<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 9, 1999
REGISTRATION NO. 333-78985
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
1-800-FLOWERS.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 5992 11-3117311
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification
Organization) Number)
</TABLE>
1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
(516) 237-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JAMES F. MCCANN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1-800-FLOWERS.COM, INC.
1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
(516) 237-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. PAUL P. BROUNTAS, ESQ.
KENNETH R. MCVAY, ESQ. BRENT B. SILER, ESQ.
BROBECK, PHLEGER & HARRISON LLP HALE AND DORR LLP
1633 BROADWAY, 47TH FLOOR 60 STATE STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02109
(212) 581-1600 (617) 526-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED BE REGISTERED(1) SHARE(2) PRICE(2) FEE(3)
<S> <C> <C> <C> <C>
Class A common stock, par value $.01 per share.... 6,900,000 shares $18 $124,200,000 $34,527.60
</TABLE>
(1) Includes 900,000 shares which the underwriters have the option to purchase
to cover overallotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(a) under the Securities Act of 1933, as amended.
(3) $41,700 previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION. DATED JULY 9, 1999.
6,000,000 Shares
[LOGO]
1-800-FLOWERS.COM, INC.
Class A Common Stock
------------------
This is an initial public offering of shares of class A common stock of
1-800-FLOWERS.COM, Inc. All of the 6,000,000 shares of class A common stock are
being sold by 1-800-FLOWERS.COM. 1-800-FLOWERS.COM anticipates that the initial
public offering price will be between $16 and $18 per share.
Prior to this offering, there has been no public market for the class A
common stock. Application has been made for quotation of the class A common
stock on the Nasdaq National Market under the symbol "FLWS".
1-800-FLOWERS.COM has two classes of common stock, class A common stock and
class B common stock. Holders of class A common stock generally have the same
rights as holders of class B common stock, except that holders of class A common
stock have one vote per share, while holders of class B common stock have 10
votes per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
Per Share Total
----------- ---------
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to 1-800-FLOWERS.COM.............. $ $
</TABLE>
The underwriters may, subject to the terms of the underwriting agreement,
purchase up to an additional 850,000 shares of class A common stock from
1-800-FLOWERS.COM and up to an additional 50,000 shares of class A common stock
from Christopher G. McCann, 1-800-FLOWERS.COM's Senior Vice President, at the
initial public offering price less the underwriting discount. 1-800-FLOWERS.COM
will not receive any of the proceeds from the sale of the shares by Mr. McCann.
------------------------
The underwriters expect to deliver shares of class A common stock against
payment in New York, New York on , 1999.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
WIT CAPITAL CORPORATION
------------------------
Prospectus dated , 1999.
<PAGE>
[GRAPHICS]
[front inside cover - 1-800-FLOWERS.COM logo with the words "Flowers are just
the beginning...". In the background are products offered by 1-800-FLOWERS.COM,
including the words floral arrangements, farm direct, roses, single varieties,
green plants, blooming plants, preplanted bulbs, silk flowers, herbs, seeds,
tools, etc. Gatefold-across top are words "Connecting the people of the world
through their personal expressions!" Five photos of the 1-800-FLOWERS.COM Web
site. Along bottom are the words "1-800-FLOWERS.COM-SM- product line includes
fresh-cut and seasonal flowers, plants, floral arrangements, gift baskets,
gourmet foods, garden accessories, and casual lifestyle furnishings."]
2
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
1-800-FLOWERS.COM, INC.
OUR BUSINESS
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products
and gifts. As of March 28, 1999, we had sold our products to approximately 7.2
million customers, of which 2.7 million had made a purchase from us in the
previous twelve months. Our total net revenues for the nine months ended March
28, 1999 were $203.7 million.
With the development of our online business and a strategic acquisition, we
have continuously expanded our product offerings, most recently to include
gourmet foods and home and garden merchandise. As a result, we have developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption.
We believe the 1-800-FLOWERS brand is one of the most recognized brands in
the floral industry. We believe our brand is characterized by convenience,
high-quality products, a broad selection of merchandise and superior customer
service.
We provide our customers the choice of purchasing our products online, by
calling us toll-free or by visiting our owned or franchised retail stores. We
were one of the first companies to market products online through CompuServe and
America Online. In 1995, we opened our own Web site and since then have expanded
our online presence through strategic relationships with Internet companies,
including AOL and Microsoft Network.
The Internet is our fastest growing sales channel. For the nine months ended
March 28, 1999, online revenues were $30.2 million, representing an 85.3%
increase over the same period in the previous fiscal year.
We offer more than 1,500 varieties of fresh-cut and seasonal flowers, plants
and floral arrangements and more than 6,000 stock keeping units, or SKUs, of
gifts, gourmet foods and home and garden products, including garden accessories
and casual lifestyle furnishings. We are committed to providing our individual
and corporate customers the best possible shopping experience through superior
service and a 100% satisfaction guarantee.
We believe we have been and continue to be a leader in implementing
integrated technologies and systems that support our online and telephonic sales
channels and our order fulfillment. We have implemented a transaction processing
system that processes orders arising online and telephonically and a centrally
managed telecommunications network that can serve as a platform for future
growth.
Many of our products must be handled delicately and delivered promptly to
ensure customer satisfaction and freshness. We fulfill our products through a
network, known as the "BloomNet" network, of approximately 1,500 independent
local florists with whom we have non-exclusive arrangements, our owned or
franchised stores, third party suppliers and our advanced fulfillment center.
In May 1999, we completed a private placement of preferred stock. The
investors included Benchmark Capital Partners and SOFTBANK America Inc., both
leading Internet-focused investment firms, and Waelinvest S.A., an affiliate of
LVMH Moet Hennessey Louis Vuitton S.A. A representative from each of Benchmark
and SOFTBANK has joined our board of directors. The private placement yielded us
net proceeds of $101.6 million, which we intend to use together with the
proceeds of this offering to further our strategy of becoming the leading
e-commerce provider
3
<PAGE>
of flowers, gifts, gourmet foods and home and garden merchandise. All of the
outstanding preferred stock will convert into class A common stock upon the
effectiveness of this offering. The private placement investors will hold, in
the aggregate, 25.0% of the outstanding common stock after this offering.
OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers, gifts,
gourmet foods and products for the home and garden. We intend to meet this
objective by:
- aggressively extending our brand from flowers and gifts to gourmet foods
and home and garden products;
- expanding our offerings of gifts, gourmet foods and home and garden
products;
- strengthening our customer relationships through enhanced content,
features and personalization of our Web site;
- increasing the number of customers placing orders through our Web site;
- continuing to upgrade our technology infrastructure; and
- continuing to improve our order fulfillment capabilities.
OUR OFFICES
Our headquarters are located at 1600 Stewart Avenue, Westbury, New York
11590 and our telephone number is (516) 237-6000. Our Web site address is
WWW.1800FLOWERS.COM. The information on our Web site is not a part of this
prospectus.
THE OFFERING
<TABLE>
<S> <C>
Shares offered by 1-800-FLOWERS.COM........... 6,000,000 shares of class A common stock
Shares to be outstanding after this
offering.................................... 21,375,472 shares of class A common stock
40,246,205 shares of class B common stock
Proposed Nasdaq National Market symbol........ FLWS
Use of proceeds............................... To repay existing debt, redeem outstanding
stock and stock options, fund our marketing
activities, enhance our infrastructure, enter
into strategic online relationships, expand
our product offerings and for other general
corporate purposes.
</TABLE>
Investors should be aware that their interest in 1-800-FLOWERS.COM will be
diluted upon the issuance of:
- 1,237,500 shares of class B common stock subject to options outstanding as
of July 7, 1999 at a weighted average exercise price of $1.73 per share;
- 200,000 shares of class A common stock subject to options outstanding as
of July 7, 1999 and up to 9,700,000 additional shares of class A common
stock that could be issued under our 1999 stock incentive plan; and
- 2,371,040 shares of class A common stock upon the exercise of an
outstanding warrant at a nominal exercise price.
4
<PAGE>
DESCRIPTION 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 basis and each share of class
B common stock will automatically convert into one share of class A common stock
upon its transfer, with limited exceptions.
After this offering, the class A common stock will control 5.0% of the total
voting interest and 34.7% of the total economic interest of our common stock and
the class B common stock will control 95.0% of the total voting interest and
65.3% of the total economic interest of our common stock. James F. McCann, our
Chairman and Chief Executive Officer, will control 77.2% of the total voting
interest of the common stock. The ownership of our common stock after this
offering is represented by the following:
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------- ECONOMIC VOTING
CLASS A CLASS B INTEREST INTEREST
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Affiliates of 1-800-FLOWERS.COM.............................. 9,600 37,523,245 60.9% 88.5%
Non-affiliates............................................... 21,365,872 2,722,960 39.1 11.5
</TABLE>
------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS:
- REFLECTS A 10-FOR-1 STOCK SPLIT OF OUR CLASS A AND B COMMON STOCK TO BE
EFFECTED PRIOR TO COMPLETION OF THIS OFFERING; AND
- ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated statement of operations and
balance sheet data. We acquired The Plow & Hearth, Inc. in April 1998 and the
financial data reflect the results of operations of this subsidiary since its
date of acquisition. You should read this information together with the
discussion in "Management's Discussion and Analysis of Financial Condition and
Result of Operations" and our consolidated financial statements and notes to
those statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
JUNE 30, JULY 2, JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
----------- --------- --------- --------- --------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................... $ 91,663 $ 116,807 $ 153,128 $ 186,430 $ 220,592 $ 146,217 $ 203,668
Gross profit................................... 38,195 52,150 60,308 71,352 83,626 54,444 79,930
Operating income (loss)........................ 831 1,561 2,702 6,852 6,415 2,144 (9,052)
Net income (loss) applicable to common
stockholders................................. 638 837 268 2,925 3,466 1,190 (8,682)
Net income (loss) per common share applicable
to common stockholders:
Basic........................................ $ 0.01 $ 0.02 $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
Diluted...................................... 0.01 0.02 0.01 0.06 0.07 0.03 (0.20)
Shares used in the calculation of net income
(loss) per common share:
Basic........................................ 48,530 48,600 47,050 44,140 44,120 44,140 44,000
Diluted...................................... 48,530 49,780 49,420 46,740 46,610 46,750 44,000
</TABLE>
The following summary balance sheet data as of March 28, 1999 is presented:
- on an actual basis;
- on a pro forma basis to reflect the May 1999 private placement and the use
of a portion of the proceeds from the private placement to redeem all
outstanding class C common stock; and
- on a pro forma as adjusted basis to reflect the automatic conversion of
all shares of series A preferred stock into class A common stock at the
effectiveness of this offering and our sale of shares of class A common
stock in this offering at an assumed initial public offering price of $17
per share, after deducting the underwriting discount and estimated
offering expenses, and the use of a portion of the proceeds from this
offering to repay existing debt and redeem outstanding stock and stock
options.
<TABLE>
<CAPTION>
AS OF MARCH 28, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and equivalents......................................................... $ 2,632 $ 99,982 $ 166,942
Working capital (deficit).................................................... (9,490) 87,860 154,820
Total assets................................................................. 86,599 183,949 251,509
Long-term liabilities........................................................ 38,640 38,640 14,340
Redeemable class C common stock.............................................. 19,020 -- --
Total stockholders' equity (deficit)......................................... (7,919) 108,451 200,311
</TABLE>
6
<PAGE>
The summary unaudited pro forma combined financial data provided below give
effect to our acquisition of Plow & Hearth in April 1998 as if the acquisition
had been completed on June 30, 1997. The data for the nine months ended March
28, 1999 is actual, reflecting the operations of Plow & Hearth for the entire
period, and is provided for comparative purposes. The summary unaudited pro
forma combined financial data do not purport to be indicative of future
operations and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------------
JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA ACTUAL
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues................................................... $ 257,747 $ 183,372 $ 203,668
Gross profit................................................... 100,663 71,481 79,930
Operating income (loss)........................................ 5,488 1,217 (9,052)
Net income (loss) applicable to common stockholders............ 1,856 (420) (8,682)
Net income (loss) per common share applicable to common
stockholders:
Basic........................................................ $ 0.04 $ (0.01) $ (0.20)
Diluted...................................................... 0.04 (0.01) (0.20)
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 44,120 44,140 44,000
Diluted...................................................... 46,610 44,140 44,000
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR CLASS A COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN THAT CASE, THE TRADING PRICE OF
OUR CLASS A COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE WHICH MAY REDUCE THE
TRADING PRICE OF OUR CLASS A COMMON STOCK
We expect to incur significant operating and capital expenditures in order
to:
- expand the 1-800-FLOWERS.COM brand through marketing and other promotional
activities;
- enter into strategic relationships with Internet companies;
- increase the number of products we offer; and
- enhance our technological infrastructure and order fulfillment
capabilities.
Although we have been profitable in the past, we expect to incur losses for
the foreseeable future as a result of these expenditures. In order to achieve
and maintain profitability, we will need to generate revenues significantly
above historical levels. We cannot assure you that we will achieve sufficient
revenues for profitability. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATION AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE RESULTS
Our future revenues and results of operations may fluctuate significantly
due to a combination of factors, many of which are outside of our control. The
most important of these factors include:
- seasonality;
- the timing and effectiveness of our marketing programs;
- the timing and effectiveness of capital expenditures;
- our ability to enter into or renew marketing agreements with Internet
companies; and
- competition.
We may be unable to adjust spending quickly enough to offset any unexpected
revenue shortfall. If we have a shortfall in revenue in relation to our
expenses, our operating results will suffer. Our operating results for any
particular quarter may not be indicative of future operating results. You should
not rely on quarter-to-quarter comparisons of our results of operations as an
indication of our future performance. It is possible that, in future periods,
our results of operations may be below the expectations of public market
analysts and investors. This could cause the trading price of our class A common
stock to fall.
Consumer spending on flowers, gifts and other products we sell may vary with
general economic conditions. If general economic conditions deteriorate and our
customers have less disposable income, consumers will likely spend less on our
products and our quarterly operating results will suffer.
For a discussion of other factors that may affect our quarterly results, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations-- Quarterly Results of Operations".
OUR OPERATING RESULTS WILL SUFFER IF SALES DURING OUR PEAK SEASONS DO NOT MEET
OUR EXPECTATIONS
Sales of our products are seasonal, concentrated in the second calendar
quarter, due to Mother's Day, Easter and graduations, and the fourth calendar
quarter, due to the
8
<PAGE>
Thanksgiving and Christmas holidays. In anticipation of increased sales activity
during these periods, we hire a significant number of temporary employees to
supplement our permanent staff and we significantly increase our inventory
levels. If sales during these periods do not meet our expectations, we may not
generate sufficient revenue to offset these increased costs and our operating
results will suffer.
IF OUR CUSTOMERS DO NOT FIND OUR EXPANDED PRODUCT LINES APPEALING, OUR REVENUES
MAY NOT GROW AND OUR NET INCOME WILL DECREASE
Our business historically has focused on offering floral and gift products.
We have expanded our product lines in the gift, gourmet food and home and garden
categories, particularly with our acquisition of Plow & Hearth in April 1998,
and we expect to incur significant costs in marketing these new products. If our
customers do not find our expanded product lines appealing, we may not generate
sufficient revenue to offset their related costs and our net income will
decrease.
IF WE FAIL TO DEVELOP AND MAINTAIN OUR BRAND, WE WILL NOT INCREASE OR MAINTAIN
OUR CUSTOMER BASE OR OUR REVENUES
We must develop and maintain the 1-800-FLOWERS.COM brand to expand our
customer base and our revenues. In addition, we may introduce or acquire other
brands in the future. We believe that the importance of brand recognition will
increase as we expand our product offerings. Many of our customers may not be
aware of the non-floral products we offer. We intend to substantially increase
our expenditures for creating and maintaining brand loyalty and raising
awareness of our additional product offerings. However, if we fail to advertise
and market our products effectively, we may not succeed in establishing our
brands, we will lose customers and our revenues will decline.
Our success in promoting and enhancing the 1-800-FLOWERS.COM brand will also
depend on our success in providing our customers high-quality products and a
high level of customer service. If our customers do not perceive our products
and services to be of high quality, the value of the 1-800-FLOWERS.COM brand
would be diminished, we will lose customers and our revenues will decline.
A FAILURE TO ESTABLISH AND MAINTAIN STRATEGIC ONLINE RELATIONSHIPS THAT GENERATE
A SIGNIFICANT AMOUNT OF TRAFFIC COULD LIMIT THE GROWTH OF OUR BUSINESS
We expect that in the future a significant portion of our online customers
will purchase our products at our AOL online store or come to our Web site from
third party Web sites with which we have strategic relationships, including AOL,
Excite and the Microsoft Network. If these third-parties do not attract a
significant number of visitors, we will not receive a significant number of
online customers from these relationships and our revenues will decrease or not
grow. In addition, we plan to enter into more of these relationships and we may
pay significant fees to do so. There is strong competition to establish
relationships with leading Internet companies, and we may not successfully enter
into additional relationships. We may also be required to pay significant fees
to maintain and expand existing relationships. The cost of maintaining our
relationships with third party Internet companies for the nine months ended
March 28, 1999 was approximately $4.3 million. Our online revenues will suffer
if we fail to enter into new relationships or maintain existing relationships or
if these relationships do not result in traffic sufficient to justify their
cost.
IF LOCAL FLORISTS AND OTHER THIRD-PARTY VENDORS DO NOT FULFILL ORDERS TO OUR
CUSTOMERS' SATISFACTION, OUR CUSTOMERS MAY NOT SHOP WITH US AGAIN
Floral orders placed by our customers are fulfilled by local florists, most
of which are either part of the BloomNet network of approximately 1,500
independent florists or are stores that we own or franchise. Except for the
stores we own, we do not directly control any of these florists. In addition,
many of the
9
<PAGE>
non-floral products we sell are manufactured and delivered to our customers by
independent third-party vendors. If customers are dissatisfied with the
performance of the local florist or other third-party vendors, they may not
utilize our services when placing future orders and our revenues will decrease.
IF A FLORIST DISCONTINUES ITS RELATIONSHIP WITH US, OUR CUSTOMERS MAY EXPERIENCE
DELAYS IN SERVICE OR DECLINES IN QUALITY AND MAY NOT SHOP WITH US AGAIN
Many of our arrangements with local florists for order fulfillment are not
formalized in writing. Of those relationships which have been formalized in
writing, most may be terminated with 10 days notice. If a florist discontinues
its relationship with us, we will be required to obtain a suitable replacement
located in the same area, which may cause delays in delivery or a decline in
quality, leading to customer dissatisfaction and loss of customers.
IF A SIGNIFICANT AMOUNT OF CUSTOMERS ARE NOT SATISFIED WITH THEIR PURCHASE, WE
WILL BE REQUIRED TO INCUR SUBSTANTIAL COSTS TO ISSUE REFUNDS, CREDITS OR
REPLACEMENT PRODUCTS
We offer our customers a 100% satisfaction guarantee on our products. If
customers are not satisfied with the products they receive, we will either send
the customer another product or issue the customer a refund or a credit. Our net
income could decrease if a significant number of customers request replacement
products, refunds or credits.
INCREASED SHIPPING COSTS AND LABOR STOPPAGES MAY ADVERSELY AFFECT SALES OF OUR
NON-FLORAL PRODUCTS
Our non-floral products are delivered to customers either directly from the
manufacturer or from our warehouse in Virginia. We have established
relationships with the United States Postal Service, Federal Express, United
Parcel Service and other common carriers for the delivery of these products. If
these carriers were to raise the prices they charge to ship our goods, our
customers might choose to buy comparable products locally to avoid shipping
charges. In addition, these carriers may experience labor stoppages, which could
impact our ability to deliver products on a timely basis to our customers and
adversely affect our customer relationships.
IF WE FAIL TO CONTINUOUSLY IMPROVE OUR WEB SITE, WE WILL NOT ATTRACT OR RETAIN
CUSTOMERS
If our potential or existing customers do not find our Web site a convenient
place to shop, we will not attract or retain customers and our sales will
suffer. To encourage the use of our Web site, we must continuously improve its
accessibility, content and ease of use. If our competitors' Web sites are
perceived as easier to use or better able to satisfy customer needs, our
customer traffic and our business would be adversely affected.
COMPETITION IN THE FLORAL, GIFT, GOURMET FOOD AND HOME AND GARDEN INDUSTRIES IS
INTENSE AND A FAILURE TO RESPOND TO COMPETITIVE PRESSURE COULD RESULT IN LOST
REVENUES
There are many companies that offer products in the floral, gift, gourmet
food and home and garden categories. In the floral category, our competitors
include:
- retail floral shops, some of which maintain toll-free telephone numbers;
- online floral retailers;
- catalog companies that offer floral products;
- floral telemarketers and wire services; and
- supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are highly
competitive. Each of these categories encompasses a wide range of products and
is highly fragmented. Products in these categories may be purchased from a
number of outlets, including mass merchants, retail specialty shops, online
retailers and mail-order catalogs.
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Competition is intense and we expect it to increase. Increased competition
could result in:
- price reductions, decreased revenue and lower profit margins;
- loss of market share; and
- increased marketing expenditures.
These and other competitive factors could materially and adversely affect our
results of operations.
IF WE DO NOT ACCURATELY PREDICT CUSTOMER DEMAND FOR OUR PRODUCTS, WE MAY LOSE
CUSTOMERS OR EXPERIENCE INCREASED COSTS
In the past, we did not need to maintain significant inventory of products.
However, as the volume of non-floral products we offer has expanded, we intend
to increase inventory levels and the number of products maintained in our
warehouses. Because we have limited experience offering many of our non-floral
products through our Web site, we may not predict inventory levels accurately.
If we overestimate customer demand for our products, excess inventory and
outdated merchandise could accumulate, tying up working capital and potentially
resulting in reduced warehouse capacity and inventory losses due to damage,
theft and obsolescence. If we underestimate customer demand, we will disappoint
customers who may turn to our competitors. Moreover, the strength of the
1-800-FLOWERS.COM brand could be diminished due to misjudgments in merchandise
selection.
IF THE SUPPLY OF FLOWERS FOR SALE BECOMES LIMITED, THE PRICE OF FLOWERS WILL
RISE OR FLOWERS MAY BE UNAVAILABLE AND OUR REVENUES AND GROSS MARGINS COULD
DECLINE
A variety of factors affect the supply of flowers in the United States and
the price of our floral products. If the supply of flowers available for sale is
limited due to weather conditions or other factors, prices for flowers will
likely rise and customer demand for our floral products may be reduced, causing
our revenues and gross margins to decline. Alternatively, we may not be able to
obtain high quality flowers in an amount sufficient to meet customer demand.
Even if available, flowers from alternative sources may be of lesser quality
and/or may be more expensive than those currently offered by us.
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and we expect that this will
continue in the future. The availability and price of flowers could be affected
by a number of factors affecting these regions, including:
- import duties and quotas;
- agricultural limitations and restrictions to manage pests and disease;
- changes in trading status;
- economic uncertainties and currency fluctuations;
- severe weather;
- work stoppages;
- foreign government regulations and political unrest; and
- trade restrictions, including United States retaliation against foreign
trade practices.
A FAILURE TO MANAGE OUR INTERNAL OPERATING AND FINANCIAL FUNCTIONS COULD LEAD TO
INEFFICIENCIES IN CONDUCTING OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
Our expansion efforts have significantly strained our operational and
financial systems. To accommodate our growth, we recently implemented new or
upgraded operating and financial systems, procedures and controls. Any failure
to integrate these initiatives in an efficient manner could adversely affect our
business. In addition, our systems, procedures and controls may prove to be
inadequate to support our future operations.
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OUR FRANCHISEES MAY DAMAGE OUR BRAND OR INCREASE OUR COSTS BY FAILING TO COMPLY
WITH OUR FRANCHISE AGREEMENTS OR OUR OPERATING STANDARDS
As of March 28, 1999, we franchised 87 flower shops through 54 franchisees.
Our franchise business is governed by our Uniform Franchise Offering Circular,
franchise agreements and applicable franchise law. If our franchisees do not
comply with our established operating standards or the terms of the franchise
agreements, the 1-800-
FLOWERS.COM brand may be damaged. We may incur significant additional costs,
including time-consuming and expensive litigation, to enforce our rights under
the franchise agreements. Additionally, we are the primary tenant on 56 leases,
which the franchisees sublease from us. If a franchisee fails to meet its
obligations as subtenant, we could incur significant costs to avoid a default
under the primary lease. Furthermore, as a franchisor we have obligations to our
franchisees. Franchisees may challenge the performance of our obligations under
the franchise agreements and subject us to costs in defending these claims and,
if the claims are successful, costs in connection with their compliance.
IF THIRD PARTIES ACQUIRE RIGHTS TO USE SIMILAR DOMAIN NAMES OR PHONE NUMBERS OR
IF WE LOSE THE RIGHT TO USE OUR PHONE NUMBERS, OUR BRAND MAY BE DAMAGED AND WE
MAY LOSE SALES
Our Internet domain names are an important aspect of our brand recognition.
We cannot practically acquire rights to all domain names similar to
WWW.1800FLOWERS.COM. If third parties obtain rights to similar domain names,
these third parties may confuse our customers and cause our customers to
inadvertently place orders with these third parties, which would result in lost
sales for us and could damage our brand.
Likewise, the phone number that spells 1-800-FLOWERS is important to our
brand and our business. While we have obtained the right to use the phone
numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common
"FLOWERS" misdials, we may not be able to obtain rights to use the FLOWERS phone
number as new toll-free prefixes are issued, or the rights to all similar and
potentially confusing numbers. If third parties obtain the phone number which
spells "FLOWERS" with a different prefix or a toll-free number similar to
FLOWERS, these parties may also confuse our customers and cause lost sales for
us and potential damage to our brand. In addition, under applicable FCC rules,
ownership rights to telephone numbers cannot be acquired. Accordingly, the FCC
may rescind our right to use any of our phone numbers, including 1-800-FLOWERS.
IF WE DO NOT CONTINUE TO RECEIVE REBATES FROM WIRE SERVICES, OUR RESULTS OF
OPERATIONS COULD SUFFER
We have entered into arrangements with independent wire service companies
that provide us with rebates when we transmit our customers' floral orders to a
local florist utilizing their service. If we cannot renew these arrangements or
enter similar arrangements on commercially reasonable terms, our results of
operations could suffer. In addition, these companies may eliminate or modify
the rebate structure they have in place with us. Any adverse modification to
these rebate structures could also cause our results of operations to suffer.
OUR NET SALES AND GROSS MARGINS WOULD DECREASE IF WE EXPERIENCE SIGNIFICANT
CREDIT CARD FRAUD
A failure to adequately control fraudulent credit card transactions would
reduce our net sales and our gross margins because we do not carry insurance
against this risk. We have developed technology to help us to detect the
fraudulent use of credit card information. Nonetheless, to date, we have
suffered losses as a result of orders placed with fraudulent credit card data
even though the associated financial institution approved payment of the orders.
Under current credit card practices, we are liable for fraudulent credit card
transactions because we do not obtain a cardholder's signature.
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A FAILURE TO INTEGRATE THE SYSTEMS AND OPERATIONS OF ANY ACQUIRED BUSINESS,
INCLUDING PLOW & HEARTH, WITH OUR OPERATIONS MAY DISRUPT OUR BUSINESS
We have acquired complementary businesses and may continue to do so in the
future. We are currently in the process of integrating the Web site, operations,
systems and personnel of Plow & Hearth. In particular, we will migrate Plow &
Hearth's transaction processing system to our transaction processing system,
automate fulfillment by the Madison, Virginia fulfillment center of home and
garden merchandise ordered from us and migrate the internal operating and
financial functions of Plow & Hearth to those of 1-800-FLOWERS.COM. If we are
unable to fully integrate Plow & Hearth or any future acquisition, our business
and operations could suffer, our management will be distracted and our expenses
may increase.
RISKS RELATED TO THE INTERNET AND OUR TECHNOLOGY
OUR REVENUES WILL NOT GROW IF THE INTERNET IS NOT ACCEPTED AS A MEDIUM FOR
COMMERCE
We expect to derive an increasing amount of our revenue from electronic
commerce, and intend to extensively market our non-floral products online. If
the Internet is not accepted as a medium for commerce, our revenues will not
grow as we expect and our business will suffer. A number of factors may inhibit
Internet usage, including:
- inadequate network infrastructure;
- consumer concerns for Internet privacy and security;
- inconsistent quality of service; and
- lack of availability of cost-effective, high speed service.
If Internet usage grows, the infrastructure may not be able to support the
demands placed on it by that growth and its performance and reliability may
decline. Web sites have experienced interruptions as a result of delays or
outages throughout the Internet infrastructure. If these interruptions continue,
Internet usage may decline.
A LACK OF SECURITY OVER THE INTERNET MAY CAUSE INTERNET USAGE TO DECLINE AND
CAUSE US TO EXPEND CAPITAL AND RESOURCES TO PROTECT AGAINST SECURITY BREACHES
A significant barrier to electronic commerce over the Internet has been the
need for secure transmission of confidential information and transaction
information. Internet usage could decline if any well-publicized compromise of
security occurred. As a result, we may be required to expend capital and
resources to protect against or to alleviate these problems.
UNEXPECTED SYSTEM INTERRUPTIONS CAUSED BY SYSTEM FAILURES MAY RESULT IN REDUCED
REVENUE AND HARM TO OUR REPUTATION
In the past, particularly during peak holiday periods, we have experienced
significant increases in traffic on our Web site and in our toll-free customer
service centers. Our operations are dependent on our ability to maintain our
computer and telecommunications systems in effective working order and to
protect our systems against damage from fire, natural disaster, power loss,
telecommunications failure or similar events. Our systems have in the past, and
may in the future, experience:
- system interruptions;
- long response times; and
- degradation in our service.
We cannot assure you that we will adequately implement systems to improve
the speed, security and availability of our Internet and telecommunications
systems. Because our business depends on customers making purchases on our
systems, our revenues will decrease and our reputation could be harmed if we
experience frequent or long system delays or interruptions or if a disruption
occurs during a peak holiday season.
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IF FRY MULTIMEDIA AND AT&T DO NOT ADEQUATELY MAINTAIN OUR WEB SITE AND TELEPHONE
SERVICE, WE MAY EXPERIENCE SYSTEM FAILURES AND OUR REVENUES WILL DECREASE
We are dependent on Fry Multimedia to host and maintain our Web site and on
AT&T to provide telephone services to our customer service centers. If Fry
Multimedia or AT&T experience system failures or fail to adequately maintain our
systems, we would experience interruptions and our customers might not continue
to utilize our services. If we do not maintain our Web site or our telephone
service, we will be unable to generate revenue. Our future success depends upon
these third-party relationships because we do not have the resources to maintain
our Web site or our telephone service without these or other third parties. We
may not be able to maintain these relationships or replace them on financially
attractive terms. Failure to do so may disrupt our operations or require us to
incur significant unanticipated costs.
INTERRUPTIONS IN FTD'S MERCURY SYSTEM OR A REDUCTION IN OUR ACCESS TO THIS
SYSTEM MAY DISRUPT ORDER FULFILLMENT AND CREATE CUSTOMER DISSATISFACTION
A significant portion of our customers' orders were communicated to the
fulfilling florist through FTD's Mercury system. The Mercury system is an order
processing and messaging network used to facilitate the transmission of floral
orders between florists. The Mercury system has in the past experienced
interruptions in service. If the Mercury system experiences interruptions in the
future, we would experience difficulties in fulfilling our customers' orders and
many of our customers might not continue to shop with us.
In addition, we have been engaged in discussions with FTD regarding
decreasing our level of access to the Mercury system. Any decrease in our access
may impact our ability to fulfill orders in a timely fashion during peak periods
and may result in lost revenues and customers.
YEAR 2000 PROBLEMS MAY DISRUPT OUR OPERATIONS AND SUBJECT US TO INCREASED
EXPENSES
We are dependent upon the proper functioning of our technology
infrastructure. This technology infrastructure is comprised of our computer and
telecommunications systems, which include hardware and software provided by
third-party vendors, and the systems maintained by our suppliers and BloomNet
florists. A failure of any part of our technology infrastructure to correctly
recognize dates beyond December 31, 1999 could materially disrupt our ability to
receive and fulfill customer orders, cause us to incur significant expenses and
cause losses of valuable data, each of which could adversely affect our business
and operations. In addition, the vast majority of purchases by our customers are
made with credit cards, and our financial condition may be adversely affected to
the extent our customers are unable to use their credit cards due to Year 2000
issues that are not rectified by the customers' credit card vendors or third
party credit card transaction processors. For a discussion of Year 2000 issues,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Readiness Disclosure".
RISKS RELATING TO OUR ORGANIZATION AND LEGAL UNCERTAINTY
WE ARE CONTROLLED BY OUR CHIEF EXECUTIVE OFFICER, WHOSE INTERESTS MAY DIFFER
FROM OTHER STOCKHOLDERS
Our common stock is divided into two classes. The class A common stock has
one vote per share and the class B common stock has 10 votes per share. Mr.
James F. McCann, our Chairman and Chief Executive Officer, will control 77.2% of
the combined voting power of our common stock after this offering and will
control the outcome of any corporate transaction or other matter submitted to
the stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of our assets, and also the power to prevent or cause a
change in control.
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The interests of Mr. McCann may differ from the interests of the other
stockholders.
IF WE ARE UNABLE TO HIRE AND RETAIN KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL
SUFFER
Our success is dependent on our ability to hire, retain and motivate highly
qualified personnel. In particular, our success depends on the continued efforts
of our Chairman and Chief Executive Officer, James F. McCann, and our Senior
Vice President, Christopher G. McCann. In addition, we have recently hired
several new members of our senior management team to help manage our growth and
we will need to recruit, train and retain a significant number of additional
employees, particularly employees with technical backgrounds. These individuals
are in high demand and we are not certain we will be able to attract the
personnel we need. The loss of the services of any of our executive management
or key personnel, our failure to integrate any of our new senior management into
our operations or our inability to attract qualified additional personnel could
cause our growth to suffer and force us to expend time and resources in locating
and training additional personnel.
THE INTERNET IS SUBJECT TO MANY GOVERNMENTAL REGULATIONS THAT MAY AFFECT OUR
ABILITY TO CONDUCT BUSINESS
Any new law or regulation, or the application or interpretation of existing
laws, may decrease the growth in the use of the Internet or our Web site. We
expect there will be an increasing number of laws and regulations pertaining to
the Internet in the United States and throughout the world. These laws or
regulations may relate to liability for information received from or transmitted
over the Internet, online content regulation, user privacy, taxation and quality
of products and services sold over the Internet. Moreover, the applicability to
the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. This could
decrease the demand for our products, increase our costs or otherwise adversely
affect our business.
REGULATIONS IMPOSED BY THE FEDERAL TRADE COMMISSION MAY ADVERSELY AFFECT THE
GROWTH OF OUR INTERNET BUSINESS OR OUR MARKETING EFFORTS
The Federal Trade Commission has proposed regulations regarding the
collection and use of personal identifying information obtained from individuals
when accessing Web sites, with particular emphasis on access by minors. These
regulations may include requirements that we establish procedures to disclose
and notify users of privacy and security policies, obtain consent from users for
collection and use of information and provide users with the ability to access,
correct and delete personal information stored by us. These regulations may also
include enforcement and redress provisions. Moreover, even in the absence of
those regulations, the Federal Trade Commission has begun investigations into
the privacy practices of other companies that collect information on the
Internet. One investigation resulted in a consent decree pursuant to which an
Internet company agreed to establish programs to implement the principles noted
above. We may become subject to a similar investigation, or the Federal Trade
Commission's regulatory and enforcement efforts may adversely affect our ability
to collect demographic and personal information from users, which could
adversely affect our marketing efforts.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
Unauthorized use of our intellectual property by third parties may damage
our brand and our reputation and will likely result in a loss of customers. It
may be possible for third parties to obtain and use our intellectual property
without authorization. Third parties have in the past infringed or
misappropriated our intellectual property or similar proprietary rights. We
believe infringements and misappropriations will continue to occur in the
future. Furthermore, the validity, enforceability
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and scope of protection of intellectual property in Internet-related industries
is uncertain and still evolving. The laws of some foreign countries are
uncertain or do not protect intellectual property rights to the same extent as
do the laws of the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE
AND, IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR ABILITY TO CONDUCT BUSINESS
We cannot be certain that our products do not or will not infringe valid
patents, trademarks, copyrights or other intellectual property rights held by
third parties. We may be subject to legal proceedings and claims relating to the
intellectual property of others from time to time in the ordinary course of our
business. We may incur substantial expense in defending against these
third-party infringement claims, regardless of their merit. Successful
infringement claims against us may result in substantial monetary liability or
may materially disrupt our ability to conduct business.
IF STATES BEGIN IMPOSING STATE SALES AND USE TAXES, WE MAY LOSE SALES OR INCUR
SIGNIFICANT EXPENSES IN SATISFACTION OF THESE OBLIGATIONS
At present, except for our retail operations, we do not collect sales or
other similar taxes in respect of sales and shipments of our products in states
other than New York, Texas, Arizona, Florida, Georgia and Virginia. However,
various states have sought to impose state sales tax collection obligations on
out-of-state direct marketing companies such as ours. A successful assertion by
one or more of these states that we should have collected or be collecting sales
tax on the sale of our products could result in additional costs and
corresponding price increases to our customers. Any imposition of state sales
and use taxes on our products sold over the Internet may decrease customers'
demand for our products and our revenue. The U.S. Congress has passed
legislation limiting for three years the ability of states to impose taxes on
Internet-based transactions. Failure to renew this legislation could result in
the broad imposition of state taxes on e-commerce.
PRODUCT LIABILITY CLAIMS MAY SUBJECT US TO INCREASED COSTS
Several of the products we sell, including perishable food products, may
expose us to product liability claims in the event that the use or consumption
of these products results in personal injury. Although we have not experienced
any material losses due to product liability claims to date, we may be subject
to product liability claims in the future and incur significant costs in their
defense. Product liability claims often create negative publicity, which could
materially damage our reputation and our brand. Although we maintain insurance
against product liability claims, our coverage may be inadequate to cover any
liabilities we may incur.
RISKS RELATED TO THIS OFFERING
WE WILL HAVE DISCRETION AS TO THE USE OF THE PROCEEDS OF THIS OFFERING, WHICH WE
MAY NOT USE EFFECTIVELY
We are not required to use the net proceeds of this offering for any
particular purpose, other than to redeem stock and stock options and to repay
existing debt. Our management will therefore have significant flexibility in
applying the net proceeds of this offering, including uses with which
stockholders may disagree. The failure of management to apply such funds
effectively could result in lost business opportunities. See "Use of Proceeds".
OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY, PARTICULARLY
BECAUSE WE HAVE INTERNET OPERATIONS
Following this offering, the price at which our class A common stock will
trade may be highly volatile and may fluctuate substantially. The stock market
has from time to time experienced significant price and volume fluctuations that
have affected the market prices of securities, particularly securities of
companies with Internet operations. As a result, investors may experience a
material
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decline in the market price of our class A common stock, regardless of our
operating performance. In the past, following periods of volatility in the
market price of a particular company's securities, securities class action
litigation has often been brought against that company. We may become involved
in this type of litigation in the future. Litigation of this type is often
expensive and diverts management's attention and resources.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
38,649,395 shares of our common stock could be sold in the public market 180
days after the offering. Sales of a large number of these shares could have an
adverse effect on the market price of our class A common stock by increasing the
number of shares available on the public market. See "Shares Eligible for Future
Sale".
