1-800-FLOWERS.COM
Annual Report 2007

Plain-text annual report

1-800-FLOWERS.COM, Inc. 2007 Annual Report BONUS 2008 Calendar Best in Class ABOUT 1-800-FLOWERS.COM, Inc. For more than 30 years, 1-800-FLOWERS.COM Inc. – “Your Florist of Choice®” – has been providing customers around the world with the freshest flowers and finest selection of plants, gift baskets, gourmet foods, confections and plush stuffed animals perfect for every occasion. Customers can “call, click or come in” to shop 1-800-FLOWERS.COM 24/7 at 1-800-356-9377 or www.1800flowers.com. The 1-800-FLOWERS.COM collection of brands also includes home decor and children’s gifts from Plow & Hearth® (1-800-627-1712 or www.plowandhearth.com), Problem Solvers® (www.problemsolvers.com), Wind & Weather® (www.windandweather.com), HearthSong® (www.hearthsong.com) and Magic Cabin® (www.magiccabin.com); gourmet gifts including popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked gifts from Cheryl&Co.® (1-800-443-8124 or www.cherylandco.com); premium chocolates and confections from Fannie May Confections Brands® (www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com® (www.greatfood.com); wine gifts from Ambrosia.com (www.ambrosia.com); gift baskets from 1-800-BASKETS.COM® (www.1800baskets.com) and the BloomNet® international floral wire service, which provides quality products and diverse services to a select network of florists. 1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ Global Select Market under ticker symbol FLWS. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS A number of statements contained in this report, other than statements of historical fact, are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. These risks and uncertainties include, but are not limited to: the Company’s ability to achieve cost-efficient growth; its ability to maintain and enhance its online shopping web sites to attract customers; its ability to successfully introduce new products and product categories; its ability to maintain and enhance profit margins for its various products; its ability to provide timely fulfillment of customer orders; its ability to cost effectively acquire and retain customers; its ability to continue growing revenues; its ability to compete against existing and new competitors; its ability to integrate and manage its various brands; its ability to manage expenses associated with necessary general and administrative and technology investments; its ability to cost effectively manage inventories; its ability to improve its bottom line results; its ability to leverage its operating infrastructure; its ability to achieve its stated results guidance for fiscal 2008 and general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s products. For a more detailed description of these and other risk factors, please refer to the Company’s SEC filings including the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company expressly disclaims any intent or obligation to update any of the forward looking statements made in this report or in any of its SEC filings except as may be otherwise stated by the Company. Financial HigHligHts Fiscal 2007 acHiEVEMEnts Years Ended JulY 1, JulY 2, JulY 3, JunE 27, 2007 2006 2005 2004 JunE 29, 2003 (in millions, except percentages and per share data) Total net Revenues $912.6 $781.7 $670.7 $604.0 $565.6 Gross Profit Margin 43.0% 41.7% 41.1% 41.9% 42.6% Operating Expense Ratio 37.2% 38.8% EBITDA(1) EPS (GAAP) $ 0.26 $ 0.05 $ 57.4 $ 26.7 37.2% $ 26.4 $ 0.12 35.8% 37.8% $ 36.4 $ 27.5 $ 0.60(2) $ 0.18 • Grew EPS 420 percent to $0.26 per diluted share • Grew EBITDA(1) 115 percent to $57.4 million • Grew Revenues 16.7 percent, or $130.9 million, to $912.6 million • Increased Gross Profit Margin 130 basis points to 43 percent • Reduced Operating Expense Ratio 160 basis points to 37.2 percent (1) Earnings Before Interest, Taxes, Depreciation and Amortization; excludes accounting for effect of stock-based compensation; a reconciliation of EBITDA to net income is included as part of the enclosed Financial Section. (2) For the year ended June 27, 2004, EPS included a net income tax benefit of $19.2 million, or $0.28 per share and was prior to the adoption of FASB 123R. Financial REPORt insERt See inside rear-cover pocket. tOtal REVEnUEs Total Net Revenues (in millions) EBITDA $565.6 $27.5 $604.0 $36.4 $670.7 $26.4 $912.6 $57.4 $781.7 $26.7 FY03 FY04 FY05 FY06 FY07 catEgORY REsUlts Gourmet Food & Gift Baskets Home & Children’s Gifts Bloomnet Wire Service FY06 $452.2 $196.9 $105 $29.9 $46.5 $7.1 $7.1 $6.8 Consumer Floral FY07 $491.4 $192.7 $186.9 $44.4 $26.4 $64.6 $14.2 ($1.2) $186.9 $491.4 Net Revenue (in millions) Category EBITDA(3) (in millions) Net Revenue (in millions) Category EBITDA(3) (in millions) (3) The Company defines Category EBITDA as earnings before interest, taxes, depreciation and amortization and before allocation of corporate overhead expenses. Fiscal 2007 was a very good year for our company; one in which we achieved strong top- and bottom-line results repre- senting significant returns on the investments that we made in fiscal years 2005 and 2006. We are very pleased to have delivered on the guidance that we provided a year ago which called for solid revenue growth and increases in EBITDA and EPS of more than 100 percent. To recap, for the year we: s Grew revenues approximately 17 percent, or $131 million, to $913 million, s Increased Gross Profit Margin 130 basis points to 43 percent, and Best in Class The blue-ribbon icon that you will find throughout the pages of this year’s annual report is used to highlight the kind of “Best in Class” performance that we are always striv- ing to achieve in all aspects of our business. Reinforcing this strategic imperative are our Seeds of Success: s BE CONSTRUCTIVE. Make and solicit positive, constructive suggestions every day. s BE POSITIVE. Teach others to have fun and celebrate success each day. Use positive language and reduce negative language s BE PROMPT. Do it now... Answer it now... Fix it now... s BE OUTCOME FOCUSED. Find positive lessons in every ad- verse situation. Use the past only for positive lessons. s BE REFLECTIVE. Look for important positive lessons. What could you have done to make something better? s BE RELENTLESS IN SEEKING POSITIVE INCREMENTAL IMPROVEMENT EVERY DAY! We believe that adhering to these concepts will help us enhance our performance-driven culture – a culture that can build long-term value for all “stakeholders” including our customers, asso- ciates, business partners, vendors and investors. s Improved Operating Expense Ratio 160 basis points to 37.2 percent. As a result, EBITDA (excluding stock-based compensation expense) increased 115 percent to more than $57 million, and EPS grew 420 percent to $0.26 per share. These results illus- trate the substantial leverage we are driving in our operating platform as well as the strength of our brands and marketing programs in attracting a significant number of new customers each year while concurrently deepening the relationships that we have with our millions of existing customers. Most important, these results were driven by strong performance in our key business categories – Consumer Floral, Bloomnet® Wire Service and Gourmet Food and Gift Baskets. This, combined with contributions from our enterprise-wide business process improvement initiatives, more than offset the weaker performance of our Home and Children’s Gifts category. tO OUR sHaREHOldERs Strong Customer Metrics and ECV A key element in growing our business, both top- and bot- tom-line, is our ability to leverage our operating platform and assets across all of our brands and businesses. Among our most unique and important assets are the relationships we have with our more than 25 million existing customers and our ability to cost efficiently attract millions of new custom- ers each year. In terms of customer metrics for fiscal 2007: s We attracted approximately 3.5 million new cus- tomers. The large majority of these customers came to us online, through our flagship 1-800-FlOWERS. COM brand. Importantly, we believe the strength of the 1-800-FlOWERS.COM brand provides a distinct advantage in customer acquisition cost compared with most e-commerce and direct marketing competitors. s More than 6.5 million e-commerce customers placed orders with us, with repeat customers repre- senting 48 percent of the total, up from 46 percent last year. This reflects the success of our efforts to deepen our relationships with our customers as their trusted resource helping them express themselves and connect with the important people in their lives. One of our most important initiatives in this area last year was the development of what we call ECV, or Enterprise Customer Value, which promotes cross-brand market- ing and merchandising efforts across our entire platform. During the year we created an enterprise-wide customer database and began using sophisticated software tools to build highly targeted, cross-brand customer “models.” These models significantly enhance the effectiveness of our email and direct marketing programs and have proved very effective in helping us introduce 1-800-FlOWERS.COM customers to our Gourmet Food and Gift Basket brands, including Cheryl&Co.® bakery gifts, Fannie May® and Harry london® chocolates, The Popcorn Factory® and our new 1-800-BASKETS.COM® brand. As a result of these efforts we are seeing improvements in all of our customer metrics, including repeat rate, average order value, response and conversion rates. Leveraging the Enterprise Platform In fiscal 2007 we began reporting specific results and operat- ing metrics for our four business categories: Consumer Floral, the Bloomnet wire service, Gourmet Food and Gift Baskets and Home and Children’s Gifts. The brands within each of these business categories leverage our enterprise op- erating platform and assets to reduce operating costs while driving both revenue growth and profitability. This “shared services” concept, including centralized human resources, IT, legal, Finance and Customer Service, among others, enables our brand managers to focus the majority of their efforts on growing their brands and deepening the relationships with their customers. Throughout the year, the business process improvement initiatives that we implemented beginning in the second half of fiscal 2006 began to pay off with significant cost savings. This was achieved by leveraging our growing scale to consoli- date costs and significantly improve operating efficiencies. These savings and efficiencies – which can be seen in both gross margin and operating expense improvements – have been “institutionalized” so that they are part of our ongoing operations in fiscal 2008 and the future. Importantly, these programs are still in their early stages and we see significant opportunities for further operating efficiencies going for- ward. In terms of our business categories: Consumer Floral – Expanding the Competitive Gap During fiscal 2007, we grew our core 1-800-FlOWERS.COM floral category nearly nine percent to more than $490 million. Importantly, this growth significantly outpaced that of our closest floral competitors and, coming on the largest base of business in the industry, allowed us to further expand our market leadership position. During fiscal 2007 we saw strong customer response to our enhanced merchandise offerings, particularly exten- sions of our signature products such as the hugely successful Happy Hour Collection and its offspring – the Happy Hour Minis. This positive response, combined with our successful efforts to increase order add-on rates and rationalize under- performing skus, enabled us to increase average order value and drive higher gross profit margins. Continuing these efforts, we recently announced our most exciting partnership to date – teaming up with Martha Stewart living Omnimedia, Inc., to create an exclusive co-branded floral, plant and gift basket program called Martha Stewart for 1-800-Flowers.comSM. The program will launch in the spring of 2008 leveraging the best of both brands – lifestyle icon Martha Stewart’s unparalleled design talent with our company’s deepening relationships with our millions of customers and our unique same-day, any-day distribution capabilities. BloomNet – Changing the Wire Service Industry launched in January 2005, the Bloomnet wire service emerged from its investment phase at the end of last year and began providing strong top and bottom-line contributions in fiscal 2007. For the year, revenues increased approximately 50 percent to more than $44 million and category contribution margin grew nearly 100 percent to more than $14 million. These results illustrate the tremendous success of Bloomnet’s “market disrupter” strategy which has enabled us to gain mar- ket share by providing florists with a superior value proposi- tion. This includes Bloomnet’s unique tiered pricing structure in which florists’ fees are tied directly to the volume of orders they receive from Bloomnet. In addition, Bloomnet has de- veloped a best-in-class suite of products and services designed to help florists grow their businesses profitably. Examples of these, introduced in fiscal 2007, include the Bloomnet Floral Selection Guide, Website Hosting service, a comprehensive technology platform for retail store management and the industry’s first and only digital florist directory, the Bloomnet Directory Online. Florists throughout the country have enthusiastically embraced the Bloomnet value proposition. As a result, the Bloomnet team has created what we believe is the very best quality network in the industry – and did it ahead of our original plan. As such, last year we began to shift our focus from growing the network to deepening our relationship with our existing members… helping them not just survive in a contracting marketplace, but to thrive. Toward this end, dur- ing fiscal 2007, Bloomnet began to capture a growing share of the order volume sent between florists. When combined with the 1-800-FlOWERS.COM order volume, Bloomnet florists are now uniquely positioned to benefit from our industry leading growth in order volume. Gourmet Food and Gift Baskets – Delicious Results During fiscal 2007 our Gourmet Food and Gift Baskets busi- ness grew more than 80 percent, or nearly $90 million, to $193 million. This growth included a strong contribution from our Fannie May Confections business, acquired in April, 2006. Combined with our Cheryl & Co. bakery gifts, novelty food gifts from The Popcorn Factory and our recently re- launched 1-800-BASKETS.COM business, we have quickly become one of the leading players in this fast growing gift category. Our customers continue to tell us – through their buying patterns and market surveys– that gourmet food gifts are an excellent way to help them connect with the important people in their lives for a broad range of celebra- tory occasions. Recent industry research indicates that this category represents more than $5 billion in annual sales with solid double-digit growth and strong profit margins. Importantly, the category is largely fragmented, with few large, dominant players. Through a combination of internal development and strategic acquisitions, we believe we are positioned to become the leading provider of gourmet food gifts for our customers. Home and Children’s Gifts – Restructured and Refocused Fiscal 2007 performance in this category was significantly below our expectations. Revenues for the year declined 5 percent to $187 million. More important, category contribu- tion margin declined more than 100 percent to a loss of $1.2 million compared with fiscal 2006. These results reflect both macro market conditions related to the weak housing sector as well as our own internal missteps in both creative and merchandising as we attempted to expand the category with the introduction of two new stand-alone titles. During the year we took aggressive steps to address the weak performance in this category. Beginning in January, we changed senior management and initiated a comprehensive review of the business. Since that time, we have made prog- ress in implementing changes that are beginning to provide benefits in the form of improved customer response rates and lower operating costs. Among these efforts: s We strengthened the management team, particularly in the areas of Creative and Merchandising. s We revised catalog circulation and marketing programs, and s We stepped up product development and sourcing efforts with a focus on unique, proprietary products and adjusted promotional pricing strategies to enhance gross margins. During fiscal 2008, we believe the changes we have made will enable us to operate this business profitably on our plan for flat revenues. Looking Ahead – Building Momentum As we look ahead into fiscal 2008 and beyond, we