flowers’ European trademarks

 

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

 

8



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Sale and Franchise of Fannie May Retail Stores

 

On November 21, 2011, the Company and GB Chocolates LLC (GB Chocolates) entered into an agreement whereby the Company sold 17 existing Fannie May stores, to be operated as franchised locations by GB Chocolates, for $5.6 million, recognizing a gain on the sale of $3.8 million.  Upon completion of the sale, the Company also recognized initial franchise fees associated with these 17 stores in the amount of $0.5 million. In conjunction with the sale of stores, the Company and GB Chocolates entered into an area development agreement whereby GB Chocolates will open a minimum of 45 new Fannie May franchise stores by December 2014.  The agreement provides exclusive development rights for several Midwestern states, as well as specific cities in Florida and Ohio. The terms of the agreement include a non-refundable area development fee of $0.9 million, store opening fees of $0.5 million, assuming successful opening of 45 stores, and a non-performance promissory note in the amount of $1.2 million, which becomes due and payable only if GB Chocolates does not open all 45 stores as set forth in the development agreement.  The Company has deferred recognition of $0.7 million, of the original $0.9 million area development fee associated with the 45 store area development agreement, based upon the number of stores opened by GB Chocolates as of March 31, 2013. The Company will recognize the remaining deferred revenue of $0.7 million on a pro-rata basis, when the conditions for revenue recognition under the area development agreement are met. Both store opening fees and area development fees are generally recognized upon the opening of a franchise store, or upon termination of the agreement between the Company and the franchisee. The Company recognized approximately $0.2 million, of the $1.2 million promissory note in the second quarter of fiscal 2012, based upon its assessment of the likelihood that the performance criteria under the agreement will be achieved.  The fair value of the promissory note is impacted by estimates relating to the probability that GB Chocolates will open 45 stores, discounted for present value, and the risk associated with counterparty payment. Changes in these assumptions could result in an increase or decrease in fair value which would impact the income statement. There were no significant changes in these estimates through the third quarter of fiscal 2013.

 

Acquisition of Flowerama

 

On August 1, 2011, the Company completed the acquisition of Flowerama of America, Inc. (Flowerama), a franchisor and operator of retail flower shops under the Flowerama trademark, with annual revenue of approximately $6.1 million and annual operating income of $0.1 million in its most recent year end prior to acquisition.  The purchase price, which included the acquisition of receivables, inventory, eight retail store locations and certain other assets and related liabilities, was approximately $4.3 million. Of the acquired intangible assets, $2.1 million was assigned to amortizable investment in licenses, which is being amortized over the estimated useful life of 20 years, based upon the estimated remaining life of the franchise agreements. Approximately $2.4 million of purchase price was assigned to goodwill which is not deductible for tax purposes. The acquisition was financed utilizing available cash balances. Flowerama’s net revenues were $4.1 million during the nine months ended March 31, 2013, compared to $4.2 million during the nine months ended April 1, 2012, and its earnings before income taxes was $0.2 million during the nine months ended March 31, 2013 and April 1, 2012.

 

9



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table summarizes the allocation of purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition of Flowerama:

 

 

 

Flowerama
Purchase Price
Allocation

 

 

 

(in thousands)

 

Current assets

 

$

1,090

 

Intangible assets

 

2,106

 

Goodwill

 

2,440

 

Property, plant and equipment

 

76

 

Total assets acquired

 

5,712

 

 

 

 

 

Current liabilities

 

620

 

Other liabilities assumed

 

756

 

 

 

1,376

 

Net assets acquired

 

$

4,336

 

 

Pro forma Results of Operation

 

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

 

 

 

Nine Months
Ended
April 1,
2012

 

 

 

(in thousands, except per
share data)

 

 

 

 

 

Net revenues from continuing operations

 

$

537,175

 

 

 

 

 

Operating income from continuing operations

 

$

20,603

 

 

 

 

 

Income from continuing operations

 

$

11,374

 

 

 

 

 

Net income per common share from continuing operations:

 

 

 

Basic

 

$

0.18

 

Diluted

 

$

0.17

 

 

10



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 5 — Inventory

 

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

 

 

 

March 31,
2013

 

July 1,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

Finished goods

 

$

32,395

 

$

26,557

 

Work-in-process

 

8,317

 

10,466

 

Raw materials

 

19,165

 

18,721

 

 

 

$

59,877

 

$

55,744

 

 

Note 6 — Goodwill and Intangible Assets

 

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

 