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER
Provisions in our charter and bylaws and Delaware law may have the effect of
delaying or preventing a change of control or changes in our management that a
stockholder might consider favorable. See "Description of Capital Stock". If a
change of control or change in management is delayed or prevented, the market
price of our class A common stock could decline.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about 1-800-FLOWERS.COM and
our industry. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of several factors, as more fully
described under the caption "Risk Factors" and elsewhere in this prospectus. The
forward-looking statements made in this prospectus relate only to events as of
the date on which the statements are made. We undertake no obligation to
publicly update any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.
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USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares of class A common stock offered by us will be $93.4 million, assuming an
initial public offering price of $17 per share and after deducting the estimated
underwriting discount and offering expenses. If the underwriters' over-allotment
option is exercised in full, we estimate that the net proceeds will be $106.8
million.
We intend to use a portion of the proceeds of this offering as follows:
- $18.0 million to repay a term loan with Chase Bank that bears interest at
LIBOR plus 2.25% per year (7.31% at March 28, 1999) and matures on the
earlier of the consummation of this offering and July 3, 2000 that was
used to fund our acquisition of Plow & Hearth;
- $3.0 million to repay a draw on our line of credit with Chase Bank that
bears interest at LIBOR plus 2.25% per year (7.31% at March 28, 1999) and
matures simultaneously with the term loan that was used for working
capital and general corporate purposes; and
- $8.4 million to redeem all outstanding Plow & Hearth common stock not held
by us and Plow & Hearth stock options.
As of the date of this prospectus, we have not made any specific expenditure
plans with respect to the remaining proceeds of this offering. Therefore, we
cannot specify with certainty the particular uses for the net proceeds to be
received upon completion of this offering. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering.
We currently intend to use the remaining proceeds over time:
- to fund our marketing activities;
- to enhance our infrastructure;
- to enter into strategic relationships with Internet companies;
- to expand our product offerings; and
- for other general corporate purposes.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate future access to
the public capital markets and to increase our visibility in the marketplace.
We believe opportunities may exist from time to time to expand our current
business through strategic acquisitions. We may use a portion of the proceeds
for these purposes. We are not currently a party to any contracts, letters of
intent, commitments or agreements, and are not currently engaged in active
negotiations, with respect to any acquisitions.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to provide funds to finance
the expansion of our business. As a result, we do not anticipate paying any cash
dividends in the foreseeable future.
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CAPITALIZATION
The following table shows our capitalization as of March 28, 1999:
- on an actual basis;
- on a pro forma basis to reflect the May 1999 private placement and the use
of a portion of the proceeds from the private placement to redeem all
outstanding class C common stock; and
- on a pro forma as adjusted basis to reflect (1) our sale of shares of
class A common stock in this offering at an assumed initial public
offering price of $17 per share, after deducting the underwriting discount
and estimated offering expenses, (2) the use of a portion of the proceeds
from this offering to repay existing debt and redeem outstanding stock and
stock options, and (3) the automatic conversion of all outstanding shares
of our preferred stock into class A common stock. See "Use of Proceeds".
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 28, 1999
----------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt and obligations under capital leases, excluding current
portion.................................................................... $ 28,148 $ 28,148 $ 10,148
Redeemable class C common stock, non-voting; 1,000,000 shares authorized,
348,220 shares issued and outstanding (actual); no shares authorized,
issued or outstanding (pro forma and pro forma as adjusted)................ 19,020 -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 200,000 shares authorized (actual);
1,200,000 shares authorized (pro forma) and 10,000,000 shares authorized
(pro forma as adjusted):
Series A preferred stock, no shares authorized, issued or outstanding
(actual); 1,200,000 shares authorized, 1,127,546 shares issued and
outstanding (pro forma); no shares authorized, issued or outstanding
(pro forma as adjusted).............................................. -- 117,370 --
Common Stock, $0.01 par value, 101,500,000 shares authorized (actual);
400,000,000 shares authorized (pro forma and pro forma as adjusted):
Class A common stock, one vote per share; 500,000 shares authorized,
480,870 shares issued and 428,070 shares outstanding (actual); no
shares authorized, issued or outstanding (pro forma and pro forma as
adjusted)............................................................ 5 -- --
Class B common stock, non-voting; 100,000,000 shares authorized,
48,849,930 shares issued and 43,569,930 shares outstanding (actual);
no shares authorized, issued or outstanding (pro forma and pro forma
as adjusted)......................................................... 488 -- --
Class A common stock, one vote per share; no shares authorized, issued
or outstanding (actual); 200,000,000 shares authorized (pro forma and
pro forma as adjusted); 4,100,012 shares issued and outstanding (pro
forma); 21,375,472 shares issued and outstanding (pro forma as
adjusted)............................................................ -- 41 214
Class B common stock, ten votes per share; no shares authorized, issued
or outstanding (actual); 200,000,000 shares authorized (pro forma and
pro forma as adjusted); 45,579,005 shares issued and 40,246,205
shares outstanding (pro forma and pro forma as adjusted)............. -- 456 456
Additional paid-in capital................................................. 3,419 6,046 216,603
Retained earnings (deficit)................................................ (7,148) (10,779) (12,279)
Deferred compensation...................................................... (1,575) (1,575) (1,575)
Treasury stock, at cost; 52,800 shares of class A common stock and
5,280,000 shares of class B common stock (actual); 5,332,800 shares of
class B common stock (pro forma and pro forma as adjusted)............... (3,108) (3,108) (3,108)
------------ ------------ ------------
Total stockholders' equity (deficit)......................................... (7,919) 108,451 200,311
------------ ------------ ------------
Total capitalization......................................................... $ 39,249 $ 136,599 $ 210,459
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The number of shares of common stock outstanding after this offering (pro
forma as adjusted) does not include:
- 1,237,500 shares of class B common stock subject to options outstanding as
of July 7, 1999 at a weighted average exercise price of $1.73 per share;
- 200,000 shares of class A common stock subject to options outstanding as
of July 7, 1999 and up to 9,700,000 additional shares of class A common
stock that could be issued under our 1999 stock incentive plan; and
- 2,371,040 shares of class A common stock issuable upon the exercise of an
outstanding warrant at a nominal exercise price.
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DILUTION
Our pro forma net tangible book value as of March 28, 1999 was approximately
$77.3 million, or $1.39 per share of common stock. Pro forma net tangible book
value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of class A and
class B common stock outstanding at that date, assuming the completion of the
May 1999 private placement, the redemption of the class C common stock and the
automatic conversion of our outstanding preferred stock into class A common
stock. Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of shares of class A common
stock in this offering and the net tangible book value per share of common stock
after giving effect to the offering. After giving effect to the issuance and
sale of the shares of class A common stock offered by us and after deducting the
estimated underwriting discount and offering expenses payable by us, our pro
forma net tangible book value as of March 28, 1999 would have been $168.6
million, or $2.74 per share. This represents an immediate increase in pro forma
net tangible book value of $1.35 per share to existing stockholders and an
immediate dilution of $14.26 per share to new investors purchasing shares in
this offering. If the initial public offering price is higher or lower, the
dilution to the new investors will be greater or less, respectively. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $ 17.00
Pro forma net tangible book value per share at March 28, 1999....... $ 1.39
Increase in pro forma net tangible book value per share attributable
to this offering.................................................. 1.35
---------
Pro forma net tangible book value per share after the offering........ 2.74
---------
Dilution per share to new investors................................... $ 14.26
---------
---------
</TABLE>
The following table summarizes, on the pro forma basis described above, as
of March 28, 1999 the differences between the number of shares of common stock
purchased from us, the aggregate cash consideration paid to us and the average
price per share paid by existing class A and class B common stockholders and new
investors purchasing shares of class A common stock in this offering. The
calculation below is based on an assumed initial public offering price of $17
per share, before deducting the estimated underwriting discount and offering
expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 55,621,677 90.3% $ 121,282,000 54.3% $ 2.18
New investors............................... 6,000,000 9.7 102,000,000 45.7 17.00
------------- --------- ---------------- -----
Total..................................... 61,621,677 100.0% $ 223,282,000 100.0%
------------- --------- ---------------- -----
------------- --------- ---------------- -----
</TABLE>
This discussion and table assume no exercise of any stock options or
warrants outstanding as of March 28, 1999. As of March 28, 1999, on the pro
forma basis described above, there were options outstanding to purchase a total
of 1,237,500 shares of class B common stock with a weighted average exercise
price of $1.73 per share and a warrant outstanding to purchase 2,371,040 shares
of class A common stock at a nominal exercise price. To the extent that any of
these options or the warrant are exercised, there will be further dilution to
new investors. See "Capitalization".
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended
June 30, 1996, June 29, 1997 and June 28, 1998 and the nine months ended March
28, 1999 and the consolidated balance sheet data as of June 29, 1997, June 28,
1998 and March 28, 1999 have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. The selected
consolidated statement of operations data for the years ended June 30, 1994 and
July 2, 1995 and the selected consolidated balance sheet data as of June 30,
1994, July 2, 1995 and June 30, 1996 are derived from our audited consolidated
financial statements not included in this prospectus. The selected consolidated
statement of operations data for the nine months ended March 29, 1998 is derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus which, in the opinion of management, has been prepared on the same
basis as the audited consolidated financial statements and contains all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of our results of operations.
The selected unaudited pro forma combined financial data give effect to our
acquisition of Plow & Hearth in April 1998 as if the acquisition was completed
on June 30, 1997. The selected unaudited pro forma combined financial data do
not purport to be indicative of what our actual results of operations would have
been if the acquisition was completed at the assumed times and the interim
period financial data do not purport to be indicative of future operations and
should not be construed as representative of future operations.
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes to those statements included elsewhere in this prospectus.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------- ------------------------
JUNE 30, JULY 2, JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1994 1995 1996 1997 1998 1998 1999
----------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues:
Telephonic..................... $ 87,284 $ 100,826 $ 127,920 $ 145,295 $ 161,874 $ 107,141 $ 146,245
Online......................... 116 4,470 9,936 16,092 26,748 16,309 30,248
Retail fulfillment............. 4,263 11,511 15,272 25,043 31,970 22,767 27,175
----------- --------- --------- --------- --------- ----------- -----------
Total net revenues........... 91,663 116,807 153,128 186,430 220,592 146,217 203,668
Cost of revenues................. 53,468 64,657 92,820 115,078 136,966 91,773 123,738
----------- --------- --------- --------- --------- ----------- -----------
Gross profit..................... 38,195 52,150 60,308 71,352 83,626 54,444 79,930
Operating expenses:
Marketing and sales............ 29,170 38,564 42,952 47,464 55,417 38,089 67,204
Technology and development..... 500 626 851 1,411 1,794 1,128 5,207
General and administrative..... 7,019 10,035 11,556 12,338 15,832 10,315 10,528
Depreciation and
amortization................. 675 1,364 2,247 3,287 4,168 2,768 6,043
----------- --------- --------- --------- --------- ----------- -----------
Total operating expenses..... 37,364 50,589 57,606 64,500 77,211 52,300 88,982
----------- --------- --------- --------- --------- ----------- -----------
Operating income (loss).......... 831 1,561 2,702 6,852 6,415 2,144 (9,052)
Other income (expense), net...... (131) (131) (209) 674 1,654 1,729 (1,129)
----------- --------- --------- --------- --------- ----------- -----------
Income (loss) before income taxes
and minority interests......... 700 1,430 2,493 7,526 8,069 3,873 (10,181)
Provision (benefit) for income
taxes.......................... 62 300 1,255 3,135 3,181 1,515 (2,926)
----------- --------- --------- --------- --------- ----------- -----------
Income (loss) before minority
interests...................... 638 1,130 1,238 4,391 4,888 2,358 (7,255)
Minority interests............... -- -- 59 (4) 186 38 (99)
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss)................ 638 1,130 1,297 4,387 5,074 2,396 (7,354)
Redeemable class C common stock
dividends...................... -- 293 1,029 1,462 1,608 1,206 1,328
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss) applicable to
common stockholders............ $ 638 $ 837 $ 268 $ 2,925 $ 3,466 $ 1,190 $ (8,682)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Net income (loss) per common
share applicable to common
stockholders:
Basic.......................... $ 0.01 $ 0.02 $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ $ 0.01 $ 0.02 $ 0.01 $ 0.06 $ 0.07 $ 0.03 $ (0.20)
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Shares used in the calculation of
net income (loss) per common
share:
Basic.......................... 48,530 48,600 47,050 44,140 44,120 44,140 44,000
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
Diluted........................ 48,530 49,780 49,420 46,470 46,610 46,750 44,000
----------- --------- --------- --------- --------- ----------- -----------
----------- --------- --------- --------- --------- ----------- -----------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------------------------
JUNE 30, 1994 JULY 2, 1995 JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- ------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and equivalents...... $ 1,344 $ 10,775 $ 6,639 $ 11,443 $ 8,873 $ 2,632
Working capital
(deficit)............... (3,382) 2,822 (2,452) 1,975 1,950 (9,490)
Total assets.............. 13,669 35,483 36,884 44,130 81,746 86,599
Long-term liabilities..... 7,251 14,959 17,804 9,456 35,359 38,640
Redeemable class C common
stock................... -- 10,293 14,622 16,084 17,692 19,020
Total stockholders' equity
(deficit)............... (4,222) (3,316) (5,615) (2,670) 672 (7,919)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED --------------------------------
JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- --------------- ---------------
<S> <C> <C> <C>
PRO FORMA PRO FORMA ACTUAL
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMBINED STATEMENT OF OPERATIONS DATA:
Net revenues:
Telephonic................................................... $ 197,303 $ 142,568 $ 146,245
Online....................................................... 26,748 16,310 30,248
Retail fulfillment........................................... 33,696 24,494 27,175
-------------- --------------- ---------------
Total net revenues......................................... 257,747 183,372 203,668
Cost of revenues............................................... 157,084 111,891 123,738
-------------- --------------- ---------------
Gross profit................................................... 100,663 71,481 79,930
Operating expenses:
Marketing and sales.......................................... 67,819 50,491 67,204
Technology and development................................... 2,126 1,460 5,207
General and administrative................................... 20,369 14,852 10,528
Depreciation and amortization................................ 5,188 3,788 6,043
-------------- --------------- ---------------
Total operating expenses................................. 95,502 70,591 88,982
-------------- --------------- ---------------
Operating income (loss)........................................ 5,161 890 (9,052)
Other income (expense), net.................................... 521 596 (1,129)
-------------- --------------- ---------------
Income (loss) before income taxes and minority interests....... 5,682 1,486 (10,181)
Provision (benefit) for income taxes........................... 2,548 882 (2,926)
-------------- --------------- ---------------
Income (loss) before minority interests........................ 3,134 604 (7,255)
Minority interests............................................. 330 182 (99)
-------------- --------------- ---------------
Net income (loss).............................................. 3,464 786 (7,354)
Redeemable class C common stock dividends...................... 1,608 1,206 1,328
-------------- --------------- ---------------
Net income (loss) applicable to common stockholders............ $ 1,856 $ (420) $ (8,682)
-------------- --------------- ---------------
-------------- --------------- ---------------
Net income (loss) per common share applicable to common
stockholders:
Basic........................................................ $ 0.04 $ (0.01) $ (0.20)
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... $ 0.04 $ (0.01) $ (0.20)
-------------- --------------- ---------------
-------------- --------------- ---------------
Shares used in the calculation of net income (loss) per common
share:
Basic........................................................ 44,120 44,140 44,000
-------------- --------------- ---------------
-------------- --------------- ---------------
Diluted...................................................... 46,610 44,140 44,000
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS,
INCLUDING THE NOTES TO THOSE STATEMENTS, INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
1-800-FLOWERS.COM is a leading e-commerce provider of floral products and
gifts. With the development of our online business and a strategic acquisition,
we have continuously expanded our product offerings, most recently to include
gourmet foods and home and garden merchandise. As a result, we have developed
relationships with customers who purchase products for gifting occasions as well
as for everyday consumption.
Approximately 95% of our total net revenues consist of the selling price of
merchandise and service and shipping charges, net of returns and credits.
A significant portion of our floral and floral-related gift products are
fulfilled by members of the BloomNet network of approximately 1,500 independent
florists or one of our owned or franchised stores. We recognize revenue upon
delivery of the order to the recipient. We transmit our orders either through
BloomLink, our proprietary Internet-based electronic communication system, or
the communication system of a third-party wire service. Our remittance to the
fulfilling florist is processed either through a third-party service that
reconciles and effects payments between sending and fulfilling florists, called
a clearinghouse, or is directly paid by us. It is industry practice for the
clearinghouse to credit back to the originating florist a rebate for payments
processed through the clearinghouse. For florist-fulfilled orders, we record the
fees paid to the clearinghouses, net of rebates earned, as a cost of revenues.
Our home and garden merchandise and our non-floral related gift products and
gourmet foods are shipped by us, members of BloomNet or third parties directly
to the customer. We recognize revenue upon shipment of the order. We ship
non-floral gift items by United States Postal Service, Federal Express, United
Parcel Service or other common carriers. Most of our home and garden products
are fulfilled from our Madison, Virginia fulfillment center. For sales of gifts,
gourmet foods and home and garden merchandise, we record the merchandise cost
and the associated costs of inbound freight and outbound shipping as cost of
revenues.
Our retail fulfillment operations primarily consist of our 33 owned stores
and 87 franchised stores. Retail fulfillment revenues also include revenues
attributable to our wholesale business, fees paid to us by members of the
BloomNet network and royalties, fees and sublease payments paid to us by our
franchised stores. Our owned stores serve as important local points of
fulfillment and enable us to test new products and marketing programs. A
majority of the revenues derived from our owned stores represent fulfillment of
our floral orders and are eliminated as intercompany revenues.
In April 1998, we acquired 88% of the issued and outstanding capital stock
of The Plow & Hearth, Inc., a catalog company specializing in home and garden
merchandise. We also acquired an advanced distribution facility, which we are
currently expanding to approximately 300,000 square feet. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed based on fair
values at the date of acquisition. The purchase price, consisting of $16.1
million in cash and a management put liability of $6.3 million, exceeded the
estimated fair values of the net assets acquired by $19.6 million. This excess
has been recorded as goodwill and is being amortized over 20 years. We borrowed
$14.7 million of the purchase price through our bank credit facility.
24
<PAGE>
With respect to the acquisition of Plow & Hearth, we entered into an
agreement with a number of Plow & Hearth's stockholders and optionholders, whose
shares and options, amounting to 12,668 and 28,334, respectively, we did not
purchase in the acquisition. According to the agreement, each stockholder and
optionholder has the right to cause Plow & Hearth to purchase all of its
outstanding stock or stock options at a price contingent upon the operating
profits of Plow & Hearth. Accordingly, we recorded a put liability of $6.3
million at the acquisition date. The put liability was increased by $2.4 million
at June 28, 1998 to approximately $8.7 million, based on the formula specified
in the agreement, of which $1.6 million was charged to earnings and $800,000 was
charged to goodwill. During the first two quarters of fiscal 1999, the prior
year charge to earnings was reversed and goodwill adjusted in accordance with
the formula to properly state the put liability. We will use $8.4 million of the
proceeds of this offering to purchase these stockholders' and optionholders'
Plow & Hearth stock and stock options.
Effective for the fiscal year ended June 28, 1998, we adopted Statement of
Position 98-1, known as SOP 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. The
statement also requires that costs related to the preliminary project stage and
post-implementation and post-operations stage in an internal-use computer
software development project be expensed as incurred. Capitalized computer
software development for internal use totaled approximately $828,000, $5.2
million and $626,000 for the years ended June 29, 1997 and June 28, 1998 and the
nine months ended March 28, 1999, respectively. None of these costs were
capitalized during the year ended June 30, 1996.
Although we have been profitable in the past, we expect to incur losses for
the foreseeable future as a result of the significant operating and capital
expenditures required to achieve our objectives. In order to achieve and
maintain profitability, we will need to generate revenues significantly above
historical levels. Our prospects for achieving profitability must be considered
in light of the risks, uncertainties, expenses, and difficulties encountered by
companies in the rapidly evolving market of online commerce.
25
<PAGE>
RESULTS OF OPERATIONS
The following table provides items from our consolidated statements of
operations expressed as a percentage of total net revenues for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------- ------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Telephonic............................................ 83.5% 78.0% 73.4% 73.2% 71.8%
Online................................................ 6.5 8.6 12.1 11.2 14.9
Retail fulfillment.................................... 10.0 13.4 14.5 15.6 13.3
----- ----- ----- ----- -----
Total net revenues.................................. 100.0 100.0 100.0 100.0 100.0
Cost of revenues........................................ 60.6 61.7 62.1 62.8 60.8
----- ----- ----- ----- -----
Gross profit............................................ 39.4 38.3 37.9 37.2 39.2
----- ----- ----- ----- -----
Operating expenses:
Marketing and sales................................... 28.0 25.4 25.1 26.0 33.0
Technology and development............................ 0.6 0.8 0.8 0.8 2.6
General and administrative............................ 7.5 6.6 7.2 7.1 5.1
Depreciation and amortization......................... 1.5 1.8 1.9 1.9 3.0
----- ----- ----- ----- -----
Total operating expenses............................ 37.6 34.6 35.0 35.8 43.7
----- ----- ----- ----- -----
Operating income (loss)................................. 1.8 3.7 2.9 1.4 (4.5)
----- ----- ----- ----- -----
Other income (expense), net............................. (0.2) 0.4 0.8 1.2 (0.5)
Income taxes (benefit).................................. 0.8 1.7 1.4 1.0 (1.4)
----- ----- ----- ----- -----
Net income (loss)....................................... 0.8% 2.4% 2.3% 1.6% (3.6)%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
COMPARISON OF THE NINE MONTHS ENDED MARCH 28, 1999 AND THE NINE MONTHS ENDED
MARCH 29, 1998
NET REVENUES. Net revenues consist primarily of the selling price of
merchandise and service and shipping charges, net of returns and credits. Total
net revenues increased 39.3%, from $146.2 million for the nine months ended
March 29, 1998 to $203.7 million for the nine months ended March 28, 1999.
Telephonic revenues increased 36.5%, from $107.1 million for the nine months
ended March 29, 1998 to $146.2 million for the nine months ended March 28, 1999
as a result of the Plow & Hearth acquisition. Online revenues increased 85.3%,
from $16.3 million for the nine months ended March 29, 1998 to $30.2 million for
the nine months ended March 28, 1999. Retail fulfillment revenues increased
19.3%, from $22.8 million for the nine months ended March 29, 1998 to $27.2
million for the nine months ended March 28, 1999, primarily due to a $4.0
million increase due to the growth in the number of owned retail stores from 21
to 34. We do not expect to materially increase the number of owned retail stores
in the foreseeable future.
COST OF REVENUES. Cost of revenues consists primarily of fees paid to
clearinghouses, net of rebates, and the cost of merchandise sold, including
inbound freight and outbound shipping. Additionally, cost of revenues includes
labor and facility expenses related to our wholesale operations and facility
costs related to properties that we sublet to our franchisees. Cost of revenues
increased 34.7%, from $91.8 million for the nine months ended March 29, 1998 to
$123.7 million for the nine months ended March 28, 1999. Cost of revenues
increased in line with total net revenues. For the same period, gross margin
increased 2.0 percentage points to 39.2%. The improvement in gross margin was
primarily attributable to the Plow & Hearth acquisition,
26
<PAGE>
whose product line carries a higher margin than our floral products.
MARKETING AND SALES EXPENSES. Marketing and sales expenses consist primarily
of advertising and promotional expenditures, catalog costs, fees paid to
establish and maintain strategic relationships with Internet companies, costs
associated with retail store, customer service center and fulfillment center
operations and the operating expenses of our departments engaged in marketing,
selling and merchandising activities. Marketing and sales expenses increased
76.4%, from $38.1 million, or 26.0% of total net revenues, for the nine months
ended March 29, 1998, to $67.2 million, or 33.0% of total net revenues, for the
nine months ended March 28, 1999. The increase was primarily attributable to
$13.6 million of catalog printing and circulation expenditures resulting from
the Plow & Hearth acquisition, a $4.5 million increase in our online and
traditional media advertising campaigns and a $7.6 million increase in payroll
in support of increased order fulfillment and customer service activities. We
expect marketing and sales expenses to increase significantly in future periods
as we implement our strategy to expand our base of strategic relationships with
Internet companies and to pursue an aggressive branding and marketing campaign.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
consist primarily of payroll and operating expenses of our information
technology group, costs associated with our Web site, including design,
development and third-party hosting, and maintenance, support and licensing
costs pertaining to our order entry, customer service, fulfillment and database
systems. Technology and development expenses increased from $1.1 million for the
nine months ended March 29, 1998 to $5.2 million for the nine months ended March
28, 1999. The increase was primarily attributable to a $1.1 million increase in
payroll and related expenses for staff additions to the technology team, a $2.0
million increase in development costs incurred to enhance the content and
functionality of our Web site and our transaction processing system and a
$434,000 increase in web hosting fees. For the nine months ended March 28, 1999,
we capitalized $626,000 of acquired or developed software in accordance with SOP
98-1. We believe that continued investment in technology and development is
critical to attaining our strategic objectives and, as a result, we expect
technology and development costs to increase significantly, particularly in the
areas of Web site development and database management.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist of payroll and other expenses in support of our executive, finance &
accounting, legal, human resources and other administrative functions, as well
as professional fees and other general corporate expenses. General and
administrative expenses increased 1.9%, from $10.3 million, or 7.1% of total net
revenues, for the nine months ended March 29, 1998 to $10.5 million, or 5.2% of
total net revenues, for the nine months ended March 28, 1999. The decrease as a
percentage of total net revenues was attributable to a $1.6 million benefit
related to the reduction in the Plow & Hearth put liability. We expect that
general and administrative expenses will increase in the future due to the
expansion of our staff to support our growth strategy and the incremental costs
we expect to incur as a public company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2.8 million for the nine months ended March 29, 1998 to $6.0 million for the
nine months ended March 28, 1999. The increase was primarily due to additional
capital expenditures in short-lived information systems hardware and software,
as well as the increase in depreciable assets acquired and goodwill of
approximately $675,000 created by the Plow & Hearth acquisition.
OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily
of interest expense attributable to our credit facility, promissory notes issued
to sellers in acquisitions, and leases, offset by interest income on our cash
and short-term
27
<PAGE>
investments and dividend income. For the nine months ended March 28, 1999, we
recorded a net expense of $1.1 million due primarily to the financing of the
Plow & Hearth acquisition. For the nine months ended March 29, 1998, we realized
other net income of $1.7 million, which consisted primarily of a $1.5 million
dividend from a minority investment.
INCOME TAXES. For the nine months ended March 28, 1999, we incurred a loss
that provided a tax benefit of $2.9 million at an effective rate of 28.7%. For
the nine months ended March 29, 1998, we provided for taxes of $1.5 million at
an effective rate of 39.1%. The effective tax rate differed from the combined
statutory rate as a result of the non-taxable component of a $1.5 million
dividend, offset in part by the non-deductibility of certain goodwill
amortization. We anticipate incurring significant losses in the foreseeable
future. After accounting for recoverable income taxes due to allowable tax
carry-back claims, we intend to provide a full valuation allowance on the
related deferred tax asset to reflect the uncertainty of its realization in the
future.
YEAR ENDED JUNE 28, 1998 COMPARED TO THE YEAR ENDED JUNE 27, 1997
NET REVENUES. Total net revenues increased 18.3%, from $186.4 million for
fiscal 1997 to $220.6 million for fiscal 1998. Telephonic revenues increased
11.4%, from $145.3 million in fiscal 1997 to $161.9 million in fiscal 1998. The
increase was primarily due to our April 1998 acquisition of Plow & Hearth, which
contributed $11.4 million in net revenues in the fourth quarter. Online revenues
increased 65.8%, from $16.1 million in fiscal 1997 to $26.7 million in fiscal
1998. Retail fulfillment revenues increased 28.0%, from $25.0 million in fiscal
1997 to $32.0 million in fiscal 1998, primarily as a result of our July 1997
acquisition of a wholesale supplier of fresh-cut flowers and floral arrangements
to the supermarket industry, which generated $5.0 million in net revenues in
fiscal 1998.
COST OF REVENUES. Cost of revenues increased 19.0%, from $115.1 million in
fiscal 1997 to $137.0 million in fiscal 1998. The increase was in line with the
increase in total net revenues. Our gross margin decreased 0.4 percentage points
from 38.3% to 37.9% due to an increase in the percentage of total net revenue
from lower margin wholesale operations.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 16.6%,
from $47.5 million, or 25.4% of total net revenues, for fiscal 1997 to $55.4
million, or 25.1% of total net revenues, for fiscal 1998. The additional
spending was primarily attributable to a $5.5 million increase in payroll in
support of order fulfillment and customer service activities, $2.6 million of
catalog expenditures resulting from the Plow & Hearth acquisition and an
increase of $1.8 million resulting from the expansion of our online presence
through an online marketing agreement with AOL, which became effective in May
1997. These increases were offset, in part, by a $3.0 million decrease in
traditional marketing that contributed to the decrease as a percentage of net
revenues.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased 28.6%, from $1.4 million in fiscal 1997 to $1.8 million in fiscal 1998
as a result of an increase in web hosting fees of $340,000. In addition to
recognized product development expenses, we capitalized $5.2 million of software
development costs in fiscal 1998 in accordance with SOP 98-1, reflecting our
increased investments in our infrastructure. This compares to $828,000 of
capitalized development costs in fiscal 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 28.5%, from $12.3 million, or 6.6% of total net revenues, for fiscal
1997 to $15.8 million, or 7.2% of total net revenues, for fiscal 1998. The
increase in general and administrative expenses was primarily due to an $856,000
increase in professional fees related to our retail fulfillment operations,
successful trademark defense costs and a charge to earnings in June 1998 of $1.6
million related to an increase in the Plow & Hearth put liability.
28
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$3.3 million in fiscal 1997 to $4.2 million in fiscal 1998. The increase relates
to the higher level of depreciable assets in fiscal 1998 as well as the
depreciable assets acquired and goodwill created by the Plow & Hearth
acquisition.
OTHER INCOME (EXPENSE), NET. Other income, net increased from $674,000 for
fiscal 1997 to $1.7 million for fiscal 1998. The increase was primarily
attributable to a $1.5 million dividend from a minority investment partially
offset by increased interest expense related to borrowings incurred to finance
our acquisition of Plow & Hearth.
INCOME TAXES. Income taxes increased from $3.1 million for fiscal 1997 to
$3.2 million for fiscal 1998. The effective tax rate decreased 2.3 percentage
points, from 41.7% for fiscal 1997 to 39.4% for fiscal 1998. The reduction in
rate was caused by receipt of a $1.5 million dividend taxed at more favorable
rates, offset in part by the effect of higher non-deductible goodwill related to
the Plow & Hearth acquisition.
YEAR ENDED JUNE 29, 1997 COMPARED TO THE YEAR ENDED JUNE 30, 1996
NET REVENUES. Total net revenues increased 21.8%, from $153.1 million in
fiscal 1996 to $186.4 million in fiscal 1997. Telephonic revenues increased
13.6% from $127.9 million for fiscal 1996 to $145.3 million for fiscal 1997 and
online revenues increased 62.6% from $9.9 million for fiscal 1996 to $16.1
million for fiscal 1997. These increases were primarily the result of the growth
of our telephonic and online customer base. Retail fulfillment revenues
increased 63.4% from $15.3 million in fiscal 1996 to $25.0 million in fiscal
1997, primarily due to the to the acquisition of a wholesale supplier of
fresh-cut flowers and floral arrangements to the supermarket industry in
September 1996, which generated $7.1 million in net revenues in fiscal 1997.
COST OF REVENUES. Cost of revenues increased 24.0%, from $92.8 million in
fiscal 1996 to $115.1 million in fiscal 1997. The increase was in line with the
increase in total net revenues. Our gross margin decreased 1.1 percentage points
from 39.4% in fiscal 1996 to 38.3% in fiscal 1997 due to the increase in revenue
from lower margin wholesale operations.
MARKETING AND SALES EXPENSES. Marketing and sales expenses increased 10.5%,
from $43.0 million, or 28.0% of total net revenues, in fiscal 1996 to $47.5
million, or 25.4% of total net revenues, in fiscal 1997. The additional spending
increase was primarily attributable to a $2.0 million increase in personnel
costs supporting the customer service centers as well as a $1.4 million increase
in general advertising dollars to support our brand. However, these increases
were, in percentage terms, lower than the percentage increase in total net
revenues, resulting in a decrease as a percentage of total net revenues.
TECHNOLOGY AND DEVELOPMENT EXPENSES. Technology and development expenses
increased 64.5%, from $851,000 in fiscal 1996 to $1.4 million in fiscal 1997.
The increase primarily consisted of a $262,000 increase in salary and related
expenses of additional information technology staff to support our growth.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 6.0%, from $11.6 million, or 7.5% of total net revenues, in fiscal
1996 to $12.3 million, or 6.6% of total net revenues, in fiscal 1997. The
increase in general and administrative expenses was primarily due to increased
salaries and related expenses associated with the expansion of our order
fulfillment operations.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$2.2 million in fiscal 1996 to $3.3 million in fiscal 1997. The increase relates
to a full year of depreciation on $5.0 million of assets purchased in fiscal
1996, as well as depreciation on assets purchased in fiscal 1997.
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OTHER INCOME (EXPENSE), NET. Other income, net was $674,000 in fiscal 1997
compared to an expense of $209,000 in fiscal 1996. The difference was primarily
attributable to the retirement of $5.8 million of related party debt obligations
in fiscal 1996.
INCOME TAXES. Income taxes increased from $1.3 million in fiscal 1996 to
$3.1 million in fiscal 1997. The effective tax rate decreased 8.6 percentage
points, from 50.3% for fiscal 1996 to 41.7% in fiscal 1997. The effective tax
rate reflects the non-deductible amortization related to our 1995 purchase of
one of our franchisees and, in fiscal 1996, a non-deductible charge.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly statement of operations
data for the last seven quarters and such data expressed as a percentage of
total net revenues. We believe this unaudited information has been prepared
substantially on the same basis as the annual audited financial statements and
all necessary adjustments, consisting of only normal recurring adjustments, have
been included in the amounts stated below to present fairly our results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 28,
1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net revenues:
Telephonic........................ $ 28,601 $ 40,041 $ 38,499 $ 54,733 $ 34,370 $ 67,972 $ 43,903
Online............................ 3,276 5,938 7,095 10,439 6,258 10,771 13,219
Retail fulfillment................ 5,638 7,610 9,519 9,203 6,946 10,061 10,168
----------- --------- --------- ----------- ----------- --------- ---------
Total net revenues.............. 37,515 53,589 55,113 74,375 47,574 88,804 67,290
Cost of revenues.................... 23,499 33,361 34,913 45,193 29,793 51,847 42,098
----------- --------- --------- ----------- ----------- --------- ---------
Gross profit........................ 14,016 20,228 20,200 29,182 17,781 36,957 25,192
----------- --------- --------- ----------- ----------- --------- ---------
Operating expenses:
Marketing and sales............... 9,792 14,689 13,608 17,328 14,455 33,065 19,684
Technology and development........ 409 185 534 666 1,127 1,807 2,273
General and administrative........ 3,280 3,730 3,305 5,517 2,348 3,273 4,907
Depreciation and amortization..... 905 905 958 1,400 1,871 2,015 2,157
----------- --------- --------- ----------- ----------- --------- ---------
Total operating expenses...... 14,386 19,509 18,405 24,911 19,801 40,160 29,021
----------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)............. (370) 719 1,795 4,271 (2,020) (3,203) (3,829)
----------- --------- --------- ----------- ----------- --------- ---------
Other income (expense), net......... 1,724 (13) 56 73 (227) (623) (378)
Income taxes (benefit).............. 524 273 718 1,666 (677) (1,071) (1,178)
----------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................... $ 830 $ 433 $ 1,133 $ 2,678 $ (1,570) $ (2,755) $ (3,029)
----------- --------- --------- ----------- ----------- --------- ---------
----------- --------- --------- ----------- ----------- --------- ---------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------
SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27, DEC. 27, MAR. 28,
1997 1997 1998 1998 1998 1998 1999
----------- --------- --------- ----------- ----------- --------- ---------
(AS A PERCENTAGE OF TOTAL NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Telephonic........................ 76.3% 74.7% 69.8% 73.6% 72.2% 76.6% 65.2%
Online............................ 8.7 11.1 12.9 14.0 13.2 12.1 19.7
Retail fulfillment................ 15.0 14.2 17.3 12.4 14.6 11.3 15.1
----------- --------- --------- ----------- ----------- --------- ---------
Total net revenues.............. 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.................... 62.6 62.3 63.3 60.8 62.6 58.4 62.6
----------- --------- --------- ----------- ----------- --------- ---------
Gross profit........................ 37.4 37.7 36.7 39.2 37.4 41.6 37.4
----------- --------- --------- ----------- ----------- --------- ---------
Operating expenses:
Marketing and sales............... 26.1 27.4 24.7 23.3 30.4 37.2 29.2
Technology and development........ 1.1 0.3 1.0 0.9 2.4 2.0 3.4
General and administrative........ 8.8 7.0 6.0 7.4 4.9 3.7 7.3
Depreciation and amortization..... 2.4 1.7 1.7 1.9 3.9 2.3 3.2
----------- --------- --------- ----------- ----------- --------- ---------
Total operating expenses........ 38.4 36.4 33.4 33.5 41.6 45.2 43.1
----------- --------- --------- ----------- ----------- --------- ---------
Operating income (loss)............. (1.0) 1.3 3.3 5.7 (4.2) (3.6) (5.7)
----------- --------- --------- ----------- ----------- --------- ---------
Other income (expense), net......... 4.6 (0.0) 0.1 0.1 (0.5) (0.7) (0.6)
Income taxes benefit................ 1.4 0.5 1.3 2.2 (1.4) (1.2) (1.8)
----------- --------- --------- ----------- ----------- --------- ---------
Net income (loss)................... 2.2% 0.8% 2.1% 3.6% (3.3)% (3.1)% (4.5)%
----------- --------- --------- ----------- ----------- --------- ---------
----------- --------- --------- ----------- ----------- --------- ---------
</TABLE>
Our quarterly results are subject to seasonal fluctuations. Historically,
revenues have been highest in the fourth fiscal quarter, due to a number of
major floral gifting occasions, including Mother's Day, Easter and graduations.
Due to our acquisition of Plow & Hearth, which generates more revenues in our
second fiscal quarter due to Christmas and Thanksgiving, our second fiscal
quarter revenues in fiscal 1999 increased significantly from historical levels.
We expect our second fiscal quarter revenues to represent a larger proportion of
our total revenues in the future.
It is difficult for us to forecast our revenues or earnings accurately. We
believe that period-to-period comparisons of our operating results may not be
meaningful and should not be relied upon as an indication of future performance.
We do not have a backlog and almost all of our net revenues are derived from
transactions that are consummated and fulfilled on the same day, the next day or
shortly thereafter.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through loans
from our Chief Executive Officer, which were repaid in June 1996, cash flow from
operations and a sale of class C common stock in January 1995. In addition, to
finance acquisitions, we have issued promissory notes to sellers and entered
into a $30.0 million credit agreement with a bank that provides for an $18.0
million term loan and a $12.0 million revolving credit facility. Additionally,
we have a $4.5 million revolving credit line with another bank. At March 28,
1999, $2.8 million was outstanding under this revolving credit line and we had
$2.6 million in cash and equivalents. In May 1999, we issued preferred stock
yielding us net proceeds of $101.6 million in a private placement.