plan to build on the momentum that we have created. For fiscal 2008 we anticipate continued strong revenue growth in our key business categories – Consumer Floral, Bloomnet Wire Service and Gourmet Food and Gift Baskets. This will be somewhat offset by the planned flat revenues in our Home and Children’s Gifts business that we mentioned earlier in this letter. As a result, we anticipate organic revenue growth for the year in a range of 7-to-9 percent. Also during the year, we expect to achieve further improvements in gross profit margin and operating expense ratio through a combination of sourcing, product mix and ongoing business process improvement initiatives. Com- bined with the anticipated revenue growth, we expect this to result in EBITDA growth of 20-to-25 percent and EPS growth of 30-to-35 percent for the year. longer term, we see our growth paths in terms of both “symmetrical” and “asymmetrical” opportunities. We will continue to grow symmetrically in our three key business categories by: s leveraging our operating platform and collection of unique assets, s Birthing new businesses and product-line extensions, such as the tremendously successful Bloomnet wire service, and s Expanding our offerings through strategic acquisitions We will also continue to explore asymmetrical growth opportunities – constantly researching, testing and, when appropriate, embracing new technologies, new social trends and new ways of looking at our existing businesses so that we can extend our position as a leading e-commerce com- pany. This focus is, frankly, part of our “DnA” and a key to our future success. We believe that the combination of symmetrical and asymmetrical growth strategies, along with leveraging our operating model and assets to reduce costs and enhance prof- itability, will enable us to build long-term shareholder value. We thank all of our stakeholders for their continued support. Sincerely, Jim McCann Chairman and CEO Chris McCann President 1-800-FLOWERS.COM’S Integrated Marketing Strategy is boosting brand exposure and expanding sales growth Best in Class Integrated Marketing During fiscal 2007, 1-800-FlOWERS.COM utilized its diverse integrated marketing capabilities to successfully launch an exciting new collection of “Happy Hour” floral products. The Company’s integrated promotional strategy encompassed both on-line and off-line marketing communication channels including banner ads, website features, e-mail, search, radio, out-of-home advertising, public relations, direct mail and retail. This integrated approach has resulted in signifi- cantly increased exposure of 1-800-flowers.com® branded products as well as improved customer conversion and repeat metrics. January/2008 December/2007 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 February/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 30 31 1 New Year’s Day 6 7 8 2 9 3 4 5 10 11 12 13 14 15 16 17 18 19 20 21 Martin Luther King Jr.’s Birthday (observed) 22 23 24 25 26 27 28 29 30 31 1 2 Striving for Customer Service Excellence results in the prestigious “Call Center of the Year” Award Best in Class Customer Service 1-800-FlOWERS.COM has been recognized for its customer service excellence numerous times by industry associations. Among the most prestigious honors received was being named “Call Center of the Year” by the International Customer Management Institute (ICMI). Each year, the award cites the very best call centers within ICMI’s worldwide membership community. The responsiveness, knowledge and commitment of 1-800-FlOWERS.COM’S Best in Class customer service professionals play a pivotal role in fostering customer satisfaction, resulting in a high degree of repeat business. February/2008 January/2008 S M T W T F S 2 3 4 5 1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 March/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 27 28 29 30 31 3 4 5 6 7 1 8 2 Groundhog Day 9 10 11 12 13 14 Valentine’s Day 15 16 17 18 Presidents’ Day 19 20 21 22 23 24 25 26 27 28 29 1 The innovative BloomNet guide is both a comprehensive training package and an essential marketing tool for retail florists Best in Class BloomNet® Floral Selection Guide March/2008 February/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 April/2008 S M T W T F S 2 3 4 5 1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 24 25 26 27 28 29 1 8 3 4 5 6 7 10 11 12 13 14 15 Bloomnet is a preferred wire service provider offering products and services to a select network of profes- sional retail florists. In fiscal 2007, Bloomnet introduced “expressions of flowersTM,” one of the industry’s most innovative floral selection guides – containing more than 250 forward-trending arrangements. Each of the arrangements can be easily recreated by Bloomnet florists, satisfying a wide array of customer needs. Also included in the guide are many tips and insights. The new guide has quickly become an essential market- ing tool for Bloomnet’s high quality member florists. 2 9 16 17 St. Patrick’s Day 18 19 20 First Day of Spring 21 22 23 Easter 30 24 31 25 26 27 28 29 Fresh Rewards® Loyalty Program attracts high value customers at efficient marketing cost Best in Class Loyalty Program As a way of rewarding loyal customers and to stimulate everyday gifting, 1-800-FlOWERS.COM created “Fresh Rewards®” – the only loyalty program in the e-commerce floral category. Members make purchases and earn points toward gift certificates. More than one million customers, including a significant number of first-time buyers, have signed up to be Fresh Rewards members. Key busi- ness benefits of the program include improved customer metrics: higher average purchases, higher repeat rates, higher retention and more purchases across the Company’s broad range of products and brands. April/2008 March/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 May/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 30 31 1 April Fools Day 6 7 8 2 9 3 4 5 10 11 12 13 14 15 16 17 18 19 Passover Begins at Sunset 20 21 Administrative Professionals’ Week Begins 22 23 Administrative Professionals’ Day 24 25 26 27 28 29 30 1 2 3 BloomNet’s online directory is the industry’s first, enabling instant access to the best-qualified florists Best in Class BloomNet® Digital Directory May/2008 April/2008 S M T W T F S 2 3 4 5 1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 June/2008 S M T W T F S 4 5 6 7 1 2 3 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 27 28 29 30 4 5 Cinco de Mayo 6 7 1 8 2 National Bring Your Mom to Work Day 3 9 10 11 Mother’s Day 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Memorial Day (Observed) 27 28 29 30 31 With the introduction of the floral industry’s first digital directory, the Bloomnet wire service has made it more convenient than ever for Bloomnet member florists to find the right floral shop to fulfill their customer orders. using the intuitive digital directory, Bloomnet florists can search and locate order-fulfilling florists by zip code, city, state, floral specialties and several other criteria. After reviewing qualifications and selecting the best-matched florist for their customer, the Bloomnet florist simply clicks and sends the order through the secure web- based “Bloomlink” network. And, since it’s another Bloomnet shop filling the order, they can be confident of the highest quality in the floral industry. Fueling growth by “talenting up,” 1-800-FLOWERS.COM helps its most important resource – its people – make the most of their careers Best in Class Professional Development 1-800-FlOWERS.COM’s innovative “Fresh university” is an internal educational arm providing professional and personal development for all of the Company’s associates, enterprise-wide. The program’s curriculum focuses on building teamwork and teaching leadership skills that associ- ates can utilize in advancing their careers. The curriculum also offers courses and workshops in several other key areas including sales, conflict resolution and computer training. Since the program’s inception, thousands of associates have received more than 35,000 hours of instruction. June/2008 May/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 July/2008 S M T W T F S 2 3 4 5 1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 1 8 2 9 3 4 5 6 7 10 11 12 13 14 Flag Day 15 Father’s Day 16 17 18 19 20 21 First Day of Summer 22 23 24 25 26 27 28 29 30 1 2 3 4 5 Leading-edge order processing is supported by state-of-the-art customer service centers Best in Class Technology July/2008 June/2008 S M T W T F S 4 5 6 7 1 2 3 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 August/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 29 30 6 7 1 8 2 9 3 4 Independence Day 5 10 11 12 13 14 Bastille Day 15 16 17 18 19 20 21 22 23 24 25 26 27 Parents’ Day 28 29 30 31 1 2 As a pioneer and leader in the e-commerce market, 1-800-FlOWERS.COM employs cutting edge technology anchored by a proprietary order process- ing system. The Company’s scalable and redundant technology supports the high volume of transactions processed through online and telephonic sales channels and provides robust reliability during peak demand periods. Furthermore, the Com- pany’s content-rich website (www.1800flowers.com) is continually updated and incorporates the most advanced search and person- alization capabilities. The site is also supported by state-of-the-art customer service centers featuring keyboard-to-keyboard chat messaging, “click-to-talk” capability and e-mail. Distinctive packaging and personalization capabilities convey the perfect sentiment for any gifting occasion Best in Class Gift Packaging August/2008 July/2008 S M T W T F S 2 3 4 5 1 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 September/2008 S M T W T F S 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Sunday Monday Tuesday Wednesday Thursday Friday Saturday Two of our most exciting gourmet food gift brands, Cheryl&Co.® and The Popcorn Factory®, offer an expansive choice of packag- ing possibilities designed to convey almost any gifting sentiment. Cheryl&Co. baked gifts are available in special configurations as well as with elegant satin ribbons that can be customized for specific occasions and recipi- ents. To enhance presentation and protect peak freshness, Cheryl&Co. cookies are individually wrapped. The Popcorn Factory’s collect- ible tins are famous for their beautiful seasonal graphics. now tins can also be custom- ized with recipient names, personal messages, company logos and just about anything else the customer has in mind, including the latest innovation, uploadable photographs for personalized gift cards. 27 28 29 30 31 3 4 5 6 7 1 8 2 9 10 11 National Friendship Week Begins 12 13 14 15 16 17 18 19 20 21 22 23 25 26 27 28 29 30 24 31 “Giving back” is a priority for the Company, exemplified by two programs benefiting veterans and students Best in Class Community Involvement September/2008 August/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 October/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 31 1 Labor Day 7 Grandparent’s Day 8 2 9 3 4 5 6 10 11 Patriot Day 12 13 14 15 16 17 18 19 20 21 22 First Day of Fall 23 24 25 26 27 28 29 Rosh Hashanah Begins at Sunset 30 1 2 3 4 Working directly with the armed services and local government, 1-800-FlOWERS.COM has initiated a program that provides military veterans and their family members with business-skills train- ing designed to ease their entry into the private sector economy. The Company’s Military Assistance Plan offers training in resume writing, computer skills, job- interview techniques and sales strategies, among other courses. The Company also offers a rapidly expanding Executive Intern Program that gives hundreds of college students from around the country an opportunity to gain hands- on experience in such areas as developing marketing programs, merchandising, information technology, and more. Thoughtful gift ideas, backed by unparalleled service, make 1-800-FLOWERS.COM a trusted business gift-giving expert Best in Class Business Gift Services For more than 30 years, 1-800-FlOWERS.COM has helped businesses thank their clients, celebrate success and reward team members. The Company delivers a unique propo- sition: a broad range of options not offered by other gift vendors, enabling customers to send distinctly different gifts on various occasions. Among the most popular business gifts are gourmet food and gift basket items from The Popcorn Factory®, Cheryl&Co.® and 1-800-BASKETS.COM®. Each product can be customized to include company logos, recipient names, or special business messages. October/2008 1 2 September/2008 S M T W T F S 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 November/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 28 29 30 1 2 3 4 5 6 7 8 Yom Kippur Begins at Sunset 9 10 11 12 National Children’s Day 13 Columbus Day (Observed) 14 15 16 National Bosses’ Day 17 18 Sweetest Day 19 20 21 22 23 24 25 26 27 28 29 30 31 Halloween 1 Unique floral arrangements and gifts are the “signature” of 1-800-FLOWERS.COM Best in Class Merchandising 2 9 1-800-FlOWERS.COM constantly strives to bring product innovation to the floral marketplace. During fiscal 2007, the Company’s highly successful “Happy Hour” collection featuring beautiful bouquets in whimsical giant cocktail glasses led to the birth of the new “Minis” – pint-sized versions of the Happy Hour collection great for everyday connective occasions. Also new to the floral category is the “Fields of the World” collection, combining unique and often exclusive floral va- rieties sourced directly by the Company from farms around the world. 1-800-FlOWERS. COM also offers exclusively- designed containers and vases, along with hand crafted arrangements from expert floral designers such as Preston Bailey, Jane Carroll, Julie Mulligan and Jane Packer. November/2008 October/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 December/2008 S M T W T F S 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 26 27 28 29 30 31 1 8 3 4 Election Day 5 6 7 10 11 Veteran’s Day 12 13 14 15 16 17 18 19 20 21 22 24 25 26 27 Thanksgiving Day 28 29 23 30 The Company’s expanded Home Agent network adds flexibility for peak holiday periods and increases the already award winning quality of its customer service Best in Class Home Agent Network To fulfill the increased staffing requirements of busy selling periods such as Valentine’s Day, Mother’s Day and Christmas, 1-800-FlOWERS.COM has developed a highly flexible and responsive Home Agent network. utilizing sophisticated call routing technologies, the Company is able to quickly and efficiently scale up its number of home-based customer service agents as well as its infrastructure to meet peak holiday demands. The expanding Home Agent network has also increased customer satisfaction and repeat business by making agents more readily available to customers. December/2008 November/2008 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 January/2009 S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Sunday Monday Tuesday Wednesday Thursday Friday Saturday 30 7 1 8 2 9 3 4 5 6 10 11 12 13 14 15 16 17 18 19 20 21 Hanukkah Begins at Sunset First Day of Winter 22 23 24 25 Christmas Day 26 First Day of Kwanzaa 27 28 29 30 31 1 2 3 BOaRd OF diREctORs cORPORatE OFFicERs James F. McCann Chairman and Chief Executive Officer 1-800-FlOWERS.COM Christopher G. McCann President 1-800-FlOWERS.COM Jan Murley Consultant, Consumer & Retail Practice Kohlberg, Kravis, Roberts & Co. Jeffrey C. Walker Chairman & CEO CCMP Capital Advisors, llC James A. Cannivino Chairman & CEO Direct Insite, Inc. leonard J. Elmore Senior Counsel leBoeuf, lamb, Green and MacRae, llP John J. Conefry Vice Chairman Astoria Financial Corporation lawrence V. Calcano Principal Calcano Capital Advisors James F. McCann Chairman and Chief Executive Officer 1-800-FlOWERS.COM Christopher G. McCann President 1-800-FlOWERS.COM William E. Shea Senior Vice President, Treasurer and Chief Financial Officer 1-800-FlOWERS.COM Gerard M. Gallagher Senior Vice President of Business Affairs, General Counsel and Corporate Secretary 1-800-FlOWERS.COM Stephen Bozzo Senior Vice President, Chief Information Officer 1-800-FlOWERS.COM Monica l. Woo President, Consumer Floral Brand 1-800-FlOWERS.COM Timothy J. Hopkins President Madison Brands 1-800-FlOWERS.COM David Taiclet Chief Executive Officer Fannie May Confections Brands, Inc. Fiscal Year 2007 Financial Report 1-800-FLOWERS.COM, Inc. Selected Financial Data 1-800-FLOWERS.COM, Inc. and Subsidiaries The following tables summarize the Company’s consolidated statement of income and balance sheet data. The Company acquired Fannie May Confections Brands, Inc. in May 2006, Wind & Weather in October 2005, Cheryl & Co. in March 2005 and The Winetasting Network in November 2004. The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition. This