The carrying amount of goodwill is as follows:

 

 

 

Consumer
Floral

 

BloomNet
Wire
Service

 

Gourmet
Food & Gift
Baskets (1)

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2013 and July 1, 2012

 

$

9,709

 

$

 

$

38,192

 

$

47,901

 

 

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

 

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

 

 

 

 

 

March 31, 2013

 

July 1, 2012

 

 

 

Amortization
Period

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets with determinable lives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment in licenses

 

14 - 16 years

 

$

7,420

 

$

5,489

 

$

1,931

 

$

7,420

 

$

5,401

 

$

2,019

 

Customer lists

 

3 - 10 years

 

15,989

 

10,993

 

4,996

 

16,019

 

9,961

 

6,058

 

Other

 

5 - 8 years

 

2,538

 

2,475

 

63

 

2,538

 

2,173

 

365

 

 

 

 

 

25,947

 

18,957

 

6,990

 

25,977

 

17,535

 

8,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks with indefinite lives

 

 

36,954

 

 

36,954

 

33,396

 

 

33,396

 

Total identifiable intangible assets

 

 

 

$

62,901

 

$

18,957

 

$

43,944

 

$

59,373

 

$

17,535

 

$

41,838

 

 

11



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Future estimated amortization expense is as follows: remainder of fiscal 2013 - $0.4 million, fiscal 2014 - $1.4 million, fiscal 2015 - $1.3 million, fiscal 2016 - $1.2 million, fiscal 2017 - $0.7 million and thereafter - $2.0 million.

 

Note 7 — Investments

 

Investments are accounted for using the equity method if the investment provides the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records these investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. The book value of investments that the Company accounted for under the equity method of accounting was $3.7 million as of March 31, 2013 and $3.6 million as of July 1, 2012. This amount is comprised of the Company’s 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made an investment in on May 31, 2012, and is included in Other assets within the Consolidated Balance Sheet. Operating results of Flores Online for the three and nine months ended March 31, 2013 were not material.

 

All other equity investments, which consist of investments for which the Company does not possess the ability to exercise significant influence, are accounted for under the cost method as they are privately held. Cost method investments are originally recorded at cost, and are included within Other Assets in the Company’s Consolidated Balance Sheets. The aggregate carrying amount of the Company’s cost method investments was $2.8 million as of March 31, 2013 and $1.7 million as of July 1, 2012. In addition, the Company had notes receivable from a company it maintains an investment in of $1.8 million as of March 31, 2013 and $0.9 million as of July 1, 2012.

 

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

 

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

 

Note 8 — Long-Term Debt

 

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

 

 

 

March 31,
2013

 

July 1, 
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

Term loan (1)

 

$

18,000

 

$

29,250

 

Revolving line of credit (1)

 

 

 

Obligations under capital leases (2)

 

 

6

 

 

 

18,000

 

29,256

 

Less current maturities of long-term debt and obligations under capital leases

 

18,000

 

15,756

 

Long-term debt and obligations under capital leases

 

$

0

 

$

13,500

 

 

12



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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

 

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

 

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

 

Outstanding amounts under the 2010 Credit Facility bear interest at the Company’s option of either: (i) LIBOR plus a defined margin, or (ii) the agent bank’s prime rate plus a margin. The applicable margins for the Company’s term loans and revolving credit facility range from 3.00% to 3.75% for LIBOR loans and 2.00% to 2.75% for ABR loans with pricing based upon the Company’s leverage ratio.

 

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

 

(2)             Equipment leases with certain manufacturing equipment vendors.

 

13



 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 9-Fair Value Measurements

 

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

 

Cash and cash equivalents, receivables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value, due to its variable nature.

 

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

 

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

 

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

 

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

 

The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis as of March 31, 2013:

 

 

 

 

 

Fair Value Measurements
Assets (Liabilities)

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

Cash equivalents (money market accounts)

 

$

12,265

 

$

12,265

 

 

 

 

 

Trading securities held in a “rabbi trust” (1)

 

1,573

 

1,573

 

 

 

 

 

Fair value of non-performance promissory note (2)

 

205

 

 

 

 

 

$

205

 

 

 

$

14,043

 

$

13,838

 

$

 

$

205

 

 

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

 

(2)         Refer to Note 4. Acquisitions and Dispositions — Sale and Franchise of Fannie May Retail Stores for more detail, including the valuation techniques used to calculate fair value. Included in Other assets on the consolidated balance sheet.