We used $9.7 million in cash to fund operations during the nine months ended
March 28, 1999, principally to fund our net loss as well as increases in
accounts receivable and inventories. This use of cash was offset in part by
increases in accounts payable and accrued expenses, due primarily to our revenue
growth. We generated $5.8 million, $10.7 million and $9.5 million in cash from
operations in fiscal 1996, 1997 and 1998, respectively.
We used $1.7 million in cash for investing activities in the nine months
ended March 28,
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1999. We used $4.0 million, $4.2 million and $25.5 million in cash for investing
activities in fiscal 1996, 1997 and 1998, respectively. In each period, cash
used for investing activities related primarily to the purchase of property,
equipment and investments in our systems infrastructure and, in fiscal 1998, the
acquisition of Plow & Hearth. For the nine months ended March 28, 1999, we
generated cash by liquidating investments yielding proceeds of $5.4 million. In
fiscal 1998, we used $15.2 million, net of cash acquired, related to the Plow &
Hearth acquisition.
We generated $5.2 million in cash from financing activities in the nine
months ended March 28, 1999 and $13.4 million in fiscal 1998. In the nine months
ended March 28, 1999, financing activities included net borrowings of $6.2
million under our credit facility and revolving lines of credit and an increase
in our mortgage notes payable of $1.1 million related to the expansion of the
Plow & Hearth credit facility. In fiscal 1998, we borrowed $15.5 million to
finance the Plow & Hearth acquisition, offset in part by repayments of capital
leases and seller acquisition notes and the purchase into treasury of $133,000
of outstanding class A and B common stock. In fiscal 1997, we used $1.7 million
in financing activities related to the repayment of capital leases and
promissory notes issued to sellers. Finally, in 1996 we used $3.0 million in
financing to repay capital leases and related party loans as well as purchased
into treasury $3.0 million of outstanding class A and B common stock.
Our material capital commitments consist of:
- an aggregate of $18.0 million outstanding at March 28, 1999 under our
credit agreement that bears interest at LIBOR plus 2.25% per annum (7.31%
at March 28, 1999);
- promissory notes issued to sellers in connection with prior acquisitions
by us in the aggregate principal amount of $4.5 million, which bear
interest at rates ranging from 6.5% to 12% per annum and mature at dates
ranging from September 1999 to November 2004, all of which are secured by
either the stock or assets of various subsidiaries of 1-800-FLOWERS.COM;
- obligations outstanding under capital and operating leases; and
- obligations to pay $11.5 million to AOL during the term of our agreements
with AOL. In addition, we are required to share a small portion of our
AOL-derived revenue with AOL. Through March 28, 1999 we have paid $7.5
million to AOL under these agreements. Of the remaining $4.0 million, $3.0
million is payable in July 1999 and $500,000 is payable during each of the
fiscal years ending June 2000 and June 2001.
As of March 28, 1999, we were in default of covenants contained in our
credit agreement. The lender under the credit agreement has waived these
defaults and the credit agreement has been amended to provide that all amounts
outstanding under the credit agreement will become due upon the effectiveness of
this offering and to reduce the revolving credit line to $5.0 million. We have
allocated a portion of the proceeds of this offering to repay the amounts
outstanding under the credit facility and we do not believe the repayment of the
credit facility will adversely impact our liquidity.
At March 28, 1999, our known commitments for the subsequent twelve months
totalled approximately $15.2 million and were comprised of fees related to
online marketing agreements, expenses under our operating leases, interest
expense and the current portion of long term debt excluding the credit facility
to be repaid from the proceeds of this offering. We believe that the net
proceeds from this offering, together with our current cash and cash
equivalents, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditures for at least the next 12 months. If cash
generated from operations is insufficient to satisfy our liquidity requirements,
we may seek to sell additional equity or debt securities. The sale of additional
equity or convertible debt securities could
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<PAGE>
result in additional dilution to our stockholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, if at
all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish
21(st) century dates from 20(th) century dates. As a result, computer systems
and software used by many companies and governmental agencies may need to be
upgraded to comply with Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
OUR STATE OF READINESS
We have made a preliminary assessment of the state of our operating and
administrative systems, including our telecommunications systems, our order
processing and data collection systems and our Internet-related systems, to
assess our state of Year 2000 readiness. Our assessment plan consists of:
- evaluating our date dependent code, software and hardware and evaluating
external dependencies;
- quality assurance testing of our internally developed software and
systems; and
- obtaining assurances or warranties from third-party vendors and licensors
of material hardware, software and services that are related to the
delivery of our services.
As part of our effort to assess our Year 2000 readiness, we identified our
suppliers and vendors, sent letters requesting Year 2000 compliance statements,
recorded their responses, and investigated alternative products and services for
those suppliers not prepared for Year 2000.
Our critical systems fall into six categories: transaction processing, call
management, telecommunications, fulfillment, finance and interactive
applications. The core transaction processing and infrastructure systems are
internally maintained and hosted. Interactive-based applications, which are our
Web site and BloomLink, are hosted at Fry Multimedia. To date, our assessment
has determined that these critical business systems are all Year 2000 compliant,
except our call routing system, which we expect to be fully Year 2000 compliant
by October 1999.
1-800-FLOWERS.COM's non-critical and non-information technology systems,
which include security and mailing systems, mail room facilities for automated
postage, fire and backup generator systems and company-wide paging and alert
systems, have been tested and/or represented to us as Year 2000 compliant.
The non-information technology systems of Plow & Hearth, including those
used for picking, packing, shipping, receiving and security, were upgraded as
part of an overall warehouse expansion project in 1998. As a result, all of
these systems have been identified, assessed and found to be Year 2000
compliant.
All material commercial software and hardware on which we depend is either
Year 2000 compliant or will be upgraded to be compliant in the normal course of
business through the installation of upgrades or replacements. Our material
hardware, software and service vendors have informed us that the products we
use, or will be using as upgrades or replacements, to support our operations are
Year 2000 compliant. Our Web site hosting service, Fry Multimedia, has
represented to us that its hardware and software systems are Year 2000
compliant. Our internal critical business systems are dependent on the software
and hardware products of four vendors: Oracle, Sun, Microsoft and AT&T. Oracle
and Sun have represented to us that their products are Year 2000 compliant. We
are in the process of migrating our current Microsoft software applications to
Year 2000
33
<PAGE>
compliant software released by Microsoft, which we expect to complete by October
1999. We expect our AT&T products to be upgraded for compliance by October 1999,
with the exception of AT&T's dynamic call routing software, which we expect to
replace by October 1999 with GeoTel software, which has been represented to us
as Year 2000 compliant.
We have not yet contacted our major suppliers of fresh products (flowers and
plants) and hard goods for their Year 2000 compliance. We expect to initiate and
complete our assessment of these suppliers by October 1999. Our business is not
dependent on any one supplier. If one or more of these suppliers are not Year
2000 compliant, we will obtain our fresh products and hard goods from
alternative suppliers that are Year 2000 compliant.
Approximately one-half of BloomNet florists use our BloomLink web-based
order processing system, which is Year 2000 compliant. The remaining BloomNet
florists are being approached to implement BloomLink. By the end of 1999 we
expect our fulfilling florists to be electronically linked to 1-800-
FLOWERS.COM either through BloomLink or one of the other available Year 2000
compliant communication systems. Our business is not dependent on any one
florist or wire service. To the extent one or more BloomNet florists are not so
linked, then we may use an alternative fulfilling florist.
COSTS TO ADDRESS YEAR 2000 ISSUES
To date, we have not incurred any significant costs attributable to Year
2000 compliance. Our recent information technology investments have been in
support of our expanding operating and decision support requirements and to the
extent they involved a replacement of an existing system, also accommodated Year
2000 compliance. We do, however, expect to incur approximately $1.0 million in
the third calendar quarter to make our call routing system Year 2000 compliant.
Other than these costs, we are not currently aware of any material operational
issues or costs associated with preparing our systems for the Year 2000.
Nonetheless, we may experience material unexpected costs caused by undetected
errors or defects in the technology used in our systems or because of the
failure of a material vendor to be Year 2000 compliant.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
Notwithstanding our Year 2000 compliance efforts, the failure of a material
system or vendor, or the Internet generally, to be Year 2000 compliant could
harm the operation of our systems or have other unforeseen, material adverse
consequences to us. We are also subject to external Year 2000-related failures
or disruptions that might generally affect industry and commerce, such as
utility or transportation company Year 2000 compliance failures and related
service interruptions. All of these factors could materially adversely affect
our business.
CONTINGENCY PLANS
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have not developed a contingency plan to address situations that might occur if
technologies on which we depend are not Year 2000 compliant.
We intend to develop a contingency plan, which we expect to complete by
October 1999. The results of our Year 2000 assessment and testing, and the
responses received from third-party vendors and service providers will be taken
into account in determining the need for and nature and extent of any
contingency plans.
Based on our assessment done to date, we believe that the reasonable likely
worst-case scenario with respect to Year 2000 issues could be the difficulty for
customers to place orders in the event of disruption of power or communication
facilities. Although these events could have an adverse effect on our business
in the short-term, we do not believe that Year 2000 issues will materially and
adversely affect our business, results of operations or financial condition over
the long-term. No assurances can be given that our expectations will be
realized.
34
<PAGE>
BUSINESS
OVERVIEW
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products
and gifts. As of March 28, 1999, we had sold our products to more than 7.2
million customers, of which 2.7 million had made a purchase from us in the
previous twelve months. Our total net revenues for the nine months ended March
28, 1999 were $203.8 million.
With the development of our online business and a strategic acquisition, we
have continuously expanded our product offerings, most recently to include
gourmet foods and home and garden merchandise. As a result, we have developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption.
We believe the 1-800-FLOWERS brand is one of the most recognized brands in
the floral industry. We offer more than 1,500 varieties of fresh-cut and
seasonal flowers, plants and floral arrangements and more than 6,000 SKUs of
gifts, gourmet foods, and home and garden products, including garden accessories
and casual lifestyle furnishings. We provide our customers the choice of
purchasing our products online, by calling us toll-free or by visiting our owned
or franchised retail stores.
Today, the Internet is our fastest growing sales channel. For the nine
months ended March 28, 1999, online revenues were $30.2 million, representing an
85.3% increase over the same period in the previous fiscal year. We believe we
have been and continue to be a leader in implementing integrated technologies
and systems that support our online and telephonic sales channels and our order
fulfillment.
THE ORIGINS OF 1-800-FLOWERS.COM
Our business began in 1976, when James F. McCann, our Chairman and Chief
Executive Officer, acquired a single retail florist in New York City. We
expanded to 14 retail locations by 1986, when we changed our business strategy
to take advantage of the rapid emergence of toll-free calling. We acquired the
right to use the toll-free telephone number 1-800-FLOWERS, adopted it as our
corporate identity and began to aggressively build a national brand around it.
We believe we were one of the first companies to embrace this new way of
conducting business.
To support the growth of our toll-free business and to provide superior
customer service, we began developing an operating infrastructure that
incorporated the best available technologies. Over time, we implemented:
- a sophisticated transaction processing system that facilitated rapid order
entry and fulfillment;
- an advanced telecommunications system; and
- multiple customer service centers to handle increasing call volume.
To enable us to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, we
created BloomNet, a nationwide network of approximately 1,500 independent local
florists selected by us for their high-quality products, superior customer
service and order fulfillment and delivery capabilities.
In the early 1990s, we recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
medium. By taking advantage of our previous investments in our infrastructure,
we were able to quickly develop and implement an online presence. As a result,
we were one of the first companies to market products online through CompuServe
beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In April 1995,
we opened our fully functional, e-commerce Web site (WWW.1800FLOWERS.COM) and
subsequently entered into strategic relationships with AOL, Excite and Microsoft
Network, among others, to build our online brand and customer base.
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Our online presence has enabled us to expand the number and types of
products we can effectively offer. Since 1995, we have expanded our online
product offerings of flowers, gourmet foods and gifts and added complementary
home and garden merchandise through our April 1998 acquisition of Plow & Hearth.
1-800-FLOWERS.COM TODAY
[Graphic consisting of five circles arranged around the periphery, each
containing a depiction of one category of products and labeled "Floral",
"Garden", "Home", "Gourmet" and "Gifts". In the center of graphic are the
Company name and logo and the words "Brand", "Product Selection", "Customer
Relationships", "Technology Infrastructure" and "Fulfillment Capabilities".]
We believe our success in selling floral, gift, gourmet food and home and garden
products is attributable to the following key elements of our business:
OUR BRAND. We believe that 1-800-FLOWERS is one of the most recognized
brands in the floral industry. The strength of our brand has enabled us to
extend our product offerings to complementary products, including gifts, gourmet
foods and home and garden merchandise, and to attract a significant number of
customers to our Web site. We continue to invest heavily in building our brand
through strategic online relationships and extensive marketing, advertising and
public relations programs. We believe our brand is characterized by:
- Convenience. Our customers may purchase floral, gift, gourmet food and
home and garden products online or by calling our toll-free telephone
number from the home or office 24 hours a day, seven days a week. We offer
a variety of delivery options, including same-day or next-day service
throughout the United States.
- Quality. High-quality products are critical to our continued brand
strength. We offer our customers a 100% satisfaction guarantee on all of
our products.
- Selection. Over the course of a year, we offer more than 1,500 varieties
of fresh-cut and seasonal flowers, plants and floral arrangements, and
more than 6,000 SKUs of gifts, gourmet foods and home and garden products,
including garden accessories and casual lifestyle furnishings.
- Customer Service. We ensure a high level of customer service by training
our agents to assist our customers over the telephone and online to select
the appropriate flowers or gifts and to monitor order fulfillment.
OUR PRODUCT SELECTION. We continuously expand our product offerings to
offer a better shopping experience for our customers. Our merchandising team
works closely with manufacturers and suppliers to select and design our
principal floral, gift, gourmet food and home and garden merchandise as well as
other products that meet the seasonal and other special needs of our customers.
Because we offer a wide selection of products, we create the opportunity to
have a relationship with customers who purchase products not only for gifting
occasions but also for everyday consumption.
OUR CUSTOMER RELATIONSHIPS. Through our direct contact with our customers,
we collect information and maintain a database about our customers. This
information includes the customer's name, address, e-mail address, telephone
number, demographic information, individual preferences, shopping and buying
patterns and other key attributes. We use this information to improve our
customers' experience with us by offering products that meet their needs, to
target promotional offers, to identify future consumption and giving occasions
and to send gift reminders and e-mail messages, including our electronic
newsletter. As of March 28, 1999, our total database of customers numbered
approximately 7.2 million. We also gather information about the recipients of
our
36
<PAGE>
products, including their name, address, telephone number and the products
received.
We market our products to businesses for gifting, incentive and reward
programs. We currently provide many of our large corporate customers with an
account manager, a team of floral and gifting coordinators and a customized,
password-protected area of our Web site. In addition, each employee of our
corporate customers is entitled to receive special offers and discounts on
personal purchases.
OUR TECHNOLOGY INFRASTRUCTURE. We believe we have been and continue to be a
leader in implementing new technologies and systems to give our customers the
best possible experience with us, whether online or over the telephone. Our Web
site has been designed to be secure, fast and easy to use. To serve our
telephone customers, we have implemented a centrally managed telecommunications
network.
We process both online and telephonic orders through the same transaction
processing system. This system selects the florist or other vendor to fulfill a
customer's order, electronically transmits the order for fulfillment and
captures the customer's profile and purchasing history. In addition, our
customer service representatives are electronically linked to this system,
enabling them to facilitate placement of an order and subsequently track
customer and order information.
OUR FULFILLMENT CAPABILITIES. Fresh-cut and seasonal flowers and floral
arrangements are perishable and often sent as gifts. A significant portion of
our customers' purchases of floral and floral-related gift products are
fulfilled through the BloomNet network of approximately 1,500 independent
florists or one of our owned or franchised retail stores. This allows us to
deliver our floral products on a same-day or next-day basis to ensure freshness
and to meet our customers' need for prompt delivery. In addition, we are better
able to ensure consistent product quality and presentation and offer a greater
variety of arrangements, which we believe creates a better experience for our
customers and gift recipients. We select BloomNet members for their high-quality
products, superior customer service and order fulfillment and delivery
capabilities.
To ensure reliable and efficient communication of online and telephonic
orders to the BloomNet members, we created BloomLink, a proprietary
Internet-based communications system. At March 28, 1999, approximately one-half
of the BloomNet members had adopted BloomLink since its introduction in January
1998. We also have the ability to arrange for delivery of floral products
internationally through independent wire services.
We fulfill most of our gift basket and gourmet food items primarily through
members of BloomNet or third-party suppliers that ship products directly to the
customer by next-day or other delivery method chosen by the customer. We select
our third-party vendors based upon the quality of their products, their
reliability and their ability to meet our volume requirements.
We package and ship our home and garden products from our advanced 185,000
square foot fulfillment center located in Madison, Virginia by next-day or other
delivery method chosen by the customer. We are currently enlarging this facility
to approximately 300,000 square feet to support our anticipated future growth.
OUR STRATEGY
Our objective is to be the leading e-commerce provider of flowers, gifts,
gourmet foods and products for the home and garden. The key elements of our
strategy to achieve this objective are:
AGGRESSIVELY EXTEND OUR BRAND. Our goal is to make the 1-800-FLOWERS.COM
brand synonymous with flowers, gifts, gourmet foods and home and garden
products. To do this, we intend to invest in building our brand and in
communicating the benefits and convenience of shopping with 1-800-FLOWERS.COM.
We intend to
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significantly increase our marketing expenditures to:
- maintain and develop new strategic relationships with Internet companies;
- expand our Internet advertising and promotion;
- broaden our television, radio, print and outdoor advertising campaigns;
and
- increase our public relations programs, such as community events, radio
and television demonstrations and trade conferences.
We intend to market other high-quality brands in addition to
1-800-FLOWERS.COM. We may accomplish this through internal development,
co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses.
EXPAND OUR OFFERINGS OF GIFTS AND HOME AND GARDEN PRODUCTS. To broaden our
relationships with our existing customers, we intend to offer more products
designed for everyday occasions and sentiments, as well as products for the home
and garden. To do this, we intend to expand our relationships with product
manufacturers or acquire businesses with complementary product lines.
ENHANCE OUR CUSTOMER RELATIONSHIPS. We intend to enhance our relationships
with our customers, encouraging more frequent and more extensive use of our Web
site, by introducing enhanced product-related content and interactive features.
We will also continue to personalize the features of our Web site and increase
our use of both customer and recipients' information to target product
promotions, remind our customers of upcoming occasions and convey other
marketing messages. In addition, we are committed to continuing to make shopping
and visiting WWW.1800FLOWERS.COM an easy, secure and pleasurable experience for
our customers.
We believe we have a significant opportunity to expand our corporate
accounts. We intend to focus greater resources on developing customized programs
for our corporate customers to meet their gifting needs and those of their
employees.
INCREASE THE NUMBER OF ONLINE CUSTOMERS. Our goal is to increase the number
of customers placing orders through our Web site. To achieve this goal, we
intend to:
- actively promote our Web site through Web portals and online networks;
- aggressively expand our online affiliate program, in which independent Web
sites link directly to our Web site;
- aggressively market our Web site in our advertising campaigns;
- promote our Web site to our existing telephonic customers; and
- facilitate access to our Web site for our corporate customers by
developing direct links from their internal corporate networks.
CONTINUE TO UPGRADE OUR TECHNOLOGY INFRASTRUCTURE. We will continue to make
significant investments and use the best available technologies in order to
improve the functionality of our Web site and our underlying operations. In
particular, we intend to:
- continue to improve the speed and ease of use of our Web site;
- improve our transaction processing system to facilitate order tracking and
to enhance the interface with our accounting and financial systems;
- enhance our ability to analyze our database of customer information and
conduct personalized one-to-one marketing; and
- further expand the functionality and features of BloomLink.
CONTINUE TO IMPROVE OUR FULFILLMENT CAPABILITIES. We intend to improve our
fulfillment capabilities to make our operations more efficient by:
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- strengthening our relationships with BloomNet member florists and
increasing the number of BloomLink installations in their stores;
- evaluating and implementing alternative means of fulfillment, such as
centralized production and logistics partnering; and
- continuing to improve our operations that support our gift, gourmet food
and home and garden product lines.
OUR PRODUCTS
We offer a wide range of products, including fresh-cut and seasonal flowers,
floral arrangements, gifts, gourmet foods and home and garden merchandise. In
addition to selecting our core products, our merchandising team works closely
with manufacturers and suppliers to select and design products that meet the
seasonal and other special needs of our customers. For the years ended June 29,
1997 and June 28, 1998 and for the nine months ended March 28, 1999, the flowers
and plants product category represented 92.1%, 86.9% and 72.2% of total net
revenues, respectively. Additionally, for the nine months ended March 28, 1999,
the home category generated 10.0% of total net revenues.
Over the course of a year, our product selection consists of:
FLOWERS AND PLANTS. We offer more than 1,300 varieties of fresh-cut and
seasonal flowers and floral arrangements for all occasions and holidays. We also
offer more than 200 varieties of popular plants for the home and garden.
GIFTS. We offer more than 200 SKUs of gifts, including gift baskets, dolls,
plush toys, balloons, bath and spa items, wreaths and ornaments.
GOURMET FOODS. We offer more than 100 SKUs in the gourmet food category,
including candies, chocolates, nuts, cookies and fruits.
HOME. We offer more than 2,500 SKUs for the home, including candles and
lighting, vases, kitchen items and accents, casual lifestyle furniture and home
accessories.
GARDEN. We offer more than 3,000 SKUs for the garden, including outdoor
furniture, tools and accessories, pottery, nature-related products, clothing and
footwear.
OUR WEB SITE
We offer floral, gift, gourmet food and home and garden products through our
1-800-FLOWERS.COM Web site (WWW.1800FLOWERS.COM). Customers may come to our Web
site directly or may be referred to us by a Web site with which we have a
strategic relationship. Our online partners include AOL, Excite and Microsoft
Network and more than 3,000 members of our online affiliate program, which we
initiated in February 1999. In addition, our customers can shop at our AOL store
(keyword: flowers). We also offer home and garden products through the Plow &
Hearth Web site (WWW.PLOWHEARTH.COM). We intend to integrate the Plow & Hearth
Web site into our 1-800-FLOWERS.COM Web site to provide our customers the
ability to purchase floral, gift, gourmet food and home and garden products
conveniently in a single visit. As of March 28, 1999, approximately 495,000
customers had made a purchase through our Web site or our AOL store in the
previous twelve months.
Our Web site allows customers to easily browse and purchase our products,
promotes brand loyalty and encourages repeat purchases by providing an inviting
customer experience. Our Web site offers customers detailed product information,
complete with photographs, contests, home decorating and how-to tips,
information on floral trends, gift-giving suggestions and information about
special events and offers. We have designed our Web site to be fast, secure and
easy to use and to enable customers to order products with minimal effort. Our
Web site includes the following key features:
SEARCHING. We have incorporated sophisticated search capabilities, which
enable customers to search for products by category, occasion, price, flower
type or keyword. We
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also have a "Gift Center" section that provides popular gift ideas for each
occasion.
PERSONALIZATION. We utilize our Web site to enhance the direct relationship
with our customers. The "My Assistant" area of our site enables customers to
establish their floral and gift preferences, which personalizes and simplifies
their visits. "My Assistant" members are also provided with an online address
book of names and addresses of their gift recipients, access to their purchasing
history and e-mail notification of specials and events at our local retail
stores. Our customers can also register for our "Gift Reminder Program," in
which we send them an e-mail reminder a few days prior to an occasion to remind
them of the occasion and to recommend specific flowers and gifts.
SECURITY. We use secure server software to encrypt the customer's credit
card number prior to transmitting it over the Internet.
DELIVERY. We offer customers a variety of delivery and shipping options,
including same-day or next-day delivery by the fulfilling local florist and a
number of delivery options through Federal Express, United Parcel Service, the
United States Postal Service and other common carriers.
CUSTOMER SERVICE. Through our six customer service centers, we offer
service and support to our customers 24 hours a day, seven days a week over the
telephone. We also provide real-time online messaging and e-mail support to our
customers. We intend to enhance our ability to provide a high level of customer
service through the use of new Internet-based technologies.
PRIVACY. We recognize the importance of maintaining the privacy of our
customers. We use the information gathered from our customers and others who
have registered on our Web site from time to time to send our own promotional
materials. We periodically make information available to selected third parties
for direct marketing purposes. However, customers may elect not to receive our
promotional information or instruct us not to make their information available
to third parties. We also gather information concerning how visitors use and
navigate our Web site. We use this information only internally to better allow
us to serve our customers. Our current online privacy policy is set forth on our
Web site.
MARKETING AND PROMOTION
Our marketing and promotion strategy is designed to strengthen our 1-800-
FLOWERS.COM brand, build customer loyalty, increase the number of online and
telephonic customers, encourage repeat purchases and develop additional product
revenue opportunities. We also intend to develop and market other high-quality
brands in addition to 1-800-FLOWERS.COM through internal development,
co-branding arrangements, strategic partnerships or acquisitions of
complementary businesses. We market and promote our brand and products as
follows:
OUR STRATEGIC ONLINE RELATIONSHIPS. We promote our products through
strategic relationships with leading Web portals and online networks. Our key
relationships include:
- America Online. We have worked with AOL since 1994 and maintain a separate
online 1-800-FLOWERS.COM store for the convenience of AOL's subscribers.
We are the exclusive provider of fresh-cut flowers and plants through any
area controlled by AOL on AOL's proprietary online service and the
exclusive provider of fresh-cut flowers and plants for gifting occasions
on AOL.com. Under our agreements with AOL, the term "exclusive" means that
AOL will not promote, market or advertise on its online service or AOL.com
these products on behalf of any entity other than 1-800-FLOWERS.COM. In
addition, we are prominently promoted through banner and other
advertisements across AOL's online service and AOL.com. Our agreements
with AOL extend through June 2001.
- Microsoft Network. Our products, advertisements and links to our Web site
are prominently featured on Microsoft Network's online shopping channel.
Our
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agreement with Microsoft Network extends through September 1999.
- Excite. Our products and links to our Web site are also prominently
featured on Excite's shopping channel. Our agreement with Excite extends
through June 2000.
- StarMedia Network. Through our relationship with StarMedia Network, we are
developing Spanish and Portuguese language versions of our Web site.
OUR ONLINE AFFILIATE PROGRAM. In addition to securing alliances with
frequently visited Web sites, in February 1999 we established an affiliate
network that has grown to more than 3,000 Web sites operated by third parties.
Affiliates may join this program through our Web site and their participation
may be terminated by them or by us at any time. To date, this program has not
generated a significant amount of revenue. These Web sites earn commissions by
referring customers from their sites to our Web site. Affiliates include AT&T
WorldNet, Earthlink/Sprint, Gateway 2000, HomeArts, About.com and PCWorld
Online.
TRADITIONAL MEDIA. We utilize traditional media, such as television, radio,
print and outdoor advertising, to market our brand and products. Traditional
media allows us both to reach a large number of customers and to target
particular market segments.
DIRECT MAIL AND CATALOGS. We use our direct mail promotions and catalogs to
increase the number of new customers and to introduce additional products to our
existing customers. Through the use of PLOW & HEARTH'S catalogs, we intend to
cross-promote our floral and gift products to our home and garden customers as
well as home and garden products to our floral and gift customers. For the nine
months ended March 28, 1999, we mailed a total of approximately 28.6 million
catalogs, including PLOW & HEARTH and AMERICAN COUNTRY HOME. We believe these
catalogs will attract additional customers to our WWW.1800FLOWERS.COM and
WWW.PLOWHEARTH.COM Web sites.
CO-MARKETING AND PROMOTIONS. We have established a number of co-marketing
relationships and promotions to advertise our products. For example, we have
established co-marketing arrangements with United, American and Delta airlines
as well as American Express, VISA and MasterCard, among others. We established
the American and Delta airlines relationships in the third quarter of fiscal
1999. To date, all of these relationships have not generated a significant
amount of revenue.
FULFILLMENT OPERATIONS
Our customers primarily place orders for our products online or over the
telephone. Our fulfillment operations are represented in the following diagram:
[Graphical representation of fulfillment operations, consisting of three
headings labeled "Channel", "Fulfillment" and "Products". Under the heading
"Channel" are depictions of a computer terminal, with the caption "Online", and
a telephone sales agent, with the caption "Telephonic". Under the heading
"Fulfillment" is a map of the United States with scattered dots representing our
retail stores and the caption "1500 BloomNet Stores" and depictions of other
types of fulfillment facilities and the captions "Owned & Franchised Florists",
"Unaffiliated Florists", "Direct from Vendor" and "Our Fulfillment Centers".
Under the heading "Products" are depictions of our various product offerings and
the captions "Flowers & Plants", "Gifts", "Gourmet" and "Home and Garden".]
FLOWERS AND PLANTS. A significant portion of our floral orders are
fulfilled through the BloomNet network of approximately 1,500 independent
florists or one of our owned or franchised retail stores. We select retail
florists for the BloomNet network based upon the historical volume of floral
purchases in a particular geographic area, the number of
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BloomNet florists currently serving the area and the florist's design staff,
facilities, quality of floral processing, ability to fulfill orders in
sufficient volume and delivery capabilities. To join BloomNet, a retail florist
must submit an application to 1-800-FLOWERS.COM and be approved by our internal
selection committee.
By fulfilling floral orders through BloomNet or one of our owned or
franchised stores, we are able to deliver floral products on a same-day or
next-day basis to ensure freshness and to meet our customers' need for prompt
delivery. Because we select these florists and receive customer feedback on
their performance in fulfilling orders, we are able to ensure consistent product
quality and presentation and offer a greater variety of arrangements, which we
believe creates a better experience for our customers and gift recipients.
Our relationships with our BloomNet members are non-exclusive. Many
florists, including many BloomNet florists, also are members of other floral
fulfillment organizations. The BloomNet agreements generally are cancellable by
either party with ten days notification and do not guarantee any orders, dollar
amounts or exclusive territories from us to the florist.
Of the BloomNet member florists and our owned or franchised stores,
approximately one-half are connected to us electronically via BloomLink, an
Internet-based electronic communications system. Where we are not connected to
the BloomNet partners or our owned and franchised stores via BloomLink, we
utilize the communication system of an independent wire service to transmit an
order to the fulfilling florist. In addition, we also ship to the customer
directly from growers.
We own and operate 33 retail stores, located primarily in the New York and
Los Angeles metropolitan areas. In addition, we have 87 franchised stores,
located primarily in California. Our owned stores serve as important local
points of fulfillment and enable us to test new products and marketing programs.
We do not expect to materially increase the number of owned or franchised retail
stores in the foreseeable future.
GIFTS AND GOURMET FOODS. Our gift and gourmet food products are shipped
directly to the customer by members of BloomNet or third-party product suppliers
using next-day or other delivery method selected by the customer. Our business
is not dependent on any one of these third-party suppliers.
HOME AND GARDEN. We fulfill purchases of home and garden merchandise from
our Madison, Virginia fulfillment center or by third-party product suppliers
using next-day or other delivery method selected by the customer. In calendar
year 1998, we shipped more than 800,000 packages from this facility.
Construction is currently underway to expand this facility from 185,000 square
feet to approximately 300,000 square feet, which will approximately double our
shipping capacity. This facility employs advanced technology for receiving,
packaging, shipping and inventory control.
TECHNOLOGY INFRASTRUCTURE
We believe we have an advanced technology platform. Our technology
infrastructure, primarily consisting of our Web site, transaction processing,
customer databases and telecommunications systems, is built and maintained for
reliability, security and flexibility. In addition, our infrastructure is
scalable, allowing it to grow with our business. To minimize the risk of service
interruptions from unexpected component or telecommunications failure,
maintenance and upgrades, we have built full back-up into those components of
our systems that we have identified as critical. Since June 30, 1997, we spent a
total of $21.3 million on our technology infrastructure, primarily due to the
installation of an Oracle-based order processing and database management system
and BloomLink, the upgrade of our telecommunications network, including our call
management system, and desktop computers. We plan to continue to invest in
technologies that will improve and expand our e-commerce and telecommunication
capabilities.
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Our Web site and BloomLink are hosted and maintained by Fry Multimedia, a
hosting and online services company headquartered in Ann Arbor, Michigan. Fry
Multimedia provides development, maintenance and hosting services to us under an
agreement that extends through June 2001, which automatically renews for
successive two-year periods unless we terminate the agreement. For the nine
months ended March 28, 1999, we paid to Fry Multimedia a total of $580,000 for
these services. In addition to Fry Multimedia's two hosting facilities, we also
intend to co-locate the hosting of our Web site and BloomLink with a third-party
vendor to provide additional back-up and system redundancy.
Our transaction processing system selects the florist or vendor to fulfill
the order and captures customer profile and history in a customized Oracle
database. Through the use of customized software applications, we are able to
retrieve, sort and analyze customer information to enable us to better serve our
customers and target our product offerings. We expect to develop or license
additional software applications to expand our ability to analyze and use this
information.
Our six customer service centers and many of our third party product
suppliers are connected electronically to our transaction processing system to
permit the rapid transmission of, and access to, critical order and customer
information. In addition, BloomLink electronically connects us to approximately
one-half of the retail florists in the BloomNet network and our owned or
franchised stores.
Our operation center is located in our headquarters in Westbury, New York.
We provide comprehensive facility management services, including human and
technical monitoring of all production servers, 24 hours per day, seven days per
week.
COMPETITION
The growing popularity and convenience of e-commerce has given rise to mass
merchants on the Internet. In addition to selling their products over the
Internet, many of these retailers sell their products through a combination of
channels by maintaining a Web site, a toll-free phone number and physical
locations. These mass merchants offer an expanding variety of products and are
attracting an increasing number of customers. Some of these merchants have
expanded their offerings to include competing products and may continue to do so
in the future. These mass merchants, as well as other potential competitors, may
be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- adopt more aggressive pricing policies; and
- make more attractive offers to potential employees, distribution partners
and retailers.
In addition, we face intense competition in each of our individual product
categories. In the floral industry, there are many other providers of floral
products, none of which is dominant. Our competitors include:
- retail floral shops, some of which maintain toll-free telephone numbers;
- online floral retailers;
- catalog companies that offer floral products;
- floral telemarketers and wire services; and
- supermarkets and mass merchants with floral departments.
Similarly, the gift, gourmet food and home and garden categories are highly
competitive. Each of these categories encompasses a wide range of products, is
highly fragmented and is served by a large number of companies in addition to
us, none of which is dominant. Products in these categories may be purchased
from a number of outlets, including mass merchants, telemarketers, retail
specialty shops, online retailers and mail-order catalogs.
We believe our brand strength, product selection, customer relationships,
technology
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infrastructure and fulfillment capabilities position us to compete effectively
against our current and potential competitors in each of our product categories.
However, increased competition could result in:
- price reductions, decreased revenues and lower profit margins;
- loss of market share; and
- increased marketing expenditures.
These and other competitive factors may adversely impact our business and
results of operations.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Internet is rapidly evolving and there are few laws or regulations
directly applicable to e-commerce. Legislatures are considering an increasing
number of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
- user privacy;
- pricing;
- content;
- connectivity;
- intellectual property;
- distribution;
- taxation;
- liabilities;
- antitrust; and
- characteristics and quality of products and services.
Further, the growth and development of the market for online services may
prompt more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. The adoption of any
additional laws or regulations may impair the growth of the Internet or
commercial online services. This could decrease the demand for our services and
increase our cost of doing business. Moreover, the applicability to the Internet
of existing laws regarding issues like property ownership, taxes, libel and
personal privacy is uncertain. Any new legislation or regulation that has an
adverse impact on the Internet or the application of existing laws and
regulations to the Internet could have a material adverse effect on our
business, financial condition and results of operations.
States or foreign countries might attempt to regulate our business or levy
sales or other taxes relating to our activities. Because our products and
services are available over the Internet anywhere in the world, multiple
jurisdictions may claim that we are required to do business as a foreign
corporation in one or more of those jurisdictions. Our failure to qualify as a
foreign corporation in a jurisdiction where we are required to do so could
subject us to taxes and penalties. States or foreign governments may charge us
with violations of local laws.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our service marks, trademarks, trade secrets, domain names and
similar intellectual property as critical to our success. We have applied for or
received trademark and/or service mark registration for, among others, the marks
"1-800-FLOWERS.COM", "1-800-FLOWERS", and "Plow & Hearth". We also have rights
to numerous domain names, including WWW.1800FLOWERS.COM, WWW.FLOWERS.COM and
WWW.PLOWHEARTH.COM. In addition, we have developed a transaction processing
system and operating systems as well as marketing data, including customer
information databases.
We rely on trademark, unfair competition and copyright law, trade secret
protection and contracts such as confidentiality and license agreements with our
employees, customers, partners and others to protect our proprietary rights.
Despite our precautions, it may be possible for competitors to obtain and/or use
our proprietary information without authorization or to develop technologies
similar to ours and independently create a similarly functioning infrastructure.
Furthermore, the protection of proprietary rights in Internet-
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related industries is uncertain and still evolving. The laws of some foreign
countries do not protect proprietary rights to the same extent as do the laws of
the United States. Our means of protecting our proprietary rights in the United
States or abroad may not be adequate.
We intend to continue to license technology from third parties, including
Oracle, Microsoft and AT&T, for our communications technology and the software
that underlies our business systems. The market is evolving and we may need to
license additional technologies to remain competitive. We may not be able to
license these technologies on commercially reasonable terms or at all. In
addition, we may fail to successfully integrate licensed technology into our
operations.
Third parties have in the past infringed or misappropriated our intellectual
property or similar proprietary rights. We believe infringements and
misappropriations will continue to occur in the future. We intend to police
against infringement or misappropriation. However, we cannot guarantee we will
be able to enforce our rights and enjoin the alleged infringers from their use
of confusingly similar trademarks, servicemarks, telephone numbers and domain
names.
In addition, third parties may assert infringement claims against us. We
cannot be certain that our technologies or marks do not infringe valid patents,
trademarks, copyrights or other proprietary rights held by third parties. We may
be subject to legal proceedings and claims from time to time relating to the
intellectual property of others in the ordinary course of our business.
Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running our business.
EMPLOYEES
As of April 29, 1999, we had 1,464 full-time and 227 part-time employees, of
which 185 worked in administration, 887 in customer service and 619 in retail
and fulfillment operations. During peak periods, we substantially increase the
number of customer service and retail and fulfillment personnel. Our personnel
are not represented under collective bargaining agreements and we consider our
relations with our employees to be good.
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PROPERTIES
Our headquarters and one of our customer service centers are located in
approximately 71,000 square feet office space in Westbury, New York, under a
lease that expires in May 2005. Our annual rent under this lease increases from
$715,000 in the first year of the lease (May 15, 1998 to May 15, 1999) to $1.7
million in the seventh year of the lease. Total rent to be paid over the life of
the lease equals $10.0 million. In addition, we own an approximately 185,000
square foot fulfillment center in Madison, Virginia, with an additional 115,000
square feet under construction, and lease an approximately 27,000 square foot
local distribution center in Phoenix, Arizona and an approximately 24,000 square
foot local distribution center in Denver, Colorado. We lease a total of
approximately 53,000 square feet for our customer service centers in:
- Westbury, New York;
- Marietta, Georgia;
- San Antonio, Texas;
- Phoenix, Arizona;
- Madison, Virginia; and
- Bethpage, New York.