information should be read together with the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual Report. Years Ended (1) July 1, July 2, July 3, June 27, June 29, 2007 2006 2005 2004 2003 (in thousands, except per share data) Consolidated Statement of Income Data: Net revenues: E-commerce (telephonic/online) Other (retail/wholesale) Total net revenues Cost of revenues Gross profit Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization Total operating expenses Operating income Other income (expense), net Income before income taxes Income tax expense (benefit) Net income Net income per common share: Basic Diluted Shares used in the calculation of net income per common share: Basic Diluted $749,238 163,360 912,598 520,132 392,466 262,303 21,316 56,017 17,837 357,473 34,993 (5,984) 29,009 11,891 $ 17,118 $ $ 0.27 0.26 $706,001 75,740 781,741 456,097 325,644 239,573 19,819 43,978 15,765 319,135 6,509 (141) 6,368 3,181 $620,831 49,848 670,679 395,028 275,651 198,935 14,757 35,572 14,489 263,753 11,898 1,349 13,247 5,398 $570,509 33,469 603,978 351,111 252,867 172,251 13,799 30,415 14,992 231,457 21,410 320 21,730 (19,174) $536,349 29,269 565,618 324,565 241,053 170,013 13,937 29,593 15,389 228,932 12,121 117 12,238 –– $ 3,187 $ 7,849 $ 40,904 $ 12,238 $ $ 0.05 0.05 $ $ 0.12 0.12 $ $ 0.62 0.60 $ 0.19 $ 0.18 63,786 65,526 65,100 66,429 66,038 67,402 65,959 68,165 65,566 67,670 Note (1): The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years ended July 1, 2007, July 2, 2006, June 27, 2004 and June 29, 2003 consisted of 52 weeks, while the fiscal year ended July 3, 2005 consisted of 53 weeks. Note (2): Effective July 4, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123(R) using the modified prospective application method. The impact of the adoption, which reduced net income per common share by $0.05 for both of the fiscal years ended July 1, 2007 and July 2, 2006, is described in further detail in Note 2 of the Company’s Annual Financial Statements. As of July 1, July 2, July 3, June 27, June 29, 2007 2006 2005 2004 2003 (in thousands) Consolidated Balance Sheet Data: Cash and equivalents and short-term investments Working capital Investments-non current Total assets Long-term liabilities Total stockholders’ equity $ 16,087 51,419 –– 352,507 78,911 201,031 $ 46,608 44,739 –– 251,952 5,281 186,334 $103,374 83,704 8,260 261,552 8,874 186,390 $ 61,218 26,875 19,471 214,796 12,820 137,288 $ 24,599 44,250 –– 346,634 79,221 193,183 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 1-800-FLOWERS.COM, Inc. and Subsidiaries Overview For more than 30 years, 1-800-FLOWERS.COM, Inc. – “Your Florist of Choice®” - has been providing customers around the world with the freshest flowers and finest selec- tion of plants, gift baskets, gourmet foods and confections, and plush stuffed animals perfect for every occasion. 1-800- FLOWERS.COM® 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 delivered through its “Fresh From Our Growers(TM)” program. Customers can “call, click or come in” to 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. Sales and Service Specialists 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 children’s gifts from Plow & Hearth® (1-800-627-1712 or www.plowandhearth.com); Wind & Weather® (www.windandweather.com), HearthSong® (www.hearthsong.com) and Magic Cabin® (www.magiccabin.com); gourmet gifts including popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked gifts from Cheryl&Co. ® (1-800-443-8124 or wwwcherylandco.com); premium chocolates and confections from Fannie May Confections Brands (www.fanniemay.com); gourmet foods from GreatFood.com® (www.greatfood.com); wine gifts from Ambrosia.com (www.ambrosiawine.com); gift baskets from 1-800-BASKETS.COM® (www.1800baskets.com) and the BloomNet® international floral wire service, which provides quality products and diverse services to a select network of florists. 1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker symbol FLWS. Category Information During the first quarter of fiscal 2007, the Company segmented its organization to improve execution and cus- tomer focus and to align its resources to meet the demands of the markets it serves. The following table presents the contribu- tion of net revenues, gross profit and “EBITDA” (earnings before interest, taxes, depreciation and amortization) from each of the Company’s business categories. Net Revenues Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Net revenues: 1-800-Flowers.com Consumer Floral BloomNet Wire Service Gourmet Food & Gift Baskets $491,404 8.7% $452,188 7.2% $422,012 44,379 48.5% 29,884 37.2% 21,784 192,698 83.5% 105,002 93.5% 54,263 Home & Children’s Gifts 186,948 (5.1%) 196,919 14.3% 172,317 Corporate(*) 1,652 19.0% 1,388 (25.5%) 1,863 Intercompany eliminations Total net revenues (4,483) (23.2%) (3,640) (133.3%) (1,560) $912,598 16.7% $781,741 16.6% $670,679 Gross Profit Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Gross profit: 1-800-Flowers.com Consumer Floral BloomNet Wire Service Gourmet Food & Gift Baskets Home & Children’s Gifts $192,921 39.3% 13.2% $170,352 37.7% 6.8% $159,553 37.8% 24,844 56.0% 55.4% 88,207 45.8% 85.9% 85,899 45.9% 764 46.2% (6.2%) 38.7% 15,989 53.5% 47,442 45.2% 91,555 46.5% 551 39.7% 35.6% 99.3% 14.8% (31.6%) 11,795 54.1% 23,806 43.9% 79,728 46.3% 806 43.3% (169) (245) (37) $392,466 20.5% $325,644 18.1% $275,651 43.0% 41.7% 41.1% Corporate(*) Intercompany eliminations Total gross profit 3 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries EBITDA (**) Years Ended Reconciliation of Net Income to EBITDA: Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 July 1, July 2, July 3, 2007 2006 2005 (in thousands) (in thousands) Net income $17,118 $ 3,187 $ 7,849 Category Contribution Margin: 1-800-Flowers.com Consumer Floral $64,580 38.8% $46,518 (1.1%) $47,039 BloomNet Wire Service 14,169 99.4% 7,106 20.2% 5,912 Gourmet Food & Gift Baskets 26,377 286.4% 6,827 790.1% 767 Home & Children’s Gifts (1,215) (117.0%) 7,134 5.8% 6,741 Category Contribution Margin Subtotal 103,911 53.7% 67,585 11.8% 60,459 Corporate(*) (51,081) (12.7%) (45,311) (33.0%) (34,072) EBITDA $52,830 137.2% $22,274 (15.6%) $26,387 (*) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock- Based Compensation. In order to leverage the Company’s infra- structure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific category. (**) Performance is measured based on category contribution margin or category EBITDA, reflecting only the direct controllable revenue and operating expenses of the categories. As such, management’s measure of profitability for these categories does not include the effect of corporate overhead, described above, nor does it include depreciation and amortization, other income (net), and income taxes. Management utilizes EBITDA as a performance measurement tool because it considers such information a meaning- ful supplemental measure of its performance and believes it is frequently used by the investment community in the evaluation of companies with comparable market capitalization. The Company also uses EBITDA as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. The Company’s credit agreement uses EBITDA (with additional adjustments) to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA is also used by the Company to evaluate and price potential acquisition candidates. EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, the Company’s working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company’s debts; and (c) although depreciation and amorti- zation are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company’s performance. Add: Interest expense 7,390 Depreciation and amortization 17,837 Income tax expense Less: Interest income Other income (expense) 11,891 1,381 25 1,407 15,765 3,181 481 14,489 5,398 1,260 1,690 6 140 $26,387 EBITDA $52,830 $22,274 Results of Operations The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2007 and 2006, which ended on July 1, 2007 and July 2, 2006, respectively, consisted of 52 weeks, while fiscal year 2005, which ended on July 3, 2005, consisted of 53 weeks. Net Revenues Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Net Revenues: E-Commerce $749,238 6.1% $706,001 13.7% $620,831 Other 163,360 115.7% 75,740 51.9% 49,848 $912,598 16.7% $781,741 16.6% $670,679 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 16.7% during the fiscal year ended July 1, 2007 was due to a combination of organic growth, as well as the acquisitions of Fannie May Confections Brands, a manufacturer and retailer of premium chocolates and other confections, acquired on May 1, 2006 and Wind & Weather, a direct marketer of weather-themed gifts, acquired on October 31, 2005. Organic revenue growth, including post acquisition growth of the aforementioned acquisitions, adjusted for the disposition of certain Company owned floral retail stores, during fiscal 2007 was approximately 8%, reflecting: (i) the Company’s strong brand name recognition, (ii) continued leveraging of its existing customer base, and (iii) cost effective spending on its marketing and selling programs, designed to improve customer acquisition and accelerate top-line growth. The Company’s revenue growth of 16.6% during the fiscal 4 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries year ended July 2, 2006 was due to a combination of organic growth, as well as the acquisitions of Cheryl & Co., acquired on March 28, 2005, Wind & Weather, acquired on October 31, 2005, and Fannie May Confections Brands, acquired on May 1, 2006. Organic revenue growth, including post acquisition growth of the aforementioned acquisitions, during fiscal 2006 was approximately 10%, adjusted for the additional week of sales during fiscal 2005 which consisted of 53 weeks, compared to fiscal 2006 which consisted of 52 weeks. The Company fulfilled approximately 11,635,000, 11,315,000 and 10,213,000 orders through its e-commerce (combined online and telephonic) sales channel during the fiscal years ended July 1, 2007, July 2, 2006, and July 3, 2005, respectively, representing increases of 2.8% and 10.8% over the respective prior fiscal years. The Company’s e-commerce (combined online and telephonic) sales channel average order value increased 3.2% to $64.37 during fiscal 2007, and 2.6% to $62.39 during fiscal 2006, as a result of increased service and shipping charges (in line with industry norms) to partially offset the impact of increased fuel costs passed on from freight carriers. Other revenues for the fiscal years ended July 1, 2007 and July 2, 2006, increased in comparison to the same periods of the prior year, primarily as a result of the retail/ wholesale contribution of Fannie May Confections Brands, as well as the continued membership growth and wholesale floral product and service offerings from the Company’s BloomNet Wire Service category. Additionally, during fiscal 2006, other revenues increased from the retail/wholesale contribution of Cheryl & Co. The 1-800-Flowers.com Consumer Floral category includes the 1-800-Flowers brand operations which derives revenue from the sale of consumer floral products through its e-commerce sales channels (telephonic and online sales) and company-owned and operated retail floral stores, as well as royalties from its franchise operations. Net revenues during the fiscal years ended July 1, 2007 and July 2, 2006, increased by 8.7% and 7.2% over the respective prior year periods, primarily from a combination of increased average order value and order volumes from its e-commerce sales channel, offset in part by lower retail sales from its company- owned floral stores due to the planned transition of Company stores to franchise ownership. The BloomNet Wire Service category includes revenues from membership fees as well as other service offerings to florists. Net revenues during the fiscal years ended July 1, 2007 and July 2, 2006 increased by 48.5% and 37.2% over the respective prior year periods, primarily as a result of increased florist membership, expanded product and service offerings, pricing initiatives and an increase in wholesale floral product sales. The Gourmet Food & Gift Basket category includes the operations of the Cheryl & Co., Fannie May Confections Brands, The Popcorn Factory and The Winetasting Network brands. Revenue is derived from the sale of cookies, baked gifts, premium chocolates and confections, gourmet popcorn and wine gifts through its E-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Cheryl & Co. and Fannie May Confections brands, as well as wholesale operations. Net revenue during the fiscal year ended July 1, 2007 increased by 83.5% over the prior year period, as a result of the contribution of Fannie May Confections Brands, which was acquired in May 2006, and strong organic growth within the Cheryl & Co. Net revenue during the fiscal year ended July 2, 2006 increased by 93.5% over the prior year period, as a result of the contribution of Cheryl & Co., which was acquired in March 2005, and strong organic growth within The Popcorn Factory brand. The Home & Children’s Gifts category includes revenues from the Plow & Hearth, Wind & Weather, Problem Solvers, Madison Place, HearthSong and Magic Cabin brands. Revenue is derived from the sale of home decor and children’s gifts through its e-commerce sales channels (telephonic and online sales) or company-owned and operated retail stores operated under the Plow & Hearth brand. Net revenue during the year ended July 1, 2007 decreased by 5.1% over the prior year period due to a lack of new “hit” products and an overall macro decline in customer demand within this category. During the second quarter of fiscal 2007, efforts to expand titles outside of the core Plow & Hearth brand did not attract the level of customer demand to justify the increase in marketing costs. In response to the poor results, during the third quarter of fiscal 2007, manage- ment implemented several changes to improve the perfor- mance within this category: (i) revised the aforementioned plans to expand and add titles, (ii) strengthened the manage- ment team, (iii) improved the creative look and feel of the catalogs and (iv) revised the circulation plans for all titles to place more focus on the category’s existing customer base. Net revenue during the fiscal year ended July 2, 2006 increased by 14.3% over the prior year period as a result of increased average order value and order volumes from its e-commerce sales channel, including the contribution of Wind & Weather, as well as higher retail sales from the Plow & Hearth brand company-owned stores due to the addition of 3 new store locations. Over the past several years, through a combination of organic efforts and strategic acquisitions, the Company has rapidly grown its revenues, achieving a solid base of busi- ness which is approaching $1 billion. For fiscal 2008, the Company anticipates continued strong growth in its key business categories: Consumer Floral, BloomNet Wire Service and Gourmet Food & Gift Baskets, partially offset by anticipated flat growth in its Home and Children’s category. As a result, the Company anticipates organic revenue growth for the year in a range of 7-9 percent. Gross Profit Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Gross profit $392,466 20.5% $325,644 18.1% $275,651 Gross margin % 43.0% 41.7% 41.1% Gross profit consists of net revenues less cost of rev- enues, 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 out- bound shipping charges. Additionally, cost of revenues include labor and facility costs related to direct-to-consumer merchandise operations. Gross profit increased during the fiscal years ended July 1, 2007 and July 2, 2006, in comparison to the same periods of the prior years, primarily as a result of the revenue growth 5 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries described above and an increase in gross margin percent- age. Gross margin percentage increased 130 basis points and 60 basis points during the fiscal years ended July 1, 2007 and July 2, 2006, respectively, as a result of product mix and pricing initiatives as well as continued improvements in customer service, fulfillment, including improved outbound shipping rates, and merchandising programs. The 1-800-Flowers.com Consumer Floral category gross profit for the fiscal years ended July 1, 2007 and July 2, 2006, increased by 13.2% and 6.8% over the respective prior year periods, as a result of the aforementioned increase in net revenues. During fiscal 2007, gross margin percentage increased 160 basis points to 39.3% as a result of improve- ments in sourcing, fulfillment logistics, including reduced outbound shipping rates, and pricing initiatives. During fiscal 2006, gross margin percentage decreased 10 basis points to 37.7% as a result of increases in carrier fuel charges. The BloomNet Wire Service