 

14



 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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

 

 

 

 

 

Fair Value Measurements
Assets (Liabilities)

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

(in thousands)

 

Assets (liabilities):

 

 

 

 

 

 

 

 

 

Cash equivalents (money market accounts)

 

$

27,276

 

$

27,276

 

 

 

 

 

Trading securities held in a “rabbi trust” (1)

 

1,143

 

1,143

 

 

 

 

 

Fair value of non-performance promissory note (2)

 

205

 

 

 

 

 

$

205

 

Interest rate swap (3)

 

(7

)

 

 

$

(7

)

 

 

 

 

$

28,617

 

$

28,419

 

$

(7

)

$

205

 

 

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

 

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

 

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

 

Note 10 — Income Taxes

 

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate from continuing operations for the three and nine months ended March 31, 2013 was 31.8% and 37.7%, respectively, compared to 131.1% and 38.9% in same periods of the prior year.  The forecasted effective rates for fiscal 2013 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, permanent differences and a change in uncertain tax positions.

 

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 fiscal year 2011. The IRS has concluded its federal examination for its fiscal years 2007 through 2009, while fiscal 2010 remains subject to federal examination. Due to non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At March 31, 2013 the Company has an unrecognized tax position of approximately $0.8 million, including accrued interest and penalties of $0.2 million. During the nine months ended March 31, 2013, the Company recorded a gross unrecognized tax position of $0.6 million, of which $0.1million was resolved during the quarter ended March 31, 2013. The Company believes that an additional $0.5 million of its unrecognized tax positions will be resolved over the next twelve months.

 

15



 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 11 — Business Segments

 

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

 

·                  Consumer Floral,

·                  BloomNet Wire Service, and

·                  Gourmet Food and Gift Baskets

 

During the first quarter of fiscal 2012, the Company made the decision to divest its non-strategic wine fulfillment services business, which was previously included within its Gourmet Food & Gift Baskets segment. On September 6, 2011, the Company completed the sale of this business; refer to “Discontinued Operations” below for a further discussion. Consequently, the Company has classified the results of operations of its wine fulfillment services business as a discontinued operation for all periods presented.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

Net revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Net Revenues:

 

 

 

 

 

 

 

 

 

Consumer Floral

 

$

121,005

 

$

112,987

 

$

285,608

 

$

274,168

 

BloomNet Wire Service

 

22,819

 

24,060

 

61,320

 

60,837

 

Gourmet Food & Gift Baskets

 

49,341

 

43,104

 

220,483

 

202,829

 

Corporate (**)

 

200

 

199

 

594

 

575

 

Intercompany eliminations

 

(741

)

(691

)

(1,497

)

(1,707

)

Total net revenues

 

$

192,624

 

$

179,659

 

$

566,508

 

$

536,702

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Contribution Margin (*):

 

 

 

 

 

 

 

 

 

Consumer Floral

 

$

13,902

 

$

10,948

 

$

31,074

 

$

26,899

 

Bloomnet Wire Service

 

6,952

 

6,258

 

18,797

 

15,925

 

Gourmet Food & Gift Baskets (***)

 

970

 

948

 

25,351

 

29,188

 

Segment Contribution Margin Subtotal

 

21,824

 

18,154

 

75,222

 

72,012

 

Corporate (**)

 

(12,879

)

(13,125

)

(37,737

)

(36,505

)

Depreciation and amortization

 

(4,849

)

(4,874

)

(13,838

)

(14,705

)

Operating income

 

$

4,096

 

$

155

 

$

23,647

 

$

20,802

 

 

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

 

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

 

16



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

(***) GFGB segment contribution margin during the nine months ended April 1, 2012 includes a $3.8 million gain on the sale of 17 Fannie May stores, which are being operated as franchised locations post-sale.

 

Note 12-Discontinued Operations

 

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

 

Results for discontinued operations are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Net revenues from discontinued operations

 

$

 

$

 

$

 

$

2,003

 

 

 

 

 

 

 

 

 

 

 

Operating loss from discontinued operations

 

$

 

$

 

$

 

$

(232

)

 

 

 

 

 

 

 

 

 

 

Gain (loss) on sale of discontinued operations, net of tax

 

$

 

$

(136

)

$

 

$

4,342

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations

 

$

 

$

(136

)

$

 

$

4,320

 

 

Note 13 — Commitments and Contingencies

 

Legal Proceedings

 

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business.