As of March 28, 1999, we leased approximately 239,000 gross square feet for
our owned or franchised retail stores. Most of the existing stores are leased by
1-800-FLOWERS.COM with lease terms typically ranging from five to 20 years. Most
of our leases provide for a minimum rent plus a percentage rent based upon sales
after certain minimum thresholds are achieved. The leases generally require us
to pay insurance, utilities, real estate taxes and repair and maintenance
expenses.
LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings and litigation
incidental to the normal conduct of our business. We are not currently involved
in any material legal proceedings or litigation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and key employees of 1-800-FLOWERS.COM,
their ages as of July 7, 1999 and the positions held by them are set forth
below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- --------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
James F. McCann................... 47 Chairman and Chief Executive Officer
Christopher G. McCann............. 38 Director and Senior Vice President
John W. Smolak.................... 50 Senior Vice President--Finance and Administration
Peter G. Rice..................... 53 President--Plow & Hearth
Kerry W. Coin..................... 51 Vice President--Retail and Fulfillment
Kenneth J. Mesnik................. 49 Vice President--Merchandising
T. Guy Minetti.................... 48 Director
Jeffrey C. Walker................. 43 Director
David Beirne...................... 35 Director
Charles R. Lax.................... 40 Director
Kevin J. O'Connor................. 38 Director
KEY EMPLOYEES:
Donna M. Iucolano................. 35 Vice President--Interactive Services
Vincent J. McVeigh................ 38 Vice President--Customer Service Centers
Thomas G. Hartnett................ 35 Vice President--Development
William E. Shea................... 40 Treasurer and Vice President--Finance
Guru P. Ghosh..................... 54 Vice President--Information Technology
Brian McGee....................... 35 Vice President--Real Estate and Construction
</TABLE>
JAMES F. MCCANN has been our Chairman and Chief Executive Officer since
inception. Prior to that, Mr. McCann founded Flora Plenty, a chain of 14 flower
shops in the New York metropolitan area. Mr. McCann is a member of the boards of
directors of Gateway 2000, OfficeMax, Inc., PETCO Animal Supplies, Inc., the
National Retail Federation and Very Special Arts, as well as the boards of
Hofstra University and Winthrop-University Hospital. James F. McCann is the
brother of Christopher G. McCann.
CHRISTOPHER G. MCCANN has been our Senior Vice President and a director
since inception. Prior to joining us, Mr. McCann was President of Flora Plenty.
Mr. McCann serves on the board of directors of Neoware, Inc. and is a member of
the Advisory Board of the Marist College School of Management, the National
Retail Federation Marketing Committee and the Society of American Florists
Marketing Committee. Christopher G. McCann is the brother of James F. McCann.
JOHN W. SMOLAK has been our Senior Vice President--Finance and
Administration since January 1999. From February 1995 until joining us, Mr.
Smolak was senior vice president and chief financial officer of Lechters, Inc.,
a national housewares specialty retailer. Prior to that, Mr. Smolak was senior
vice president of finance and administration of Jungle Jim's Playlands, Inc.
PETER G. RICE, President--Plow & Hearth, was co-founder of The Plow &
Hearth, Inc. and served as its President and Chairman of the Board since its
inception in November 1980. Mr. Rice was also involved in the formation of Blue
Ridge Mountain Sports, a retail chain of backpacking/outdoor stores, and Phoenix
Products, a manufacturer of kayaks. He is a director of the New England Mail
Order Association and a member of the U.S. Senate Productivity and Quality Award
Board for Virginia.
KERRY W. COIN has been our Vice President--Retail and Fulfillment since
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January 1999. From February 1998 until joining us, Mr. Coin was an independent
consultant. From August 1996 until February 1998, Mr. Coin was the president and
chief operating officer of Diedrich Coffee, a California-based purveyor of
gourmet coffee. Prior to that, Mr. Coin founded and served as president and
chief executive officer of Boston West, the largest area developer of Boston
Chicken, from January 1993.
KENNETH J. MESNIK has been our Vice President--Merchandising since January
1999. From May 1993 until joining us, Mr Mesnik was the Senior Vice President of
Federated Merchandising. Prior to that, Mr. Mesnik served as Vice President of
May Company in charge of home furnishings from January 1990.
T. GUY MINETTI has been one of our directors since December 1993. Mr.
Minetti serves as President of Bayberry Advisors, an investment banking firm
which he founded in March 1989. In September 1993, Mr. Minetti co-founded
American Sports Products Group Inc., a holding company which has acquired nine
niche sporting goods manufacturers. Prior to forming Bayberry, Mr. Minetti was a
Managing Director at Kidder, Peabody & Company.
JEFFREY C. WALKER has been one of our directors since February 1995. Mr.
Walker has been General Managing Partner of Chase Capital Partners, the private
equity division of The Chase Manhattan Corporation, since 1988, and a General
Partner thereof since 1984. Mr. Walker is a director of the Monet Group, Guitar
Center, House of Blues and Domain.
DAVID BEIRNE has been one of our directors since July 1999. Mr. Beirne has
been a Managing Member of Benchmark Capital Management Co. II, L.L.C., a venture
capital firm, since June 1997. Prior to joining Benchmark, Mr. Beirne founded
Ramsey/Beirne Associates, an executive search firm, and served as its Chief
Executive Officer from October 1987 to June 1997. Mr. Beirne serves as a
director to several private companies, including ePhysician, Kana
Communications, Inc., living.com, Inc., PlanetRx, Inc., Scient Corporation,
TriStrata, Inc. and Webvan Group, Inc.
CHARLES R. LAX has been one of our directors since July 1999. Mr. Lax has
been a general partner of SOFTBANK Technology Ventures IV, L.P. since November
1997. From March 1996 to November 1997, Mr. Lax was a Vice President of SOFTBANK
Holdings Inc. Mr. Lax was previously a venture partner at Vimac Partners LLC, a
venture capital firm specializing in investments in the information technology
and Internet-related industries, from June 1993 to March 1996. Mr. Lax is a
director of a number of private companies, including ThirdAge Media, Inc.
LIMITrader Securities, Inc., Gamesville.com, Reciprocal, Inc. and several public
companies, including Interliant, Inc., Art Technology Group, Inc. and Global
Sports Interactive.
KEVIN J. O'CONNOR has been one of our directors since July 1999. Mr.
O'Connor co-founded DoubleClick, Inc., an Internet advertising network, and has
served as its Chief Executive Officer and Chairman of the Board of Directors
since its inception in January 1996. From December 1995 until January 1996, Mr.
O'Connor served as Chief Executive Officer of Internet Advertising Network, an
Internet advertising company which he founded. From September 1994 to December
1995, Mr. O'Connor served as Director of Research for Digital Communications
Associates, a data communications company (now Attachmate Corporation), and from
April 1992 to September 1994, as its Chief Technical Officer and Vice President,
Research.
DONNA M. IUCOLANO has been our Vice President--Interactive Services since
August 1998. Prior to that role, Ms. Iucolano held various positions within
1-800-
FLOWERS.COM since her arrival in June 1994, including Director, Manager and
Marketing Coordinator of our interactive services division. Before joining us,
Ms. Iucolano was a marketing and creative services consultant to educational and
other non-profit organizations.
VINCENT J. MCVEIGH has been our Vice President--Customer Service Centers
since September 1998. He joined us in May 1991 as a BloomNet manager, assisting
in the development of our independently owned
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<PAGE>
BloomNet affiliates. He was promoted to general manager of the New York customer
service center in May 1993, and then in October 1995 to Director of Call Center
Operations. From February 1988 until joining us, Mr. McVeigh worked with Hyundai
Motor America as a district manager.
THOMAS G. HARTNETT has been our Vice President--Development since January
1999. Prior to that role, Mr. Hartnett held various positions within
1-800-FLOWERS.COM since his arrival in August 1991, including Controller,
director of Store Operations and Vice President of Retail Operations. From June
1984 until joining us, Mr. Hartnett was a certified public accountant at Ernst &
Young.
WILLIAM E. SHEA has been our Treasurer since January 1997 and Vice President
of Finance since August 1998. Prior to being appointed Treasurer, Mr. Shea
served as our Corporate Controller after joining us in April 1996. From 1980
until joining us, Mr. Shea was a certified public accountant with Ernst & Young.
GURU P. GHOSH has been our Vice President--Information Technology since July
1996. From August 1989 until joining us, Mr. Ghosh was the director of
information technology at Independence Blue Cross, a nationwide health insurance
company. Prior to that, Mr. Ghosh was a senior vice president at Prudential
Securities Incorporated from January 1984.
BRIAN MCGEE has been our Vice President--Real Estate and Construction since
February 1996. From August 1990 until joining us, Mr. McGee was the Northeast
construction manager for Blockbuster Entertainment Corp.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. Each initial director in Class I, Class II
and Class III shall hold office until the annual meeting of the stockholders in
2000, 2001, and 2002, respectively. Messrs. Walker and O'Connor have been
elected to Class I; Messrs. Beirne and Lax have been elected to Class II; and
Messrs. James F. McCann, Christopher G. McCann and Minetti have been elected to
Class III. These provisions, when coupled with the provision of our third
amended and restated certificate of incorporation authorizing the board of
directors to fill vacant directorships or increase the size of the board of
directors, may delay a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies with its own nominees. The maximum number of directors authorized
under our third amended and restated certificate of incorporation is 15.
Mr. Walker had originally been elected to our board of directors under an
agreement we entered into with Chase. The provision of this agreement providing
Chase with the right to select one of our directors does not extend to future
director elections. In addition, Messrs. Lax and Beirne were elected to our
board of directors under an agreement executed with the closing of the May 1999
private placement. Our agreement to appoint a representative of Benchmark and
Softbank to our board of directors, according to which Messrs. Beirne and Lax
were elected, does not extend to future director elections.
BOARD COMMITTEES
The audit committee reports to the board regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls. The audit committee consists of Messrs. Minetti, Christopher G. McCann
and O'Connor. After this offering, an additional outside director will be added
to the audit committee.
The compensation committee of the board of directors reviews and makes
recommendations regarding our compensation policies and all forms of
compensation to be provided to our executive officers and directors. In
addition, the compensation
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<PAGE>
committee reviews bonus and stock compensation arrangements for all of our other
employees. The compensation committee will administer our 1999 stock incentive
plan. The current members of the compensation committee are Messrs. Walker,
Beirne and Lax.
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
DIRECTOR COMPENSATION
Directors currently do not receive a stated salary from 1-800-FLOWERS.COM
for their service as members of the board of directors, although by resolution
of the board they may receive a fixed sum and reimbursement for expenses in
connection with the attendance at board and committee meetings. We currently do
not provide additional compensation for committee participation or special
assignments of the board of directors.
We have entered into a letter agreement with Bayberry Advisors, Inc.,
pursuant to which Bayberry provides us with consulting and advisory services. T.
Guy Minetti, one of our directors, serves as Bayberry's President and owns 70%
of its outstanding stock, and James F. McCann, our Chairman and Chief Executive
Officer, owns 30% of its outstanding stock. The original term of the letter
agreement expired in 1995, but has been extended for one-year periods since its
initial expiration with the current expiration date of May 2000. We pay Bayberry
a retainer fee of $100,000 per year for these services. We also pay Bayberry a
mutually agreed upon fee upon the closing of any transaction outside our
ordinary course of business which results from the services provided by
Bayberry. With respect to our April 1998 acquisition of Plow & Hearth, we paid
Bayberry advisory fees in the amount of $210,000, against which the $100,000
retainer for that year was credited.
In July 1998, we granted Mr. Minetti options to purchase 20,000 shares of
class B common stock with an exercise price of $2.00 per share for his services
on our board of directors.
Each individual who first becomes a non-employee board member at any time
after the completion of this offering will automatically receive an option grant
for 10,000 shares on the date such individual joins the board. In addition, on
the date of each annual meeting of stockholders held after the completion of
this offering, each non-employee board member who is to continue to serve as a
non-employee board member will automatically be granted an option to purchase
5,000 shares of class A common stock, if such individual has served on the board
for at least six months.
EMPLOYMENT CONTRACTS
We have entered into employment agreements with each of James F. McCann,
Christopher G. McCann, John W. Smolak, Peter G. Rice and Kerry W. Coin.
Mr. James F. McCann's employment agreement with us became effective as of
July 1, 1999. The agreement is for a five year term, and on each anniversary of
the agreement, the term is extended for one additional year. The annual salary
for Mr. McCann is $1,000,000, with the eligibility to participate in our
management incentive plan or other bonus plan, which do not currently require
objective criteria to be met in order for the executive to receive the bonus. We
intend to establish these objective criteria by September 30, 1999. Upon
termination without good cause or resignation for good reason, Mr. McCann is
entitled to severance pay in the amount of $2,500,000, plus the base salary
otherwise payable to him for the balance of the then current employment term and
any base salary, bonuses, vacation and unreimbursed expenses accrued but unpaid
as of the termination date. Mr. McCann will also be entitled to health insurance
coverage for himself and his dependents and life insurance coverage. Upon
termination due to death, or for good cause or a voluntary resignation, Mr.
McCann is not entitled to any compensation from us, except for the payment of
any base salary, bonuses, benefits or
50
<PAGE>
unreimbursed expenses accrued but unpaid as of the date of termination.
Mr. Christopher G. McCann's employment agreement with us became effective as
of July 1, 1999. The agreement is for a five year term, and on each anniversary
of the agreement, the term is extended for one additional year. The annual
salary for Mr. McCann is $250,000, with the eligibility to participate in our
management incentive plan or other bonus plan, which do not currently require
objective criteria to be met in order for the executive to receive the bonus. We
intend to establish these objective criteria by September 30, 1999. In addition,
Mr. McCann has received options to purchase 200,000 shares of our class A common
stock, which options vest 25% each year over a four-year period from the date of
grant, with an exercise price equal to the price of the shares being sold in
this offering. Upon termination without good cause or resignation for good
reason, Mr. McCann is entitled to severance pay in the amount of $500,000, plus
the base salary otherwise payable to him for the balance of the then current
employment term and any base salary, bonuses, vacation and unreimbursed expenses
accrued but unpaid as of the termination date. Mr. McCann will also be entitled
to health insurance coverage for himself and his dependents and life insurance
coverage. Upon termination due to death or for good cause, or a voluntary
resignation, Mr. McCann is not entitled to any compensation from us, except for
the payment of any base salary, bonuses, benefits or unreimbursed expenses
accrued but unpaid as of the date of such termination.
Mr. Smolak's employment agreement with us became effective on January 4,
1999 and can be terminated at any time. The annual salary for Mr. Smolak is
$260,000, with the possibility of a bonus of up to 30% of his salary upon
attaining performance goals established at the discretion of the Chief Executive
Officer. These criteria will be established by September 30, 1999. In addition,
he has received options to purchase 150,000 shares of our class B common stock
with an exercise price of $2.00 per share, which options vest at the rate of 25%
per year beginning on the first anniversary of the date of grant. Mr. Smolak is
not entitled to any compensation from us after his employment is terminated,
except that if Mr. Smolak's employment is terminated without cause within the
first 12 months following his commencement of employment, then we will continue
to pay his salary, health insurance coverage and any earned bonus compensation
pro rated for the time Mr. Smolak was employed during the period.
Mr. Rice has entered into an employment agreement with Plow & Hearth, which
became effective April 3, 1998. The agreement terminates on April 3, 2001, with
automatic one-year renewals unless prior notice is given. Mr. Rice's annual
salary is $200,000 and he is eligible to participate in Plow & Hearth's annual
profit sharing bonus plan. Mr. Rice may receive bonuses contingent upon, but not
limited to, Plow & Hearth's profits, his contribution to that profit and the
level of bonus paid to similarly-situated executives. Upon termination without
cause, Mr. Rice is entitled to an amount equal to his salary through the end of
the agreement, any amounts earned, accrued or owing but not yet paid as of the
date of the termination and other benefits, if any, as are payable to or for the
benefit of Mr. Rice as of the date of his termination until the end of the
agreement.
Mr. Coin's agreement with us became effective on January 18, 1999 and can be
terminated at any time. Mr. Coin's annual salary is $170,000, with the
possibility of a bonus of up to 25% of his salary upon attaining performance
goals established at the discretion of our Chief Executive Officer. These
criteria will be established by September 30, 1999. In addition, Mr. Coin
received options to purchase 50,000 shares of our class B common stock with an
exercise price of $2.00 per share, which options vest at the rate of 25% per
year beginning on the first anniversary of the date of grant. Mr. Coin is not
entitled to any compensation from us after his employment is terminated, except
that if Mr. Coin's employment is terminated, without cause, within the first 12
months following his commencement of employment, then we will
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<PAGE>
continue to pay his salary for a period of six months following the date of
termination.
Under their employment agreements, Messrs. McCann are each restricted from
participating in a competitive floral products business for a period of one year
after a voluntary resignation or termination for good cause. In addition,
Messrs. Smolak and Coin have each agreed not to compete with us during their
respective terms of employment and for one year immediately following their
termination and to not solicit our clients or employees during their respective
terms of employment and for two years immediately following their termination.
Mr. Rice has agreed not to compete with us or solicit our clients or employees
during his term of employment and for two years immediately following his
termination. Each of these executives is also bound by confidentiality
provisions, which prohibit the executive from, among other things, disseminating
or using confidential information about our clients in any way that would be
adverse to us.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued for
the year ended June 28, 1998 to our Chief Executive Officer and to our most
highly compensated executive officer, other than the Chief Executive Officer,
whose salary and bonus for that fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------
-------------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#)
- ------------------------------------------------------------- ------------- ----------- ---------------------------
<S> <C> <C> <C>
James F. McCann.............................................. $ 1,229,930 $ -- --
Chairman and Chief Executive Officer
Christopher G. McCann........................................ 191,667 42,600 --
Senior Vice President
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant options to either our Chief Executive Officer or the named
executive officer for the fiscal year ended June 28, 1998. In addition, we have
never granted any stock appreciation rights to our Chief Executive Officer or
the named executive officer.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of June
28, 1998 by our Chief Executive Officer and the named executive officer. No
options were exercised during fiscal 1998 by either of these executive officers.
There was no pubic trading market for the common stock as of June 28, 1998.
Accordingly, the value of unexercised in-the-money options at fiscal year-end is
based on the assumed initial public offering price of $17 per share, less the
exercise price per share, multiplied by the number of shares underlying the
options. All options indicated are to purchase shares of class B common stock.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
---------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------- ------------ -------------- ------------- --------------
<S> <C> <C> <C> <C>
James F. McCann..................................... -- -- $ -- $ --
Christopher G. McCann............................... 169,200 253,800 2,656,440 3,984,660
</TABLE>
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<PAGE>
STOCK OPTION PLANS
1997 STOCK OPTION PLAN
Our 1997 Stock Option Plan was adopted by the board of directors in January
1997 and was subsequently approved by the stockholders in December 1997. Options
to purchase 1,237,500 shares of class B common stock have been granted under the
1997 Plan. No further options will be granted under the 1997 Plan.
The 1997 Plan is administered by the compensation committee.
The exercise price for the shares of our class B common stock subject to
option grants made under the 1997 Plan was determined by the board at the time
of the option grant and may be paid in cash or in shares of our common stock
valued at fair market value on the exercise date.
In the event of an acquisition of 1-800-FLOWERS.COM, whether by merger or
asset sale, each outstanding option which is not to be assumed by the successor
corporation will automatically accelerate in full.
The board may amend or modify the 1997 Plan at any time, subject to any
required stockholder approval.
1999 STOCK INCENTIVE PLAN
INTRODUCTION. Our 1999 stock incentive plan was adopted by the board and
approved by our stockholders in July 1999. The 1999 stock incentive plan became
effective upon adoption by the board. The 1999 stock incentive plan will be
administered by our compensation committee.
SHARE RESERVE. 9,900,000 shares of class A common stock have been
authorized for issuance under the 1999 stock incentive plan. The share reserve
will automatically increase on the first trading day in January of each calendar
year, beginning January 2, 2000, by an amount equal to 3% of the total number of
shares of common stock outstanding on the last trading day in December in the
preceding calendar year, but in no event will this annual increase exceed
2,000,000 shares. In addition, no participant in the 1999 stock incentive plan
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances for more than 1,000,000 shares of class A common
stock in total per calendar year.
PROGRAMS. The 1999 stock incentive plan is divided into four separate
programs:
- the discretionary option grant program under which eligible individuals in
the employ of 1-800-FLOWERS.COM may be granted options to purchase shares
of class A common stock at an exercise price determined by the plan
administrator;
- the stock issuance program under which such individuals may be issued
shares of class A common stock directly, through the purchase of such
shares at a price determined by the plan administrator or as a bonus tied
to the performance of services;
- the salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
- the automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of class A common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date.
PLAN FEATURES. The 1999 stock incentive plan will include the following
features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of class A common stock valued at fair market value on
the exercise date. The option may also be
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<PAGE>
exercised through a same-day sale program without any cash outlay by the
optionee.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of class
A common stock on the new grant date.
- Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
1-800-FLOWERS.COM equal to the fair market value of the vested shares of
class A common stock subject to the surrendered option less the exercise
price payable for those shares. 1-800-FLOWERS.COM may make the payment in
cash or in shares of class A common stock.
CHANGE IN CONTROL. The 1999 stock incentive plan will include change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
- In the event that 1-800-FLOWERS.COM is acquired by merger or asset sale or
a board-approved sale of more than fifty percent of 1-800-FLOWERS.COM
stock by its stockholders, each outstanding option under the discretionary
option grant program which is not assumed or continued by the successor
corporation will immediately become exercisable for all the option shares,
and all unvested shares will immediately vest, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
successor corporation.
- The plan administrator may grant options which vest immediately upon an
acquisition of 1-800-FLOWERS.COM or upon a hostile change of control or
upon the individual's termination of service following an acquisition
which results in a change in control.
AMENDMENT. The board may amend or modify the 1999 stock incentive plan at
any time, subject to any required stockholder approval. The 1999 stock incentive
plan will terminate no later than July 6, 2009.
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<PAGE>
RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CHASE
In January 1995, we entered into an investment agreement with the
predecessor of Chase Venture Capital Associates under which Chase purchased
shares of our class C common stock and a warrant to purchase 2,371,040 shares of
class A common stock with a nominal exercise price for an aggregate of $10.0
million. Chase currently holds over 5% of our class A common stock, assuming
exercise of their warrant, and Jeffrey C. Walker, one of our directors, is a
managing partner of Chase. With respect to the private placement completed in
May 1999, we entered into an amendment to the investment agreement, under which
Chase agreed to allow us to redeem the class C common stock owned by them in
exchange for 263,452 shares of class A common stock and approximately $14.9
million. We sold shares of preferred stock to Chase in our May 1999 private
placement for a purchase price equal to the $14.9 million proceeds from the
redemption of their class C common stock. With respect to the private placement,
Chase has waived its registration rights for this offering, but retained
registration rights for the future under the investors' rights agreement
described below. See "Description of Capital Stock--Registration Rights" for a
description of these registration rights.
In March 1999, we entered into a credit agreement with The Chase Manhattan
Bank, an affiliate of Chase Venture Capital Associates and Jeffrey C. Walker,
under which Chase agreed to provide us with a term loan of $18.0 million and a
revolving loan commitment of $12.0 million. At March 28, 1999, the amount of
indebtedness to Chase outstanding was $18.0 million. We have amended the terms
of the credit agreement to provide, among other things, that the indebtedness
outstanding under the credit agreement matures on the earlier of the
consummation of this offering and July 3, 2000. We intend to use a portion of
the proceeds from this offering to repay all of our outstanding indebtedness
under the credit facility.
TRANSACTIONS REGARDING PLOW & HEARTH
With respect to our acquisition of 88% of the outstanding common stock of
Plow & Hearth, we entered into a stockholders agreement, under which the
remaining stockholders of Plow & Hearth have the right to either convert their
shares of Plow & Hearth and Plow & Hearth options granted under one of its
option plans into cash or shares of our class A common stock after the
completion of this offering. We have amended the Plow & Hearth stockholders
agreement to provide that each of these minority holders will have their
interests redeemed upon effectiveness of this offering for an aggregate of $8.4
million. In addition, we have amended Plow & Hearth's other option plan so that
upon effectiveness of this offering, 40% of these options will accelerate and be
redeemed for an aggregate of $354,000 and the remaining 60% will terminate.
Peter G. Rice, an executive officer, will receive an aggregate of $4.0 million
under these amendments.
TRANSACTIONS INVOLVING OUR PRIVATE PLACEMENT
With respect to our private placement of preferred stock to Waelinvest,
SOFTBANK, Benchmark and other investors and the amendment to our Chase
investment agreement, we entered into an investors' rights agreement with these
investors and James F. McCann and Christopher G. McCann. Under the investors'
rights agreement, we will be required to register the stock held by these
investors and Messrs. McCann upon their request. See "Description of Capital
Stock-- Registration Rights" for a description of these registration rights.
TRANSACTIONS WITH OUR DIRECTORS AND OFFICERS
Concurrent with the closing of the May 1999 private placement, we redeemed
the existing class C common stock owned by Mr. James McCann in exchange for $4.4
million and 84,767 shares of class B common stock.
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We have entered into an agreement with Bayberry Advisors, Inc., pursuant to
which Bayberry provides us with consulting and advisory services. T. Guy
Minetti, one of our directors, serves as Bayberry's President and owns 70% of
its outstanding stock, and James F. McCann, our Chairman and Chief Executive
Officer, owns 30% of its outstanding stock. We pay Bayberry a retainer fee of
$100,000 per year for these services. In connection with our April 1998
acquisition of Plow & Hearth, we paid Bayberry advisory fees in the amount of
$210,000, against which the $100,000 retainer for that year was credited.
In July 1998, we loaned Christopher G. McCann, our Senior Vice President, an
amount of $67,631 at an interest rate of 7% per annum. This loan was repaid in
July 1999.
We maintain life insurance for each of our executive officers in the amount
of $50,000 and also maintain a directors and officers insurance policy.
GENERAL
We have adopted a policy providing that all future material transactions
between us and our officers, directors and other affiliates must be on fair
terms and be approved by either a majority of the disinterested members of our
board of directors or our stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of July 7, 1999 and as adjusted to reflect the
sale of class A common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each of our directors;
- each executive officer named in the Summary Compensation Table; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o 1-800-FLOWERS.COM, 1600 Stewart Avenue, Westbury, New York
11590. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options or warrants held by such persons that are exercisable within 60 days of
July 7, 1999, but excludes shares of common stock underlying options held by any
other person. Percentage of beneficial ownership is based on 15,375,472 shares
of class A common stock, assuming conversion of our preferred stock, and
40,246,205 shares of class B common stock outstanding as of July 7, 1999 and
21,375,472 shares of class A common stock outstanding after completion of this
offering.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
SHARES BENEFICIALLY OWNED THE OFFERING THE OFFERING
---------------------------- ------------------------ ------------------------
NAME OF BENEFICIAL OWNER A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
- ---------------------------------------------- ------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
James F. McCann(1)............................ -- 36,605,105 -- % 91.0% -- % 91.0%
Christopher G. McCann(2)...................... -- 3,524,940 -- 8.6 -- 8.6
T. Guy Minetti(3)............................. 9,600 20,000 * * * *
Jeffrey C. Walker(4).......................... 4,065,022 -- 22.9 -- 17.1 --
David Beirne(5)............................... 7,399,080 -- 48.1 -- 34.6 --
Charles R. Lax(6)............................. 3,836,560 -- 25.0 -- 17.9 --
Kevin J. O'Connor(7).......................... -- -- -- -- -- --
Chase Venture Capital Associates(8)........... 4,065,022 -- 22.9 -- 17.1 --
Benchmark Capital Partners(9)................. 7,399,080 -- 48.1 -- 34.6 --
SOFTBANK America Inc.(10)..................... 3,836,560 -- 25.0 -- 17.9 --
Waelinvest S.A.(11)........................... 2,397,850 -- 15.6 -- 11.2 --
All directors and executive officers as a
group (11 persons)(12)...................... 15,310,262 38,150,045 86.3% 93.3% 64.5% 93.3%
</TABLE>
- ------------------------
* Indicates less than 1%.
(1) Includes (a) 2,000,000 shares of class B common stock held by a limited
partnership, of which Mr. McCann is a general partner and exercises control,
(b) an aggregate of 77,500 shares of class B common stock held by two
trusts, over which Mr. McCann exercises control, and (c) 3,875,000 shares of
class B common stock for which Mr. McCann disclaims beneficial ownership
that is held by a limited partnership over which he does not exercise
control.
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(2) Includes (a) 2,000,000 shares of class B common stock held by a limited
partnership, of which Mr. McCann is a general partner and exercises control
and (b) 606,800 shares of class B common stock issuable upon the exercise of
currently exercisable stock options. If the underwriters' over-allotment
option is exercised in full, Mr. McCann will sell 50,000 shares in this
offering. Accordingly, in this event, Mr. McCann would beneficially own
3,474,940 shares of class B common stock, representing 8.5% of our class B
common stock outstanding, after this offering.
(3) Includes 20,000 shares of class B common stock issuable upon the exercise of
currently exercisable stock options and options which vest within 60 days.
The address of Mr. Minetti is c/o Bayberry Advisors, 70 West Red Oak Lane,
White Plains, New York 10604.
(4) Includes 2,371,040 shares of class A common stock subject to a currently
exercisable warrant. All shares indicated as owned by Mr. Walker are
included because of Mr. Walker's affiliation with Chase Venture Capital
Associates. Mr. Walker disclaims beneficial ownership of all shares owned by
Chase. Mr. Walker's address is c/o Chase Venture Capital Associates, 380
Madison Avenue, 12th Floor, New York, New York 10017.
(5) All shares indicated as owned by Mr. Beirne are included because of Mr.
Beirne's affiliation with the Benchmark entities. Mr. Beirne disclaims
beneficial ownership of all shares owned by the Benchmark entities. Mr.
Beirne's address is c/o Benchmark Capital Partners, 2480 Sand Hill Road,
Suite 200, Menlo Park, California.
(6) All shares indicated as owned by Mr. Lax are included because of Mr. Lax's
affiliation with Softbank. Mr. Lax disclaims beneficial ownership of all
shares owned by Softbank. Mr. Lax's address is c/o Softbank America Inc., 10
Langly Road, suite 202, Newton Center, Massachusetts 02159.
(7) Mr. O'Connor's address is c/o DoubleClick, Inc., 41 Madison Ave., 32(nd)
Floor, New York, New York, 10019.
(8) Includes 2,371,040 shares of class A common stock subject to a currently
exercisable warrant. The address of Chase is 380 Madison Avenue, 12th Floor,
New York, New York 10017.
(9) Consists of (a) 951,870 shares of class A common stock owned by Benchmark
Capital Partners II, L.P., (b) 2,543,170 shares of class A common stock
owned by Benchmark Capital Partners III, L.P., and (c) 3,904,040 shares of
class A common stock owned by Benchmark Investors III, L.P. Benchmark
Capital Management Co. II, L.L.C. is the general partner of Benchmark
Capital Partners II, L.P. and directs its investment decisions, and
Benchmark Capital Management Co. III, L.L.C. is the general partner of
Benchmark Capital Partners III, L.P. and Benchmark Investors III, L.P. and
controls their investment decision. Both Benchmark Capital Management Co. II
and Benchmark Capital Management Co. III are controlled by David Beirne,
Bruce Dunlevie, J. William Gurley, Kevin Harvey, Robert Kagel and Andrew
Rachleff. The address of the Benchmark entities is 2480 Sand Hill Road,
Suite 200, Menlo Park, California 94025.
(10) SOFTBANK America Inc. is an indirect wholly-owned subsidiary of SOFTBANK
Corp. Approximately 43.3% of the outstanding common stock of SOFTBANK Corp.
is owned by Masayoshi Son. SOFTBANK's address is 10 Langley Road, Suite 202,
Newton Center, Massachusetts 02159.
(11) Waelinvest is indirectly controlled by Mr. Bernard Arnault, who also
controls, indirectly, LVMH Moet Hennessey Louis Vuitton S.A. The address of
Waelinvest is 102 rue Waelhem, 1030 Brussels, Belgium.
(12) Includes 2,371,040 shares of class A common stock issuable upon exercise of
a currently exercisable warrant and 626,800 shares of class B common stock
issuable upon the exercise of currently exercisable stock options and
options which vest within 60 days.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our third amended and restated certificate of incorporation authorizes the
issuance of up to 200,000,000 shares of class A common stock, par value $.01 per
share, 200,000,000 shares of class B common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As shares of class B common stock are converted into shares of class
A common stock, the number of shares classified as class B common stock will be
reduced and the number of shares classified as class A common stock shall be
increased on a one-for-one basis. Each outstanding share of preferred stock will
be automatically converted into an equal number of shares of class A common
stock upon completion of this offering and the simultaneous 10-for-1 stock split
of our common stock. As of July 7, 1999, assuming the conversion of our
preferred stock, 15,375,472 shares of class A common stock were outstanding and
40,246,205 shares of class B common stock were outstanding. As of July 7, 1999,
we had 75 stockholders.
No additional shares of class B common stock may be issued except (a) upon
the exercise of stock options existing upon the closing of this offering or (b)
in connection with a stock split or stock dividend on the class B common stock
in which the class A common stock is similarly split or receives a similar
dividend.
COMMON STOCK
Holders of our class A and class B common stock have identical rights,
except that holders of class A common stock are entitled to one vote for each
share held of record and holders of class B common stock are entitled to 10
votes for each share held of record on all matters submitted to a vote of the
stockholders, including the election of directors. Stockholders do not have
cumulative voting rights. Holders of class A common stock and class B common
stock 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. Each share of class B common stock is convertible at any time, at the
option of the holder, into one share of class A common stock. Each share of
class B common stock shall convert automatically into one share of class A
common stock upon transfer, with limited exceptions for related party and estate
planning transfers. Once transferred and converted to class A common stock, the
class B common stock shall be terminated and shall not be reissued. None of the
class A common stock or the class B common stock may be subdivided or combined
in any manner unless the shares of the other class are subdivided or combined in
the same proportion. The class B common stock is not subject to any restrictions
on transfer, except as imposed by the federal securities laws and upon execution
of lock-up agreements. The class B common stock is not being registered under
the federal securities laws in this offering and we have no plans to do so in
the future.
Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of our common stock are entitled to receive ratably
dividends, if any, as may be declared by the board of directors out of legally
available funds. In case of a liquidation, dissolution or winding up of
1-800-FLOWERS.COM, the holders of common stock will be entitled to share ratably
in the net assets legally available for distribution to shareholders after
payment of all of our liabilities and the liquidation preferences of any
preferred stock then outstanding. Holders of common stock have no preemptive or
subscription rights and no conversion rights except as described above. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of class A common stock are, and the shares of class A common
stock sold in this offering when issued and paid for will be, fully paid and
non-assessable.
The rights, preferences and privileges of holders of common stock are
subject to the rights of the holders of shares of any series of preferred stock
that we may designate and
59
<PAGE>
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Our board of directors has the authority, without further action by the
stockholders, to issue from time to time shares of preferred stock in one or
more series. The board of directors may fix the number of shares, designations,
preferences, powers and other special rights of the preferred stock. The
preferences, powers, rights and restrictions of different series of preferred
stock may differ. The issuance of preferred stock could decrease the amount of
earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of common stock. The issuance may also have the effect of delaying, deferring or
preventing a change in control of 1-800-FLOWERS.COM. We have no plans to issue
any preferred stock.
REGISTRATION RIGHTS
We have entered into an investors' rights agreement with Waelinvest,
SOFTBANK, Benchmark, Chase, James F. McCann, Christopher G. McCann and other
investors. Under this agreement, these parties will have the right to require us
to register shares of class A common stock they own, or will own upon the
conversion of their preferred stock at the closing of this offering, on various
occasions. An aggregate of 53,269,757 shares of class A common stock can be
registered under the agreement. One year after the completion of this offering,
a majority in interest of the parties to the agreement other than Messrs. McCann
and 1-800-FLOWERS.COM will have the right to require us on one occasion to
register their stock. In addition, one year after this offering, these
investors, as well as Messrs. McCann, have the right to require us to register
their shares of stock at any time we propose to register any of our common stock
for offerings to the public. The investors and Messrs. McCann can also require
us to register their shares on a registration statement on Form S-3 up to two
times per year. These registration rights expire on the earlier of the third
anniversary of this offering or the date on which all shares held by these
parties can be sold under Rule 144 under the Securities Act of 1933, as amended,
and are subject to customary limitations. We have agreed to pay the offering
expenses in connection with the registration of these shares, other than
underwriters' commissions.
WARRANT
We have issued a warrant to purchase an aggregate of 2,371,040 shares of
class A common stock to Chase Capital Partners for a nominal purchase price. The
exercise price and number and kind of shares are subject to adjustment upon a
stock split, stock dividend or other recapitalization of our common stock. The
warrant does not give Chase any voting or other rights until exercised for
shares of class A common stock.
CHARTER AND BYLAWS PROVISIONS AND DELAWARE LAWS RELATING TO ANTI-TAKEOVER
PROTECTION
We are subject to Section 203 of the Delaware General Corporation Law, or
DGCL, regulating corporate takeovers. This section prevents Delaware
corporations from engaging under specified circumstances in a "business
combination", which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder", or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date such stockholder became an "interested stockholder" unless:
- the transaction in which such stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained this status;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding
60
<PAGE>
those shares owned by persons who are directors and also officers; or
- on or after the date the business combination is approved by the board of
directors and authorized at an annual or special meeting of stockholders
by the affirmative vote of at least two-thirds of the outstanding voting
stock that is not owned by the interested stockholder.
Our third amended and restated certificate of incorporation provides that
our board of directors is divided into three classes of directors with each
class serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of 1-800-FLOWERS.COM and may maintain the
incumbency of the board of directors, because the classification of the board of
directors generally increases the difficulty of replacing a majority of the
directors. In addition, our third amended and restated certificate of
incorporation provides that directors be removed only for cause and only by the
vote of the holders of 66.67% of the combined voting power of the outstanding
class A and class B common stock, which also increases the difficulty of
replacing a majority of directors. Our third amended and restated certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting and our amended and restated bylaws eliminate the right of
stockholders to call special meetings of stockholders. The third amended and
restated certificate of incorporation and amended and restated bylaws do not
provide for cumulative voting in the election of directors. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of 1-800-FLOWERS.COM. These
and other provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of 1-800-
FLOWERS.COM. The amendment of any of these provisions requires approval by
holders of at least 66.67% of the combined voting power of the outstanding class
A and class B common stock.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's bylaws, any agreement, a vote
of stockholders or otherwise.
Our third amended and restated certificate of incorporation provides for
indemnification of our directors and officers against, and absolution of,
liability to us and our stockholders. We maintain directors' and officers'
liability insurance covering liabilities that may be incurred by our directors
and officers in connection with the performance of their duties.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the class A common stock is ChaseMellon
Shareholder Services, L.L.C.
LISTING
We have applied to list our class A common stock on the Nasdaq National
Market under the trading symbol "FLWS".