category gross profit for the fiscal years ended July 1, 2007 and July 2, 2006, increased by 55.4% and 35.6% over the respective prior year periods as a result of increases in florist membership, product and service offerings, pricing initiatives and floral wholesale product sales. Gross margin percentage increased 250 basis points to 56.0% primarily as a result of sales mix, whereas, the gross margin percentage during fiscal 2006 decreased by 60 basis points as a result of increases in carrier fuel charges on sales of floral wholesale products. The Gourmet Food & Gift Basket category gross profit for the fiscal year ended July 1, 2007 increased by 85.9% over fiscal 2006 as a result of the incremental revenue generated by Fannie May Confections Brands and strong organic growth within the Cheryl & Co. brand, combined with an increase in gross margin percentage of 60 basis points, to 45.8%, as a result of improvements in outbound shipping rates and merchandising programs across all brands within the category. Gross profit for the fiscal year ended July 2, 2006 increased by 99.3% over fiscal 2005 as a result of the incremental revenue and higher gross margin percentage generated by Cheryl & Co., combined with the strong organic growth of The Popcorn Factory brand. As a result, during fiscal 2006, gross margin percentage increased by 130 basis points to 45.2%. The Home & Children’s Gift category gross profit for the fiscal year ended July 1, 2007 decreased by 6.2% over the respective prior year period as a result of the aforementioned decline in sales, combined with a lower gross margin percent- age, which declined by 60 basis points to 45.9%, due to sales mix and markdowns to move inventory. During the year ended July 2, 2006, gross profit increased by 14.8% as a result of the aforementioned increase in revenue combined with an improvement in gross margin percentage, which increased 20 basis points to 46.5%, as a result of sourcing initiatives. During fiscal year 2008, the Company expects that its gross margin percentage will continue to improve, primarily through: (i) growth of its higher margin business categories including Gourmet Food and Gift Baskets and BloomNet Wire Service, (ii) improved product sourcing, new product devel- opment and process improvement initiatives implemented during the fiscal 2007, (iii) continued improvements in performance of the Consumer Floral segment, and (iv) refocus on the core Home and Children’s Gifts’ businesses. Marketing and Sales Expense Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Marketing and sales Percentage of sales $262,303 9.5% $239,573 20.4% $198,935 28.7% 30.6% 29.7% Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search costs, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and merchandising activities. During the fiscal year ended July 1, 2007, marketing and sales expenses decreased from 30.6% to 28.7% of net revenues, reflecting improved operating leverage from a number of cost-saving initiatives and the completion of the investment phase of the Company’s BloomNet Wire Service business, including the absorption of incremental personnel to expand membership, increase product and service offerings, and increase BloomNet Technologies penetration. This leverage was achieved through significant improvement within the Company’s 1-800-Flowers Consumer Floral, BloomNet Wire Service and Gourmet Food & Gift Baskets categories, as efforts to grow the Home and Children’s Gifts businesses through the introduction of titles outside of the core Plow & Hearth brand did not attract the necessary level of customer demand to justify the costs. During the fiscal year ended July 2, 2006, marketing and sales expense increased as a percentage of net revenues as a result of several factors including: (i) the Company’s efforts to increase new customer acquisition and accelerate top-line growth through increased marketing efforts both online and via broadcast advertising, (ii) investments required to expand its BloomNet business-to-business floral operations, (iii) incre- mental expenses associated with the Company’s recent acquisitions, which, while contributing to revenue growth and achieving higher gross product margins, also incur higher marketing expenses, and (iv) the impact of adopting SFAS No. 123(R), “Share-Based Payment” – refer to Footnote 2 of the Company’s Annual Financial Statements for further details. During the fiscal years ended July 1, 2007 and July 2, 2006, marketing and sales expense increased over the respective prior year periods by 9.5% and 20.4% as a result of several factors, including: (i) incremental expenses associated with the acquisition of Fannie May Confections Brands in May 2006 and Cheryl & Co. in March 2005, (ii) incremental variable costs to accommodate higher sales volumes, and (iii) personnel associated with the expansion of the BloomNet Wire Service business. Additionally, as previously mentioned, fiscal 2006 was further impacted by the adoption of SFAS No. 123(R), “Share-Based Payment”. During the fiscal year ended July 1, 2007, the Company added approximately 3,464,000 new e-commerce customers, compared to 3,556,000 and 3,311,000 in fiscal 2006 and fiscal 2005, respectively. Of the 6,630,000 total customers who placed e-commerce orders during the fiscal year ended 6 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries July 1, 2007, approximately 47.7% were repeat customers, compared to 46.4% in both prior fiscal years, reflecting the Company’s ongoing focus on deepening the relationship with its existing customers as their trusted source for gifts and services for all of their celebratory occasions. During fiscal 2007, the Company focused on improving its operating expense ratio through a number of cost saving initiatives, including catalog printing and e-mail pricing improvements, as well as a review of the type, quantity and effectiveness of its marketing programs. In addition to the improved operating results expected now that the Company has completed the investment phase of its BloomNet florist business, during fiscal 2008, the Company expects that marketing and sales expense will continue to decrease as a percentage of net revenue in comparison to the prior years. Technology and Development Expense Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Technology and development Percentage of sales $21,316 7.6% $19,819 34.3% $14,757 2.3% 2.5% 2.2% Technology and development expense consists primarily of payroll and operating expenses of the Company’s informa- tion technology group, costs associated with its web sites, including hosting, design, content development and mainte- nance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. During the fiscal year ended July 1, 2007, technology and development expense decreased to 2.3% of net revenue, reflecting improved operating leverage, however, technology and development expense increased by 7.6% over the prior year period, as a result of the incremental expenses associ- ated with Fannie May Confections Brands, as well as for increases in the cost of maintenance and license agreements required to support the Company’s technology platform. During the fiscal year ended July 2, 2006, technology and development expense increased to 2.5% of net revenues primarily as a result of: (i) incremental expenses associated with system improvements required by The Winetasting Network, and integration projects for Wind & Weather, which was absorbed into the Company’s Madison, Virginia operations, (ii) content development for the upgrade of the Company’s 1-800-Flowers.com branded website which was launched in the fourth quarter of fiscal 2006, (iii) increases in the cost of maintenance and license agreements required to support the Company’s technology platform, and (iv) the impact of adopting SFAS No. 123(R), “Share-Based Payment” – refer to Footnote 2 of the Company’s Annual Financial Statements for further details. During the fiscal years ended July 1, 2007, July 2, 2006, and July 3, 2005 the Company expended $32.3 million, $33.6 million, and $24.0 million, respectively, on technology and development, of which $11.0 million, $13.8 million, and $9.2 million, respectively, has been capitalized. The Company believes that continued investment in technology and development is critical to attaining its strategic objectives. While many of its acquisition-related integration projects are complete, as a result of incremental expenses associated with Fannie May Confections Brands, the Company expects that its spending for the fiscal 2008 will remain consistent, as a percentage of net revenues, in comparison to the prior year. General and Administrative Expenses Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) General and administrative $56,017 27.4% $43,978 23.6% $35,572 Percentage of sales 6.1% 5.6% 5.3% 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 27.4% and 23.6% during the fiscal years ended July 1, 2007 and July 2, 2006, respectively, and by 50 basis points and 30 basis points as a percentage of net revenues in comparison to the respec- tive prior year periods, primarily as a result of: (i) incremental expenses associated with the acquisitions of Fannie May Confections Brands in May 2006 and Cheryl & Co. in March 2005, (ii) increased legal and professional fees, and (iii) the achievement of certain performance related bonus targets in fiscal 2007 which were not earned in the prior fiscal years. Additionally, general and administrative expense during fiscal 2006 was further impacted by incremental expenses associ- ated with the Company’s corporate headquarters relocation in December 2005, and the impact of adopting SFAS No. 123(R), “Share-Based Payment” – refer to Footnote 2 of the Company’s Annual Financial Statements for further details. Although the Company believes that its current general and administrative infrastructure is sufficient to support existing requirements and drive operating leverage, the Company expects that its general and administrative expenses as a percentage of net revenue during fiscal 2008 will remain consistent with the prior year period. Depreciation and Amortization Years Ended July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 (in thousands) Depreciation and amortization Percentage of sales $17,837 13.1% $15,765 8.8% $14,489 2.0% 2.0% 2.2% Depreciation and amortization expense increased by 13.1% and 8.8% during the fiscal years ended July 1, 2007 and July 2, 2006, respectively, in comparison to the prior year periods as a result of the incremental amortization expense related to the intangibles established as a result of the acquisitions of Fannie May Confections Brands and Wind & Weather in fiscal 2006 and Cheryl & Co. in fiscal 2005, as well as depreciation associated with recently completed technology projects designed to provide improved order/ warehouse management functionality across the enterprise. The Company believes that continued investment in its 7 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries infrastructure, primarily in the areas of technology and development, including the improvement of the technology platforms are critical to attaining its strategic objectives. As a result of these improvements, and the increase in amortization expense associated with intangibles established as a result of recent acquisitions, the Company expects that depreciation and amortization for the fiscal 2008 will remain consistent as a percentage of net revenues in comparison to the prior year. Other Income (Expense) Years Ended effective income tax rate for fiscal 2006 of approximately 8.5% from the associated book/tax differences in accounting for incentive stock options. Additionally, the Company’s effective tax rate for the fiscal years ended July 1, 2007, July 2, 2006 and July 3, 2005 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, partially offset by various tax credits. At July 1, 2007, the Company’s net operating loss carryforwards were approximately $27.7 million, which, if not utilized, will begin to expire in fiscal year 2020. July 1, July 2, July 3, 2007 % Change 2006 % Change 2005 Liquidity and Capital Resources (in thousands) Interest income $ 1,381 9.6% $1,260 (25.4)% $ 1,690 Interest expense (7,390) (425.2)% (1,407) (192.5)% (481) Other, net 25 316.7% 6 (95.7)% 140 $ (5,984) (4,144.0)% $ (141) (110.5)% $ 1,349 Other income (expense) consists primarily of interest income earned on the Company’s investments and available cash balances, offset by interest expense, primarily attribut- able to the Company’s long-term debt, and revolving line of credit. In order to finance the acquisition of Fannie May Confections Brands, on May 1, 2006, the Company entered into a $135.0 million secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders (the “2006 Credit Facility”). The 2006 Credit Facility, as amended on October 24, 2006, currently includes an $85.0 million term loan and a $60.0 million revolving facility, which bear interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the Company’s leverage ratio. At closing, the Company borrowed $85.0 million of the term facility to acquire all of the outstanding capital stock of Fannie May Confections Brands, Inc. The decrease in other income (expense) during the fiscal years ended July 1, 2007 and July 2, 2006, respectively, in comparison to prior years was the result of higher interest expense on the Company’s 2006 Credit Facility. Additionally, other income (expense) during fiscal 2006 decreased as a result of lower interest income, resulting from a decrease in average cash balances, due to the acquisitions of the The Winetasting Network in November 2004, Cheryl & Co. in March 2005, Wind & Weather in November 2005, and Fannie May Confections Brands in May 2006, which was partially funded from the Company’s existing cash balances, as well as the Company’s stock buy-back program. Income Taxes During the fiscal years ended July 1, 2007, July 2, 2006 and July 3, 2005, the Company recorded income tax ex- pense of $11.9 million, $3.2 million and $5.4 million, respec- tively. The Company’s effective tax rate for the fiscal years ended July 1, 2007, July 2, 2006 and July 3, 2005 was 41.0%, 50.0% and 40.7%, respectively. The decrease in the effective tax rate during the fiscal year ended July 1, 2007 resulted from the dilution of the impact of stock-based compensation recognized in accordance with SFAS No. 123(R), over an increased level of income before taxes in comparison the prior fiscal year. The increase in the effective tax rate during the fiscal year ended July 2, 2006, resulted from the impact of stock-based compensation recognized in accordance with SFAS No. 123(R) which was adopted in fiscal 2006, thus resulting in an increase in the annual 8 At July 1, 2007, the Company had working capital of $51.4 million, including cash and equivalents of $16.1 million, compared to working capital of $44.3 million, includ- ing cash and equivalents of $24.6 million, at July 2, 2006. Net cash provided by operating activities of $32.3 million for the fiscal year ended July 1, 2007 was primarily attribut- able to net income, adjusted to add back non-cash charges for depreciation and amortization, deferred income taxes and stock-based compensation, offset in part by increases in inventory (primarily due to the strong growth in the Gourmet Food and Gift Baskets category as well as slower growth in the Home & Children’s Gifts category) and receivables (due to the strong growth in the Gourmet Food and Gift Baskets category as well as the BloomNet Wire Service category). Net cash used in investing activities of $16.7 million for the fiscal year ended July 1, 2007 was primarily attributable to capital expenditures related to the Company’s technology and distribution infrastructure, offset in part by the sale of certain Company owned floral retail stores to franchise operators. Net cash used in financing activities of $24.2 million for the fiscal year ended July 1, 2007, was primarily due to the scheduled repayments (net) of the Company’s debt and bank borrowings against the Company’s 2006 Credit Facility and capital lease obligations of $10.3 million, and the repurchase of 3,035,367 shares of treasury stock in the amount of $15.9 million, offset by the net proceeds received upon the exercise of employee stock options. On May 1, 2006, the Company entered into a secured credit facility with JPMorgan Chase Bank, N.A., as adminis- trative agent, and a group of lenders (the “2006 Credit Facility”). The 2006 Credit Facility includes an $85.0 million term loan and a $60.0 million revolving credit facility, as adjusted, which bear interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the Company’s leverage ratio. At closing, the Company borrowed $85.0 million of the term facility to acquire all of the outstanding capital stock of Fannie May Confections Brands, Inc. The Company is required to pay the outstanding term loan in quarterly installments, with the final installment payment due on May 1, 2012. The 2006 Credit Facility contains various conditions to borrowing, and affirmative and negative financial covenants. The Company had historically utilized cash generated from operations to meet its cash requirements, including all operating, investing and debt repayment activities. However, due to the Company’s continued expansion into non-floral products, including the acquisition of Fannie May Confections Brands, as well as its recent acquisition of $15.9 million of treasury stock, during the second half of fiscal 2007, the Company expects to borrow against its existing line of credit Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries to fund working capital requirements related to pre-holiday manufacturing and inventory purchases. At July 1, 2007, the Company had no outstanding amounts under its revolving credit facility, but anticipates borrowing against the facility prior to the end of its first quarter. The Company anticipates that such borrowings will peak during its fiscal second quarter, before being repaid prior to the end of that quarter. 