 

On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company’s subsidiaries previously engaged in with certain third-party vendors.  On December 23, 2011, plaintiff filed a notice of voluntary dismissal seeking to dismiss the entire action without prejudice.  The court entered an Order on November 28, 2012, dismissing the case in its entirety. This case was subsequently refiled in the United States District Court for the District of Connecticut.

 

On March 6, 2012 and March 15, 2012, two additional purported class action complaints were filed in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants in actions purporting to assert claims substantially similar to those asserted in the lawsuit filed on November 10, 2010.  In each case, plaintiffs seek to have the respective case certified as a class action and seek restitution and other damages, each in an amount in excess of $5.0 million. On April 26, 2012, the two Connecticut cases were consolidated with a third case previously pending in the United States District Court for the District of Connecticut in which the Company is not a party. A consolidated amended complaint was filed by plaintiffs on September 7, 2012, purporting to assert claims substantially similar to those originally asserted.  The Company moved to dismiss the consolidated amended complaint on December 7, 2012.

 

17



Table of Contents

 

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

On December 5, 2012, the same plaintiff from the action voluntarily dismissed in the United States District Court for the Eastern District of New York filed a purported class action complaint in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants, purporting to assert claims substantially similar to those asserted in the consolidated amended complaint.  On January 23, 2013, plaintiffs in the consolidated action filed a motion to transfer and consolidate the action filed on December 5, 2012 with the consolidated action.  The Company intends to defend each of these actions vigorously.

 

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

 

18



Table of Contents

 

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

 

Forward Looking Statements

 

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

 

Overview

 

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

 

The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); delicious cut-fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); wine gifts from Winetasting.com® (www.winetasting.com); ultra- premium meats from Stockyards.com (www.stockyards.com); as well as exquisite, customizable invitations and personal stationery from FineStationery.com (www.finestationery.com). The Company’s Celebrations® brand (www.celebrations.com) is a new premier online destination for fabulous party ideas and planning tips. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly “green” programs as well as various philanthropic and charitable efforts.

 

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

 

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

 

19



 

Segment Information

 

The following table presents the contribution of net revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated “EBITDA” (earnings before interest, taxes, depreciation and amortization). Additionally, the table adjusts Segment Contribution Margin to EBITDA, EBITDA excluding stock-based compensation, and Adjusted EBITDA, and reconciles Net Income to EBITDA, EBITDA excluding stock-based compensation, Adjusted EBITDA, and Adjusted Net Income. As noted previously, the Company’s wine fulfillment services business, which had previously been included within its Gourmet Foods & Gift Baskets segment has been classified as discontinued operations and therefore excluded from segment information below.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

% Change

 

March 31,
2013

 

January 1,
2012

 

% Change

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

 

Net revenues from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Floral

 

$

121,005

 

$

112,987

 

7.1

%

$

285,608

 

$

274,168

 

4.2

%

BloomNet Wire Service

 

22,819

 

24,060

 

(5.2

)%

61,320

 

60,837

 

0.8

%

Gourmet Food & Gift Baskets

 

49,341

 

43,104

 

14.5

%

220,483

 

202,829

 

8.7

%

Corporate (*)

 

200

 

199

 

0.5

%

594

 

575

 

3.3

%

Intercompany eliminations

 

(741

)

(691

)

(7.2

)%

(1,497

)

(1,707

)

12.3

%

Total net revenues from continuing operations

 

$

192,624

 

$

179,659

 

7.2

%

$

566,508

 

$

536,702

 

5.6

%

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

% Change

 

March 31,
2013

 

April 1,
2012

 

% Change

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

 

Gross profit from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Floral

 

$

48,455

 

$

44,045

 

10.0

%

$

112,701

 

$

106,258

 

6.1

%

 

 

40.0

%

39.0

%

 

 

39.5

%

38.8

%

 

 

BloomNet Wire Service

 

11,382

 

10,733

 

6.0

%

30,974

 

28,254

 

9.6

%

 

 

49.9

%

44.6

%

 

 

50.5

%

46.4

%

 

 

Gourmet Food & Gift Baskets

 

20,418

 

18,116

 

12.7

%

90,200

 

84,981

 

6.1

%

 

 

41.4

%

42.0

%

 

 

40.9

%

41.9

%

 

 

Corporate (*)

 

148

 

145

 

2.1

%

650

 

434

 

49.8

%

 

 

74.0

%

72.9

%

 

 

109.4

%

75.6

%

 

 

Total gross profit from continuing operations

 

$

80,403

 

$

73,039

 

10.1

%

$

234,525

 