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our class A common stock in the public
market could adversely affect prevailing market prices of our class A common
stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
21,375,472 shares of our class A common stock, assuming no exercise of the
underwriters' over-allotment option, and 40,246,205 shares of class B common
stock, assuming no exercise of outstanding options. Each share of class B common
stock is convertible at any time, at the option of the holder, into one share of
class A common stock. Each share of class B common stock shall convert
automatically into one share of class A common stock upon their transfer, with
limited exceptions for related party and estate planning transfers. Of the
outstanding shares, all of the shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless such shares are purchased by "affiliates" as that term is defined in Rule
144 under the Securities Act. The remaining 55,621,677 shares of class A and
class B common stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act, which rules are summarized below.
LOCK-UP AGREEMENTS
All of our directors, officers and key employees listed in the section of
this prospectus entitled "Management" and stockholders, who together will hold
an aggregate of 54,024,867 shares of class A or class B common stock,
representing 97.1% of our common stock prior to this offering, have signed
lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for shares of common stock, for a period of
180 days after the date of this prospectus. Transfers or dispositions can be
made sooner:
- with the prior written consent of Goldman, Sachs & Co.;
- in the case of transfers to specified trusts; or
- as a bona fide gift.
As a result of these lock-up agreements and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:
- approximately 1,596,810 restricted securities will be eligible for
immediate sale on the date of this prospectus;
- approximately 704,050 restricted securities will be eligible for sale
beginning 90 days after the date of this prospectus, subject in some cases
to compliance with Rule 144;
- approximately 38,649,395 additional restricted securities will be eligible
for sale beginning 180 days after the effective date of this offering upon
expiration of the lock-up agreements, subject in some cases to compliance
with Rule 144; and
- the remainder of the restricted securities will be eligible for sale from
time to time thereafter, subject in some cases to compliance with Rule
144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of class A common stock then outstanding, which
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<PAGE>
will equal approximately 213,755 shares immediately after this offering;
or
- the average weekly trading volume of the class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the filing
of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale requirements and
notice requirements and to the availability of current public information about
us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144. Therefore, unless otherwise restricted,
"144(k) shares" may be sold immediately upon the completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us
under a compensatory stock plan or other written agreement is eligible to resell
the shares 90 days after the effective date of this offering in reliance on Rule
144, but without compliance with restrictions, including the holding period,
contained in Rule 144.
REGISTRATION RIGHTS
One year after completion of this offering, the holders of 53,269,757 shares
of our class A common stock or their permitted transferees will be entitled to
require us to register their shares under the Securities Act. See "Description
of Capital Stock-Registration Rights".
STOCK OPTIONS
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 1,237,500 shares of class A common stock that
may be issued upon the conversion of class B common stock reserved for issuance
under our 1997 Stock Plan and the 9,900,000 shares of class A common stock that
may be issued under our 1999 stock incentive plan. As of July 7, 1999, options
to purchase 1,237,500 shares of class B common stock were issued and outstanding
and options to purchase 200,000 shares of class A common stock were issued and
outstanding. Such registration statement is expected to be filed and effective
as soon as practicable after the effective date of this offering.
Upon the expiration of the lock-up agreements described above, at least
769,050 shares of class B common stock will be subject to vested options, based
on options outstanding as of July 7, 1999. Accordingly, shares registered under
such registration statement will, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, be available for sale in the
open market immediately after the 180-day lock-up agreements expire.
LEGAL MATTERS
The validity of the class A common stock offered hereby will be passed upon
for 1-800-FLOWERS.COM by Brobeck, Phleger & Harrison LLP, New York, New York.
Brobeck, Phleger & Harrison LLP currently owns 9,600 shares of series A
preferred stock, and Alexander D. Lynch, a partner of Brobeck, Phleger &
Harrison LLP, currently owns 8,640 shares of series A preferred stock. The
underwriters are represented on legal matters related to this offering by Hale
and Dorr LLP, Boston, Massachusetts.
63
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EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at March 28, 1999, June 28, 1998 and June 29,
1997, and for the nine months ended March 28, 1999 and for each of the three
years in the period ended June 28, 1998, as set forth in their reports. We have
included our consolidated financial statements and schedule in this prospectus
and elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
The consolidated financial statements of The Plow & Hearth, Inc. as of
December 31, 1996 and December 31, 1997 and for the years ended December 31,
1996 and December 31, 1997 included in this prospectus have been so included in
reliance upon the report of KPMG LLP, independent certified public accountants,
given on the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the class A common stock to be sold in this
offering. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to 1-800-FLOWERS.COM and the
class A common stock, reference is made to the registration statement and the
exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549 and at the regional offices of the Commission located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our Commission filings, including the
registration statement, will also be available to you on the Commission's
Internet site (http://www.sec.gov).
We intend to furnish to our stockholders annual reports containing financial
statements audited by our independent auditors and to make available to our
stockholders quarterly reports containing unaudited financial data for the first
three quarters of each fiscal year.
TRADEMARKS
We have applied for or received trademark and/or service mark registration
for, among others, the marks "1-800-FLOWERS.COM", "1-800-FLOWERS", and "Plow &
Hearth". All other trademarks and service marks used in this prospectus are the
property of their respective owners.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets as of June 29, 1997, June 28, 1998 and March 28,
1999...................................................................... F-3
Consolidated Statements of Operations for the years ended June 30, 1996,
June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998
(unaudited) and March 28, 1999............................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended June 30, 1996, June 29, 1997 and June 28, 1998 and the nine months
ended March 28, 1999...................................................... F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1996,
June 29, 1997 and June 28, 1998 and the nine months ended March 29, 1998
(unaudited) and March 28, 1999............................................ F-6
Notes to Consolidated Financial Statements.................................. F-7
THE PLOW & HEARTH, INC.
Independent Auditors' Report................................................ F-29
Consolidated Balance Sheets as of December 31, 1996 and 1997................ F-30
Consolidated Statements of Income for the years ended December 31, 1996 and
1997 and the three months ended March 31, 1997 and 1998 (unaudited)....... F-31
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996 and 1997 and the three months ended March 31, 1998
(unaudited)............................................................... F-32
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1997 and the three months ended March 31, 1997 and 1998 (unaudited)... F-33
Notes to Consolidated Financial Statements.................................. F-34
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited Pro Forma Consolidated Statement of Operations for the
year ended June 28, 1998.................................................. F-45
Unaudited Pro Forma Consolidated Statement of Operations for the nine months
ended March 29, 1998...................................................... F-46
Notes to Unaudited Pro Forma Consolidated Statements of Operations.......... F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
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 Subsidiaries (the "Company") as of March 28, 1999,
June 28, 1998 and June 29, 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the nine months
ended March 28, 1999 and for each of the three years in the period ended June
28, 1998. These financial statements 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 generally accepted auditing
standards. 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
1-800-FLOWERS.COM, Inc. and Subsidiaries at March 28, 1999, June 28, 1998 and
June 29, 1997, and the consolidated results of their operations and their cash
flows for the nine months ended March 28, 1999 and for each of the three years
in the period ended June 28, 1998, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Melville, New York
May 20, 1999, except for the second
paragraph
of Note 12--Capital Transactions as
to which
the date is , 1999
-------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in the second paragraph of Note
12--Capital Transactions to the consolidated financial statements.
Ernst & Young LLP
Melville, New York
July 9, 1999
F-2
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.......................................... $ 11,443 $ 8,873 $ 2,632
Short-term investments........................................ 3,210 5,034 --
Receivables, net.............................................. 6,520 8,432 10,966
Inventories................................................... 786 4,971 8,060
Prepaid and other............................................. 538 1,026 1,318
Recoverable income taxes...................................... -- -- 3,217
Deferred tax assets........................................... 738 1,637 1,175
--------------- --------------- ---------------
Total current assets...................................... 23,235 29,973 27,368
Property, plant and equipment at cost, net...................... 8,486 19,379 24,832
Investments..................................................... 2,854 1,383 987
Capitalized investment in leases................................ 2,149 1,837 1,529
Notes receivable, net........................................... 1,243 902 780
Goodwill, net of accumulated amortization of $146 in 1997, $534
in 1998 and $1,384 in 1999.................................... 1,274 22,725 21,671
Investment in licenses, net of accumulated amortization of $837
in 1997, $1,175 in 1998 and $1,418 in 1999.................... 4,090 3,752 3,509
Other........................................................... 799 1,795 5,923
--------------- --------------- ---------------
Total assets.................................................... $ 44,130 $ 81,746 $ 86,599
--------------- --------------- ---------------
--------------- --------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 15,448 $ 20,790 $ 27,037
Accrued expenses.............................................. 2,625 3,101 4,321
Current maturities of long-term debt and obligations under
capital leases.............................................. 2,055 3,287 5,500
Income taxes payable.......................................... 1,132 845 --
--------------- --------------- ---------------
Total current liabilities................................. 21,260 28,023 36,858
Long-term debt and obligations under capital leases............. 6,591 22,463 28,148
Deferred tax liabilities........................................ 168 1,332 237
Deferred rent and other liabilities............................. 2,697 2,904 3,955
Management put liability........................................ -- 8,660 6,300
--------------- --------------- ---------------
Total liabilities............................................... 30,716 63,382 75,498
Redeemable Class C common stock, $.01 par value, 100,000 shares
authorized, 34,822 shares issued and outstanding, stated at
liquidation and redemption value.............................. 16,084 17,692 19,020
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued................................................. -- -- --
Class A common stock, $.01 par value, 200,000,000 shares
authorized, 480,870 shares issued........................... 5 5 5
Class B common stock, $.01 par value, 200,000,000 shares
authorized, 48,849,927 shares issued........................ 488 488 488
Additional paid-in capital.................................... 1,739 1,739 3,419
Accumulated other comprehensive income........................ 5 14 --
Retained earnings (deficit)................................... (1,932) 1,534 (7,148)
Deferred compensation......................................... -- -- (1,575)
Treasury stock, at cost--51,400 Class A and 5,140,000 Class B
shares in 1997 and 52,800 Class A and 5,280,000 Class B
shares in 1998 and 1999..................................... (2,975) (3,108) (3,108)
--------------- --------------- ---------------
Total stockholders' equity (deficit)...................... (2,670) 672 (7,919)
--------------- --------------- ---------------
Total liabilities and stockholders' equity (deficit)............ $ 44,130 $ 81,746 $ 86,599
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------- --------------------------------
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net revenues......................... $ 153,128 $ 186,430 $ 220,592 $ 146,217 $ 203,668
Cost of revenues..................... 92,820 115,078 136,966 91,773 123,738
-------------- -------------- -------------- --------------- ---------------
Gross profit......................... 60,308 71,352 83,626 54,444 79,930
Operating expenses:
Marketing and sales................ 42,952 47,464 55,417 38,089 67,204
Technology and development......... 851 1,411 1,794 1,128 5,207
General and administrative......... 11,556 12,338 15,832 10,315 10,528
Depreciation and amortization...... 2,247 3,287 4,168 2,768 6,043
-------------- -------------- -------------- --------------- ---------------
Total operating expenses....... 57,606 64,500 77,211 52,300 88,982
-------------- -------------- -------------- --------------- ---------------
Operating income (loss).............. 2,702 6,852 6,415 2,144 (9,052)
Other income (expense):
Interest income.................... 1,205 1,121 1,290 812 702
Interest expense................... (1,444) (912) (1,177) (720) (1,863)
Other, net......................... 30 465 1,541 1,637 32
-------------- -------------- -------------- --------------- ---------------
Total other income (expense)... (209) 674 1,654 1,729 (1,129)
-------------- -------------- -------------- --------------- ---------------
Income (loss) before income taxes and
minority interests................. 2,493 7,526 8,069 3,873 (10,181)
Provision (benefit) for income
taxes.............................. 1,255 3,135 3,181 1,515 (2,926)
-------------- -------------- -------------- --------------- ---------------
Income (loss) before minority
interests.......................... 1,238 4,391 4,888 2,358 (7,255)
Minority interests in operations of
consolidated subsidiaries.......... 59 (4) 186 38 (99)
-------------- -------------- -------------- --------------- ---------------
Net income (loss).................... 1,297 4,387 5,074 2,396 (7,354)
Redeemable Class C common stock
dividends.......................... (1,029) (1,462) (1,608) (1,206) (1,328)
-------------- -------------- -------------- --------------- ---------------
Net income (loss) applicable to
common stockholders................ $ 268 $ 2,925 $ 3,466 $ 1,190 $ (8,682)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Net income (loss) per common share
applicable to common stockholders:
Basic.............................. $ 0.01 $ 0.07 $ 0.08 $ 0.03 $ (0.20)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ $ 0.01 $ 0.06 $ 0.07 $ 0.03 $ (0.20)
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Shares used in the calculation of net
income (loss) per common share:
Basic.............................. 47,050 44,140 44,120 44,140 44,000
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
Diluted............................ 49,420 46,740 46,610 46,750 44,000
-------------- -------------- -------------- --------------- ---------------
-------------- -------------- -------------- --------------- ---------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1996, JUNE 29, 1997 AND JUNE 28, 1998 AND NINE MONTHS ENDED
MARCH 28, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------------------------
ACCUMULATED
CLASS A CLASS B ADDITIONAL OTHER RETAINED
---------------------- ----------------------- PAID-IN COMPREHENSIVE EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (DEFICIT)
--------- ----------- ---------- ----------- ----------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 2, 1995............ 480,870 $ 5 48,087,000 $ 481 $ 1,253 $ 70 $ (5,125)
Issuance of warrants............... -- -- -- -- 492 -- --
Issuance of common stock........... -- -- 762,927 7 (6) -- --
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,029)
Purchase of treasury stock......... -- -- -- -- -- -- --
Comprehensive income:
Net income....................... -- -- -- -- -- -- 1,297
Unrealized loss on marketable
securities..................... -- -- -- -- -- (85) --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 30, 1996........... 480,870 5 48,849,927 488 1,739 (15) (4,857)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,462)
Comprehensive income:
Net income....................... -- -- -- -- -- -- 4,387
Unrealized gain on marketable
securities..................... -- -- -- -- -- 20 --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 29, 1997........... 480,870 5 48,849,927 488 1,739 5 (1,932)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,608)
Purchase of treasury stock......... -- -- -- -- -- -- --
Comprehensive income:
Net income....................... -- -- -- -- -- -- 5,074
Unrealized gain on marketable
securities..................... -- -- -- -- -- 9 --
Total comprehensive income..... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at June 28, 1998........... 480,870 5 48,849,927 488 1,739 14 1,534
Accrual of Redeemable Class C
common stock dividends........... -- -- -- -- -- -- (1,328)
Employee stock options............. -- -- -- -- 1,680 -- --
Amortization of deferred
compensation..................... -- -- -- -- -- -- --
Comprehensive loss:
Net loss......................... -- -- -- -- -- -- (7,354)
Unrealized loss on marketable
securities..................... -- -- -- -- -- (14) --
Total comprehensive loss....... -- -- -- -- -- -- --
--------- ----- ---------- ----- ----------- --- -----------
Balance at March 28, 1999.......... 480,870 $ 5 48,849,927 $ 488 $ 3,419 $ -- $ (7,148)
--------- ----- ---------- ----- ----------- --- -----------
--------- ----- ---------- ----- ----------- --- -----------
<CAPTION>
TOTAL
TREASURY STOCK STOCKHOLDERS'
DEFERRED ---------------------- EQUITY
COMPENSATION SHARES AMOUNT (DEFICIT)
--------------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at July 2, 1995............ $ -- -- $ -- $ (3,316)
Issuance of warrants............... -- -- -- 492
Issuance of common stock........... -- -- -- 1
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,029)
Purchase of treasury stock......... -- 5,191,400 (2,975) (2,975)
Comprehensive income:
Net income....................... -- -- -- 1,297
Unrealized loss on marketable
securities..................... -- -- -- (85)
-------
Total comprehensive income..... -- -- -- 1,212
------- --------- ----------- -------
Balance at June 30, 1996........... -- 5,191,400 (2,975) (5,615)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,462)
Comprehensive income:
Net income....................... -- -- -- 4,387
Unrealized gain on marketable
securities..................... -- -- -- 20
-------
Total comprehensive income..... -- -- -- 4,407
------- --------- ----------- -------
Balance at June 29, 1997........... -- 5,191,400 (2,975) (2,670)
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,608)
Purchase of treasury stock......... -- 141,400 (133) (133)
Comprehensive income:
Net income....................... -- -- -- 5,074
Unrealized gain on marketable
securities..................... -- -- -- 9
-------
Total comprehensive income..... -- -- -- 5,083
------- --------- ----------- -------
Balance at June 28, 1998........... -- 5,332,800 (3,108) 672
Accrual of Redeemable Class C
common stock dividends........... -- -- -- (1,328)
Employee stock options............. (1,680) -- -- --
Amortization of deferred
compensation..................... 105 -- -- 105
Comprehensive loss:
Net loss......................... -- -- -- (7,354)
Unrealized loss on marketable
securities..................... -- -- -- (14)
-------
Total comprehensive loss....... -- -- -- (7,368)
------- --------- ----------- -------
Balance at March 28, 1999.......... $ (1,575) 5,332,800 $ (3,108) $ (7,919)
------- --------- ----------- -------
------- --------- ----------- -------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- --------- ------------ -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)..................................... $ 1,297 $ 4,387 $ 5,074 $ 2,396 $ (7,354)
Reconciliation of net income (loss) to net cash
provided by (used in) operations:
Depreciation and amortization....................... 2,247 3,287 4,168 2,768 6,043
Deferred income taxes............................... 645 (170) 265 126 (633)
Management put liability............................ -- -- 1,631 -- (1,631)
Bad debt expense.................................... 319 553 383 235 231
Minority interests.................................. (59) 4 (186) (38) 99
Issuance of warrants................................ 492 -- -- -- --
Amortization of deferred compensation............... -- -- -- -- 105
Loss on disposal of equipment and other............. -- -- 313 -- 151
Changes in operating items, excluding the effects of
acquisitions:
Working capital items............................. 891 2,547 (284) (3,229) (2,741)
Nonworking capital items.......................... (13) 56 (1,864) (1,493) (3,972)
----------- ----------- --------- ------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... 5,819 10,664 9,500 765 (9,702)
----------- ----------- --------- ------------ -----------
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.................... -- (1,057) (15,206) (939) --
Proceeds on sale of retail operations................. -- 83 -- -- --
Capital expenditures, net of noncash
expenditures--$2,071, $1,114, $561, $245 and $3,009,
for fiscal 1996, 1997, 1998 and nine months ended
March 29, 1998 and March 28, 1999, respectively..... (2,890) (1,814) (10,302) (2,965) (7,254)
Purchases of investments.............................. (741) (4,382) (4,050) (3,447) --
Sales and maturities of investments................... -- 3,077 3,754 2,647 5,428
Notes receivable, net................................. (47) (97) 341 (650) 122
Other, net............................................ (336) -- -- -- --
----------- ----------- --------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES........... (4,014) (4,190) (25,463) (5,354) (1,704)
----------- ----------- --------- ------------ -----------
FINANCING ACTIVITIES:
Proceeds from bank borrowings......................... -- -- 15,500 -- 32,402
Acquisition of treasury stock......................... (2,975) -- (133) -- --
Payments of capital lease obligations................. (1,032) (1,408) (1,648) (1,523) (1,062)
Payments of related party debt........................ (1,886) -- -- -- --
Repayment of notes payable............................ (48) (262) (326) (231) (26,175)
----------- ----------- --------- ------------ -----------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES.................................... (5,941) (1,670) 13,393 (1,754) 5,165
----------- ----------- --------- ------------ -----------
Net change in cash and equivalents.................... (4,136) 4,804 (2,570) (6,343) (6,241)
Cash and equivalents:
Beginning of period................................. 10,775 6,639 11,443 11,443 8,873
----------- ----------- --------- ------------ -----------
End of period....................................... $ 6,639 $ 11,443 $ 8,873 $ 5,100 $ 2,632
----------- ----------- --------- ------------ -----------
----------- ----------- --------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 28, 1999
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
1. DESCRIPTION OF BUSINESS
1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products
and gifts. Customers can purchase products through any of three sales channels:
online, by calling toll-free and by visiting one of 123 retail stores (owned or
franchised) located across the United States. 1-800-FLOWERS.COM has broadened
its product lines to include home and garden merchandise through its acquisition
of The Plow & Hearth, Inc. in April 1998 (see Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
1-800-FLOWERS.COM and its wholly-owned and majority-owned subsidiaries and
partnerships. All significant intercompany balances and transactions have been
eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The financial statements for the nine months ended March 29, 1998, have been
prepared by 1-800-FLOWERS.COM without audit. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the results of operations and cash flows for the nine months
ended March 29, 1998 have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or eliminated.
The results of operations for the nine months ended March 28, 1999, are not
necessarily indicative of the results to be expected for any future interim
period or for the year ending June 27, 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND EQUIVALENTS
Cash and equivalents consist of demand deposits with banks, highly liquid
money market funds, overnight repurchase agreements and commercial paper with
maturities of three months or less when purchased.
RECEIVABLES AND CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable are limited
due to 1-800-FLOWERS.COM's large number of customers and their dispersion
substantially throughout the United States. A substantial portion of receivables
are related to balances owed by major credit
F-7
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
card companies. The timing of the related cash realization and fees accrued are
determined based upon agreements with these companies. Credit is also extended
to customers based upon an evaluation of the customer's financial condition and
collateral is generally not required. Allowances relating to accounts receivable
(June 29, 1997--$509,000, June 28, 1998--$784,000 and March 28, 1999--$998,000)
have been recorded based upon previous experience and other relevant factors, in
addition to management's periodic evaluation. Credit losses have been within
management's expectations.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method of accounting.
DEFERRED CATALOG COSTS
1-800-FLOWERS.COM 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 twenty-six weeks. No costs
were deferred at June 29, 1997. The unamortized balance of deferred catalog
costs at June 28, 1998 and March 28, 1999 was approximately $669,000 and
$1,772,000, respectively, and is included in other non-current assets.
DEPRECIATION AND AMORTIZATION
Depreciation is calculated using the straight-line method over the estimated
useful lives of the related assets. Amortization of assets held under capital
leases is calculated using the straight-line method over the estimated useful
life of the asset. Amortization of leasehold improvements is 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.
The useful lives of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
YEARS
-----------
<S> <C>
Building............................................................................ 40
Leasehold improvements.............................................................. 15-20
Furniture, fixtures and equipment (including computer equipment, software
development costs and telecommunication equipment)................................ 3-5
</TABLE>
COMPUTER SOFTWARE DEVELOPED FOR INTERNAL USE
1-800-FLOWERS.COM follows the provisions of Statement of Position 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE, which requires the capitalization of costs incurred in connection with
developing or obtaining software for internal use. These costs are amortized
over a period of three years, the estimated useful life of the software. The
useful life of Internet and Web site development costs is less than one year
and, accordingly, are expensed as incurred. No costs for computer software
developed for internal use were capitalized during the year ended June 30, 1996.
Capitalized computer software developed for
F-8
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
internal use approximated $828,000, $5,169,000, $3,860,000 and $626,000 for the
years ended June 29, 1997 and June 28, 1998 and for the nine months ended March
29, 1998 and March 28, 1999, respectively.
INVESTMENTS
1-800-FLOWERS.COM's investments, consisting primarily of debt and equity
securities, are classified as available-for-sale and are stated at fair value,
with unrealized gains and losses, net of tax, reported in accumulated other
comprehensive income. Realized gains and losses and declines in value judged to
be other-than-temporary on available-for-sale securities are included in other
income. The cost of investments sold is determined using the specific
identification method. Estimated fair values of investments are based on quoted
market prices at the end of each accounting period. Interest, dividends and
other distributions of earnings are included in other income.
NOTES RECEIVABLE
Notes receivable are principally the result of (i) an acquired entity's land
and building sales from prior years, which mature through 2011 and bear interest
at rates ranging from 8% to 11% per annum; (ii) converting past due franchise
receivables into three-year promissory notes bearing interest of up to 10% per
annum; (iii) the sale of 1-800-FLOWERS.COM-owned stores to new franchisees; (iv)
the resale of franchises and (v) license fees associated with termination
agreements designed to compensate 1-800-FLOWERS.COM for the loss of future
license fees. Gains resulting from the sale of stores described in (iii) and the
transactions in (iv) above have been deferred and are included in other
liabilities and will be recognized over the life of the related notes. The
balance of deferred gains at June 29, 1997, June 28, 1998 and March 28, 1999 are
approximately $233,000, $127,000 and $103,000, respectively. Allowances relating
to such notes (1997--$423,000, 1998--$593,000 and, 1999--$258,000) have been
recorded based upon previous experience and management's periodic evaluation of
other relevant factors.
LICENSES AND GOODWILL
Licenses represent the fair value of franchise agreements acquired in
1-800-FLOWERS.COM's acquisition of Amalgamated Consolidated Enterprises, Inc.
and are amortized on a straight-line basis over a 16-year period.
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired. Amortization expense relating to goodwill is amortized
on a straight-line basis over periods ranging from 15 to 20 years.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The recorded amounts of 1-800-FLOWERS.COM's cash and equivalents, notes and
accounts receivable, accounts payable, and accrued liabilities approximate their
fair values principally because of the short-term nature of the significant
items. The fair value of 1-800-FLOWERS.COM's long-term obligations are estimated
based on the current rates offered to 1-800-FLOWERS.COM for
F-9
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
obligations of similar terms and maturities. Under this method,
1-800-FLOWERS.COM's fair value of long-term obligations was not significantly
different than the stated values at June 29, 1997, June 28, 1998 and March 28,
1999.
REVENUE RECOGNITION
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, net of
returns and credits, and include customer service and shipping charges. Net
revenues are recognized upon delivery of the order to the recipient of floral
products and upon shipment of non-floral products. 1-800-FLOWERS.COM provides an
allowance for sales returns in the period of sale, based upon historical
experience.
COST OF REVENUES
Cost of revenues consists primarily of florist fulfillment costs (fees paid
to wire services that serve as clearinghouses for floral orders, net of
rebates), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and the associated costs of inbound freight and outbound
shipping. Additionally, cost of revenues includes labor and facility costs
related to wholesale operations.
MARKETING AND SALES
Marketing and sales expenses consist primarily of advertising and
promotional expenditures, catalog costs, fees paid to strategic online partners,
fulfillment (other than costs included in cost of revenues) and customer service
center expenses as well as payroll and non-payroll related expenses for those
areas engaged in marketing, selling, merchandising, customer service and
fulfillment activities. All such marketing and sales costs are expensed when
incurred.
In accordance with Statement of Position 93-7, REPORTING OF ADVERTISING
COSTS, 1-800-FLOWERS.COM expenses all advertising costs at the time the
advertisement is first shown. Advertising expense (including the amortization of
deferred catalog costs of approximately $2,604,000, $0 and $13,771,000 for the
year ended June 28, 1998 and for the nine months ended March 29, 1998 and March
28, 1999, respectively) was approximately $15,100,000, $16,700,000, $16,691,000,
$11,421,000 and $27,581,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively.
TECHNOLOGY AND DEVELOPMENT
Technology and development expenses consist primarily of the payroll and
operating expenses for the information technology group, maintenance, support
and licensing costs pertaining to the order entry, customer service, fulfillment
and database systems as well as all costs associated with the Web site,
including designing, developing and third party hosting. All such technology and
development costs are expensed as incurred.
F-10
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
When impairment indicators are present, 1-800-FLOWERS.COM reviews the
carrying value of its assets in determining the ultimate recoverability of their
unamortized values using future undiscounted cash flow analysis expected to be
generated by the asset. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds the future discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value, less costs to sell.
1-800-FLOWERS.COM evaluates the periods of amortization continually in
determining whether later events and circumstances warrant revised estimates of
useful lives. If estimates are changed, the unamortized costs will be allocated
to the increased or reduced number of remaining periods in the revised useful
life.
INCOME TAXES
Income taxes are provided using the liability method. Accordingly, deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as determined under
enacted tax laws and rates that will be in effect when the differences are
expected to reverse.
STOCK-BASED COMPENSATION
1-800-FLOWERS.COM accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and complies with the disclosure provisions of Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
SEGMENT DISCLOSURES
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. Statement 131 superseded Statement of Financial Accounting
Standards No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE.
Statement 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. Statement 131 also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. 1-800-FLOWERS.COM operates in one business segment through any of its
three access channels. The adoption of Statement 131 did not affect
1-800-FLOWERS.COM's consolidated results of operations or financial position.
For the years ended June 29, 1997 and June 28, 1998 and for the nine months
ended March 28, 1999, the flowers and plants products category represented
92.1%, 86.9% and 72.2% of total net revenues, respectively. Additionally, for
the nine months ended March 28, 1999, the home category represented 10.0% of
total net revenues.
F-11
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
Effective June 29, 1998, 1-800-FLOWERS.COM adopted Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME. Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this statement had no impact on
1-800-FLOWERS.COM's net income (loss) or stockholders' equity (deficit).
Statement 130 requires unrealized gains or losses on 1-800-FLOWERS.COM's
available-for-sale securities, which prior to adoption was reported separately
in stockholders' equity, to be included in comprehensive income. The related tax
effect on comprehensive income is not material for the periods presented. Prior
year consolidated financial statements have been restated to conform to the
requirements of Statement 130.
3. ACQUISITIONS
During the three years ended June 28, 1998, 1-800-FLOWERS.COM made the
acquisitions described below, each of which has been accounted for as a
purchase. Accordingly, the consolidated financial statements include the
operating results of each business from the respective date of acquisition. No
acquisitions were consummated during the nine-month period ended March 28, 1999.
THE PLOW & HEARTH, INC.
In April 1998, 1-800-FLOWERS.COM acquired 88% of the issued and outstanding
shares of common stock of Plow & Hearth (70% of the fully diluted equity of Plow
& Hearth due to the existence of 28,334 outstanding management stock options).
Plow & Hearth is a catalog company located in Virginia. The acquisition price
was $16,100,000, exclusive of the management put liability described below, of
which $14,700,000 was financed through 1-800-FLOWERS.COM's credit agreement (see
Note 5). The purchase price has been allocated to the assets acquired and the
liabilities assumed based on fair values at the date of acquisition. The excess
of the purchase price over the estimated fair values of the net assets acquired
of $19,600,000 has been recorded as goodwill and is being amortized over 20
years.
1-800-FLOWERS.COM, Plow & Hearth and Plow & Hearth management shareholders
and option holders entered into a stockholders' agreement effective with the
acquisition. In accordance with the agreement, as amended, each management
shareholder and option holder has the right to cause Plow & Hearth to purchase
12,668 shares of its outstanding stock and 28,344 stock options at a price
contingent upon the operating profits of Plow & Hearth, with a minimum
obligation upon either the death, disability or termination of employment of a
management shareholder or option holder or the 60-day period commencing on April
3, 2002 and terminating on June 3, 2002. Accordingly, 1-800-FLOWERS.COM recorded
a liability of $6,300,000 at the acquisition date. The liability at June 28,
1998 was adjusted to approximately $8,700,000 and, subsequently at March 28,
1999, to $6,300,000, based on the formula defined in the stockholders'
agreement. This resulted in an increase and subsequent reduction of general and
administrative expenses of approximately $1,631,000 for the year ended June 28,
1998 and the nine months ended March 28, 1999, respectively, reflecting the
option holders percentage of the increase (decrease), with the remainder
adjusted to goodwill. 1-800-FLOWERS.COM's minimum obligation under the put
liability increases
F-12
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
to $8,400,000 upon the completion of an initial public offering of
1-800-FLOWERS.COM's common stock.
Additionally, under Plow & Hearth's amended and restated stock option plan,
35,342 shares of unissued Plow & Hearth common stock are reserved for issuance.
The aforementioned 28,334 management stock options are immediately exercisable
and expire in February 2008. In April 1998, Plow & Hearth issued 3,504 stock
options to management at an exercise price equal to the per share acquisition
price of $153.65. These options do not contain the management stockholder put
option as defined in the preceding paragraph. These options will expire ten
years from the issuance date and vest ratably over five years.
Concurrently with the acquisition of Plow & Hearth, 1-800-FLOWERS.COM also
acquired an 85% interest in Plow & Hearth LP. Plow & Hearth owns the remaining
15%. Plow & Hearth LP owns the land and distribution center/office facility of
Plow & Hearth and leases the facility to Plow & Hearth. The $800,000 purchase
price has been allocated to the assets acquired and the liabilities assumed
based on fair values at the date of acquisition. The purchase price approximates
the estimated fair values of the net assets acquired, including the assumption
of a $2,400,000 construction loan payable.
The following table reflects unaudited pro forma results of operations of
1-800-FLOWERS.COM and Plow & Hearth on the basis that the acquisition had taken
place at the beginning of the earliest period presented:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
<S> <C> <C>
JUNE 29, 1997 JUNE 28, 1998
-------------- --------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues...................................................................... $ 222,324 $ 257,747
-------------- --------------
-------------- --------------
Net income........................................................................ $ 4,468 $ 3,464
-------------- --------------
-------------- --------------
Net income applicable to common stockholders...................................... $ 3,006 $ 1,856
-------------- --------------
-------------- --------------
Net income per common share applicable to common stockholders:
Basic........................................................................... $ 0.07 $ 0.04
-------------- --------------
-------------- --------------
Diluted......................................................................... $ 0.06 $ 0.04
-------------- --------------
-------------- --------------
Shares used in the calculation of net income per common share:....................
Basic........................................................................... 44,140 44,120
-------------- --------------
-------------- --------------
Diluted......................................................................... 46,740 46,610
-------------- --------------
-------------- --------------
</TABLE>
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the actual results that would have occurred had the
acquisition been consummated on July 1, 1996 or of future operations of the
combined companies.
F-13
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
GREAT PLAINS WHOLESALE FLORISTS, INC.
In July 1997, 1-800-FLOWERS.COM's subsidiary, Floral Works, Inc., acquired
the business and assets of Great Plains Wholesale Florists, Inc., a supplier of
fresh cut flowers and arrangements to the supermarket industry, for $900,000 in
cash and the issuance of a $900,000 four-year seller financed note bearing
interest at 6.5% per annum. The purchase price has been allocated to the assets
acquired and the liabilities assumed based on their fair values at the date of
acquisition.
The excess of the purchase price over the net assets acquired, of
approximately $1,744,000, has been recorded as goodwill and is being amortized
over 15 years. Had this acquisition been consummated as of July 1, 1996, the
unaudited pro forma consolidated net revenues and results of operations would
not have been considered material for the year ended June 29, 1997.
FLORAL WORKS, INC.
In September 1996, 1-800-FLOWERS.COM invested $1,100,000 in cash for an 80%
interest in Floral Works, Inc. which was formed in order to acquire specific
assets and liabilities of FLS Floral Wholesalers Ltd. The purchase price has
been allocated to the assets acquired and the liabilities assumed based on fair
values at the date of acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired of approximately $826,000 has
been recorded as goodwill and is being amortized over 15 years.
Upon the sale or an initial public offering of 1-800-FLOWERS.COM,
1-800-FLOWERS.COM may elect to issue shares of its common stock in exchange for
the minority stockholders' shares. Additionally, the minority stockholders
received 75 stock appreciation rights with an exercise price of $2,800 per
right. The stock appreciation rights vest ratably over 5 years and the exercise
price increases 10% annually. At March 28, 1999, 40% of the stock appreciation
rights are exercisable. Since issuance, 1-800-FLOWERS.COM has not recorded any
provision related to such stock appreciation rights.
Had this acquisition been consummated as of July 3, 1995, the unaudited pro
forma consolidated net revenues and results of operations would not have been
considered material for the year ended June 30, 1996.
AMERICAN FLORAL SERVICES, INC.
In February 1994, 1-800-FLOWERS.COM completed an investment transaction with
American Floral Services, Inc., a floral wire service. The investment consisted
of 1-800-FLOWERS.COM purchasing a minority interest in American Floral Services
Class A common stock and 15% preferred stock and a long-term note receivable.
During the year ended June 30, 1996, the long-term note receivable was converted
into additional preferred stock of American Floral Services. On June 30, 1997,
American Floral Services repurchased, on a pro-rata basis, 59% of its then
outstanding shares of Class A common stock in the amount of $387.16 per share.
This transaction resulted in a gain on 1-800-FLOWERS.COM's investment in
American Floral Services of approximately $1,545,000 which was received and
recorded as other income during the year ended June 28, 1998. In addition,
during the years ended June 29, 1997 and June 28, 1998 and the nine months ended
March 29, 1998 and March 28, 1999, 1-800-FLOWERS.COM recorded $318,000,
F-14
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
3. ACQUISITIONS (CONTINUED)
$123,000, $92,000 and $92,000, respectively, of other income representing the
accrual of cumulative preferred stock dividends. Accrued preferred stock
dividends at June 29, 1997 of $318,000 were paid in July 1997.
4. CAPITAL STOCK INVESTMENT AGREEMENTS
In January 1995, 1-800-FLOWERS.COM, its principal shareholder and a venture
capital firm entered into an investment agreement, as amended, whereby each
existing share of common stock was converted into one share of Class A common
stock (which shares contain all voting rights of 1-800-FLOWERS.COM) and 100
shares of Class B common stock (which contain no voting rights). Additionally,
Class C common stock (which contain no voting rights) and a preferred stock
class were established.
Pursuant to the investment agreement, 1-800-FLOWERS.COM, upon obtaining
financial and operational targets, has the right to draw up to $25,000,000 in
funds. As of March 28, 1999, 1-800-FLOWERS.COM has taken $10,000,000 and based
upon the structure and targets of the investment agreement, an additional
$10,000,000 is immediately available. In exchange for each funds takedown,
1-800-FLOWERS.COM provides the venture capital firm a predetermined number of
shares of Class C common stock and warrants to acquire shares of Class B common
stock at a nominal price per share. Upon the takedown of $10,000,000 by
1-800-FLOWERS.COM in January 1995, the venture capital firm received 26,345
shares of Class C common stock and warrants to acquire 2,371,040 shares of Class
A common stock expiring in 2005. The fair value of the warrants was estimated by
1-800-FLOWERS.COM at approximately $1,375,000. As of March 28, 1999, all of such
warrants are outstanding. The Class C common stock accrues a cumulative dividend
at the rate of 10% per annum and has a liquidation preference as to unpaid
dividends and the original investment. 1-800-FLOWERS.COM may, at its option,
repurchase and/or retire the shares of Class B and/or C common stock held by the
venture capital firm in advance of the Class C common stock's 2005 stated
redemption date, at which time the redemption value, including accrued
dividends, of the Class C common stock would be approximately $970 per share.
The investment agreement contains financial covenants with which
1-800-FLOWERS.COM is in compliance as of March 28, 1999.
On June 28, 1996, 1-800-FLOWERS.COM retired related party debt obligations
of approximately $5,800,000, through $2,500,000 in cash and the balance in
shares of Class B and Class C common stock. Accordingly, $3,300,000 of debt was
converted to equity under terms similar to the terms of the investment
agreement. As such, 8,477 shares of Class C common stock and 762,930 Class B
warrants were issued. The fair value of the warrants was estimated by
1-800-FLOWERS.COM at approximately $492,000 and was charged to operations during
the year ended June 30, 1996. The Class B warrants were immediately exercised
into 762,930 shares of Class B common stock. The redemption value, including
accrued dividends, of the Class C common stock at the 2005 stated redemption
date would be approximately $917 per share.
Additionally, upon the completion of an exchange event, as defined in the
investment agreement, each share of Class C common stock is convertible into one
share of preferred stock and ten shares of Class B common stock.