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. Under this program, as of July 1, 2007, the Company had repurchased 1,534,677 shares of common stock for $11.3 million. In a separate transaction, during fiscal 2007, the Company’s Board of Directors authorized the repurchase of 3,010,740 shares ($15.7 million) from an affiliate. The purchase price was $15,689,000, or $5.21 per share. The repurchase was approved by the disinterested members of the Company’s Board of Directors and is in addition to the Company’s existing stock repurchase authorization of $20.0 million, of which $8.7 million remains authorized but unused. At July 1, 2007, the Company’s contractual obligations consist of: Payments due by period Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years (in thousands) Long-term debt, including interest $ 93,113 99 Capital lease obligations 68,577 Operating lease obligations 6,232 Sublease obligations 33,788 Purchase commitments (*) Total $201,809 $ 14,741 41 10,812 2,099 33,788 $ 61,481 $ 32,610 27 16,436 2,904 –– $ 51,977 $ 45,762 25 13,182 976 –– $ –– 6 28,147 253 –– $ 59,945 $ 28,406 (*) Purchase commitments consist primarily of inventory, equipment purchase orders and online marketing agreements made in the ordinary course of business. Critical Accounting Policies and Estimates The Company’s discussion and analysis of its financial position and results of operations are based upon the consolidated financial statements of 1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circum- stances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in prepa- ration of its consolidated financial statements. Revenue Recognition Net revenues are generated by E-commerce operations from the Company’s online and telephonic sales channels as well as other operations (retail/wholesale) and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product shipment. Shipping terms are FOB shipping point. Net revenues generated by the Company’s BloomNet Wire Service operations include membership fees as well as other products and service offerings to florists. Membership fees are recognized monthly in the period earned, and products sales are recognized upon product shipment with shipping terms of FOB shipping point. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its custom- ers or franchisees to make required payments. If the financial condition of the Company’s customers or franchisees were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory The Company states inventory at the lower of cost or market. In assessing the realization of inventories, we are required to make judgments as to future demand require- ments 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 performs an annual impairment test as of the first day of its fiscal fourth quarter, or earlier if indicators of potential impairment exist, to evaluate goodwill. Goodwill is considered impaired if the carrying amount of the reporting unit exceeds its estimated fair value. In assessing the recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions with regard to fair value. Judgment regarding the existence of impairment 9 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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 is impaired. Capitalized Software The carrying value of capitalized software, both pur- chased 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 SFAS No. 123R requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant. The Company determines the fair value of stock options issued by using the Black-Scholes option- pricing model. The Black-Scholes option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior. Expected volatilities are based on historical volatility of the Company’s stock price. The dividend yield is based on historical experience and future expectations. The risk-free interest rate is derived from the US Treasury yield curve in effect at the time of grant. The Black-Scholes model also incorporates expected forfeiture rates, based on historical behavior. Determining these assumptions are subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of the Company’s stock options. Income Taxes The Company has established deferred income tax assets and liabilities for temporary differences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company has recognized as a deferred tax asset the tax benefits associated with losses related to operations, which are expected to result in a future tax benefit. Realiza- tion of this deferred tax asset assumes that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that we consider in assessing the likelihood of realization include the forecast of future taxable income and available tax planning strategies that could be implemented to realize the deferred tax assets. Recent Accounting Pronouncements In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes” and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained then no benefits of the position are to be recog- nized. FIN 48 requires additional disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition. 10 In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value mea- surements. Statement No. 157 applies to other accounting pronouncements that require or permit fair value measure- ments and, accordingly, does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The transition adjust- ment of the difference between the carrying amounts and the fair values of those financial instruments should be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The company is currently evaluating the impact of adopting the provisions of Statement No. 157. Quantitative and Qualitative Disclosures About Market Risk The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds and investment grade corporate and U.S. government securities, as well as from outstanding debt. As of July 1, 2007, the Company’s outstanding debt, including current maturities, approximated $78.1 million, of which $76.5 million was variable rate debt. Each 25 basis point change in interest rates would have a corresponding effect on our interest expense of approximately $0.2 million as of July 1, 2007. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. Cautionary Statements Under the Private Securities Litigation Reform Act of 1995 Our disclosures and analysis in this annual report contain some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking state- ments in other statements we release to the public as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan, “believe” and similar expressions in connec- tion with any discussion of future operating or financial performance. In particular, these include statements relating to future actions; the effectiveness of our marketing programs; the performance of our existing products and services; our ability to attract and retain customers and expand our cus- tomer base; our ability to enter into or renew online marketing agreements; our ability to respond to competitive pressures; expenses, including shipping costs and the costs of marketing our current and future products and services; the outcome of contingencies, including legal proceedings in the normal course of business; and our ability to integrate acquisitions. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risk, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertain- Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries ties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward looking statements. We undertake no obligation to publicly update forward- looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our 10-K, 10-Q and 8-K reports to the SEC. Also note we provide the following cautionary discussion of risks, uncer- tainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Conse- quently, you should not consider the following to be a complete discussion of all potential risks and uncertainties. Quarterly Results of Operations The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2007 and 2006. The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly the Company’s results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period. Three Months Ended July 1, Apr. 1, Dec. 31, Oct. 1, Jul. 2, Apr. 2, Jan. 1, Oct. 2, 2007 2007 2006 2006 2006 2006 2006 2005 (in thousands, except per share data) Net revenues: E-Commerce (telephonic/online) Other $194,228 37,593 $175,592 38,187 $270,159 59,707 $109,259 27,873 $161,820 18,197 $258,484 19,345 $100,655 12,110 231,821 132,833 213,779 127,092 329,866 177,889 98,988 86,687 151,977 137,132 82,318 54,814 180,017 109,743 277,829 152,837 84,352 70,274 124,992 $185,042 26,088 211,130 126,778 Total net revenues Cost of revenues Gross Profit Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization Total operating expenses Operating income (loss) Other income (expense), net Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Basic and diluted net income (loss) 61,873 5,485 14,545 4,812 86,715 12,273 59,023 5,469 14,198 4,447 83,137 99,037 5,201 13,931 3,834 122,003 42,370 5,161 13,343 4,744 65,618 60,287 5,083 11,804 4,555 81,729 53,188 5,170 11,181 3,877 73,416 87,874 4,797 10,357 3,809 106,837 3,550 29,974 (10,804) 2,623 (3,142) 18,155 (11,127) (979) 11,294 4,732 137 (10,990) 7,704 (4,364) $ 6,562 $ 1,053 $ 16,922 $ (7,419) $ 1,017 $ (1,540) $ 10,336 $ (6,626) (1,347) (2,178) 27,796 10,874 (1,480) (12,284) (4,865) 515 (2,627) (1,087) (678) 1,945 928 (115) 18,040 2,203 1,150 112,765 66,739 46,026 38,224 4,769 10,636 3,524 57,153 per share: $ 0.10 $ 0.02 $ 0.26 $ (0.11) $ 0.02 $ (0.02) $ 0.16 $ (0.10) The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into non-floral products, including the acquisitions of Wind & Weather and Fannie May Confections Brands. during fiscal 2006, 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, Administrative Professionals Week and Easter, revenues also rise during the Company’s fiscal fourth quarter. For fiscal 2008, however, the Easter holiday will occur in the Company’s third fiscal quarter, thus creating high growth in the Company’s third fiscal quarter and lower growth in the Company’s fourth fiscal quarter. 11 Consolidated Balance Sheets 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except share data) July 1, July 2, 2007 2006 Assets Current Assets: $ 16,087 17,010 62,051 19,260 9,576 123,984 62,561 112,131 52,750 –– 1,081 $ 352,507 $ 62,433 10,132 72,565 68,000 8,230 2,681 151,476 –– 303 $ 24,599 13,153 52,954 17,427 10,347 118,480 59,732 131,141 29,822 6,224 1,235 $ 346,634 $ 63,870 10,360 74,230 78,063 –– 1,158 153,451 –– 299 421 269,270 421 262,667 (38,893) (56,011) (30,070) (14,193) 201,031 193,183 $346,634 $ 352,507 Cash and equivalents Receivables, net Inventories Deferred income taxes Prepaid and other Total current assets Property, plant and equipment, net Goodwill Other intangibles, net Deferred income taxes Other assets Total assets Liabilities and Stockholders’ Equity Current liabilities: Accounts payable and accrued expenses Current maturities of long-term debt and obligations under capital leases Total current liabilities Long-term debt and obligations under capital leases Deferred income taxes Other liabilities Total liabilities 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, 30,298,019 and 29,872,183 shares issued in 2007 and 2006, respectively Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465 shares issued in 2007 and 2006 Additional paid-in capital Retained deficit Treasury stock, at cost – 4,590,717 and 1,555,350 Class A shares in 2007 and 2006, respectively, and 5,280,000 Class B shares Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes. 12 Consolidated Statements of Income 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except per share data) Years Ended July 1, July 2, July 3, 2007 2006 2005 Net revenues Cost of revenues Gross profit $781,741 456,097 325,644 $912,598 520,132 392,466 $670,679 395,028 275,651 Operating expenses: Marketing and sales Technology and development General and administrative Depreciation and amortization Total operating expenses Operating income 262,303 21,316 56,017 17,837 357,473 34,993 239,573 19,819 43,978 15,765 319,135 6,509 198,935 14,757 35,572 14,489 263,753 11,898 Other income (expense): 1,690 Interest income Interest expense (7,390) (1,407) (481) 140 Other, net 1,349 Total other income (expense), net 6 (141) 25 (5,984) 1,260 1,381 Income before income taxes Income tax expense 29,009 11,891 6,368 3,181 13,247 5,398 Net income $ 17,118 $ 3,187 $ 7,849 Net income per common share: Basic Diluted $ 0.27 $ 0.26 $ $ 0.05 0.05 $ $ 0.12 0.12 Weighted average shares used in the calculation of net income per common share: Basic Diluted 63,786 65,526 65,100 66,429 66,038 67,402 See accompanying notes. 13 S e e a c c o m p a n y i n g n o t e s . N e t i n c o m e l B a a n c e a t J u y l 2 , 2 0 0 6 l C a s s A c o m m o n s t o c k N e t i n c o m e B a l a n c e a t J u l y 1 , 2 0 0 7 S t o c k r e p u r c h a s e p r o g r a m S t o c k - b a s e d c o m p e n s a t i o n v e s t i n g o f r e s t r i c t e d s t o c k l E x e r c i s e o f e m p o y e e s t o c k o p t i o n s a n d S t o c k - b a s e d c o m p e n s a t i o n v e s t i n g o f r e s t r i c t e d s t o c k E x e r c s e i o f l e m p o y e e s t o c k o p t i o n s a n d S t o c k r e p u r c h a s e p r o g r a m C o n v e r s o n i o f l C a s s B c o m m o n s t o c k i n t o l R e c a s s i f i c a t i o n o f u n v e s t e d r e s t r i c t e d s t o c k u p o n a d o p t i o n o f - S F A S N o . 