$

219,927

 

6.6

%

 

 

41.7

%

40.7

%

 

 

41.4

%

41.0

%

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

% Change

 

March 31,
2013

 

April 1,
2012

 

% Change

 

 

 

(dollars in thousands)

 

 

 

(dollars in thousands)

 

 

 

Adjusted EBITDA from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Contribution Margin (**)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Floral

 

$

13,902

 

$

10,948

 

27.0

%

$

31,074

 

$

26,899

 

15.5

%

BloomNet Wire Service

 

6,952

 

6,258

 

11.1

%

18,797

 

15,925

 

18.0

%

Gourmet Food & Gift Baskets (***)

 

970

 

948

 

2.3

%

25,351

 

29,188

 

(13.1

)%

Segment Contribution Margin Subtotal

 

21,824

 

18,154

 

20.2

%

75,222

 

72,012

 

4.5

%

Corporate (*)

 

(12,879

)

(13,125

)

1.9

%

(37,737

)

(36,505

)

(3.4

)%

EBITDA from continuing operations

 

8,945

 

5,029

 

77.9

%

37,485

 

35,507

 

5.6

%

Add: Stock-based compensation

 

1,093

 

1,356

 

(19.4

)%

3,397

 

3,736

 

(9.1

)%

EBITDA from continuing operations, excluding stock-based compensation

 

10,038

 

6,385

 

57.2

%

40,882

 

39,243

 

4.2

%

Less: Gain on sale of stores (***)

 

 

 

 

 

3,789

 

 

Adjusted EBITDA from continuing operations

 

$

10,038

 

$

6,385

 

57.2

%

$

40,882

 

$

35,454

 

15.3

%

 

20



 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

% Change

 

March 31,
2013

 

April 1,
2012

 

% Change

 

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

 

 

 

$

2,003

 

 

Gross profit

 

 

 

 

 

$

405

 

 

Contribution margin

 

 

 

 

 

$

(190

)

 

Gain (loss) on sale of discontinued operations, net of tax

 

 

(136

)

 

 

$

4,342

 

 

Income from discontinued operations

 

 

(136

)

 

 

$

4,320

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands)

 

Reconciliation of Net Income from continuing operations to Adjusted EBITDA from continuing operations (**):

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

2,638

 

$

51

 

$

14,043

 

$

11,494

 

Add:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

227

 

319

 

1,088

 

1,990

 

Depreciation and amortization

 

4,849

 

4,874

 

13,838

 

14,705

 

Income tax expense

 

1,231

 

 

8,516

 

7,318

 

Less:

 

 

 

 

 

 

 

 

 

Income tax benefit

 

 

215

 

 

 

EBITDA

 

8,945

 

5,029

 

37,485

 

35,507

 

Add: Stock-based compensation

 

1,093

 

1,356

 

3,397

 

3,736

 

EBITDA, excluding stock-based compensation

 

10,038

 

6,385

 

40,882

 

39,243

 

Less: Gain on sale of stores

 

 

 

 

3,789

 

Adjusted EBITDA from continuing operations

 

$

10,038

 

$

6,385

 

$

40,882

 

$

35,454

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

March 31,
2013

 

April 1,
2012

 

March 31,
2013

 

April 1,
2012

 

 

 

(in thousands, except per share data)

 

Reconciliation of Net Income and EPS from continuing operations to Adjusted Net Income and EPS from continuing operations:

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 

$

2,638

 

$

51

 

$

14,043

 

$

11,494

 

Less: Gain on sale of stores, net of tax (***)

 

 

 

 

2,315

 

Adjusted Net Income from continuing operations

 

$

2,638

 

$

51

 

$

14,043

 

$

9,179

 

 

 

 

 

 

 

 

 

 

 

Net Income per common share from continuing operations

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.00

 

$

0.22

 

$

0.18

 

Diluted

 

$

0.04

 

$

0.00

 

$

0.21

 

$

0.17

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income per common share from continuing operations

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

$

0.00

 

$

0.22

 

$

0.14

 

Diluted

 

$

0.04

 

$

0.00

 

$

0.21

 

$

0.14

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in the calculation of net income per common share from continuing operations

 

 

 

 

 

 

 

 

 

Basic

 

64,256

 

64,988

 

64,528

 

64,683

 

Diluted

 

66,111

 

66,299

 

66,647

 

66,257

 

 

21



Table of Contents

 

(*)         Corporate expenses consist of the Company’s enterprise shared service cost centers including, 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 ab