On May 8, 1998, 1-800-FLOWERS.COM entered into a stock purchase agreement
with a stockholder whereby 1-800-FLOWERS.COM purchased 1,400 shares of its Class
A common stock and 140,000 shares of its Class B common stock for $133,000.
F-15
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT
1-800-FLOWERS.COM's long-term debt obligations are as follows:
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank term loan (1).............................................. $ -- $ -- $ 18,000
Standby credit note (2)......................................... -- 15,500 --
Commercial notes and revolving credit line (3-5)................ -- 2,333 6,497
Seller financed acquisition obligations (6-11).................. 3,277 3,867 3,430
Obligations under capital leases (see Note 11).................. 5,369 4,050 5,721
------- -------------- ---------------
8,646 25,750 33,648
Less current maturities of long-term debt and obligations under
capital leases................................................ 2,055 3,287 5,500
------- -------------- ---------------
$ 6,591 $ 22,463 $ 28,148
------- -------------- ---------------
------- -------------- ---------------
</TABLE>
- ------------------------
(1) On March 19, 1999, 1-800-FLOWERS.COM entered into an agreement with a bank
that provided for an $18,000,000 term loan and a $12,000,000 revolving
credit line, bearing interest at LIBOR Index plus 2.25% per annum (7.31% at
March 28, 1999) payable monthly. 1-800-FLOWERS.COM received the proceeds
under the term loan during the nine-month period ended March 28, 1999 and
used such proceeds to repay amounts outstanding under its previous credit
agreement. Subsequent to March 28, 1999, 1-800-FLOWERS.COM borrowed
$3,000,000 under the $12,000,000 revolving credit line.
As of March 28, 1999, 1-800-FLOWERS.COM is in default of certain covenants
within the agreement. The bank has subsequently waived such defaults and
amended the agreement whereby the term loan will be due and payable on the
earlier of 1-800-FLOWERS.COM's successful completion of an initial public
offering of its common stock or July 3, 2000. Additionally, the revolving
credit line was reduced to $5,000,000. The amended agreement contains
limited restrictive financial covenants.
(2) On April 3, 1998, 1-800-FLOWERS.COM entered into a credit agreement with a
bank that provided for a $15,500,000 standby credit note and a $5,000,000
revolving credit facility. 1-800-FLOWERS.COM borrowed the full amount under
the standby credit note in connection with the acquisitions of Plow & Hearth
and Plow & Hearth LP (see Note 3). The credit agreement requires interest to
be paid monthly. On March 19, 1999, 1-800-FLOWERS.COM repaid amounts then
outstanding and entered into a new credit agreement with the same bank (see
(1) above).
Other components of long-term debt, relating to obligations of Plow & Hearth,
are as follows:
(3) $2,400,000 commercial note dated June 13, 1997 ($2,278,000 outstanding at
March 28, 1999) assumed in the Plow & Hearth and Plow & Hearth LP
acquisitions, bearing interest at 8.19% per annum. The note is payable in
203 equal monthly installments of principal and interest commencing June 13,
1997.
F-16
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
(4) $4,500,000 revolving credit line dated September 28, 1998 ($2,789,000
outstanding at March 28, 1999) bearing interest equal to the monthly LIBOR
Index plus 1.75% per annum (6.7% at March 28, 1999). Interest is paid
monthly on the outstanding principal balance. The note is payable upon
expiration of the line on September 15, 1999.
(5) $1,460,000 note dated July 1, 1998 ($1,430,000 outstanding at March 28,
1999) bearing interest equal to the monthly LIBOR Index plus 1.75% per annum
(6.7% at March 28, 1999). The note is payable in 180 equal monthly
installments of principal and interest commencing November 1, 1998.
The following notes relate to seller-financed acquisition obligations, all of
which have been collateralized by either the stock or assets of various
subsidiaries of 1-800-FLOWERS.COM:
(6) $2,225,000 in promissory notes payable dated October 10, 1994 bearing
interest at rates between 9% and 12% per annum. Interest is paid monthly on
the outstanding principal balance until the notes have been paid in full.
The notes are payable in 60 equal monthly installments commencing November
1, 1999.
(7) $800,000 promissory note payable assumed October 10, 1994 ($133,000
outstanding at March 28, 1999) and dated September 1, 1993 bearing interest
at 12% per annum. Interest is paid monthly on the outstanding principal
balance until the note has been paid in full. The note is payable in 36
equal monthly installments commencing October 1, 1996.
(8) $200,000 promissory note payable assumed October 10, 1994 and dated
September 1, 1993 bearing interest at 9% per annum. Interest is paid monthly
on the outstanding principal balance until the note has been paid in full.
The note is payable in 60 equal monthly installments commencing November 1,
1999.
(9) $275,000 promissory note payable dated November 1, 1994 ($180,000
outstanding at March 28, 1999) bearing interest at 8% per annum. The note is
payable in 120 equal monthly installments of principal and interest
commencing December 1, 1994.
(10) $95,000 note payable assumed November 1, 1994 ($17,000 outstanding at March
28, 1999) bearing interest at 8% per annum. The note is payable in 60 equal
monthly installments of principal and interest commencing February 1, 1995.
(11) $900,000 promissory note payable dated July 1,1997 ($675,000 outstanding at
March 28, 1999) bearing interest at 6.5% per annum. The note is payable in
four equal installments of principal and interest commencing July 1, 1998.
F-17
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
5. LONG-TERM DEBT (CONTINUED)
As of March 28, 1999, long-term debt maturities, excluding amounts relating
to capital leases, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR DEBT MATURITIES
- ----------------------------------------------------------------------------- ---------------
<S> <C>
2000......................................................................... $ 3,532
2001......................................................................... 5,655
2002......................................................................... 5,658
2003......................................................................... 5,436
2004......................................................................... 5,439
Thereafter................................................................... 2,207
---------------
$ 27,927
---------------
---------------
</TABLE>
The aggregate fair value of the long-term debt approximated the recorded
amounts at March 28, 1999.
6. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- ----------- ------------- -----------
Current:
Federal............................................. $ 430 $ 2,600 $ 2,039 $ 971 $ (2,293)
State and local..................................... 180 705 877 418 --
----------- ----------- ----------- ------------- -----------
610 3,305 2,916 1,389 (2,293)
Deferred.............................................. 645 (170) 265 126 (633)
----------- ----------- ----------- ------------- -----------
$ 1,255 $ 3,135 $ 3,181 $ 1,515 $ (2,926)
----------- ----------- ----------- ------------- -----------
----------- ----------- ----------- ------------- -----------
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 29, JUNE 28, MARCH 28,
1996 1997 1998 MARCH 29, 1998 1999
----------- ----------- ----------- --------------- -----------
Tax at U.S. statutory rates........................... 34.0% 34.0% 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefit........ 8.0 6.0 7.5 7.5 (3.1)
Nondeductible goodwill amortization................... 4.3 1.9 2.1 2.1 3.8
Dividends received deduction.......................... -- (1.0) (4.4) (4.4) (0.2)
Other................................................. 3.3 0.8 0.2 (0.1) 0.6
Nondeductible compensation expense.................... 6.5 -- -- -- --
(Decrease) increase in valuation allowance............ (5.8) -- -- -- 4.2
--- --- --- --- -----
50.3% 41.7% 39.4% 39.1% (28.7)%
--- --- --- --- -----
--- --- --- --- -----
</TABLE>
F-18
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Significant components of 1-800-FLOWERS.COM's deferred tax assets
(liabilities) are as follows:
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- -------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Bad debts..................................................... $ 321 $ 481 $ 400
Other accrued expenses and reserves........................... 353 1,156 775
Book in excess of tax depreciation............................ 64 -- --
State tax operating losses.................................... -- -- 334
Tax credits................................................... -- -- 93
Valuation allowance........................................... -- -- (427)
Deferred tax liabilities:
Installment sales............................................. (168) (157) (152)
Tax in excess of book depreciation............................ -- (1,175) (85)
------ ------- ------
Net deferred taxes.............................................. $ 570 $ 305 $ 938
------ ------- ------
------ ------- ------
</TABLE>
1-800-FLOWERS.COM paid income taxes of approximately $1,244,000, $1,700,000,
$2,930,000, $2,194,000 and $1,726,000 for the years ended June 30, 1996, June
29, 1997 and June 28, 1998 and for the nine months ended March 29, 1998 and
March 28, 1999, respectively.
7. SUPPLEMENTARY FINANCIAL INFORMATION
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Computer equipment.............................................. $ 5,948 $ 9,648 $ 14,447
Software development costs...................................... 828 5,997 6,623
Telecommunication equipment..................................... 3,547 3,854 4,207
Leasehold improvements.......................................... 2,497 3,715 6,554
Building and building improvements.............................. -- 3,463 3,848
Equipment....................................................... 1,015 1,917 2,266
Furniture and fixtures.......................................... 1,012 1,437 2,198
Land............................................................ -- 389 389
-------------- -------------- ---------------
14,847 30,420 40,532
Accumulated depreciation and amortization....................... 6,361 11,041 15,700
-------------- -------------- ---------------
$ 8,486 $ 19,379 $ 24,832
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
F-19
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
INVESTMENTS
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998
------------------------ ------------------------
AMORTIZED AMORTIZED MARCH 28,
COST FAIR VALUE COST FAIR VALUE 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Investments available-for-sale:
Federal and municipal government bonds............ $ 4,576 $ 4,581 $ 5,173 $ 5,178
Equity securities................................. 5 6 266 275
Corporate notes................................... 560 559 -- --
----------- ----------- ----------- -----------
5,141 $ 5,146 5,439 $ 5,453
----------- ----------- ----------- -----------
----------- -----------
Other investments:
Equity investment in American Floral Services..... 918 918 $ 918
Other............................................. -- 46 69
----------- ----------- -----
6,059 6,403 987
Less short-term investments......................... 3,134 5,034 --
----------- ----------- -----
$ 2,925 $ 1,369 $ 987
----------- ----------- -----
----------- ----------- -----
</TABLE>
Maturities of investments classified as available-for-sale were as follows
(in thousands):
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998
---------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Due in one year or less............................................. $ 3,134 $ 3,210 $ 5,034 $ 5,034
Due after one year.................................................. 2,002 1,930 139 144
Equity securities not due at a specific date........................ 5 6 266 275
----------- --------- ----------- ---------
$ 5,141 $ 5,146 $ 5,439 $ 5,453
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
There were no gross unrealized holding losses at June 29, 1997 or June 28,
1998.
OTHER ASSETS
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
--------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Exclusive online marketing contract............................. $ -- $ -- $ 3,125
Deferred catalog costs.......................................... -- 669 1,772
Other assets.................................................... 999 1,429 1,451
----- ------- -------
999 2,098 6,348
Accumulated amortization........................................ 200 303 425
----- ------- -------
$ 799 $ 1,795 $ 5,923
----- ------- -------
----- ------- -------
</TABLE>
F-20
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS
Changes in operating working capital items, excluding the effects of
acquisitions:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------- ------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Receivables................................ $ (1,381) $ (1,475) $ (1,908) $ (1,033) $ (2,765)
Inventories................................ (158) 32 (373) (169) (3,089)
Prepaid and other.......................... (1,159) 838 732 (2,207) (292)
Accounts payable........................... 3,833 1,742 3,655 317 6,247
Accrued expenses........................... (131) 278 (2,010) 945 1,220
Recoverable income taxes................... -- -- -- -- (3,217)
Taxes payable.............................. (113) 1,132 (380) (1,082) (845)
--------- --------- --------- ----------- -----------
$ 891 $ 2,547 $ (284) $ (3,229) $ (2,741)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</TABLE>
Changes in operating nonworking capital items, excluding the effects of
acquisitions:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------- -------------------------
JUNE 30, JUNE 29, JUNE 28, MARCH 29, MARCH 28,
1996 1997 1998 1998 1999
----------- ----------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Other assets, including goodwill and licenses......... $ (75) $ (24) $ (1,821) $ (984) $ (4,913)
Other liabilities..................................... 62 80 (43) (509) 941
--- --- --------- ------------ -----------
$ (13) $ 56 $ (1,864) $ (1,493) $ (3,972)
--- --- --------- ------------ -----------
--- --- --------- ------------ -----------
</TABLE>
Interest paid amounted to approximately $3,360,000, $912,000, $879,000,
$720,000 and $2,113,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1999 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively.
Cash receipts on notes receivable amounted to $413,000, $600,000, $723,000,
$542,000 and $492,000 for the years ended June 30, 1996, June 29, 1997 and June
28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999,
respectively.
F-21
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
7. SUPPLEMENTARY FINANCIAL INFORMATION (CONTINUED)
ACCRUED EXPENSES
<TABLE>
<CAPTION>
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
-------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Payroll and payroll related items............................... $ 1,510 $ 1,877 $ 2,354
Credits and chargeback reserve.................................. 400 425 320
Sales and use taxes............................................. 289 61 409
Interest........................................................ -- 298 48
Other........................................................... 426 440 1,190
------- ------- -------
$ 2,625 $ 3,101 $ 4,321
------- ------- -------
------- ------- -------
</TABLE>
8. PROFIT SHARING PLAN
1-800-FLOWERS.COM established a 401(k) Profit Sharing Plan which covers
substantially all eligible employees of 1-800-FLOWERS.COM. All full-time
employees of 1-800-FLOWERS.COM and its subsidiaries 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 1-800-FLOWERS.COM,
as determined by its board of directors, may make certain discretionary
contributions. Employees are vested in 1-800-FLOWERS.COM's contribution based
upon years of service. 1-800-FLOWERS.COM made contributions of $50,000,
$101,000, $92,000, $63,000 and $54,000 for the years ended June 30, 1996, June
29, 1997 and June 28, 1999 and for the nine months ended March 29, 1998 and
March 28, 1999, respectively.
9. STOCK OPTION PLAN
In January 1997, 1-800-FLOWERS.COM's board of directors approved
1-800-FLOWERS.COM's 1997 Stock Option Plan. The stock option plan authorizes the
granting to key employees, officers, directors and consultants of
1-800-FLOWERS.COM options to purchase an aggregate of 5,985,440 shares of
1-800-FLOWERS.COM's Class B common stock, $0.01 par value. The options may be
either incentive stock options or non-qualified stock options. The exercise
price of an option shall be determined by 1-800-FLOWERS.COM's board of directors
or compensation committee of the board at the time of grant, provided, however,
that in the case of an incentive stock option the exercise price may not be less
than 100% of the fair market value of such stock at the time of the grant, or
less than 110% of such fair market value in the case of options granted to a 10%
owner of 1-800-FLOWERS.COM's stock. The vesting and expiration periods of
options issued under the stock option plan are determined by 1-800-FLOWERS.COM's
board of directors or compensation committee as set forth in the applicable
option agreement, provided that the expiration date shall not be later than ten
years from the date of grant.
During January 1999, 1-800-FLOWERS.COM issued stock options to employees to
purchase 200,000 shares of common stock at $2.00 per share, which was considered
to be the fair value of the common stock at that time and vest at the rate of
25% per year on the anniversary of the grant
F-22
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
9. STOCK OPTION PLAN (CONTINUED)
date. Soon thereafter, 1-800-FLOWERS.COM entered into discussions with an
investor to purchase shares of common stock at $10.43 per share; accordingly,
for accounting purposes, 1-800-FLOWERS.COM used such per share value to record a
deferred compensation charge of $1,680,000, of which $105,000 was amortized
during the nine months ended March 28, 1999, associated with the option grants
in January 1999.
The following table summarizes activity in stock options:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------- NINE MONTHS ENDED
JUNE 29, 1997 JUNE 28, 1998 MARCH 28, 1999
---------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE
OPTION PRICE OPTION PRICE OPTION PRICE
--------- ----------- ------------ ----------- ----------- -----------
Balance, beginning of year..................... -- $ -- 427,750 $ 1.30 525,500 $ 1.36
Grants......................................... 427,750 1.30 102,500 1.61 712,000 2.00
Forfeitures.................................... -- -- (4,750) 1.18 -- --
--------- ------------ -----------
Balance, end of year........................... 427,750 1.30 525,500 1.36 1,237,500 1.73
--------- ------------ -----------
--------- ------------ -----------
Weighted-average fair value of options issued
during the period............................ $ 0.22 $ 0.73 $ 0.90
</TABLE>
The following table summarizes information about stock options outstanding
at March 28, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
OPTIONS OPTIONS CONTRACTUAL
EXERCISE PRICE OUTSTANDING EXERCISABLE LIFE
- ---------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
$1.30............................................... 423,000 253,800 2.8 years
1.61............................................... 102,500 25,630 8.8
2.00............................................... 712,000 393,000 9.4
------------ ------------
1,237,500 672,430 7.1
------------ ------------
------------ ------------
</TABLE>
At March 31, 1999, 1-800-FLOWERS.COM has reserved approximately 8,710,000
shares of common stock for issuance under common stock options, warrants and
conversion of Class C common stock.
FAIR VALUE DISCLOSURES
Pro forma information regarding net income (loss) is required by Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION,which also requires that the information be determined as if
1-800-FLOWERS.COM had accounted for its stock options under the fair value
method of that statement. The fair value of these options was estimated at the
date of grant using the minimum value option pricing model with the following
assumptions: risk free interest rate of 6%; no dividend yield and a
weighted-average expected life of the options of 5 years at date of grant.
Because the determination of fair value of all options granted after such
F-23
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
9. STOCK OPTION PLAN (CONTINUED)
time as 1-800-FLOWERS.COM becomes a public entity will include an expected
volatility factor in addition to the factors described above, the results
presented below may not be indicative of future periods.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period.
1-800-FLOWERS.COM pro forma financial information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
-------------- -------------- --------------- ---------------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss) applicable to common
stockholders:
As reported................................. $ 2,925 $ 3,466 $ 1,190 $ (8,682)
Pro forma................................... 2,898 3,438 1,172 (9,095)
Basic earnings (loss) per share applicable to
common stockholders:
As reported................................. $0.07 $0.08 $0.03 $(0.20 )
Pro forma................................... 0.07 0.08 0.03 (0.21 )
Diluted earnings (loss) per share applicable
to common stockholders:
As reported................................. $0.06 $0.07 $0.03 $(0.20 )
Pro forma................................... 0.06 0.07 0.03 (0.21 )
</TABLE>
F-24
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
10. BASIC AND DILUTED EARNINGS PER SHARE
The following sets forth the computation of basic and diluted earnings
(loss) per common share data:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, 1996 JUNE 29, 1997 JUNE 28, 1998 MARCH 29, 1998 MARCH 28, 1999
--------------- --------------- --------------- --------------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)........... $ 1,297 $ 4,387 $ 5,074 $ 2,396 $ (7,354)
Redeemable Class C common
stock dividends........... (1,029) (1,462) (1,608) (1,206) (1,328)
--------------- --------------- --------------- --------------- ---------------
Net income (loss) applicable
to common stockholders.... $268 $ 2,925 $ 3,466 $ 1,190 $ (8,682 )
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
Denominator:
Denominator for basic
earnings (loss) per share-
weighted average common
shares outstanding........ 47,050 44,140 44,120 44,140 44,000
Effect of dilutive securities:
Employee stock options...... -- 230 120 240 --
Warrants.................... 2,370 2,370 2,370 2,370 --
--------------- --------------- --------------- --------------- ---------------
Dilutive potential common
shares.................... 2,370 2,600 2,490 2,610 --
--------------- --------------- --------------- --------------- ---------------
Denominator for diluted
earnings (loss) per share-
weighted average common
shares outstanding and
assumed conversions....... 49,420 46,740 46,610 46,750 44,000
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
</TABLE>
During the nine months ended March 28, 1999, options and warrants to
purchase 3,420,000 shares of common stock (using the treasury stock method) were
excluded from the diluted loss per share computation as their effect would be
antidilutive. Additionally, for all periods presented, 350,000 shares of common
stock to be issued upon the conversion of Class C common stock (See Note 4) was
excluded from the diluted loss per share computation as its effect would be
antidilutive.
11. COMMITMENTS AND CONTINGENCIES
LEASES
1-800-FLOWERS.COM currently leases office, store facilities, and equipment
under various operating leases through fiscal 2009. As 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 1-800-FLOWERS.COM to pay real estate taxes, insurance, common area
maintenance and operating expenses applicable to the leased properties.
1-800-FLOWERS.COM has also entered into leases that are on a month-to-month
basis.
1-800-FLOWERS.COM also leases certain computer, telecommunication and
related equipment under capital leases, which are included in property and
equipment with a capitalized cost of
F-25
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
approximately $6,500,000, $7,037,000 and $10,124,000 at June 29, 1997, June 28,
1998 and March 28, 1999, respectively, and accumulated amortization of
$3,500,000, $5,031,000 and $6,453,000 respectively. Under the terms of one of
these leases, 1-800-FLOWERS.COM is required to maintain an irrevocable standby
letter of credit in the amount of approximately $785,000 which is renewable
annually.
As of March 28, 1999, future minimum payments under noncancelable equipment
lease obligations and operating leases with initial terms of one year or more
consist of the following:
<TABLE>
<CAPTION>
OBLIGATIONS
UNDER
EQUIPMENT OPERATING
LEASES LEASES
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
2000...................................................................... $ 2,015 $ 4,848
2001...................................................................... 1,240 4,273
2002...................................................................... 935 4,107
2003...................................................................... 735 3,817
2004...................................................................... 95 3,457
Thereafter................................................................ 3 4,372
----------- -----------
Total minimum lease payments.............................................. 5,023 $ 24,874
-----------
-----------
Less amounts representing interest........................................ (684)
-----------
Present value of net minimum lease payments............................... $ 4,339
-----------
-----------
</TABLE>
1-800-FLOWERS.COM, through the Amalgamated Consolidated Enterprises
acquisition, subleases land and buildings (which are leased from third parties)
to 1-800-FLOWERS.COM's franchisees. Certain of the leases, other than land
leases which have been classified as operating leases, are classified as capital
leases and have initial lease terms of approximately 20 years (including option
periods in some cases).
The following schedule, as of March 28, 1999, reflects the lease receipts
due from franchisees (shown as Capitalized Investment in Leases) and capital
lease payment obligations:
<TABLE>
<CAPTION>
CAPITALIZED OBLIGATIONS
INVESTMENT IN UNDER CAPITAL
LEASES LEASES
------------- --------------
<S> <C> <C>
(IN THOUSANDS)
2000................................................................ $ 490 $ 409
2001................................................................ 454 401
2002................................................................ 394 359
2003................................................................ 280 245
2004................................................................ 185 177
Thereafter.......................................................... 202 202
------------- -------
Total minimum lease payments........................................ 2,005 1,793
Less interest....................................................... (476) (411)
------------- -------
Present value of net minimum lease payments......................... $ 1,529 $ 1,382
------------- -------
------------- -------
</TABLE>
F-26
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At March 28, 1999, the aggregate future rental expense under long-term
operating leases for land and buildings and corresponding sublease rental income
under long-term operating subleases were as follows:
<TABLE>
<CAPTION>
SUBLEASE SUBLEASE
INCOME EXPENSE
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
2000......................................................................... $ 3,283 $ 3,216
2001......................................................................... 2,952 2,900
2002......................................................................... 2,451 2,411
2003......................................................................... 2,049 2,015
2004......................................................................... 1,781 1,749
Thereafter................................................................... 5,729 5,573
--------- ---------
$ 18,245 $ 17,864
--------- ---------
--------- ---------
</TABLE>
In addition to the above, 1-800-FLOWERS.COM has agreed to provide rent
guarantees for leases entered into by certain franchisees with third party
landlords. At March 28, 1999, the aggregate minimum rent due by franchisees
guaranteed by 1-800-FLOWERS.COM during the eight-year period ending in fiscal
year 2006 was approximately $581,000.
Rent expense was approximately $5,000,0000, $5,800,000, $5,637,000,
$4,508,000 and $5,543,000 for the years ended June 30, 1996, June 29, 1997 and
June 28, 1998 and for the nine months ended March 29, 1998 and March 28, 1999.
1-800-FLOWERS.COM has commitments under exclusive online marketing
agreements with AOL and AOL.com whereby 1-800-FLOWERS.COM will pay a minimum of
$11,500,000 over a four-year period commencing July 1, 1997. Such online
marketing costs are capitalized and amortized over the greater of the ratio of
the number of impressions delivered over the total number of contracted
impressions, or a straight-line basis over the term of the agreement. Through
March 28, 1999, 1-800-FLOWERS.COM has paid $7,500,000 pursuant to such online
marketing agreements. The remaining $4,000,000 is payable $3,000,000 in July
1999, and $500,000 during each of the fiscal years ending June 2000 and 2001.
The unamortized balance of such costs were approximately $0 and $3,125,000 at
June 28, 1998 and March 28, 1999, respectively, and were included in other
non-current assets. Additionally, 1-800-FLOWERS.COM is required to share a
portion of revenue derived from such online marketing agreements. Such amount is
expensed as the related revenue is recognized.
LITIGATION
There are various claims, lawsuits, and pending actions against
1-800-FLOWERS.COM 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 1-800-FLOWERS.COM's consolidated financial
position, results of operations or liquidity.
F-27
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED MARCH 29, 1998 IS UNAUDITED)
12. CAPITAL TRANSACTIONS
On May 20, 1999, 1-800-FLOWERS.COM completed a private placement of 984,493
shares of non-voting Series B preferred stock, yielding net proceeds of
$101,600,000. In connection with this private placement, all shares of
Redeemable Class C common stock were redeemed and a portion reinvested in
143,053 shares of such preferred stock. The non-voting Series B preferred stock
was subsequently converted into voting Series A preferred stock. The Series A
preferred stock has a preference in liquidation and each share of preferred
stock is convertible into ten shares (assuming the stock split described below)
of Class A common stock upon the completion of an initial public offering.
On May 20, 1999, the board of directors and stockholders approved an
increase in the number of authorized shares of common stock to 400,000,000 and
preferred stock to 1,200,000. On July 7, 1999, 1-800-FLOWERS.COM amended and
restated its certificate of incorporation to provide that all previously
outstanding shares of Class A common stock, which the holders of were entitled
to one vote per share, and Class B common stock, which contained no voting
rights, convert into a new series of Class B common stock and are entitled to 10
votes per share. Each share of Class B common stock shall automatically convert
into one share of Class A common stock upon transfer, with limited exception.
Additionally, a new series of Class A common stock was established that entitles
the holders to one vote per share. Also on July 7, 1999, the board of directors
and stockholders approved an amendment to the certificate of incorporation to be
effective on , 1999 that provides for a ten-for-one split of the
outstanding shares of common stock and an increase in the number of authorized
shares of preferred stock to 10,000,000. Retroactive effect has been given to
the stock split. All common stock, option and warrant data has been restated to
reflect the stock split.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Plow & Hearth, Inc.:
We have audited the accompanying consolidated balance sheets of The Plow &
Hearth, Inc. (the "Company") as of December 31, 1996 and 1997, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Plow &
Hearth, Inc. as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Roanoke, Virginia
March 9, 1998
F-29
<PAGE>
THE PLOW & HEARTH, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------------- --------------
<S> <C> <C>
ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents (note 7)............................................. $ 4,318,609 $ 3,686,460
Accounts receivable (note 7):
Trade........................................................................ 315,054 561,292
Other........................................................................ 143,588 201,194
Inventories.................................................................... 2,132,218 3,563,486
Deferred catalog costs......................................................... 858,390 723,537
Deferred income taxes (note 6)................................................. 89,954 194,216
Prepaid expenses and other current assets...................................... 25,260 63,122
-------------- --------------
Total current assets......................................................... 7,883,073 8,993,307
-------------- --------------
Property, plant and equipment (note 3):
Land and improvements.......................................................... 345,295 345,295
Building....................................................................... 2,626,979 2,626,979
Leasehold improvements......................................................... 113,872 117,920
Furniture, fixtures and equipment.............................................. 1,755,545 1,993,735
-------------- --------------
4,841,691 5,083,929
Less accumulated depreciation and amortization................................. 1,483,781 1,755,751
-------------- --------------
Net property, plant and equipment................................................ 3,357,910 3,328,178
-------------- --------------
Deferred income taxes (note 6)................................................... 17,694 3,634
Purchased software costs, net (note 1)........................................... 136,067 130,145
Intangibles, net (note 1)........................................................ -- 20,005
Other assets, net................................................................ 43,887 43,845
-------------- --------------
197,648 197,629
-------------- --------------
$ 11,438,631 $ 12,519,114
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and obligations under capital leases
(notes 2 and 3).............................................................. $ 602,706 $ 83,769
Accounts payable............................................................... 2,890,881 1,843,734
Accrued expenses............................................................... 852,010 1,214,156
Customer deposits.............................................................. 153,021 152,283
Income taxes payable........................................................... 817,321 1,307,424
-------------- --------------
Total current liabilities.................................................... 5,315,939 4,601,366
-------------- --------------
Long-term debt and obligations under capital leases, excluding current maturities
(notes 2 and 3)................................................................ 2,588,839 2,317,222
-------------- --------------
Minority interest (note 1)....................................................... 573,347 528,818
-------------- --------------
Stockholders' equity (notes 4 and 8):
Common stock, $.10 par value, 200,000 shares authorized; issued and outstanding
107,256 and 105,356 at December 31, 1996 and 1997, respectively.............. 10,726 10,536
Additional paid-in capital..................................................... 1,397,926 1,336,366
Retained earnings.............................................................. 1,551,854 3,724,806
-------------- --------------
Total stockholders' equity....................................................... 2,960,506 5,071,708
Commitments and contingencies (notes 1, 2, 3, 5 and 8)
-------------- --------------
$ 11,438,631 $ 12,519,114
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE>
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------ THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, ------------------------------
1996 1997 MARCH 31, MARCH 31,
-------------- -------------- 1997 1998
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating revenues:
Merchandise sales, net........................ $ 29,045,513 $ 38,996,352 $ 3,616,611 $ 4,901,994
Mailing list rental income.................... 290,569 188,495 59,087 52,994
Membership fee income......................... 231,711 13,056 11,870 --
Shipping income, net of shipping costs........ 418,896 433,947 (23,462) (38,278)
-------------- -------------- -------------- --------------
29,986,689 39,631,850 3,664,106 4,916,710
-------------- -------------- -------------- --------------
Operating costs and expenses:
Cost of goods sold............................ 16,101,851 21,653,476 2,131,043 2,913,920
Catalog production and marketing costs........ 7,864,827 9,539,107 794,933 1,134,658
Selling, general and administrative
expenses.................................... 3,759,736 4,619,167 855,724 5,017,158
-------------- -------------- -------------- --------------
27,726,414 35,811,750 3,781,700 9,065,736
-------------- -------------- -------------- --------------
Income (loss) from operations................... 2,260,275 3,820,100 (117,594) (4,149,026)
Other income (expense):
Interest expense.............................. (325,108) (248,449) (69,476) (38,967)
Interest income............................... 24,490 101,041 38,428 43,261
Other, net.................................... 90,940 (37,265) 24,132 (77,311)
Minority interest............................. (25,462) (25,471) (7,515) (19,713)
-------------- -------------- -------------- --------------
(235,140) (210,144) (14,431) (92,730)
-------------- -------------- -------------- --------------
Income (loss) before income taxes............... 2,025,135 3,609,956 (132,025) (4,241,756)
Income tax expense (benefit) (note 6)........... 767,941 1,437,004 (46,438) (1,689,886)
-------------- -------------- -------------- --------------
Net income (loss)............................... $ 1,257,194 $ 2,172,952 $ (85,587) $ (2,551,870)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE>
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997 AND
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1995................ 107,006 $ 10,701 $ 1,394,851 $ 294,660 $ 1,700,212
Exercise of employee stock options ($22.50
per share) (note 4)...................... 810 81 18,144 -- 18,225
Common stock purchased ($32.50 per
share)................................... (560) (56) (18,144) -- (18,200)
Tax benefit of stock options exercised
(note 4)................................. -- -- 3,075 -- 3,075
Net income................................. -- -- -- 1,257,194 1,257,194
--------- --------- ------------- ------------- --------------
Balances, December 31, 1996................ 107,256 10,726 1,397,926 1,551,854 2,960,506
Common stock purchased ($32.50 per
share)................................... (1,900) (190) (61,560) -- (61,750)
Net income................................. -- -- -- 2,172,952 2,172,952
--------- --------- ------------- ------------- --------------
Balances, December 31, 1997................ 105,356 10,536 1,336,366 3,724,806 5,071,708
Employee stock options (unaudited)......... -- -- 3,945,826 -- 3,945,826
Net loss (unaudited)....................... -- -- -- (2,551,870) (2,551,870)
--------- --------- ------------- ------------- --------------
Balances, March 31, 1998 (unaudited)....... 105,356 $ 10,536 $ 5,282,192 $ 1,172,936 $ 6,465,664
--------- --------- ------------- ------------- --------------
--------- --------- ------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE>
THE PLOW & HEARTH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
------------------------------ ----------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss)............................................... $ 1,257,194 $ 2,172,952 $ (85,587) $ (2,551,870)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Employee stock options...................................... -- -- -- 3,945,826
Depreciation and amortization............................... 392,480 366,022 85,416 90,340
Minority interest........................................... 25,462 25,471 7,515 19,713
Provision for deferred income taxes......................... (53,161) (90,202) 3,214 106,075
Provision for inventory obsolescence........................ (5,000) 47,000 16,500 36,000
(Increase) decrease in:
Accounts receivable....................................... 245,342 (303,844) 209,602 375,872
Inventories............................................... 119,881 (1,478,268) (53,530) (145,412)
Deferred catalog costs.................................... (418,457) 134,853 (240,071) (190,414)
Income taxes refundable................................... 93,477 -- 175,049 (1,589,137)
Prepaid expenses and other current assets................. (586) (37,862) (66,244) (35,884)
Other assets.............................................. (7,702) 9,555 (43) --
Increase (decrease) in:
Accounts payable.......................................... 335,387 (1,047,147) (2,046,005) (156,517)
Accrued expenses.......................................... 297,258 362,146 (817,321) (925,276)
Customer deposits......................................... 46,269 (738) (704,729) (33,830)
Income taxes payable...................................... 820,396 490,103 (59,647) (1,307,424)
-------------- -------------- ------------- -------------
Net cash provided by (used in) operating activities............... 3,148,240 650,041 (3,575,881) (2,361,938)
-------------- -------------- ------------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (62,694) (242,238) (44,080) (21,916)
Purchases of software........................................... (49,312) (82,368) (5,610) (692)
Purchase of intangible assets................................... -- (21,058) -- (9,699)
-------------- -------------- ------------- -------------
Net cash used in investing activities............................. (112,006) (345,664) (49,690) (32,307)
-------------- -------------- ------------- -------------
Cash flows from financing activities:
Borrowings under line of credit agreement....................... 6,848,000 2,588,000 296,000 --
Payments under line of credit agreement......................... (6,848,000) (2,588,000) (280,000) --
Proceeds from issuance of long-term debt........................ 420,000 2,400,000 -- --
Principal payments on long-term debt and obligations under
capital leases................................................ (552,938) (3,190,554) (42,475) (20,773)
Financing costs for long-term debt.............................. -- (14,222) -- --
Common stock options exercised.................................. 18,225 -- -- --
Purchase of common stock........................................ (18,200) (61,750) (61,750) --
Return of capital to limited partners........................... (70,000) (70,000) (17,500) (17,500)
-------------- -------------- ------------- -------------
Net cash used in financing activities............................. (202,913) (936,526) (105,725) (38,273)
-------------- -------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents.............. 2,833,321 (632,149) (3,731,296) (2,432,518)
Cash and cash equivalents, beginning of period.................... 1,485,288 4,318,609 4,318,609 3,686,460
-------------- -------------- ------------- -------------
Cash and cash equivalents, end of period.......................... $ 4,318,609 $ 3,686,460 $ 587,313 $ 1,253,942
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Supplemental cash flow information:
Income taxes paid (refunded) during the period.................. $ (92,771) $ 1,037,103 $ 821,200 $ 1,100,600
Interest paid during the period................................. 324,949 242,166 73,502 924
Noncash investing and financing activities:
Capital lease obligations incurred for telephone equipment...... $ 3,375 $ -- $ -- $ --
Income tax benefit from exercise of stock options............... 3,075 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Plow & Hearth, Inc. is a retail and catalog sales outlet, incorporated
under the laws of the Commonwealth of Virginia on April 2, 1980.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and operations of
The Plow & Hearth, Inc. and Plow & Hearth LP, (collectively "Plow & Hearth").
Plow & Hearth LP was organized to finance the acquisition of 39.549 acres of
land and the construction of a 108,000-square foot distribution center/office
facility. The distribution center/office facility is leased to The Plow &
Hearth, Inc. for a 20-year term. Plow & Hearth LP is owned by The Plow & Hearth,
Inc. (15 percent general partner interest with an initial $50,000 contribution)
and 28 limited partners (85 percent limited partnership interest with an
aggregate of $700,000 in initial contributions). Due to the interrelationship of
the investments, loan guarantees, collateral and control among The Plow &
Hearth, Inc., its stockholders and Plow & Hearth LP, the accounts of Plow &
Hearth LP have been consolidated with those of The Plow & Hearth, Inc. and all
significant intercompany transactions have been eliminated.
The Plow & Hearth LP partnership agreement requires quarterly cash
distributions to the partners equal to an annual rate of 10 percent of their
initial cash investment. Total distributions to the partners amounted to $75,000
for the years ended December 31, 1996 and 1997, of which The Plow & Hearth,
Inc., as general partner, received $5,000.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements for the three months ended March 31,
1997 and 1998 have been prepared by Plow & Hearth without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations and cash flows for the
three months ended March 31, 1997 and 1998 have been made. Certain information
and footnote disclosures normally included in fiancial statements prepared in
accordance with generally accepted accounting principles have been condensed or
eliminated. The results of operations for the three months ended March 31, 1998
are not necessarily indicative of the results to be expected for any future
interim period.
CASH AND CASH EQUIVALENTS
Plow & Hearth considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents, which
consist of commercial paper and an overnight repurchase agreement aggregating
$5,317,926 and $7,841,971 at December 31, 1996 and 1997, respectively, are
stated at cost which approximates fair value.
F-34
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTS RECEIVABLE--OTHER
Accounts receivable--other consist of amounts due for rental of Plow &
Hearth's mailing list and miscellaneous receivables.
INVENTORIES
Inventories are stated at the lower of cost or market. The allowance to
reduce inventories to the lower of cost or market was $40,000 and $87,000 at
December 31, 1996 and 1997, respectively. Cost is determined using the first-in,
first-out method.
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 twenty-six weeks.
DEFERRED FINANCING COSTS
Financing costs are amortized over the life of the loan using the interest
method and are included as a component of interest expense.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred. Depreciation is
calculated by use of the straight-line and accelerated methods over the
estimated useful lives of the related assets. Amortization of assets held under
capital leases and leasehold improvements is calculated by use of 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.
The useful lives of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Building............................................................................. 39
Leasehold improvements............................................................... 15-20
Furniture, fixtures and equipment.................................................... 5-10
</TABLE>
PURCHASED SOFTWARE COSTS
Plow & Hearth capitalizes costs for purchased software which is used
internally in operating activities. These costs are amortized over a period of
three years, the estimated useful life of the software. Amortization expense for
the years ended December 31, 1996 and 1997 was $95,905 and
F-35
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
$88,290, respectively. Purchased software costs consisted of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Purchased software costs.......................................... $ 496,540 $ 578,908
Accumulated amortization.......................................... (360,473) (448,763)
------------ ------------
Purchased software costs, net..................................... $ 136,067 $ 130,145
------------ ------------
------------ ------------
</TABLE>
INTANGIBLES
Intangibles consisted of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Customer mailing list............................................... $ 81,405 $ 102,463
Other............................................................... 2,069 2,069
---------- -----------
83,474 104,532
Accumulated amortization............................................ (83,474) (84,527)
---------- -----------
Intangibles, net.................................................... $ -- $ 20,005
---------- -----------
---------- -----------
</TABLE>
Customer mailing lists are being amortized over a period of five years.