1 2 3 R S h a r e B a s e d P a y m e n t N e t I n c o m e l B a a n c e a t J u y l 3 , 2 0 0 5 S t o c k r e p u r c h a s e p r o g r a m I s s u a n c e o f r e s t r i c t e d s t o c k F o r f e i t u r e o f u n v e s t e d r e s t r i c t e d s t o c k A m o r t i z a t i o n o f u n e a r n e d r e s t r i c t e d s t o c k , n e t l E m p o y e e s t o c k p u r c h a s e p a n l E x e r c s e i o f l e m p o y e e s t o c k o p t i o n s l B a a n c e a t J u n e 2 7 , 2 0 0 4 2 9 , 4 2 8 , 1 4 3 $ 2 9 5 4 2 , 1 4 4 , 4 6 5 $ 4 2 1 $ 2 5 5 , 8 2 9 $ ( 6 7 , 0 4 7 ) $ ( i n t h o u s a n d s , e x c e p t s h a r e d a t a ) Y e a r s e n d e d J u l y 1 , 2 0 0 7 , J u l y 2 , 2 0 0 6 , a n d J u l y 3 , 2 0 0 5 1 - 8 0 0 - F L O W E R S . C O M , I n c . a n d S u b s i d i a r i e s C o n s o l i d a t e d S t a t e m e n t s o f S t o c k h o l d e r s ’ E q u i t y l C a s s A l C a s s B S h a r e s A m o u n t S h a r e s A m o u n t C o m m o n S t o c k C a p i t a l i P a d - I n A d d i t i o n a l D e f i c i t R e t a n e d i C o m p e n s a t i o n S t o c k - B a s e d U n e a r n e d 2 9 , 8 7 2 , 1 8 3 2 9 9 4 2 , 1 3 8 , 4 6 5 4 2 1 2 6 2 , 6 6 7 ( 5 6 , 0 1 1 ) 6 , 0 0 0 – – ( 1 5 5 , 9 1 9 ) – – 1 3 3 , 4 9 9 – – – – – – – – ( 2 ) – – 1 ( 6 , 0 0 0 ) – – – – – – – – – – – – – – – – – – – – – – – – – – – – ( 1 , 1 1 4 ) 4 , 2 8 4 6 4 9 3 , 1 8 7 – – – – – – – – – – 4 2 5 , 8 3 6 – – – – – – – – – – – – 4 – – – – – – – – – – – – – – – – 4 , 6 0 0 2 , 0 0 3 – – – – 1 7 , 1 1 8 – – – – – – 3 0 , 2 9 8 , 0 1 9 $ 3 0 3 4 2 , 1 3 8 , 4 6 5 $ 4 2 1 $ 2 6 9 , 2 7 0 $ ( 3 8 , 8 9 3 ) $ – – – – – – – – – – – – – – – – – – 1 , 1 1 6 – – – – 9 , 8 7 0 , 7 1 7 $ ( 3 0 , 0 7 0 ) $ 2 0 1 , 0 3 1 – – – – 1 7 , 1 1 8 3 , 0 3 5 , 3 6 7 ( 1 5 , 8 7 7 ) ( 1 5 , 8 7 7 ) – – – – – – – – 4 , 6 0 0 2 , 0 0 7 6 , 8 3 5 , 3 5 0 ( 1 4 , 1 9 3 ) 1 9 3 , 1 8 3 1 8 2 , 0 0 0 ( 1 , 3 2 4 ) – – – – – – – – ( 7 , 5 0 0 ) – – – – – – 5 2 – – 3 , 1 8 7 – – ( 1 , 3 2 4 ) – – 4 , 3 3 6 6 5 0 2 9 , 8 8 8 , 6 0 3 3 0 0 4 2 , 1 4 4 , 4 6 5 4 2 1 2 5 8 , 8 4 8 ( 5 9 , 1 9 8 ) ( 1 , 1 1 6 ) 6 , 6 6 0 , 8 5 0 ( 1 2 , 9 2 1 ) 1 8 6 , 3 3 4 14 ( 5 , 8 7 6 ) – – 1 6 1 , 7 9 5 7 5 , 8 4 6 2 2 8 , 6 9 5 – – – – – – – – – – – – 2 1 2 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ( 4 9 ) – – 1 , 3 5 5 1 , 2 4 7 4 6 6 7 , 8 4 9 – – – – – – – – – – – – ( 1 , 3 5 7 ) 1 9 2 – – – – 4 9 – – – – – – 1 , 3 2 8 , 0 5 0 ( 9 , 8 1 3 ) – – – – – – – – – – – – – – – – – – – – – – – – 7 , 8 4 9 ( 9 , 8 1 3 ) 1 9 2 4 6 7 – – – – 1 , 2 4 9 5 , 3 3 2 , 8 0 0 $ ( 3 , 1 0 8 ) $ 1 8 6 , 3 9 0 S h a r e s A m o u n t E q u i t y T r e a s u r y S t o c k S t o c k h o d e r s l ’ Consolidated Statements of Cash Flows 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands) Years Ended July 1, July 2, July 3, 2007 2006 2005 Operating activities: Net income Reconciliation of net income to net cash $ 17,118 3,187 7,849 $ $ provided by operations: Depreciation and amortization Deferred income taxes Bad debt expense Stock-based compensation Other non-cash items Changes in operating items, excluding the effects of acquisitions: Receivables Inventories Prepaid and other Accounts payable and accrued expenses Other assets Other liabilities Net cash provided by operating activities Investing activities: Capital expenditures Acquisitions, net of cash acquired Dispositions Purchases of investments Proceeds from sales of investments Other Net cash used in investing activities Financing activities: Acquisition of treasury stock Proceeds from employee stock options/stock purchase plan Proceeds from bank borrowings and revolving line of credit Repayment of notes payable and bank borrowings Repayment of capital lease obligations Other Net cash provided by (used in) financing activities 17,837 10,325 1,880 4,600 (791) (5,737) (9,800) 771 (5,562) 177 1,523 32,341 (18,043) (347) 1,463 –– –– 242 (16,685) (15,877) 2,007 110,000 (119,913) (385) –– (24,168) 15,765 2,175 476 4,336 125 1,316 (9,106) 5,513 (1,046) (6,208) (1,795) 14,738 14,489 4,702 270 192 –– (655) (6,345) 220 (10,334) 919 (878) 10,429 (20,491) (96,874) –– –– 6,647 2 (13,334) (50,965) –– (93,946) 118,109 192 (110,716) (39,944) (1,324) 558 105,000 (22,482) (1,228) 92 80,616 (9,813) 1,533 –– (1,391) (1,677) –– (11,348) Net change in cash and equivalents Cash and equivalents: Beginning of year End of year (8,512) (15,362) (40,863) 24,599 $ 16,087 39,961 $ 24,599 80,824 $ 39,961 Supplemental Cash Flow Information: - - The Company paid income taxes of approximately $1,429, $23 and $762, net of tax refunds received, for the years ended July 1, 2007, Interest paid amounted to $7,390, $1,407, and $481 for the years ended July 1, 2007, July 2, 2006 and July 3, 2005, respectively. July 2, 2006, and July 3, 2005. See accompanying notes. 15 Notes to Consolidated Financial Statements 1-800-FLOWERS.COM, Inc. and Subsidiaries July 1, 2007 Note 1. Description of Business For more than 30 years, 1-800-FLOWERS.COM, Inc. – “Your Florist of Choice®” – has been providing customers around the world with the freshest flowers and finest selection of plants, gift baskets, gourmet foods, confections and plush stuffed animals perfect for every occasion. 1-800- FLOWERS.COM® 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 overnight “Fresh From Our GrowersTM” program. Customers can “call, click or come in” to shop 1-800-FLOWERS.COM twenty four hours a day, 7 days a week at 1-800-356-9377 or www.1800flowers.com. Sales and Service Specialists are available 24/7, and fast and reliable delivery is offered same day, any day. As always, 100 percent satisfaction and freshness are guaran- teed. The 1-800-FLOWERS.COM collection of brands also includes home decor and children’s gifts from Plow & Hearth® (1-800-627-1712 or www.plowandhearth.com), Wind & Weather® (www.windandweather.com), HearthSong® (www.hearthsong.com) and Magic Cabin® (www.magiccabin.com); gourmet gifts including popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked gifts from Cheryl&Co.® (1-800-443-8124 or www.cherylandco.com); premium chocolates and confections from Fannie May Confections Brands (www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com® (www.greatfood.com); wine gifts from Ambrosia.com (www.ambrosia.com); gift baskets from 1-800-BASKETS.COM® (www.1800baskets.com) and the BloomNet® international floral wire service, which provides quality products and diverse services to a select network of florists. 1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker symbol FLWS. Note 2. Significant Accounting Policies Fiscal Year The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2007 and 2006, which ended on July 1, 2007, July 2, 2006, respectively, consisted of 52 weeks, while fiscal year 2005, which ended on July 3, 2005, consisted of 53 weeks. Basis of Presentation The consolidated financial statements include the accounts of 1-800-FLOWERS.COM, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accom- panying notes. Actual results could differ from those estimates. Cash and Equivalents Cash and equivalents consist of demand deposits with banks, highly liquid money market funds, United States government securities, overnight repurchase agreements and commercial paper with maturities of three months or less when purchased. Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting. Property, Plant and Equipment Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives using the straight-line method. Amortization of lease- hold improvements and capital leases are calculated using the straight-line method over the shorter of the lease terms, including renewal options expected to be exercised, or estimated useful lives of the improvements. Estimated useful lives are periodically reviewed, and where appropriate, changes are made prospectively. The Company’s property plant and equipment is depreciated using the following estimated lives: Buildings Leasehold Improvements Furniture, Fixtures and Equipment Software 40 years 3 - 10 years 3 - 10 years 3 - 5 years Goodwill and Other Intangible Assets Goodwill and indefinite-lived intangibles are not amor- tized, but are evaluated annually for impairment. The Company performs its annual impairment test as of the first day of its fiscal fourth quarter, or earlier if indicators of potential impairment exist, to evaluate goodwill. Goodwill is considered impaired if the carrying amount of the report- ing unit exceeds its estimated fair value. In assessing the recoverability of goodwill, the Company reviews both quantitative as well as qualitative factors to support its assumptions with regard to fair value. To date, there has been no impairment of these assets. The cost of intangible assets with determinable lives is amortized to reflect the pattern of economic benefits con- sumed, on a straight-line basis, over the estimated periods benefited, ranging from 3 to 16 years. Deferred Catalog Costs The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion with actual sales from the corresponding catalog over a period not to exceed 26-weeks. Included within prepaid and other current assets was $4.3 million at both July 1, 2007 and July 2, 2006, relating to prepaid catalog expenses. Investments The Company considers all of its debt and equity securities, for which there is a determinable fair market value and no restrictions on the Company’s ability to sell within the next 12 months, as available-for-sale. Available- for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity. For the years ended July 1, 2007, July 2, 2006 and July 3, 2005, there were no significant unrealized gains or losses. Realized gains and losses are included in other income. The cost basis for realized gains and losses on available-for-sale securities is determined on a specific identification basis. Fair Values of Financial Instruments The recorded amounts of the Company’s cash and equivalents, short-term investments, receivables, accounts 16 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries payable, and accrued liabilities approximate their fair values principally because of the short-term nature of these items. The fair value of investments, including available-for-sale securities, is based on quoted market prices where avail- able. The fair value of the Company’s long-term obligations, the majority of which are carried at a variable rate of interest, are estimated based on the current rates offered to the Company for obligations of similar terms and maturities. Under this method, the Company’s fair value of long-term obligations was not significantly different than the carrying values at July 1, 2007 and July 2, 2006. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and equivalents, investments and accounts receivable. The Company maintains cash and equivalents and investments with high credit, quality financial institutions. Concentration of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers and their dispersion throughout the United States, and the fact that a substantial portion of receivables are related to balances owed by major credit card companies. Allowances relating to consumer, corporate and franchise accounts receivable ($1.4 million and $2.3 million at July 1, 2007 and July 2, 2006, respectively) have been recorded based upon previous experience and management’s evaluation. Revenue Recognition Net revenues are generated by E-commerce operations from the Company’s online and telephonic sales channels as well as other operations (retail/wholesale) and primarily consist of the selling price of merchandise, service or outbound shipping charges, less discounts, returns and credits. Net revenues are recognized upon product ship- ment. Shipping terms are FOB shipping point. Net revenues generated by the Company’s BloomNet Wire Service operations include membership fees as well as other products and service offerings to florists. Membership fees are recognized monthly in the period earned, and products sales are recognized upon product shipment with shipping terms of FOB shipping point. Cost of Revenues Cost of revenues consists primarily of florist fulfillment costs (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 includes labor and facility costs related to direct-to-con- sumer merchandise production operations. Marketing and Sales Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search expenses, retail store and fulfill- ment 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. The Company expenses all advertising costs, with the exception of catalog costs (see Deferred Catalog Costs above) at the time the advertisement is first shown. Advertis- ing expense was $133.2 million, $127.4 million and $107.8 million for the years ended July 1, 2007, July 2, 2006 and July 3, 2005, respectively. Technology and Development 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, content development and mainte- nance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Costs associated with the acquisition or development of software for internal use are capitalized if the software is expected to have a useful life beyond one year and amor- tized over the software’s useful life, typically three to five years. Costs associated with repair, maintenance or the development of web site content are expensed as incurred as the useful lives of such software modifications are less than one year. Stock-Based Compensation The Company’s employee stock-based compensation plans are described more fully in Note 11. 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 eliminat- ing 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 on a straight-line basis during the year ended July 2, 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 disclo- sures), 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 deductions in excess of recog- nized 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 reduc- 17 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries tion of taxes paid. There were no significant excess tax benefits for the years ended July 1, 2007 or July 2, 2006. the fair value recognition provisions of SFAS No. 123 to stock- based employee compensation prior to July 4, 2005: The amounts of stock-based compensation expense recognized in the periods presented are as follows: Years Ended July 1, July 2, July 3, 2007 2006 2005 (in thousands, except per share data) Stock options Restricted stock awards Total Deferred income tax benefit Stock-based compensation expense, net Impact on basic and diluted net income $2,736 1,864 4,600 $ 3,710 626 4,336 1,353 1,120 $ –– 192 192 77 $3,247 $ 3,216 $ 115 per common share $ (0.05) $ (0.05) $ (0.00) Stock based compensation expense is recorded within the following line items of operating expenses: Years Ended July 1, July 2, July 3, 2007 2006 2005 (in thousands, except per share data) Marketing and sales Technology and development General and administrative Total $1,605 $1,504 $ –– 690 642 –– 2,305 $4,600 2,190 $ 4,336 192 $ 192 The amounts above include the impact of recognizing compensation expense relating to stock options and restricted stock awards. For the periods prior to our imple- mentation of SFAS 123(R) on July 4, 2005, only compensa- tion expense related to restricted stock awards was recog- nized and included in general and administrative expenses. Stock-based compensation expense has not been allocated between business segments, but is reflected in Corporate. (Refer to Note 14 – Business Segments) 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 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 Year Ended July 3, 2005 (1) (in thousands, except per share data) Net income (loss) As reported Less: Stock option compensation expense Net income (loss) – Pro forma Net income (loss) per share: Basic and diluted – As reported Basic and diluted – Pro forma $ 7,849 10,499 $ (2,650) 0.12 $ $ (0.04) (1) During fiscal 2005, the Company accelerated the vesting of all unvested stock options awarded to employees and officers which had an exercise price greater than $10.00 per share. Options to purchase approximately 0.8 million shares became exercisable immediately as a result of the vesting acceleration. The Company sought to balance the benefit of eliminating the requirement to recognize compensation expense in future periods with the need to continue to motivate employee performance through previously issued, but currently unvested, stock option grants. With those factors being considered, management determined it to be appropriate to accelerate only those unvested stock options where the strike price was reason- ably in excess of the Company’s then current stock price. The effect of the acceleration was an increase in pro- forma stock based employee compensation expense for the year ended July 3, 2005 of $3.0 million ($0.05 per basic and diluted share). Comprehensive Income For the years ended July 1, 2007, July 2, 2006 and July 3, 2005, the Company’s comprehensive income was equal to the respective net income for each of the periods presented. Net Income Per Share Basic net income per common share is computed using the weighted-average number of common shares outstand- ing during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting primarily of employee stock options and restricted stock awards) outstanding during the period. Recent Accounting Pronouncements In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Account- ing for Income Taxes” and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax 18 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries effects of a position be recognized only if it is “more-likely- than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more- likely-than-not” to be sustained then no benefits of the position are to be recognized. FIN 48 requires additional disclosures and is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Com- pany is currently evaluating the effect that the adoption of FIN 48 will have on its consolidated results of operations and financial condition. In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“Statement No. 157”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value mea- surements. Statement No. 157 applies to other accounting pronouncements that require or permit fair value measure- ments and, accordingly, does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The transition adjustment of the difference between the carrying amounts and the fair values of those financial instruments should be recognized as a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The company is currently evaluating the impact of adopting the provisions of Statement No. 157. Reclassifications Certain balances in the prior fiscal years have been reclassi- fied to conform with the presentation in the current fiscal year. Note 3. Net Income Per Common Share The following table sets forth the computation of basic and diluted net income per common share: Years Ended July 1, July 2, July 3, 2007 2006 2005 (1) (in thousands, except per share data) Numerator: Net income Denominator: Weighted average $17,118 $ 3,187 $ 7,849 shares outstanding 63,786 65,100 66,038 Effect of dilutive securities: Employee stock options (2) Employee restricted stock awards Adjusted weighted-average shares and assumed 1,282 1,282 1,364 458 1,740 47 1,329 –– 1,364 conversions 65,526 66,429 67,402 Net income per common share: Basic Diluted $ $ 0.27 0.26 $ 0.05 $ 0.05 $ 0.12 $ 0.12 Note (1): The Company adopted the fair value recogni- tion provisions of SFAS No. 123(R) using the modified 19 prospective application method on July 4, 2005. Accordingly, results for the fiscal year ended July 3, 2005 do not reflect compensation expense associated with stock options, which is more fully discussed above in Note 2. Note (2): The effect of options to purchase 5.8 million, 5.9 million and 3.8 million shares for the years ended July 1, 2007, July 2, 2006, and July 3, 2005, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive. 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. Acquisition of Fannie May Confections Brands, Inc. On May 1, 2006, the Company acquired all of the outstanding common stock of Fannie May Confections Brands, Inc. (hereafter referred to as “Fannie May Confec- tions Brands”), a manufacturer and multi-channel retailer and wholesaler of premium chocolate and other confections under the well-known Fannie May, Harry London and Fanny Farmer brands. The acquisition, for a purchase price of approximately $96.6 million in cash (including the achieve- ment of $4.4 million of “earn-out” incentives for financial targets achieved during fiscal 2007 and estimated working capital adjustments and transaction costs), included a 200,000-square foot manufacturing facility in North Canton, Ohio and 52 Fannie May retail stores in the Chicago area, where the chocolate brand has been a tradition since 1920. The purchase price is subject to “earn-out” incentives which amount to a maximum of $4.5 million during the year ending July 1, 2007 (of which $4.4 million was achieved) and $1.5 million during the year ending June 29, 2008, upon achieve- ment of specified earnings targets. Prior to the acquisition, Fannie May Confections Brands had generated revenues of approximately $75.0 million during its most recent fiscal year which ended on April 30, 2006. As described further under “Long-Term Debt,” in order to finance the acquisition, on May 1, 2006, the Company entered into a $135.0 million secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders (the “2006 Credit Facility”). The 2006 Credit Facility, as amended on October 24, 2006, includes an $85.0 million term loan and a $60.0 million revolving facility, which bear interest at LIBOR plus 0.625% to 1.125%, with pricing based upon the Company’s leverage ratio. At closing, the Company borrowed $85.0 million of the term facility to acquire all of the outstanding capital stock of Fannie May Confections Brands. During fiscal 2007, the Company completed the process of allocating the Fannie May Confections Brands purchase Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 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 outstanding long-term debt. Pro forma Results of Operation The following unaudited pro forma consolidated financial information has been prepared as if the acquisitions of Fannie May Confections Brands, Wind & Weather, Cheryl & Co. and The Winetasting Network had taken place at the beginning of fiscal year 2005. 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. Years Ended July 2, July 3, 2006 2005 (in thousands, except per share data) Net revenues Operating income Net income Basic and diluted net income per common share $854,333 $ 16,182 $ 5,321 $780,199 $ 23,462 $ 12,246 $ 0.08 $ 0.18 Note 5. Inventory The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finish goods for resale, packaging supplies, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows: Years Ended July 1, July 2, 2007 2006 (in thousands) Finished goods Work-in-process Raw materials $43,113 $ 3,911 $15,027 $62,051 $36,689 $ 3,370 $12,895 $52,954 price to the estimated fair values of assets acquired and liabilities assumed: Fannie May Confections Brands Purchase Price Allocation (in thousands) Current assets Property, plant and equipment Intangible assets Goodwill Other Total assets acquired Current liabilities Deferred tax liability Other Total liabilities assumed Net assets acquired $ 19,718 4,642 37,879 44,096 156 106,491 5,045 4,485 399 $ 9,929 $ 96,562 Of the $37.9 million of acquired intangible assets related to the Fannie May Confections Brands acquisition, $28.2 million was assigned to trademarks that are not subject to amortization, while the remaining acquired intangibles of $9.7 million were allocated primarily to customer related intan- gibles which are being amortized over the assets’ determin- able useful life of 3-10 years. Of the $44.1 million of goodwill, approximately $2.1 million is deductible for tax purposes. Acquisition of Wind & Weather On October 31, 2005, the Company acquired all of the outstanding common stock of Wind & Weather, a Fort Bragg, California based direct marketer of weather-themed gifts, with annual revenues of approximately $14.4 million during its then most recently completed fiscal year ended March 31, 2005. The purchase price of approximately $5.2 million, including acquisition costs, was funded utilizing the Company’s then existing line of credit which was repaid during the Company’s second quarter of fiscal 2006 utilizing cash generated from operations, and excludes the assump- tion of Wind & Weather’s $1.2 million balance on its sea- sonal working capital line. The Company has since relo- cated the operations of Wind & Weather to its Madison, Virginia facility, and terminated operations in California. 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 then most recent year ended January 29, 2005. The purchase price of approxi- mately $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. 20 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 6. Goodwill and Intangible Assets The change in the net carrying amount of goodwill is as follows (in thousands): 1-800-Flowers.com BloomNet Gourmet Home and Consumer Wire Food and Children’s Floral Service Gift Baskets Gifts Total Balance at July 3, 2005 Acquisition of Winetasting Network Acquisition of Cheryl & Co. Acquisition of Wind & Weather Acquisition of Fannie May Confections Brands Other Balance at July 2, 2006 Acquisition of Wind & Weather Acquisition of Fannie May Confections Brands Purchase Price Allocation of Fannie May Confections- Reclassification of goodwill to intangible assets Other Balance at July 1, 2007 $6,919 –– –– –– –– (267) 6,652 –– –– –– (300) $6,352 $ $ –– –– –– –– –– –– –– –– –– –– –– –– $40,449 273 2,461 –– 62,752 –– 105,935 –– 6,023 (24,679) –– $87,279 $15,851 –– –– 2,703 –– –– 18,554 $ 63,219 273 2,461 2,703 62,752 (267) 131,141 (54) (54) –– –– –– 6,023 (24,679) (300) $18,500 $112,131 The Company’s intangible assets consist of the following: July 1, July 2, 2007 2006 Gross Gross Amortization Carrying Accumulated Carrying Accumulated Period Amount Amortization Net Amount Amortization Net (in thousands) Intangible assets with determinable lives: Investment in licenses Customer lists Other 14 - 16 years 3 - 10 years 3 - 8 years $ 4,927 14,260 2,639 21,826 Trademarks with indefinite lives Total intangible assets –– 39,676 $61,502 $ 4,085 3,919 748 8,752 –– $ 8,752 $ 842 10,341 1,891 13,074 39,676 $52,750 $ 4,927 18,500 1,754 25,181 10,886 $36,067 $3,762 2,231 252 6,245 –– $6,245 $ 1,165 16,269 1,502 18,936 10,886 $29,822 The amortization of intangible assets for the years ended July 1, 2007, July 2, 2006 and July 3, 2005 was $2.5 million, $1.6 million, and $0.8 million, respectively. Future estimated amortization expense is as follows: 2008 - $2.7 million, 2009 - $2.6 million, 2010 - $2.5 million, 2011 - $1.9 million, and 2012 - $0.8 million, and thereafter - $2.6 million. 21 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 7. Property, Plant and Equipment July 1, July 2, 2007 2006 (in thousands) Land Building and building improvements Leasehold improvements Furniture and fixtures Equipment Computer equipment Telecommunication equipment Software Accumulated depreciation and amortization $ 2,516 $ 2,516 16,209 19,087 5,637 21,278 54,942 9,106 57,763 16,409 20,474 5,182 18,346 51,449 8,344 51,086 186,538 173,806 123,977 114,074 $ 59,732 $ 62,561 Note 8. Long-Term Debt July 1, July 2, 2007 2006 (in thousands) Term loan and revolving credit line (1) Commercial note (2) Other Obligations under capital leases (see Note 14) Less current maturities of long-term debt and obligations under capital leases $76,500 1,553 –– 79 78,132 $85,000 2,942 23 458 88,423 10,132 $68,000 10,360 $78,063 (1) Term loan and revolving credit line - In order to finance the acquisition of Fannie May Confections Brands, on May 1, 2006, the Company entered into a secured credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders (the “2006 Credit Facility”). The 2006 Credit Facility, as amended on October 24, 2006, includes an $85.0 million term loan and a $60.0 million revolving facility, which bear interest at LIBOR (5.35%) plus 0.625% to 1.125%, with pricing based upon the Company’s leverage ratio (6.23% at July 1, 2007). At closing, the Company borrowed $85.0 million of the term facility to acquire all of the outstanding capital stock of Fannie May Confections Brands. The Company is required to pay the outstanding term loan in escalating quarterly installments, with the final installment payment due on May 1, 2012. The 2006 Credit Facility contains various conditions to borrow- ing, and affirmative and negative financial covenants. Concurrent with the establishment of the 2006 Credit Facility, the Company’s previous $25.0 million revolving credit facilities were terminated. The obligations of the Company and its subsidiaries under the 2006 Credit Facility are secured by liens on all personal property of the Company and its subsidiaries. No amounts were outstanding under the revolving credit facility at July 1, 2007. (2) Commercial note - Bank note relating to obligations arising from, and collateralized by, the underlying assets of the Company’s Plow & Hearth facility in Madison, Virginia. The note, dated June 27, 2003, in the amount of $6.6 million, bears interest at 5.44% per annum, and resulted from the consolidation and refinancing of a series of fixed and variable rate mortgage and equipment notes. The note is payable in 60 equal monthly installments of principal and interest commencing August 1, 2003, of which $1.6 million is outstanding at July 1, 2007. As of July 1, 2007, long-term debt maturities, excluding amounts relating to capital leases, are as follows: Year Debt Maturities (in thousands) 2008 2009 2010 2011 2012 Thereafter $10,053 12,750 12,750 17,000 25,500 –– $78,053 Note 9. Income Taxes Significant components of the income tax provision are as follows: Years Ended July 1, July 2, July 3, 2007 2006 2005 (in thousands) Current provision: Federal State Deferred provision: Federal State Income tax provision $ (275) 1,841 1,566 9,082 1,243 10,325 $11,891 $ 351 655 1,006 2,120 55 2,175 $ 3,181 $ 308 388 696 3,313 1,389 4,702 $5,398 22 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows: convert into one share of Class A common stock upon its transfer, with limited exceptions. Years Ended July 1, July 2, July 3, 2007 2006 2005 Tax at U.S. statutory rates 35.0% State income taxes, net of federal tax benefit 35.0% 35.0% 7.3 8.7 6.9 Non-deductible stock-based compensation 1.7 8.5 –– Non-deductible goodwill amortization Tax credits Tax settlements Other, net 0.4 (0.4) (3.1) 0.5 41.0% 2.2 (5.0) –– 2.0 50.0% 1.5 –– –– (4.5) 40.7% Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company’s deferred income tax assets (liabilities) are as follows: Years Ended July 1, July 2, July 3, 2007 2006 2005 (in thousands) Deferred income tax assets: Net operating loss carryforwards Accrued expenses and reserves Stock-based compensation $12,944 $25,963 $ 23,742 6,318 6,325 3,965 2,529 1,098 –– Deferred income tax liabilities: Other intangibles Installment sales Tax in excess of (9,112) –– (9,285) (25) –– (34) book depreciation (1,649) (425) (293) Net deferred income tax assets $11,030 $23,651 $27,380 At July 1, 2007, the Company’s net operating loss carryforwards were approximately $27.7 million, which, if not utilized, will begin to expire in fiscal year 2020. Note 10. Capital Stock Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one share basis. Each share of Class B common stock will automatically 23 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. Under this program, as of July 1, 2007, the Company had repurchased 1,534,677 shares of common stock for $11.3 million, of which $0.2 million (24,627 shares), $1.3 million (182,000 shares) and $9.8 million (1,328,050 shares) were repurchased during the fiscal years ending July, 1 2007, July 2, 2006 and July 3, 2005, respectively. In a separate transaction, during fiscal 2007, the Company’s Board of Directors authorized the repurchase of 3,010,740 shares from an affiliate. The purchase price was $15,689,000 or $5.21 per share. The repurchase was approved by the disinterested members of the Company’s Board of Directors and is in addition to the Company’s existing stock repurchase authorization of $20.0 million, of which $8.7 remains authorized but unused. Note 11. Stock Based Compensation The Company has stock options and restricted stock awards outstanding to participants under the 1-800- FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the “Plan”). Options are also outstanding under the Company’s 1999 Stock Incentive Plan, but no further options may be granted under this plan. The Plan is a broad-based, long-term incentive program that is intended to attract, retain and motivate employees, consultants and directors to achieve the Company’s long-term growth and profitability objectives, and therefore align stockholder and employee interests. The Plan provides for the grant to eligible employees, consultants and directors of stock options, share appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, perfor- mance units, dividend equivalents, and other share-based awards (collectively “Awards”). The Plan is administered by the Compensation Commit- tee or such other Board committee (or the entire Board) as may be designated by the Board (the “Committee”). Unless otherwise determined by the Board, the Committee will consist of two or more members of the Board who are non- employee directors within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and “outside directors” within the meaning of Section 162(m) of the Internal Rev- enue Code of 1986, as amended. The Committee will determine which eligible employees, consultants and directors receive awards, the types of awards to be received and the terms and conditions thereof. The Chief Executive Officer shall have the power and authority to make Awards under the Plan to employees and consultants not subject to Section 16 of the Exchange Act, subject to limitations imposed by the Committee. At July 1, 2007, the Company has reserved approxi- mately 14.8 million shares of common stock for issuance, including options previously authorized for issuance under the 1999 Stock Incentive Plan. Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Stock Options Plans 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: Years Ended July 1, July 2, July 3, 2007 2006 2005 Weighted average fair value of options granted Expected volatility Expected life (in years) Risk-free interest rate Expected dividend yield $ 3.29 46% 5.3 4.6% 0.0% $ 3.16 46% 5.3 4.6% 0.0% $4.44 61% 5.0 3.8% 0.0% 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 and fiscal 2007, 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 contrac- tual 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%. The following table summarizes stock option activity during the year ended July 1, 2007: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Options Price Term Value (000s) Outstanding – beginning of period 10,103,491 187,500 Granted Exercised (395,379) Forfeited/Expired (742,947) Outstanding – end of period 9,152,665 Options vested or expected to vest at end of period Exercisable at end of period 8,888,395 7,322,901 $8.09 $6.82 $4.94 $9.33 $8.10 $8.13 $8.36 4.8 years $24,210 4.7 years 4.0 years $23,592 $19,871 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the company’s closing stock price on the last trading day of fiscal 2007 and the exercise price, multiplied by the number of in-the- money options) that would have been received by the option holders had all option holders exercised their options on July 1, 2007. This amount changes based on the fair market value of the company’s stock. The total intrinsic value of options exercised for the years ended July 1, 2007, July 2, 2006 and July 3, 2005 was $1.0 million, $0.3 million, and $0.7 million, respectively. The following table summarizes information about stock options outstanding at July 1, 2007: Options Outstanding Options Exercisable Weighted- Weighted- Weighted- Average Average Average Options Remaining Exercise Options Exercise Exercise Price Outstanding Contractual Life Price Exercisable Price $ 1.61 - 4.50 $ 5.25 - 6.52 $ 6.53 - 8.45 $ 8.47 - 12.87 $12.95 - 21.00 2,461,805 2,206,431 1,852,490 2,025,893 606,046 9,152,665 2.9 years 6.3 years 7.1 years 4.1 years 2.3 years 4.8 years 2,461,805 1,380,381 854,076 2,020,593 606,046 7,322,901 $ 3.83 $ 6.40 $ 7.24 $ 12.19 $ 20.01 $ 8.36 $ 3.83 $ 6.40 $ 7.43 $12.18 $20.01 $ 8.10 As of July 1, 2007, the total future compensation cost related to nonvested options not yet recognized in the statement of income was $4.9 million and the weighted average period over which these awards are expected to be recognized was 2.9 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 condi- tions 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 un- earned stock-based compensation (“Deferred Compensa- tion”). In accordance with SFAS No. 123(R), in fiscal 2006, the Company reclassified the balance of Deferred Compen- sation against additional paid-in capital, and reduced its shares of Class A Common Stock issued accordingly. 