Amortization expense for the years ended December 31, 1996 and 1997 was $8,466
and $1,053, respectively.
REVENUE RECOGNITION
Merchandise sales, cost of goods sold and shipping income, net of shipping
costs, are recognized upon shipment of products. Mailing list rental income is
recognized upon notification that another company has used a Plow & Hearth
customer name.
Plow & Hearth derives membership fee income from offering its customers
membership in its "Buyers' Club." An annual membership fee of $10 per customer
is recognized when received. Annual membership privileges entitle the customer
to a 5 percent discount on all purchases during the membership year and various
other special offers throughout the year. As a result of the Buyers' Club, Plow
& Hearth recorded net discounts of $351,942 and $76,610 for the years ended
December 31, 1996 and 1997, respectively. This program was discontinued during
1997.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or
F-36
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
No income taxes are payable by the partnership and none have been provided
in the accompanying financial statements. The partners include the respective
shares of the partnership's profits or losses in their individual tax returns.
HEALTH INSURANCE PLAN
Plow & Hearth is partially self-insured for health claims up to an aggregate
annual claim amount of $119,000 and $103,000 at December 31, 1996 and 1997,
respectively. Plow & Hearth's stop loss insurance covers aggregate annual claims
costs in excess of this limit. Self-insurance accruals are provided based upon
the liability for reported claims and an estimated liability for claims incurred
but not reported. Total expense under the plan amounted to $90,902 and $76,500
for the years ended December 31, 1996 and 1997, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Plow & Hearth reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
MINORITY INTEREST
Minority interest represents the 85 percent ownership of the limited
partners of the Partnership.
USE OF ESTIMATES
Management of Plow & Hearth has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and revenues and expenses
and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.
(2) LINE OF CREDIT AND LONG-TERM DEBT
The Plow & Hearth, Inc. currently has a line of credit with Central Fidelity
Bank. Under this agreement, The Plow & Hearth, Inc. has a revolving line of
credit under which it can borrow up to a maximum of $2,500,000 at an interest
rate of LIBOR plus 1.75 percent. The line of credit matures on June 30, 1998.
The line of credit is collateralized by The Plow & Hearth, Inc.'s accounts
F-37
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
receivable, inventories, equipment and general intangibles. No amounts were
outstanding under this line at December 31, 1996 or December 31, 1997.
Under the line of credit, The Plow & Hearth, Inc. must comply with certain
restrictive covenants. The most restrictive financial covenants relate to the
ratio of debt to tangible net worth, a fixed charge coverage ratio and a minimum
equity balance. The Plow & Hearth, Inc. was in compliance with these covenants
at December 31, 1997.
Long-term debt, including obligations under capital leases, consisted of the
following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Construction term loan with an interest rate of 8.19% payable in equal monthly
installments amortized over a 20-year period, due and payable in full June 2014,
collateralized by a deed of trust and assignment of all leases.................... $ 2,370,553 $ 2,367,319
Term loan with an interest rate of 8.37%, paid in full during 1997.................. 350,634 --
11.00% subordinated notes payable to seven members of The Plow & Hearth, Inc. board
of directors, paid in full during 1997............................................ 425,000 --
Obligations under capital leases (note 3)........................................... 45,358 33,672
------------- -------------
3,191,545 2,400,991
Less current maturities of long-term debt and obligations under capital leases...... 602,706 83,769
------------- -------------
Long-term debt and obligations under capital leases, excluding current maturities... $ 2,588,839 $ 2,317,222
------------- -------------
------------- -------------
</TABLE>
The construction term loan to Plow & Hearth LP was used to finance the
construction of the facility and is collateralized by a first lien deed of trust
on the facility and an assignment of all leases with respect to the distribution
center/office facility including the lease with The Plow & Hearth, Inc. The loan
is also unconditionally and fully guaranteed by The Plow & Hearth, Inc. The
loan's financial covenants require Plow & Hearth LP to meet a debt coverage
ratio of at least 1.10 to 1.00. Plow & Hearth LP was in compliance with this
covenant at December 31, 1997.
F-38
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(2) LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
As of December 31, 1997, long-term debt maturities, excluding amounts
relating to capital leases, are as follows:
<TABLE>
<CAPTION>
YEAR MATURITY
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 70,831
1999........................................................................... 76,920
2000........................................................................... 83,532
2001........................................................................... 90,713
2002........................................................................... 98,511
Thereafter..................................................................... 1,946,812
-------------
$ 2,367,319
-------------
-------------
</TABLE>
(3) LEASES
Plow & Hearth is obligated under various capital leases for certain
telephone and duplicating equipment which expire in 2000. The cost and
accumulated amortization of equipment held under capital leases at December 31,
1996 and 1997 were as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Equipment............................................................. $ 60,145 $ 60,145
Accumulated amortization.............................................. (30,195) (42,175)
---------- ---------
$ 29,950 $ 17,970
---------- ---------
---------- ---------
</TABLE>
Plow & Hearth also has several noncancellable operating leases for a retail
store facility, outlet store facility and certain equipment. Total rental
expense for operating leases amounted to $183,292 and $211,707 for the years
ended December 31, 1996 and 1997, respectively.
F-39
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(3) LEASES (CONTINUED)
Minimum future payments under capital leases and noncancellable operating
leases at December 31, 1997 were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -------------
<S> <C> <C>
1998................................................................................... $ 15,782 $ 259,382
1999................................................................................... 15,782 269,716
2000................................................................................... 6,576 222,748
2001................................................................................... -- 160,886
2002................................................................................... -- 133,286
Thereafter............................................................................. -- 22,214
--------- -------------
Total minimum lease payments........................................................... 38,140 $ 1,068,232
-------------
-------------
Less amount representing interest and administrative costs............................. 4,468
---------
Present value of net minimum lease payments............................................ 33,672
Less current installments of obligations under capital leases.......................... 12,938
---------
Obligations under capital leases, excluding current installments....................... $ 20,734
---------
---------
</TABLE>
(4) COMMON STOCK AND COMMON STOCK OPTIONS
COMMON STOCK
The Plow & Hearth, Inc. and its stockholders are parties to a buy-sell
agreement which imposes certain restrictions on the transferability of The Plow
& Hearth, Inc.'s outstanding stock. Under the agreement, most transfers of stock
require the approval of stockholders representing at least two-thirds of the
outstanding shares of The Plow & Hearth, Inc. Any stock offered for resale must
first be offered, at the selling price, to The Plow & Hearth, Inc. and the
existing stockholders (see note 8).
COMMON STOCK OPTIONS
The Plow & Hearth, Inc.'s stock option plan, adopted on November 13, 1990,
provides for the issuance of stock options at a price not less than the fair
value of the shares on the date of grant.
F-40
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED)
The options are exercisable for a period not to exceed ten years from the date
an option is granted. Following is a summary of stock option activity for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ------------------
<S> <C> <C>
Outstanding at December 31, 1995.................................................. 32,128 $ 27.53
Granted in 1996................................................................... 810 32.50
Exercised in 1996................................................................. (810) 22.50
Forfeited in 1996................................................................. (810) 32.50
-----------
Outstanding at December 31, 1996.................................................. 31,318 27.66
Granted in 1997................................................................... --
Exercised in 1997................................................................. --
Forfeited in 1997................................................................. --
-----------
Outstanding at December 31, 1997 (exercise prices ranging from $22.50 to $32.50
per share)...................................................................... 31,318 27.66
-----------
-----------
</TABLE>
Prior to October 21, 1997, the stock option plan included a vesting schedule
based on years of service. Effective October 21, 1997, The Plow & Hearth, Inc.'s
board of directors approved the immediate vesting of all previously unvested
options.
Options exercisable at December 31, 1996 and 1997 were 30,022 and 31,318,
respectively.
Effective February 28, 1998, The Plow & Hearth, Inc. adopted The Plow &
Hearth, Inc. amended and restated stock option plan to replace the existing
November 13, 1990 stock option plan. The Plow & Hearth, Inc. canceled the grant
of the previously granted options and, simultaneously therewith, granted new
options at the same price and for the same number of shares, to the
optionholders in accordance with the amended plan. Accordingly, The Plow &
Hearth, Inc. recorded compensation expense during the three months ended March
31, 1998 of $3,945,826 (unaudited) representing the difference between the
exercise price of the stock options and the fair value of the common stock on
the date of grant. Under the amended plan, 31,318 shares of unissued common
stock are reserved for the exercise of outstanding stock options and the maximum
number of shares of common stock which may be issued and sold under the amended
plan is 31,318 shares. The new options will expire ten years from the effective
date of the amended plan and are immediately exercisable.
The Plow & Hearth, Inc. accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
was issued in October 1995 and if fully adopted, changes the methods of
recognition of cost on plans similar to those of Plow & Hearth. Adoption of SFAS
123 is optional; however, pro forma disclosures as if
F-41
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(4) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED)
Plow & Hearth adopted the cost recognition requirements under SFAS 123 in 1996
and 1997 are presented below.
The per share weighted average fair value of stock options granted during
1996 was $8.76 on the date of grant using the minimal value option pricing model
with the following weighted average assumptions: expected dividend yield 0%,
risk-free interest rate of 6.48 percent and an expected life of 5 years.
Had Plow & Hearth determined compensation cost based on the fair value at
the grant date for its stock options granted during 1995 and 1996 under SFAS No.
123, Plow & Hearth's net income would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Net income:
As reported................................................... $ 1,257,194 $ 2,172,952
Pro forma..................................................... 1,248,550 2,166,913
</TABLE>
Pro forma net income reflects only options granted in 1995 and 1996.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost for options granted prior to January
1, 1995 is not considered.
(5) 401(K) RETIREMENT PLAN
The 401(k) retirement plan covers substantially all employees who meet
eligibility requirements and provides an opportunity for employees to make tax
deferred contributions with Plow & Hearth matching, at their discretion, 25
percent of the employees' contribution up to 3 percent of the employees' annual
compensation. Plow & Hearth incurred $11,910 of expense related to the 401(k)
retirement plan for the year ended December 31, 1997. No Plow & Hearth
contributions were made in 1996.
F-42
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(6) INCOME TAXES
Income tax expense for the years ended December 31, 1996 and 1997 consists
of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Current:
Federal............................................................................. $ 691,407 $ 1,286,847
State............................................................................... 129,695 240,359
----------- -------------
Total current......................................................................... 821,102 1,527,206
----------- -------------
Deferred:
Federal............................................................................. (44,759) (75,945)
State............................................................................... (8,402) (14,257)
----------- -------------
Total deferred........................................................................ (53,161) (90,202)
----------- -------------
Total income tax expense.............................................................. $ 767,941 $ 1,437,004
----------- -------------
----------- -------------
</TABLE>
Income tax expense for the years ended December 31, 1996 and 1997 differed
from amounts computed by applying the U.S. Federal income tax rate of 34 percent
to income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1996 1997
----------- -------------
<S> <C> <C>
Computed "expected" income tax expense................................................ $ 688,546 $ 1,227,385
Increase (reduction) in income tax expense resulting from:
State income tax expense, net of effect of federal income taxes..................... 80,053 149,227
Nondeductible acquisition costs..................................................... -- 40,284
Other, net.......................................................................... (658) 20,108
----------- -------------
Total income tax expense.............................................................. $ 767,941 $ 1,437,004
----------- -------------
----------- -------------
</TABLE>
F-43
<PAGE>
THE PLOW & HEARTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997 AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences which comprise the deferred tax
assets and deferred tax liabilities at December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
Deferred tax assets:
Depreciation......................................................................... $ 7,428 $ 9,397
Inventories.......................................................................... 76,705 137,208
Intangible assets.................................................................... 15,486 266
Allowances for returns............................................................... 82,305 151,183
Other................................................................................ 20,111 27,438
----------- ------------
Total gross deferred tax assets........................................................ 202,035 325,492
Less valuation allowance............................................................. -- --
----------- ------------
Net deferred tax assets................................................................ 202,035 325,492
----------- ------------
Deferred tax liabilities:
Deferred catalog costs............................................................... (89,167) (121,613)
Other................................................................................ (5,220) (6,029)
----------- ------------
Total gross deferred tax liabilities................................................... (94,387) (127,642)
----------- ------------
Net deferred tax asset................................................................. $ 107,648 $ 197,850
----------- ------------
----------- ------------
</TABLE>
Plow & Hearth has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 1996 and 1997, since
substantially all deferred tax assets can be recognized during the carryback
period available under current tax laws.
(7) CONCENTRATION OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Financial instruments which potentially subject Plow & Hearth to
concentration of credit risk consist of cash equivalents and accounts
receivable. Plow & Hearth's cash equivalents consisted of commercial paper and
an overnight repurchase agreement at December 31, 1996 and 1997. Plow & Hearth's
policy is not to hold collateral, and the amount of loss which could be incurred
in the event the commercial paper or overnight repurchase agreement failed to
perform is equal to Plow & Hearth's investment in commercial paper and overnight
repurchase agreement, less any depository insurance proceeds. Accounts
receivable consist principally of trade accounts receivable resulting primarily
from credit card sales to customers and receivables for the rental of Plow &
Hearth's mailing list. Concentrations of credit risk with respect to accounts
receivable are limited due to Plow & Hearth's large number of customers and
their dispersion throughout geographic regions.
(8) SUBSEQUENT EVENT
On March 9, 1998, certain stockholders of The Plow & Hearth, Inc. executed a
stock purchase agreement with 1-800-Flowers, Inc., providing for the purchase of
70 percent, on a fully diluted basis, of the outstanding common stock and common
stock options of The Plow & Hearth, Inc. The transaction is expected to close
during April 1998.
F-44
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 28, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1-800-
FLOWERS.COM, PRO FORMA
INC. AND THE PLOW & ADJUSTMENTS
SUBSIDIARIES HEARTH, INC. (NOTE 2) PRO FORMA
----------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenues............................................. $ 220,592 $ 33,572 $ 3,583(a) $ 257,747
Cost of revenues......................................... 136,966 18,383 1,735(b) 157,084
----------------- ------------ ------------ -----------
Gross profit......................................... 83,626 15,189 1,848 100,663
Operating expenses:
Marketing and sales.................................... 55,417 -- 12,402(c) 67,819
Catalog production and marketing....................... -- 7,916 (7,916)(d) --
Technology and development............................. 1,794 -- 332(e) 2,126
General and administrative............................. 15,832 -- 4,537(f) 20,369
Selling, general and administrative.................... -- 7,766 (7,766)(g) --
Depreciation and amortization.......................... 4,168 -- 1,020(h) 5,188
----------------- ------------ ------------ -----------
Total operating expenses........................... 77,211 15,682 2,609 95,502
----------------- ------------ ------------ -----------
Operating income (loss).................................. 6,415 (493) (761) 5,161
Other income (expense):
Interest income........................................ 1,290 87 -- 1,377
Interest expense....................................... (1,177) (157) (900)(i) (2,234)
Other, net............................................. 1,541 (163) -- 1,378
----------------- ------------ ------------ -----------
1,654 (233) (900) 521
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority
interests.............................................. 8,069 (726) (1,661) 5,682
Provision for income taxes............................... 3,181 (291) (342)(j) 2,548
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................. 4,888 (435) (1,319) 3,134
Minority interests in operations of consolidated
subsidiaries........................................... 186 (26) 170(k) 330
----------------- ------------ ------------ -----------
Net income (loss)........................................ 5,074 (461) (1,149) 3,464
Redeemable Class C common stock dividends................ (1,608) -- -- (1,608)
----------------- ------------ ------------ -----------
Net income (loss) applicable to common stockholders...... $ 3,466 $ (461) $ (1,149) $ 1,856
----------------- ------------ ------------ -----------
----------------- ------------ ------------ -----------
Net income (loss) per common share applicable to common
stockholders:
Basic.................................................. $ 0.08 $ 0.04
----------------- -----------
----------------- -----------
Diluted................................................ $ 0.07 $ 0.04
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per
common share:
Basic.................................................. 44,120 44,120
----------------- -----------
----------------- -----------
Diluted................................................ 46,610 46,610
----------------- -----------
----------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-45
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 29, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1-800-
FLOWERS.COM, PRO FORMA
INC. AND THE PLOW & ADJUSTMENTS
SUBSIDIARIES HEARTH, INC. (NOTE 2) PRO FORMA
----------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net revenues............................................. $ 146,217 $ 33,572 $ 3,583(a) $ 183,372
Cost of revenues......................................... 91,773 18,383 1,735(b) 111,891
----------------- ------------ ------------ -----------
Gross profit........................................... 54,444 15,189 1,848 71,481
Operating expenses:
Marketing and sales.................................... 38,089 -- 12,402(c) 50,491
Catalog production and marketing....................... -- 7,916 (7,916)(d) --
Technology and development............................. 1,128 -- 332(e) 1,460
General and administrative............................. 10,315 -- 4,537(f) 14,852
Selling, general and administrative.................... -- 7,766 (7,766)(g) --
Depreciation and amortization.......................... 2,768 -- 1,020(h) 3,788
----------------- ------------ ------------ -----------
Total operating expenses........................... 52,300 15,682 2,609 70,591
----------------- ------------ ------------ -----------
Operating income (loss).................................. 2,144 (493) (761) 890
Other income (expense):
Interest income........................................ 812 87 -- 899
Interest expense....................................... (720) (157) (900)(i) (1,777)
Other, net............................................. 1,637 (163) -- 1,474
----------------- ------------ ------------ -----------
1,729 (233) (900) 596
----------------- ------------ ------------ -----------
Income (loss) before income taxes and minority
interests.............................................. 3,873 (726) (1,661) 1,486
Provision (benefit) for income taxes..................... 1,515 (291) (342)(j) 882
----------------- ------------ ------------ -----------
Income (loss) before minority interests.................. 2,358 (435) (1,319) 604
Minority interests in operations of consolidated
subsidiaries........................................... 38 (26) 170(k) 182
----------------- ------------ ------------ -----------
Net income (loss)........................................ 2,396 (461) (1,149) 786
Redeemable Class C common stock dividends................ (1,206) -- -- (1,206)
----------------- ------------ ------------ -----------
Net income (loss) applicable to common stockholders...... $ 1,190 $ (461) $ (1,149) $ (420)
----------------- ------------ ------------ -----------
----------------- ------------ ------------ -----------
Net income (loss) per common share applicable to common
stockholders:
Basic.................................................. $ 0.03 $ (0.01)
----------------- -----------
----------------- -----------
Diluted................................................ $ 0.03 $ (0.01)
----------------- -----------
----------------- -----------
Shares used in calculation of net income (loss) per
common share:
Basic.................................................. 44,140 44,140
----------------- -----------
----------------- -----------
Diluted................................................ 46,750 44,140
----------------- -----------
----------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-46
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 28, 1998 AND
THE NINE MONTHS ENDED MARCH 29, 1998
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations give effect to
the acquisition by 1-800-FLOWERS.COM, Inc. of The Plow & Hearth, Inc. as if it
occurred on June 30, 1997. Such unaudited pro forma consolidated statements of
operations set forth the historical results of operations of 1-800-FLOWERS.COM
for the year ended June 28, 1998 and the nine months ended March 29, 1998 and
Plow & Hearth for the nine months ended March 29, 1998. The operations of Plow &
Hearth for the three months ended June 28, 1998 are included in the operations
of 1-800-FLOWERS.COM.
The unaudited pro forma statements of operations have been prepared by
management and should be read in conjunction with the historical financial
statements of 1-800-FLOWERS.COM and Plow & Hearth. The statements do not purport
to be indicative of the results of operations that might have occurred if the
Plow & Hearth acquisition was consummated on June 30, 1997, and do not purport
to be indicative of future results.
Management believes additional synergies and operational improvements, not
reflected in the accompanying unaudited pro forma consolidated statements of
operations, will be realized by the combined companies. Such amounts cannot be
reasonably quantified and, therefore, are not reflected in the unaudited pro
forma consolidated statements of operations.
2. PRO FORMA ADJUSTMENTS
The following pro forma adjustments give effect to the acquisition of Plow &
Hearth as if it occurred on June 30, 1997 and include adjustments that
reclassify the financial statement presentation of Plow & Hearth to be
consistent with the accounting policies of 1-800-FLOWERS.COM, Inc.:
(a) Shipping expense of $3,375,000 and promotional discounts of $208,000
originally recorded as a reduction to revenues reclassified to cost of
revenues and marketing and sales.
(b) Shipping expense of $3,375,000 described in (a) and $1,640,000 of
fulfillment costs reclassified to marketing and sales.
(c) Catalog production and marketing costs of $7,916,000 reclassified to
marketing and sales, $1,640,000 of fulfillment costs described in (b) and
$658,000 of credit card clearing fees, $300,000 of fulfillment payroll
and $1,680,000 of labor and advertising reclassified from selling,
general and administrative expenses and $208,000 of promotional discounts
described in (a).
(d) Catalog production and marketing costs of $7,916,000 described in (c).
(e) $332,000 of technology and development costs reclassified from selling,
general and administrative expenses.
(f) $4,511,000 of general and administrative expenses reclassified from
selling, general and administrative expenses and $26,000 from minority
interests.
(g) $3,946,000 charge related to a stock option revaluation reclassified to
general and administrative expenses, $565,000 of selling, general and
administrative expenses
F-47
<PAGE>
1-800-FLOWERS.COM, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED JUNE 28, 1998 AND
THE NINE MONTHS ENDED MARCH 29, 1998
2. PRO FORMA ADJUSTMENTS (CONTINUED)
reclassified to general and administrative expenses and $658,000 of
credit card clearing fees, $300,000 of fulfillment payroll and $1,680,000
of labor and advertising, described in (c), reclassified from selling,
general and administrative expenses, and $285,000 of reclassified
depreciation and amortization expense and $332,000 of technology and
development costs described in (e).
(h) $285,000 of depreciation and amortization described in (g) and an
adjustment of $735,000 to provide for a full-year amortization of the
intangibles acquired.
(i) Adjustment of $900,000 to provide additional interest expense incurred
on borrowings to fund the acquisition. A 1/8% fluctuation in the variable
interest rate would result in a change of interest expense of
approximately $20,000.
(j) Adjustment of $342,000 to provide the tax benefit for the additional
interest expense described in (i).
(k) Adjustment of $144,000 to provide for additional minority interests and
the reclassification described in (f).
F-48
<PAGE>
UNDERWRITING
1-800-FLOWERS.COM and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
terms of the underwriting agreement, each underwriter has severally agreed to
purchase the number of shares indicated in the following table. Goldman, Sachs &
Co., Credit Suisse First Boston Corporation and Wit Capital Corporation are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------------------------------------------------------------------------- -----------
<S> <C>
Goldman, Sachs & Co............................................................
Credit Suisse First Boston Corporation.........................................
Wit Capital Corporation........................................................
-----------
Total.................................................................... 6,000,000
-----------
-----------
</TABLE>
------------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 850,000
shares from 1-800-FLOWERS.COM and up to an additional 50,000 shares from
Christopher G. McCann to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by 1-800-FLOWERS.COM. Such amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
Paid by 1-800-FLOWERS.COM
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------ -------------
<S> <C> <C>
Per Share...... $ $
Total.......... $ $
</TABLE>
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by Mr. Christopher G. McCann assuming
full exercise of the underwriters' option to purchase additional shares from Mr.
McCann:
Paid by Mr. McCann
<TABLE>
<S> <C>
Per Share..................... $
Total.........................
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
other brokers or dealers at a discount of up to $ per share from the initial
public offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms.
U-1
<PAGE>
1-800-FLOWERS.COM and its directors, officers, key employees and
substantially all stockholders have agreed with the underwriters not to dispose
of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock during the period from the date of this
prospectus continuing through the date 180 days after the date of this
prospectus, except with the prior written consent of Goldman, Sachs & Co. This
agreement does not apply to any existing employee benefit plans. Please see
"Shares Eligible for Future Sale" for a discussion of transfer restrictions.
At the request of 1-800-FLOWERS.COM, the underwriters have reserved at the
initial public offering price up to 300,000 shares of common stock for sale to
Messrs. Beirne, Lax and O'Connor, directors of 1-800-FLOWERS.COM, full-time and
regular part-time employees, friends and persons having business relationships
with 1-800-FLOWERS.COM. There can be no assurance that any of the reserved
shares will be purchased. The number of shares available for sale to the general
public in this offering will be reduced by the number of reserved shares sold.
Any reserved shares not so purchased will be offered to the general public on
the same basis as the other shares offered hereby.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among 1-800-FLOWERS.COM and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be 1-800-FLOWERS.COM's historical performance, estimates of the
business potential and earnings prospects of 1-800-FLOWERS.COM, an assessment of
1-800-FLOWERS.COM's management and the consideration of the above factors in
relation to market valuation of companies in related businesses.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-Manager or selected dealer in over 65 public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with 1-800-FLOWERS.COM, or any of its founders or significant stockholders.
1-800-FLOWERS.COM has applied to list the class A common stock on the Nasdaq
National Market under the symbol "FLWS".
In connection with this offering, the underwriters may purchase and sell
shares of class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the class A common stock. As a result, the price of
the class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
Each underwriter has also agreed that (a) it has not offered or sold and
prior to the date
U-2
<PAGE>
six months after the date of issue of the shares of class A common stock will
not offer or sell any shares of class A common stock to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances that have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (b) it
has complied, and will comply, with all applicable provisions of the Financial
Services Act of 1986 of Great Britain with respect to anything done by it in
relation to the shares of class A common stock in, from or otherwise involving
the United Kingdom, and (c) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document received by it in connection with
the issuance of the shares of class A common stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 of Great Britain or is a person to whom
the document may otherwise lawfully be issued or passed on.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
1-800-FLOWERS.COM estimates that the total expenses of this offering,
excluding underwriting discounts and commissions, will be approximately
$1,500,000.
1-800-FLOWERS.COM has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
U-3
<PAGE>
[pictures of florists tending to floral arrangements, flowers being delivered to
customer and warehouses. The words "We Deliver," with bullet points beneath
reading "- 33 owned and 87 franchised retail stores; - BloomNet network of
approximately 1,500 independent local florists; - Direct Shipment by third party
suppliers; - Advanced fulfillment center for packaging, shipping and inventory
control of home and garden merchandise; - Flexible delivery options, including
same-day and next-day service.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Cautionary Note Regarding Forward-
Looking Statements.................. 17
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 24
Business.............................. 35
Management............................ 47
Related Party Transactions............ 55
Principal Stockholders................ 57
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 62
Legal Matters......................... 63
Experts............................... 64
Where you Can Find More Information... 64
Trademarks............................ 64
Index to Financial Statements......... F-1
Underwriting.......................... U-1
</TABLE>
------------------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as underwriter and with respect to an unsold allotment or subscription.
6,000,000 Shares
1-800-FLOWERS.COM, INC.
Class A Common Stock
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
WIT CAPITAL CORPORATION
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the costs and expenses, other
than the underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the class A common stock being
registered.
<TABLE>
<S> <C>
SEC registration fee........................................... $ 34,528
NASD filing fee................................................ 15,500
NASDAQ listing fee............................................. 95,500
Legal fees and expenses........................................ 500,000
Accountants' fees and expenses................................. 300,000
Printing expenses.............................................. 350,000
Blue sky fees and expenses..................................... 5,000
Transfer agent and registrar fees and expenses................. 15,000
Miscellaneous.................................................. 184,472
----------
Total.................................................... $1,500,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or DGCL, makes
provision for the indemnification of officers and directors in terms
sufficiently broad to indemnify officers and directors under certain
circumstances from liabilities (including reimbursement for expenses incurred)
arising under the Securities Act. Section 145 of the DGCL empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit. The DGCL provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise.
The certificate of incorporation of 1-800-FLOWERS.COM provides for
indemnification of our directors against, and absolution of, liability to
1-800-FLOWERS.COM and its stockholders to the fullest extent permitted by the
DGCL. 1-800-FLOWERS.COM maintains directors' and officers' liability insurance
covering certain liabilities that may be incurred by our directors and officers
in connection with the performance of their duties.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information regarding the issuance of the Registrant's
securities does not give effect to the recapitalization or subsequent split of
its common stock. Pursuant to the Registrant's recapitalization, each share of
class A common stock outstanding will be automatically converted into one share
of new class B common stock and each share of class B common stock will be
automatically converted into one share of new class B common stock. In May 1999,
each share of class C common stock was converted into one share of class B
common stock and cash. Pursuant
II-1
<PAGE>
to the stock split, each share of common stock will be split into 10 shares of
the same class. The Registrant has issued the following securities since May
1996:
1. On April 28, 1996, the Registrant issued 76,292 shares of class B
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
2. On June 28, 1996, the Registrant issued 8,476.97 shares of class C
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
3. From February 3, 1997 to January 18, 1999, the Registrant granted
123,750 options to purchase Class B common stock to 29 employees at exercise
prices ranging from $13.00 to $20.00.
4. On May 20, 1999, the Registrant issued 1,127,546 shares of preferred
stock for an aggregate amount of $117.4 million. The preferred stock
automatically converts into class A common stock upon the closing of the
initial public offering.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipients of securities in each of these transactions represented their
intention to acquire the securities for investment only and not with view to or
for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationship
with the Registrant, to information about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------
<C> <S>
1.1(*) Form of Underwriting Agreement.
3.1 Third Amended and Restated Certificate of Incorporation.
3.2(*) Form of Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation to be effective upon the initial public offering.
3.3(++) Amended and Restated By-laws.
4.1 Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining the rights of holders of
Common Stock of the Registrant.
4.3(++) Form of Warrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(++) Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C and
800-FLOWERS, Inc.
10.2 Investment Agreement, dated as of January 16, 1995, among Chemical Venture
Capital Associates, Teleway, Inc. and James F. McCann.
10.3 Consent and Amendment No. 1 to Investment Agreement, dated as of May 20,
1999, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and James F.
McCann.
10.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS, Inc. and
The Chase Manhattan Bank.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- -----------------------------------------------------------------------------
<C> <S>
10.5(+*) Interactive Marketing Agreement, dated as of May 1, 1997, between America
Online, Inc. and 800-FLOWERS, Inc.
10.6(+*) Interactive Marketing Agreement, dated as of January 1, 1998, between America
Online, Inc. and 800-FLOWERS, Inc.
10.7(+*) E-Commerce Merchant Agreement for The Plaza on MSN, with a term start date of
October 21, 1997, between The Microsoft Network, L.L.C. and 800-FLOWERS,
Inc., as amended.
10.8(+*) Sponsorship Agreement, dated as of May 1, 1998, between Excite, Inc. and
800-FLOWERS, Inc.
10.9(+*) Development and Hosting Agreement, dated as of June 18, 1999, between Fry
Multimedia, Inc. and 800-Gifthouse, Inc.
10.10(++) 1997 Stock Option Plan, as amended.
10.11(++) Stockholders' Agreement, dated as of April 3, 1998, among The Plow & Hearth,
Inc., 1-800-FLOWERS, Inc. and the Persons Set Forth on Schedule A thereto.
10.12 Amendments to Stockholders' Agreement, dated as of May 17, 1999, among The
Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc. and the Persons Set Forth on
Schedule A thereto.
10.13(++) Employment Agreement, effective as of January 4, 1999, between John W. Smolak
and 1-800-FLOWERS, Inc.
10.14(++) Employment Agreement, effective as of April 3, 1998, between Peter G. Rice
and 1-800-FLOWERS, Inc.
10.15(++) Employment Agreement, effective as of January 18, 1999, between Kerry W. Coin
and 1-800-FLOWERS, Inc.
10.16 Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the
persons designated as Investors on the signature pages thereto.
10.17 Stock Purchase Agreement, dated as of May 20, 1999, among 1-800-FLOWERS.COM,
Inc., James F. McCann, Christopher G. McCann and the Investors listed on
Schedule A thereto.
10.18(*) 1999 Stock Incentive Plan.
10.19 Employment Agreement, effective as of July 1, 1999, between James F. McCann
and 1-800-FLOWERS.COM, Inc.
10.20 Employment Agreement, effective as of July 1, 1999, between Christopher G.
McCann and 1-800-FLOWERS.COM, Inc.
21.1(++) Subsidiaries of the Registrant.
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG LLP.
24.1 Powers of Attorney (included in the Signature Page).
27.1(++) Financial Data Schedule for the year ended June 28, 1998.
27.2(++) Financial Data Schedule for the nine months ended March 28, 1999.
</TABLE>
- ------------------------
(*) To be filed by amendment.
(+) Confidential treatment to be requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(++) Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on this 9th day of July, 1999.
<TABLE>
<S> <C>
Dated: July 9, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the registration statement has been signed by the following persons in
the capacities indicated below:
<TABLE>
<S> <C>
Dated: July 9, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: July 9, 1999 /s/ JOHN W. SMOLAK
--------------------------------------------
John W. Smolak
Senior Vice President--Finance and
Administration (Principal Financial and
Accounting Officer)
Dated: July 9, 1999 *
--------------------------------------------
Christopher G. McCann
Director, Senior Vice President
Dated: July 9, 1999 *
--------------------------------------------
T. Guy Minetti
Director
Dated: July 9, 1999 *
--------------------------------------------
Jeffrey C. Walker
Director
Dated: July 9, 1999 *
--------------------------------------------
David Beirne
Director
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
Dated: July 9, 1999 *
--------------------------------------------
Charles R. Lax
Director
Dated: July 9, 1999 *
--------------------------------------------
Kevin J. O'Connor
Director
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ JOHN W. SMOLAK
--------------------------------
John W. Smolak
Attorney-in-fact
</TABLE>
II-6
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc.
(the "Company"), hereby severally constitute and appoint James F. McCann and
John W. Smolak, and each of them individually, with full powers of substitution
and resubstitution, our true and lawful attorneys, with full powers to them and
each of them to sign for us, in our names and in the capacities indicated below,
the registration statement on Amendment No. 1 to Form S-1 filed with the
Securities and Exchange Commission, and any and all amendments to said
registration statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities Act
of 1933, as amended, of equity securities of the Company, and to file or cause
to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or could
do in person, and hereby ratifying and confirming all that said attorneys, and
each of them, or their substitute or substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
<TABLE>
<S> <C> <C>
Dated: July 9, 1999 /s/ DAVID BEIRNE
--------------------------------------------------
David Beirne
Director
Dated: July 9, 1999 /s/ CHARLES R. LAX
--------------------------------------------------
Charles R. Lax
Director
Dated: July 9, 1999 /s/ KEVIN J. O'CONNOR
--------------------------------------------------
Kevin J. O'Connor
Director
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of 1-800-FLOWERS.COM,
Inc. and subsidiaries (the "Company") as of March 28, 1999, June 28, 1998 and
June 29, 1997, and for the nine months ended March 28, 1999 and for each of the
three years in the period ended June 28, 1998, and have issued our report
thereon dated May 20, 1999, except for the second paragraph of Note 12--Capital
Transactions as to which the date is , 1999 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Melville, New York
------------------------------------
The foregoing report is in the form that will be signed upon the completion
of the restatement of capital accounts described in the second paragraph of Note
12--Capital Transactions to the consolidated financial statements.
/s/ Ernst & Young LLP
Melville, New York
July 9, 1999
S-1
<PAGE>
1-800-FLOWERS.COM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION OF PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------- ----------- -------------- ----------------- ------------ -----------
Year ended June 28,1998:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 509,000 $ 213,000 $ 62,000(c) $ -- $ 784,000
Reserve for estimated doubtful
accounts--notes receivable......... 423,000 170,000 -- -- 593,000
----------- -------------- -------- ------------ -----------
$ 932,000 $ 383,000 $ 62,000 $ -- $1,377,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
Year ended June 29,1997:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 359,000 $ 269,000 $ -- $ (119,000)(a) $ 509,000
Reserve for estimated doubtful
accounts--notes receivable......... 185,000 284,000 -- (46,000)(a) 423,000
----------- -------------- -------- ------------ -----------
$ 544,000 $ 553,000 $ -- $ (165,000) $ 932,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
Year ended June 30, 1996:
Reserves and allowances deducted from
asset accounts:
Reserve for estimated doubtful
accounts--accounts receivable...... $ 262,000 $ 289,000 $ -- $ (192,000)(a) $ 359,000
Reserve for estimated doubtful
accounts--notes receivable......... 155,000 30,000 -- -- 185,000
Valuation allowance on deferred tax
assets............................. 150,000 -- -- (150,000)(b) --
----------- -------------- -------- ------------ -----------
$ 567,000 $ 319,000 $ -- $ (342,000) $ 544,000
----------- -------------- -------- ------------ -----------
----------- -------------- -------- ------------ -----------
</TABLE>
- ------------------------------
(a) Reduction in allowance due to write-off of accounts receivable balances.
(b) Reduction in valuation allowance for deferred tax assets.
(c) Increase in reserve due to acquisition of Plow & Hearth.
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
1.1(*) Form of Underwriting Agreement.
3.1 Third Amended and Restated Certificate of Incorporation.
3.2(*) Form of Amendment No. 1 to Third Amended and Restated Certificate of
Incorporation to be effective upon the initial public offering.
3.3(++) Amended and Restated By-laws.
4.1 Specimen class A common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate
of Incorporation and By-laws of the Registrant defining the rights of
holders of Common Stock of the Registrant.
4.3(++) Form of Warrant.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(++) Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C
and 800-FLOWERS, Inc.
10.2 Investment Agreement, dated as of January 16, 1995, among Chemical
Venture Capital Associates, Teleway, Inc. and James F. McCann.
10.3 Consent and Amendment No. 1 to Investment Agreement, dated as of May
20, 1999, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and
James F. McCann.
10.4(++) Credit Agreement, dated as of March 19,1999, between 1-800-FLOWERS,
Inc. and The Chase Manhattan Bank.
10.5(+*) Interactive Marketing Agreement, dated as of May 1, 1997, between
America Online, Inc. and 800-FLOWERS, Inc.
10.6(+*) Interactive Marketing Agreement, dated as of January 1, 1998, between
America Online, Inc. and 800-FLOWERS, Inc.
10.7(+*) E-Commerce Merchant Agreement for The Plaza on MSN, with a term start
date of October 21, 1997, between The Microsoft Network, L.L.C. and
800-FLOWERS, Inc., as amended.
10.8(+*) Sponsorship Agreement, dated as of May 1, 1998, between Excite, Inc.
and 800-FLOWERS, Inc.
10.9(+*) Development and Hosting Agreement, dated as of June 18, 1999, between
Fry Multimedia, Inc. and 800-Gifthouse, Inc.
10.10(++) 1997 Stock Option Plan, as amended.
10.11(++) Stockholders' Agreement, dated as of April 3, 1998, among The Plow &
Hearth, Inc., 1-800-FLOWERS, Inc. and the Persons Set Forth on
Schedule A thereto.
10.12 Amendments to Stockholders' Agreement, dated as of May 17, 1999, among
The Plow & Hearth, Inc., 1-800-FLOWERS.COM, Inc. and the Persons Set
Forth on Schedule A thereto.