24 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 14. Business Segments During the first quarter of fiscal 2007, the Company segmented its organization to improve execution and customer focus and to align its resources to meet the demands of the markets it serves. The Company’s manage- ment reviews the results of the Company’s operations by the following four business categories: (cid:127) 1-800-Flowers.com Consumer Floral; (cid:127) BloomNet Wire Service; (cid:127) Gourmet Food and Gift Baskets; and (cid:127) Home and Children’s Gifts. Category performance is measured based on contribu- tion margin, which includes only the direct controllable revenue and operating expenses of the categories. As such, management’s measure of profitability for these categories does not include the effect of corporate overhead (see * below), which are operated under a centralized manage- ment platform, providing services throughout the organiza- tion, nor does it include stock-based compensation, depre- ciation and amortization, other income (net), and income taxes. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by category. Net Revenues Years Ended July 1, July 2, July 3, 2007 2006 2005 (in thousands) Net revenues: 1-800-Flowers.com Consumer Floral BloomNet Wire Service Gourmet Food & Gift Baskets Home & Children’s Gifts Corporate (*) Intercompany $491,404 $452,188 $422,012 44,379 29,884 21,784 192,698 105,002 54,263 186,948 1,652 196,919 1,388 172,317 1,863 eliminations (4,483) (3,640) (1,560) $670,679 Total net revenues $781,741 $912,598 The following table summarizes the activity of non-vested restricted stock during the year ended July 1, 2007: Weighted Average Grant Date Shares Fair Value Non-vested – beginning of period 293,681 Granted 984,536 Vested (39,913) Forfeited (136,322) 1,101,982 Non-vested – end of period $7.44 $5.22 $6.48 $5.81 $5.70 The fair value of nonvested shares is determined based on the closing stock price on the grant date. As of July 1, 2007, there was $3.8 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over a weighted-average period of 2.0 years. Note 12. Employee Stock Purchase Plan In December 2000, the Company’s Board of Director’s approved the 1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a non-compensatory employee stock purchase plan under Section 423 of the Internal Revenue Code, to provide substantially all employees who have completed six months of service, an opportunity to purchase shares of the Company’s Class A common stock. Employees may contribute a maximum of 15% of eligible compensation, but in no event can an employee purchase more than 500 shares on any purchase date. Offering periods have a duration of six months, and the purchase price per share will be the lower of: (i) 85% of the fair market value of a share of Class A common stock on the last trading day of the applicable offering period, or (ii) 85% of the fair market value of a share of Class A common stock on the last trading day before the commencement of the offering period. The ESPP was terminated effective as of June 30, 2005. Note 13. Profit Sharing Plan The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employ- ees who have attained the age of 21 are eligible to participate upon completion of one year of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceeding federal guidelines. On an annual basis the Company, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company’s contributions based upon years of service. The Company made contributions of $0.5 million, $0.4 million, and $0.3 million, for the years ended July 1, 2007, July 2, 2006 and July 3, 2005, respectively. 25 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Operating Income Years Ended cancelable capital lease obligations and operating leases with initial terms of one year or more consist of the following: July 1, July 2, July 3, 2007 2006 2005 (in thousands) Category Contribution Margin: 1-800-Flowers.com Consumer Floral BloomNet Wire Service Gourmet Food & Gift Baskets Home & $64,580 $46,518 $47,039 14,169 7,106 5,912 26,377 6,827 767 Children’s Gifts (1,215) 7,134 6,741 Category Contribution Margin Subtotal 60,459 103,911 Corporate (*) (51,081) (45,311) (34,072) Depreciation and 67,585 amortization (17,837) (15,765) (14,489) Operating income (loss) $34,993 $ 6,509 $11,898 (*) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among others, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, provid- ing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center which are allocated directly to the above categories based upon usage, are included within corporate expenses, as they are not directly allocable to a specific category. Note 15. Commitments and Contingencies Leases The Company currently leases office, store facilities, and equipment under various operating leases through fiscal 2019. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company has also entered into leases that are on a month- to-month basis. All leases and subleases with an initial term of greater than one year are accounted for under SFAS No. 13, Accounting for Leases. These leases are classified as either capital leases, operating leases or subleases, as appropriate. As of July 1, 2007, future minimum payments under non- Obligations Under Capital Operating Leases Leases (in thousands) 2008 2009 2010 2011 2012 Thereafter Total minimum lease payments Less amounts representing $40 14 13 13 13 6 $99 interest (20) Present value of net minimum lease payments $79 $11,416 9,141 7,289 7,006 6,176 28,146 $69,174 At July 1, 2007, the aggregate future sublease rental income under long-term operating sub-leases for land and buildings and corresponding rental expense under long- term operating leases were as follows: Sublease Sublease Income Expense (in thousands) 2008 2009 2010 2011 2012 Thereafter $ 2,099 1,713 1,191 635 341 253 $ 6,232 $ 2,099 1,713 1,191 635 341 253 $ 6,232 Rent expense was approximately $18.9 million, $13.7 million, and $9.7 million for the years ended July 1, 2007, July 2, 2006and July 3, 2005, respectively. Litigation There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. 26 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of 1-800-FLOWERS.COM, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of 1-800-FLOWERS.COM, Inc. and Subsid- iaries (the “Company”) as of July 1, 2007 and July 2, 2006, and the related consolidated statements of income, stock- holders’ equity, and cash flows for each of the three years in the period ended July 1, 2007. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the stan- dards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. financial position of 1-800-FLOWERS.COM, Inc. and Subsid- iaries at July 1, 2007 and July 2, 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 1, 2007, in conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment,” as revised, effective July 4, 2005. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of 1-800-FLOWERS.COM, Inc.’s internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our re- port dated September 10, 2007 expressed an unqualified opinion thereon. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated Melville, New York September 10, 2007 27 Management’s Report on Internal Control Over Financial Reporting Management of the Company is responsible for estab- lishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13-a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effectuated by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial state- ments for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: (cid:127) pertain to the maintenance of records that, in reason- able detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (cid:127) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted account- ing principles, and that receipts and expenditures of the Company are being made only in accordance with authori- zation of management and directors of the Company; and (cid:127) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposi- tion of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of July 1, 2007. In making this assessment, management used the criteria established in “Internal Control-Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management believes that, as of July 1, 2007 the Company’s internal control over financial reporting is effective. Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued a report on the effectiveness of the Company’s internal control over financial reporting, as of July 1, 2007; their report is included on the following page. James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) William E. Shea Senior Vice President Finance and Administration (Principal Financial and Accounting Officer) 28 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of 1-800- FLOWERS.COM, Inc. and Subsidiaries We have audited 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) internal control over financial reporting as of July 1, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s manage- ment is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the stan- dards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effective- ness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regard- ing the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transac- tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, 1-800-FLOWERS.COM, Inc. and Subsid- iaries maintained, in all material respects, effective internal control over financial reporting as of July 1, 2007, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 1-800- FLOWERS.COM, Inc. and Subsidiaries as of July 1, 2007 and July 2, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended July 1, 2007 and our report dated September 10, 2007 expressed an unqualified opinion thereon. Melville, New York September 10, 2007 Market for Common Equity and Related Stockholder Matters Market Information 1-800-FLOWERS.COM’s Class A common stock trades on The Nasdaq Stock Market under the ticker symbol “FLWS.” There is no established public trading market for the Company’s Class B common stock. The following table sets forth the reported high and low sales prices for the Company’s Class A common stock for each of the fiscal quarters during the fiscal years ended July 1, 2007 and July 2, 2006. High Low Year ended July 1, 2007 July 3, 2006 – October 1, 2006 October 2, 2006 – December 31, 2006 January 1, 2007 – April 1, 2007 April 2, 2007 – July 1, 2007 Year ended July 2, 2006 July 4, 2005 – October 2, 2005 October 3, 2005 – January 1, 2006 January 2, 2006 – April 2, 2006 April 3, 2006 – July 2, 2006 $ 6.10 $ 6.35 $ 8.00 $ 9.47 $ 7.86 $ 7.65 $ 7.10 $ 7.90 $ 4.33 $ 4.94 $ 5.84 $ 7.66 $ 6.45 $ 5.83 $ 6.16 $ 5.39 29 Rights of Common Stock Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one share basis. Each share of Class B common stock will automatically convert into one share of Class A common stock upon its transfer, with limited exceptions. Holders As of September 5, 2007, there were approximately 276 stockholders of record of the Company’s Class A common stock, although the Company believes that there Market for Common Equity and Related Stockholder Matters (continued) is a significantly larger number of beneficial owners. As of September 5, 2007, there were approximately 21 stockhold- ers of record of the Company’s Class B common stock. Dividend Policy Although the Company has never declared or paid any cash dividends on its Class A or Class B common stock, the Company anticipates that it will generate increasing free cash flow in excess of its capital invest- ment requirements. As such, although the Company has no current intent to do so, the Company may choose, at some future date, to use some portion of its cash for the purpose of cash dividends. Resales of Securities 36,923,303 shares of Class A and Class B common stock are “restricted securities” as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market from time to time only if registered or if they qualify for an exemption from registra- tion under Rule 144 or 701 under the Securities Act. As of September 5, 2007, all of such shares of the Company’s common stock could be sold in the public market pursuant to and subject to the limits set forth in Rule 144. Sales of a large number of these shares could have an adverse effect on the market price of the Company’s Class A common stock by increasing the number of shares available on the public market. Purchases of Equity Securities by the Issuer 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. Under this program, as of July 1, 2007, the Company had repurchased 1,534,677 shares of common stock for $11.3 million, of which $0.2 million (24,627 shares), $1.3 million (182,000 shares) and $9.8 million (1,328,050 shares) were repurchased during the fiscal years ending July, 1 2007, July 2, 2006 and July 3, 2005, respectively. In a separate transaction, during fiscal 2007, the Company’s Board of Directors authorized the repurchase of 3,010,740 shares from an affiliate. The purchase price was $15,689,000 or $5.21 per share. The repurchase was approved by the disinterested members of the Company’s Board of Directors and is in addition to the Company’s existing stock repurchase authorization of $20.0 million, of which $8.7 remains authorized but unused. The following table sets forth, for the months indicated, the Company’s purchase of Class A common stock during the fiscal year ending July 1, 2007, which includes the period July 3, 2006 through July 1, 2007. Total Number of Dollar Value of Shares Purchased Shares That May Total Number as Part of Publicly Yet Be Purchased of Shares Average Price Announced Plans Under the Plans Period Purchased Paid Per Share or Programs or Programs (in thousands, except average price paid per share) 7/3/06 - 7/30/06 7/31/06 - 8/27/06 8/28/06 - 10/01/06 10/2/06 - 10/29/06 10/30/06 - 11/26/06 11/27/06 - 12/31/06 1/1/07 - 1/28/07 1/29/07 - 2/25/07 2/26/07 - 4/1/07 4/2/07 - 4/29/07 4/30/07 - 5/27/07 5/28/07 - 7/1/07 Total –– –– 9.1 –– –– 3,011.1 2.0 13.2 –– –– –– –– 3,035.4 –– –– 9.1 –– –– 0.3 2.0 13.2 –– –– –– –– 24.6 $8,863 $8,863 $8,816 $8,816 $8,816 $8,814 $8,802 $8,711 $8,711 $8,711 $8,711 $8,711 $ –– $ –– $5.11 $ –– $ –– $5.21 $6.20 $6.90 $ –– $ –– $ –– $ –– $5.22 30 Comparison of 5 Year Cumulative Total Return* Among 1-800-FLOWERS.COM, the Russell 2000 Index and the NASDAQ Non-Financial Index ■ 1-800-FLOWERS.COM, INC. ▼ Russell 2000 ● Nasdaq Non-Financial * $100 invested on 6/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending June 30. 31 1-800-FLOWERS.COM, Inc. One Old Country Road, Suite 500 Carle Place, NY 11514 (516) 237-6000 STOCK EXCHANGE LISTING NASDAQ Global Select Market Ticker Symbol: FLWS TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, New York 11219 (718) 921-8200 INDEPENDENT AUDITORS Ernst & Young LLP 395 North Service Road Melville, New York 11747 (631) 752-6100 SEC COUNSEL Cahill Gordon and Reindel LLP 80 Pine Street New York, NY 10005 (212) 701-3000 SHAREHOLDER INQUIRIES Copies of the Company’s reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and additional information about 1-800-FLOWERS.COM may be obtained by visiting the Investor Relations section at www.1800flowers.com, by calling 516-237-6113, or by writing to: Investor Relations 1-800-FLOWERS.COM One Old Country Road, Suite 500 Carle Place, NY 11514 1-800-FLOWERS.COM, Inc. One Old Country Road, Suite 500 Carle Place, NY 11514 (516) 237-6000 

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