10.13(++) Employment Agreement, effective as of January 4, 1999, between John W.
Smolak and 1-800-FLOWERS, Inc.
10.14(++) Employment Agreement, effective as of April 3, 1998, between Peter G.
Rice and 1-800-FLOWERS, Inc.
10.15(++) Employment Agreement, effective as of January 18, 1999, between Kerry
W. Coin and 1-800-FLOWERS, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------- -----------
<C> <S> <C>
10.16 Investors' Rights Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc. James F. McCann, Christopher G. McCann and the
persons designated as Investors on the signature pages thereto.
10.17 Stock Purchase Agreement, dated as of May 20, 1999, among
1-800-FLOWERS.COM, Inc., James F. McCann, Christopher G. McCann and
the Investors listed on Schedule A thereto.
10.18(*) 1999 Stock Incentive Plan.
10.19 Employment Agreement, effective as of July 1, 1999, between James F.
McCann and 1-800-FLOWERS.COM, Inc.
10.20 Employment Agreement, effective as of July 1, 1999, between
Christopher G. McCann and 1-800-FLOWERS.COM, Inc.
21.1(++) Subsidiaries of the Registrant.
23.1 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG LLP.
24.1 Powers of Attorney (included in the Signature Page).
27.1(++) Financial Data Schedule for the year ended June 28, 1998.
27.2(++) Financial Data Schedule for the nine months ended March 28, 1999.
</TABLE>
- ------------------------
(*) To be filed by amendment.
(+) Confidential treatment to be requested for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(++) Previously filed.
<PAGE>
EXHIBIT 3.1
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
1-800-FLOWERS.COM, INC.
(formerly known as Teleway, Inc.)
(Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware)
1-800-FLOWERS.COM, Inc. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "General Corporation Law"),
DOES HEREBY CERTIFY:
FIRST: That the Corporation was originally incorporated in
Delaware, and the date of its filing of its original Certificate of
Incorporation with the Secretary of State of Delaware was June 30, 1992. The
Certificate of Incorporation was amended and restated on January 12, 1995, and
was filed with the Secretary of State of the State of Delaware on January 13,
1995. A Certificate of Amendment to the Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
June 16, 1995. A Certificate of Amendment to the Amended and Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on April 14, 1999. A Second Amended and Restated Certificate of
Incorporation was filed with the Secretary of State of the State of Delaware on
May 20, 1999.
SECOND: That the Board of Directors duly adopted resolutions
proposing to amend and restate the Amended and Restated Certificate of
Incorporation of the Corporation, declaring said amendment and restatement to be
advisable and in the best interests of the Corporation and its stockholders, and
authorizing the appropriate officers of the Corporation to solicit the written
consent of the requisite stockholders of the currently issued and outstanding
Class A Common Stock, $0.01 par value, all in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware;
THIRD: That the resolution setting forth the proposed
amendment and restatement is as follows:
RESOLVED, that the Amended and Restated of Certificate of
Incorporation of the Corporation be amended and restated in
its entirety as follows:
<PAGE>
ARTICLE I
NAME
The name of the Corporation is 1-800-FLOWERS.COM, Inc.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the
State of Delaware is 15 East North Street in the City of Dover, State of
Delaware 19901, County of Kent. The name of its registered agent at such address
is Incorporating Services, Ltd.
ARTICLE III
POWERS/TERM
The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be organized under the General
Corporation Law. The Corporation is to have perpetual existence.
ARTICLE IV
CAPITAL STOCK
A. CLASSES OF STOCK.
The total number of shares of stock which the Corporation shall have authority
to issue is four hundred and one million two hundred thousand (401,200,000),
consisting of one million two hundred thousand shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock"), and four hundred million
(400,000,000) shares of Common Stock, par value $0.01 per share (the "Common
Stock"). Of the Preferred Stock, seventy two thousand four hundred fifty four
(72,454) shares shall be undesignated and one million one hundred twenty seven
thousand five hundred forty six (1,127,546) shares shall be classified as Series
A Preferred Stock (the "Series A Preferred Stock"). Of the Common Stock, two
hundred million (200,000,000) shares shall be classified as Class A Common Stock
(the "Class A Common Stock"), and two hundred million (200,000,000) shares shall
be classified as Class B Common Stock (the "Class B Common Stock"). As shares of
Class B Common Stock are converted into shares of Class A Common Stock as
described herein, the number of shares classified as Class B Common Stock shall
be reduced and the number of shares classified as Class A Common Stock shall be
increased on a one-for-one basis.
B. PREFERRED STOCK.
<PAGE>
1. UNDESIGNATED PREFERRED STOCK. The Preferred Stock may be issued from
time to time in one or more series. The Board of Directors is hereby
authorized to provide for the issuance of shares of Preferred Stock
in one or more series and, by filing a certificate pursuant to the
applicable law of the State of Delaware (the "Preferred Stock
Designation"), to establish from time to time the number of shares
to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and
the qualifications, limitations and restrictions thereof. The
authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the
following:
(a) The designation of the series, which may be by distinguishing
number, letter or title.
(b) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of shares thereof
then outstanding).
(c) The amounts payable on, and the preferences, if any, of shares
of the series in respect of dividends, and whether such dividends, if any, shall
be cumulative or noncumulative.
(d) Dates at which dividends, if any, shall be payable.
(e) The redemption rights and price or prices, if any, for shares of
the series.
(f) The terms and amount of any sinking funds provided for the
purchase or redemption of shares of the series.
(g) The amounts payable on, and the preferences, if any, of shares
of the series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible into or
exchangeable for shares of any other class or series, or any other security, of
the Corporation or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or exchange price
or prices or rate or rates, any adjustments thereof, the date or dates at which
such shares shall be convertible or exchangeable and all other terms and
conditions upon which such conversion or change may be made.
(i) Restrictions on the issuance of shares of the same series or of
any other class or series.
(j) The voting rights, if any, of the holders of shares of the
series.
2. SERIES A PREFERRED STOCK
(a) Dividends. The holders of Series A Preferred Stock shall be
entitled to receive dividends on their shares of Series A Preferred Stock when
and as declared by the Board of
<PAGE>
Directors, out of any assets of the Corporation legally available therefor. In
addition, in the event that the Corporation shall at any time pay a dividend
(other than a dividend payable solely in shares of Common Stock or other
securities or rights convertible into, or entitling the holder thereof to
receive, directly or indirectly, additional shares of Common Stock) on the
Common Stock, it shall, at the same time, pay to the holders of shares of Series
A Preferred Stock (assuming full conversion of the Series A Preferred Stock in
accordance with sub-paragraph (d) herein) a dividend equal to such dividend on
the Common Stock. Dividends shall be non-cumulative.
(b) Liquidation Preference.
(i) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders
of Series A Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the
assets of this Corporation to the holders of Common Stock or
any other class or series of stock ranking in liquidation
junior to the Series A Preferred Stock (such Common Stock and
other stock being referred to as "Junior Stock"), by reason of
their ownership thereof, an amount per share equal to (i)
$104.26 for each outstanding share of Series A Preferred Stock
(as adjusted for stock splits, combinations, reclassifications
and the like), and (ii) an amount equal to all declared but
unpaid dividends on the Series A Preferred Stock. If upon the
occurrence of such event, the assets and funds thus
distributed among the holders of the Series A Preferred Stock
shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then the entire
assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of
the Series A Preferred Stock, in proportion to the
preferential amount each such holder is otherwise entitled to
receive and no liquidation payments shall be made to the
holders of Junior Stock.
(ii) After all of the distributions described in subsection (a)
above have been paid, the remaining assets of the Corporation
available for distribution to stockholders shall be
distributed among the holders of Junior Stock pro rata based
on the number of shares of Common Stock held by each. Shares
of Series A Preferred Stock shall not be entitled to be
converted into shares of Common Stock in order to participate
in any distribution, or series of distributions, as shares of
Common Stock, without first foregoing participation in the
distribution, or series of distributions, as shares of Series
A Preferred Stock.
(iii) For purposes of this sub-paragraph (b), a liquidation,
dissolution or winding up of the Corporation shall be deemed
to be occasioned by, or to include (unless the holders of at
least a majority of the Series A Preferred Stock then
outstanding shall determine otherwise), (A) the acquisition of
the Corporation by another entity by means of any transaction
or series of
<PAGE>
related transactions (including, without limitation, any
reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding
voting power of the Corporation; or (B) a sale of all or
substantially all of the assets of the Corporation.
(c) Redemption. The Corporation shall not have the right to redeem
the Series A Preferred Stock.
(d) Conversion.
(i) Each share of Series A Preferred Stock shall be convertible,
at the option of the holder thereof, into one (1) fully paid
and non-assessable share of Class A Common Stock, subject to
adjustment pursuant to sub-paragraph (e). In order for a
holder of Series A Preferred Stock to convert such shares into
shares of Class A Common Stock, such holder shall surrender
the certificate or certificates representing such shares of
Series A Preferred Stock at the office of the Corporation's
transfer agent, together with written notice that such holder
elects to convert all or any number of the shares of the
Series A Preferred Stock represented by such certificate or
certificates. Such notice shall state such holder's name or
the names of the nominees in which such holder wishes the
certificate or certificates for shares of Class A Common Stock
to be issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by
a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the
registered holder or its attorney duly authorized in writing.
The date of receipt of such certificates and notice by the
transfer agent is referred to herein as the "Notice Date." The
Corporation shall, as soon as practicable after the Notice
Date, issue and deliver to such holder, or to its nominee, at
such holder's address as shown in the records of the
Corporation, a certificate or certificates for the number of
whole shares of Class A Common Stock issuable upon such
conversion in accordance with the provisions hereof, together
with cash in lieu of fractional shares. If less than all of
the shares of Series A Preferred Stock represented by a stock
certificate are converted into shares of Class A Common Stock,
the Corporation shall issue a new stock certificate in the
amount of the shares not so converted.
(ii) Each share of Series A Preferred Stock shall automatically,
without any action on behalf of the holder thereof, be
converted into one fully paid and non-assessable share of
Class A Common Stock, subject to adjustment pursuant to
sub-paragraph (e), upon the earlier of (A) the closing of the
Corporation's sale of shares of Series A Common Stock in a
firm commitment underwritten public offering pursuant to an
effective registration statement under the Securities Act of
1993, as amended (the "Securities Act"), in which the
aggregate gross proceeds to the
<PAGE>
Corporation (prior to deduction of offering expenses but after
deduction of underwriting discounts and commissions) are at
least $25,000,000 (a "Qualified Public Offering"), and (B)
upon the approval (by vote or written consent, as provided by
law) of the holders of at least sixty percent (60%) of the
then outstanding shares of Series A Preferred Stock, the date
specified by such holders. The Corporation shall provide each
holder of Series A Preferred Stock at least ten (10) days
written notice prior to the automatic conversion provided
herein.
(iii) At the time of any conversion of Series A Preferred Stock to
Class A Common Stock, whether at such holder's option or
automatically, all declared but unpaid dividends on each and
all such shares of Series A Preferred Stock being converted
shall be converted to that number of shares of Class A Common
Stock determined by dividing the amount of such dividends by
the fair market value of the Class A Common Stock at the time
of conversion. The fair market value of the Class A Common
Stock shall be determined as follows:
(A) If traded on a securities exchange or through the
NASDAQ National Market, the value shall be deemed to be the
average of the closing prices of the securities on such
exchange over the thirty-day period ending three (3) days
prior to the closing;
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices
(whichever is applicable) over the thirty-day period ending
three (3) days prior to the closing; and
(C) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by
the Corporation and the holders of at least a majority of the
voting power of all then outstanding shares of Series A
Preferred Stock.
(iv) No fractional shares of Class A Common Stock shall be issued
upon conversion of shares of Series A Preferred Stock and any
fractional share to which the holder would otherwise be
entitled shall be paid in cash in an amount equal to such
fractional share multiplied by the fair market value of the
Class A Common Stock at the time of conversion. The fair
market value of the Class A Common Stock shall be determined
as set forth above.
(v) All shares of Series A Preferred Stock which shall have been
surrendered for conversion or automatically converted as
herein provided shall no longer be deemed to be outstanding,
and all rights with respect to such shares shall immediately
cease and terminate on the date on which such shares are
converted (the "Conversion Date"), except only the right of
the holders thereof to receive shares of Class A Common Stock
in exchange therefor
<PAGE>
and the payment of any declared and unpaid dividends thereon.
On the Conversion Date, the shares of Class A Common Stock
issuable upon such conversion shall be deemed to be
outstanding, and the holder thereof shall be entitled to
exercise and enjoy all rights with respect to such shares of
Class A Common Stock. All shares of Series A Preferred Stock
so converted shall, from and after the Conversion Date, resume
their status as Undesignated Preferred Stock and may be
reissued by the Corporation in one or more series with the
designation, powers, preferences and rights as determined by
the Corporation in accordance with this Article IV.
(vi) The Corporation shall at all times have reserved for issuance
that aggregate number of shares of Class A Common Stock into
which the shares of Series A Preferred Stock are convertible.
(e) Antidilution. If the Corporation shall effect a subdivision or
reclassification of the outstanding Common Stock, the conversion ratio for the
Series A Preferred Stock as set forth in sub-paragraph (d) then in effect
immediately before such subdivision or reclassification shall be proportionately
adjusted so that the number of shares of Class A Common Stock issuable on
conversion of each share of Series A Preferred Stock shall represent the same
interest in the Corporation prior to such subdivision or recapitalization. If
the Corporation shall combine the outstanding shares of Class A Common Stock,
the conversion ratio then in effect immediately before the combination shall be
likewise proportionately adjusted. If the Corporation shall make or issue a
dividend or other distribution payable in securities, then and in each such
event provision shall be made so that the holders of shares of the Series A
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Class A Common Stock receivable thereupon, the amount of securities
that they would have received had their Series A Preferred Stock been converted
into Class A Common Stock on the date of such event and had they thereafter
during the period from the date of such event to and including the Conversion
Date, retained such securities receivable by them as aforesaid during such
period giving effect to all adjustments called for during such period under this
paragraph (e), with respect to the rights of the holders of the Series A
Preferred Stock. The Corporation shall provide each holder of Series A Preferred
Stock at least ten (10) days written notice prior to the expected date of
adjustment as provided herein.
(f) Voting. The holder of each share of Series A Preferred Stock
shall have the right to one vote for each share of Class A Common Stock into
which such Series A Preferred Stock could then be converted, and with respect to
such vote, such holder shall have full voting rights and powers equal to the
voting rights and powers of the holders of Class A Common Stock, and shall be
entitled, notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the By-laws of this Corporation, and shall be
entitled to vote, together with holders of Common Stock as a single class, with
respect to any question upon which holders of Common Stock have the right to
vote. Fractional votes shall not, however, be permitted and any fractional
voting rights available on an as-converted basis (after aggregating all shares
into which shares of Series A Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
<PAGE>
3. Covenants.
(a) So long as at least 75,000 shares of Series A Preferred Stock
remain outstanding the Corporation shall not, without first obtaining the
approval of (by vote or written consent, as required by law) the holders of at
least eighty-five percent (85%) of the outstanding shares of Series A Preferred
Stock, (i) authorize or issue Preferred Stock with dividends or liquidation
preference rights more favorable than those of the Series A Preferred Stock or
(ii) take any action if such action materially and adversely affects the rights,
including action by way of amendment of the Certificate of Incorporation, bylaws
or by way of merger or consolidation, of the Series A Preferred Stock as of the
date hereof.
(b) So long as at least 75,000 shares of Series A Preferred Stock
remain outstanding, the Corporation shall not redeem, repurchase, retire or
otherwise acquire any shares of equity securities of the Corporation except
pursuant to (x) this Certificate of Incorporation or (y) any other agreement,
approved in advance by the Board or the Compensation Committee of the Board of
Directors, for the repurchase of shares from an employee upon termination of
employment.
C. COMMON STOCK.
1. RECLASSIFICATION. Effective at the filing with the Secretary of
State of the State of Delaware of this Third Amended and Restated
Certificate of Incorporation, and without further action on the part
of the holders of the class A common stock outstanding immediately
prior thereto (the "Outstanding Class A"), the class B common stock
outstanding immediately prior thereto (the "Outstanding Class B"
and, together with the Outstanding Class A, the "Outstanding Common
Stock"), each share of Outstanding Class A shall immediately and
automatically convert into one share of Class B Common Stock and
each share of Outstanding Class B shall automatically convert into
one share of Class B Common Stock. Effective immediately after the
filing of this Third Amended and Restated Certificate of
Incorporation, each certificate representing a share of Outstanding
Class A or Outstanding Class B shall be deemed to represent a share
of Class B Common Stock.
2. VOTING. Except as otherwise required by law, at any meetings at
which stockholders are entitled to vote, each share of Class A
Common Stock shall entitle the holder thereof to one vote per share
and each share of Class B Common Stock shall entitle the holder
thereof to 10 votes per share. The holders of Class A Common Stock,
Class B Common Stock and Series A Preferred Stock shall vote
together as a single class. For purposes herein, "Total Voting
Power" shall mean the total number of votes attributable to all
shares of capital stock of the Corporation outstanding and entitled
to vote on any particular matter.
3. RIGHTS AND PREFERENCES OF COMMON STOCK. Except as expressly provided
in this Article IV, Class A Common Stock and Class B Common Stock
shall have the same rights and privileges and shall rank equally,
share ratably and be identical in all
<PAGE>
respects as to all matters. The holders of Class A Common Stock and
Class B Common Stock shall have the following rights and
preferences, subject to the rights and preferences of holders of
Preferred Stock.
(a) Dividends. Holders of Class A Common Stock and Class B Common
Stock shall be entitled to receive such dividends, payable in cash or otherwise,
as may be declared thereon by the Board of Directors from time to time out of
assets or funds of the Corporation that are legally available therefor;
provided, however, that the Board of Directors shall declare no dividend, and no
dividend shall be paid, with respect to any outstanding share of Class A Common
Stock and Class B Common Stock, whether paid in cash or property (including,
without limitation, shares of Class A Common Stock paid on or with respect to
shares of Class A Common Stock or shares of Class B Common Stock paid on or with
respect to shares of Class B Common Stock (collectively, "Stock Dividends")),
unless, simultaneously, the same dividend (in the case of Stock Dividends, stock
of the class on or with respect to which the dividend is paid in the same
percentage, relative to the total number of shares of such class issued and
outstanding immediately prior to the payment of such dividend, as the Stock
Dividend on or with respect to the other class bears to the number of shares
issued and outstanding immediately prior to the payment of such dividend) is
paid with respect to each share of Class A Common Stock and Class B Common
Stock; PROVIDED FURTHER, that no dividend shall be declared or paid on Class A
Common Stock or Class B Common Stock if declared dividends on the Series A
Preferred Stock have not been paid. Stock Dividends with respect to Class A
Common Stock may only be paid with shares of Class A Common Stock and Stock
Dividends with respect to Class B Common Stock may only be paid with shares of
Class B Common Stock.
(b) Subdivisions and Combinations of Shares. If the Corporation in
any manner subdivides or combines the outstanding shares of one class of Common
Stock, the outstanding shares of the other class of Common Stock will be
likewise subdivided or combined.
(c) Liquidation or Dissolution. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, holders
of Class A Common Stock and holders of Class B Common Stock shall receive an
equal per share distribution of any assets remaining after payment or provision
for liabilities and the liquidation preference on Preferred Stock, if any.
4. CONVERSION OF CLASS B COMMON STOCK.
(a) Each outstanding share of Class B Common Stock, at the option of
the holder thereof, may be converted at any time into one (1) share of Class A
Common Stock. Any such conversion shall be effected by the presentation and
surrender of the certificates that represent the shares of Class B Common Stock
to be converted, at the principal executive offices of the Corporation or at
such other place as may from time to time be designated by the Corporation, in
such form and accompanied by all transfer taxes (or proof of payment thereof),
if any, as shall be required for such transfer, and upon such surrender, the
holder of such shares shall be entitled to receive in exchange therefor
certificates for fully paid and nonassessable shares of Class A Common Stock at
the rate aforesaid, and such holder shall be registered as the holder of such
<PAGE>
shares of Class A Common Stock.
(b) In addition to and notwithstanding the foregoing, upon any
Transfer of shares of Class B Common Stock, such shares shall be converted
automatically into a like number of shares of Class A Common Stock. Immediately
upon the occurrence of a Transfer, and without any action on the part of any
stockholder whose shares are subject to automatic conversion hereunder, the
Corporation or any other person or entity, the relevant shares of Class B Common
Stock shall be deemed converted into the same number of shares of Class A Common
Stock. From and after the time of the Transfer, any such certificates for Class
B Common Stock shall no longer represent shares of Class B Common Stock but
instead shall represent the sum of the number of shares of Class A Common Stock
and the right to have registered in the name of the transferee of such stock the
shares of Class A Common Stock issuable to such transferee as a result of such
conversion. The Class A Common Stock issuable upon any such conversion shall be
so registered and the certificates with respect to such stock shall be issued by
the Corporation upon the surrender of the certificates that represent the Class
B Common Stock immediately prior to the Transfer, duly endorsed to the
Corporation or in blank or accompanied by proper instruments of transfer to the
Corporation or in blank (such endorsements or instruments of transfer to be in
form satisfactory to the Corporation).
(c) As used in this section 4, the following terms have the
following meanings:
(i) "Affiliate" shall mean and be limited to the following
Persons: (1) with respect to any Original Shareholder who is a
natural person, that Original Shareholder's spouse, siblings,
children (including adopted children), grandchildren or
parents or parents; (2) with respect to any Original
Shareholder which is a limited partnership, (a) any Person
that, at the time the Original Shareholder first obtained
shares of Class B Common Stock, was the general partner of
such Original Shareholder, or (b) another limited partnership
which has a general partner, the control of which general
partner is held, directly or indirectly, by five or fewer
natural Persons, provided such natural Persons had control of
the general partner of such Original Shareholder at the time
such Original Shareholder first obtained shares of Class B
Common Stock; (3) a trust of which such Original Shareholder
who is a natural person is the trustee for the benefit of his
spouse, siblings, children (including adopted children),
grandchildren or parents or parents, or (4) the heirs,
executors, administrators, guardians or conservators of the
Original Shareholder who is a natural person.
(ii) "Control" shall mean ownership of more than 50% of the equity
interest in, and more than 50% of the voting power on all
matters of, the sole general partner.
(iii) "Original Shareholder" shall mean each Person to whom the
Corporation originally issues shares of Class B Common Stock
at the initial issuance
<PAGE>
thereof.
(iv) "Person" shall mean an individual, a partnership, a
corporation, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a
governmental entity or any department, agency or political
subdivision thereof.
(v) "Transfer" shall mean the sale, assignment, transfer, gift,
pledge or hypothecation (unless such pledge or hypothecation
is with full recourse against the transferor) or other
disposition, whether voluntary or involuntary, of Class B
Common Stock to any person other than an Affiliate of the
Original Shareholder which initially held the shares being
transferred.
5. RESTRICTIONS ON ISSUANCE. The Corporation shall not issue or sell
any shares of Class B Common Stock or any securities (including, without
limitation, any rights, options, warrants or other securities) convertible,
exchangeable or exercisable into shares of Class B Common Stock to any person.
Notwithstanding the foregoing, the Company may issue and sell shares of Class B
Common Stock (1) pursuant to an employee stock option plan, stock purchase plan
or similar employee incentive plan in effect at the time of a Qualified Public
Offering, and (2) in respect of stock splits, stock dividends, subdivisions,
reclassifications or similar transactions.
6. REGISTERED OWNER. The Corporation shall be entitled to treat the
person in whose name any share of its stock is registered as the owner thereof
for all purposes and shall not be bound to recognize any equitable or other
claim to, or interest in, such share on the part of any other person whether or
not the Corporation shall have notice thereof, except as expressly provided by
applicable law.
ARTICLE V
DIRECTORS
1. NUMBER.
The number of directors of the Corporation shall be such number, not
less than four (4) nor more than fifteen (15), as shall be set forth from time
to time in the bylaws, provided that no action shall be taken to decrease or
increase the number of directors without the affirmative vote of at least 66.67%
of the Total Voting Power. Vacancies in the Board of Directors of the
Corporation, however caused, and newly created directorships shall be filled by
a vote of a majority of the directors then in office, whether or not a quorum,
and any director so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which the director has
been chosen expires and when the director's successor is elected and qualified.
2. CLASSIFIED BOARD OF DIRECTORS.
<PAGE>
The Board of Directors shall be and is divided into three classes:
Class I, Class II and Class III, each of which shall be as nearly equal in
number as possible. Each director shall serve for a term ending on the date of
the third annual meeting of stockholders following the annual meeting at which
the director was elected; provided, however, that each initial director in Class
I shall hold office until the annual meeting of stockholders in 2000; each
initial director in Class II shall hold office until the annual meeting of
stockholders in 2001; and each initial director in Class III shall hold office
until the annual meeting of stockholders in 2002. Notwithstanding the foregoing
provisions of this Article V, each director shall serve until his successor is
duly elected and qualified or until his death, resignation or removal.
Subject to the provisions of this Article V, should the number of
directors not be equally divisible by three, the excess director or directors
shall be assigned to Classes I or II as follows: (i) if there shall be an excess
of one directorship over a number equally divisible by three, such extra
directorship shall be classified in Class I; and (ii) if there shall be an
excess of two directorships over a number divisible by three, one shall be
classified in Class I and the other in Class II.
In the event of any increase or decrease in the authorized number of
directors, (1) each director than serving as such shall nevertheless continue as
a director of the class of which he is a member until the expiration of his
current term, or his earlier resignation, removal from office or death, and (2)
the newly created or eliminated directorship resulting from such increase or
decrease shall be appointed by the Board of Directors among the three classes of
directors so as to maintain such classes as nearly equal as possible.
3. REMOVAL OF DIRECTORS.
Notwithstanding any other provisions of this Third Amended and
Restated Certificate of Incorporation or the bylaws of the Corporation, any
director or the entire Board of Directors of the Corporation may be removed, at
any time, but only for cause and only by the affirmative vote of not less than
66.67% of the Total Voting Power.
ARTICLE VI
STOCKHOLDER MEETINGS
Meetings of stockholders may be held within or without the State of
Delaware, as the bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the bylaws of the Corporation.
ARTICLE VII
LIMITATION OF DIRECTORS' LIABILITY
A director of the Corporation shall not be liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent
<PAGE>
such exemption from liability or limitation thereof is not permitted under the
General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended. Any amendment, modification or repeal of the foregoing
sentence shall not adversely affect any right or protection of a director of the
Corporation hereunder in respect of any act or omission occurring prior to the
time of such amendment, modification or repeal. If the General Corporation Law
of the State of Delaware is amended after approval by the stockholders of this
Article VII to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the General Corporation
Law of the State of Delaware, as so amended.
ARTICLE VIII
INDEMNIFICATION
A. RIGHT TO INDEMNIFICATION.
The Corporation shall indemnify and hold harmless, to the fullest
extent permitted by applicable law as it presently exists or may hereafter be
amended, any person (a "Covered Person") who was or is made or is threatened to
be made a party or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that he is or was or has agreed to become, or a person for
whom he is the legal representative, is or was or has agreed to become a
director or officer of the Corporation or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust, enterprise or nonprofit entity, including service with respect
to employee benefit plans, against all liability and loss suffered and expenses
(including attorneys' fees) reasonably incurred by such Covered Person.
Notwithstanding the preceding sentence, except as otherwise provided in this
Article VIII, the Corporation shall be required to indemnify a Covered Person in
connection with a proceeding (or part thereof) commenced by such Covered Person
only if the commencement of such proceeding (or part thereof) by the Covered
Person was authorized by the Board of Directors of the Corporation. The rights
to indemnification provided herein shall continue with respect to a Covered
Person notwithstanding that such Covered Person ceases to be a director, officer
or other employee or agent of the Corporation.
B. PREPAYMENT OF EXPENSES.
The Corporation shall pay the expenses (including attorneys' fees)
incurred by a Covered Person in defending any proceeding in advance of its final
disposition, PROVIDED, HOWEVER, that, to the extent required by law, such
payment of expenses in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by the Covered Person to repay all
amounts advanced if it should be ultimately determined that the Covered Person
is not entitled to be indemnified under this Article VIII or otherwise.
C. CLAIMS.
If a claim for indemnification or advancement of expenses under this
Article VIII
<PAGE>
is not paid in full within thirty days after a written claim therefor by the
Covered Person has been received by the Corporation, the Covered Person may file
suit to recover the unpaid amount of such claim and, if successful in whole or
in part, shall be entitled to be paid the expense of prosecuting such claim. In
any such action the Corporation shall have the burden of proving that the
Covered Person is not entitled to the requested indemnification or advancement
of expenses under applicable law.
D. NONEXCLUSIVITY OF RIGHTS.
The rights conferred on any Covered Person by this Article VIII
shall not be exclusive of any other rights which such Covered Person may have or
hereafter acquire under any statute, provision of the certificate of
incorporation, the bylaws, agreement, vote of stockholders or disinterested
directors or otherwise. The Corporation may, to the extent authorized from time
to time by its Board of Directors, grant indemnification rights to other
employees or agents of the Corporation or other persons serving the Corporation
and such rights may be equivalent to, or greater or less than, those provided
herein.
E. OTHER SOURCES.
The Corporation's obligation, if any, to indemnify or to advance
expenses to any Covered person who was or is serving at its request as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any amount
such Covered Person may collect as indemnification or advancement of expenses
from such other corporation, partnership, joint venture, trust, enterprise or
non-profit enterprise. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against and incurred by such person in any such capacity, or arising
out of such person's status as such.
F. AMENDMENT OR REPEAL.
Any repeal or modification of the foregoing provisions of this
Article VIII shall not adversely affect any right or protection hereunder of any
Covered Person in respect of any act or omission occurring prior to the time of
such repeal or modification.
G. OTHER INDEMNIFICATION AND PREPAYMENT OF EXPENSES.
This Article VIII shall not limit the right to the Corporation to
the extent and in the manner permitted by law, to indemnify and to advance
expenses to persons other than Covered Persons when and as authorized by
appropriate corporate action.
ARTICLE IX
AMENDMENT OF BYLAWS
<PAGE>
In furtherance of and not in limitation of powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
adopt, repeal, alter, amend and rescind the bylaws of the Corporation by vote of
66.67% of the Board of Directors.
ARTICLE X
AMENDMENT OF CERTIFICATE OF INCORPORATION
Subject to Section B.3 of Article IV, the Corporation reserves the
right to amend, alter, change or repeal any provision contained in this Second
Amended and Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute and this Second Amended and Restated Certificate
of Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation. Notwithstanding the foregoing, the provisions set
forth in Articles V, VII, VIII, IX and this Article X may not be repealed,
altered, amended or rescinded in any respect unless the same is approved by the
affirmative vote of not less than 66.67% of Total Voting Power.
* * *
FOURTH: That said amendments were duly adopted in accordance with
the provisions of Sections 242 and 245 of the General Corporation Law.
<PAGE>
IN WITNESS WHEREOF, this Third Amended and Restated Certificate of
Incorporation has been signed by the Chief Executive Officer of the Corporation
this 7 day of July, 1999.
/s/ James F. McCann
______________________________
Name: James F. McCann
Title: Chief Executive Officer
<PAGE>
Exhibit 4.1
- --------------------------------------------------------------------------------
FLA
1-800-flowers.com
1-800-FLOWERS.COM, INC.
CLASS A COMMON STOCK
INCORPORATED UNDER THE LAWS CUSIP 68243Q 10 6
OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
Is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK, PAR
VALUE $0.01 PER SHARE, OF
1-800-FLOWERS.COM, INC.
- --------------------------------------------------------------------------------
CERTIFIED STOCK
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar. WITNESS the facsimile seal of the
Corporation and the facsimile signatures of its duly authorized officers.
Dated:
/s/ [ILLEGIBLE] /s/ [ILLEGIBLE]
SENIOR VICE PRESIDENT AND SECRETARY CHAIRMAN AND CHIEF EXECUTIVE OFFICER
1-800-FLOWERS.COM, Inc.
CORPORATE
SEAL
1992
DELAWARE
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Service, L.L.C.
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR:
MARY TARTAGLIA: 215-830-2154
680 BLAIR MILL ROAD PROOF OF JUNE 22, 1999
HORSHAM, PA 19044 1-800-FLOWERS.com, inc.
(215)657-3480 H 62256face 1
- --------------------------------------------------------------------------------
SALES: L.TOGLIA: 212-593-5700 OPERATOR: hj/JW/JW
- --------------------------------------------------------------------------------
/NET/BANKNOTE/HOME 12/Flowers 1-800 62256 Rev. 3.
- --------------------------------------------------------------------------------
<PAGE>
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - __________ Custodian ___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated_________________________
-------------------------------------
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATSOEVER AND
MUST BE GUARANTEED BY AN
ELIGIBLE INSTITUTION (AS
DEFINED IN RULE 1741-15
UNDER THE SECURITIES
EXCHANGE ACT OF 1934) WHICH
MAY INCLUDE A COMMERCIAL BANK
TRUST COMPANY OR SAVINGS
ASSOCIATION CREDIT UNION
OF THE AMERICAN STOCK
EXCHANGE, NEW YORK STOCK
EXCHANGE, PACIFIC STOCK
EXCHANGE OR MIDWEST STOCK
EXCHANGE
- --------------------------------------------------------------------------------
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR:
MARY TARTAGLIA: 215-830-2154
680 BLAIR MILL ROAD PROOF OF JUNE 16, 1999
HORSHAM, PA 19044 1-800-FLOWERS.com inc.
(215) 657-3480 H 62256BK
- --------------------------------------------------------------------------------
SALES: L.TOGLIA:212-593-5700 OPERATOR:
- --------------------------------------------------------------------------------
/NET/BANKNOTE/HOME 12/Flowers 1-800-62256 NEW
- --------------------------------------------------------------------------------
<PAGE>
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
1633 Broadway, 47th Floor
New York
Telephone: (212) 581-1600 New York 10019
Facsimile: (212) 586-7878 www.brobeck.com
July 9, 1999
1-800-FLOWERS.COM, Inc.
1600 Stewart Avenue
Westbury, NY 11590
Dear Ladies and Gentlemen:
We have assisted in the preparation and filing by 1-800-FLOWERS.COM, Inc.
(the "Company"), of a Registration Statement on Form S-1, as amended through
July 9, 1999 (the "Registration Statement"), with the Securities and Exchange
Commission, relating to the sale of up to 6,900,000 shares (the "Shares") of
Class A common stock, $.01 par value (the "Common Stock"), of the Company. A
form of underwriting agreement (the "Underwriting Agreement") is filed as an
exhibit to the Registration Statement.
We have examined such records and documents and have made such examination
of laws as we considered necessary to form a basis for the opinion set forth
herein. In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity with the originals of all documents submitted to us as copies
thereof.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when sold and paid for in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
non-assessable.
We hereby consent to the use of our name in the Registration Statement
under the caption "Legal Matters" in the related prospectus and consent to the
filing of this opinion as an exhibit thereto.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit 10.2
INVESTMENT AGREEMENT
among
CHEMICAL VENTURE CAPITAL ASSOCIATES,
A CALIFORNIA LIMITED PARTNERSHIP,
TELEWAY, INC.
and
JAMES F. McCANN
Dated as of January 16, 1995
<PAGE>
INVESTMENT AGREEMENT
INVESTMENT AGREEMENT, dated as of January 16, 1995, among
CHEMICAL VENTURE CAPITAL ASSOCIATES, a California limited partnership ("CVCA"),
TELEWAY, INC., a Delaware corporation (the "Company"), and JAMES F.
McCANN ("McCann").
WITNESSETH
WHEREAS, upon the terms and conditions set forth herein, CVCA
desires to purchase, and the Company desires to issue and sell, a number of
"Units" of the Company's securities, which, subject to increase upon issuance of
the Additional CVCA Equity (as defined below), include a total of (i) up to
52,658 shares of the Class C Common Stock, par value $.01 per share (the "Class
C Common Stock"), of the Company and (ii) Warrants (as defined below) to acquire
up to 473,922 shares (subject to adjustment) of the Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), of the Company; and
WHEREAS, in connection with the above-described purchase and
sale of securities, McCann has agreed to make certain representations to CVCA
and to enter into certain agreements, as all more fully set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and in reliance upon the representations and
warranties contained herein, the parties hereto do hereby agree as follows:
1. DEFINITIONS. The following terms when used in this
Agreement shall have the following meanings, the definitions to be applicable to
both the singular and plural forms of each term defined to the extent that such
forms of such terms are used in this Agreement:
"Acceptance Notice" has the meaning set forth in Section 7.1.
"Additional CVCA Equity" means, depending on the time of
issuance to CVCA in accordance with this Agreement, the number of Class C Shares
and Warrant Shares (or a Warrant for such Warrant Shares), set forth below:
<TABLE>
<CAPTION>
Time of Number of Number of
Issuance Class C Shares Warrant Shares
-------- -------------- --------------
<S> <C> <C>
Prior to second
Investment 4,909 44,185
From and after second
Investment and prior to third investment 4,537 40,829
<PAGE>
From and after third
Investment and prior 3,315 29,839
to fourth investment
From and after fourth
Investment and prior to fifth investment 2,820 25,380
From and after fifth Investment 2,742 24,678
</TABLE>
The number of shares set forth in this definition shall be adjusted to reflect
any subdivisions, combinations or reclassifications of the Class C Common Stock
and/or Class B Common Stock following the date hereof.
"Adjusted Call Price" means the Call Price for each Warrant
and Warrant Share using as the Appraised Value for purposes of the determination
thereof the per share price to the public in the public offering in connection
with which the determination of the Adjusting Payment is being made.
"Adjusting Payment" means a cash payment with respect to each
Warrant and Warrant Share acquired upon exercise of the right set forth in
Section 7.5 in an amount equal to the excess of the Adjusted Call Price over the
Call Price.
"affiliate" means, with respect to any person, at the time in
question, any other person controlling, controlled by or under common control
with such person. Neither AFS Holdings Corp. nor any of its subsidiaries shall
be an "affiliate" of the Company or McCann for purposes of this Agreement.
"Agreement" means this Investment Agreement, including the
Exhibits and Schedules hereto, as amended, supplemented or otherwise modified
from time to time.
"Annual Interest Coverage Ratio" means, at the time of
determination thereof, the ratio of (a) EBITDA for the most recently completed
12 month-period to (b) Pro Forma Interest Expense for the Pro Forma Period with
respect to such determination.
"Applicable Market Price" means, in respect of any share of
Class B Common Stock on any date herein specified, the average of the daily
market prices for 30 consecutive Business Days commencing 45 days before such
date. The daily market price for each such Business Day shall be (i) the last
sale price on such day on the principal stock exchange on which such Class B
Common Stock is then listed or admitted to trading, (ii) if no sale takes place
on such day on any such exchange, the average of the last reported closing bid
and asked prices on such day as officially quoted on any such exchange or, if
there is no such bid and asked prices on such day, on the next preceding date
when such bid and asked prices occurred, (iii) if the Class B Common Stock is
not then listed or admitted to trading on any stock
<PAGE>
exchange, the average of the last reported closing bid and asked prices on such
day in the over-the-counter market, as furnished by the National Association of
Securities Dealers Automatic Quotation System or the National Quotation Bureau,
Inc., (iv) if neither such corporation at the time is engaged in the business of
reporting such prices, as furnished by any similar firm then engaged in such
business, or (v) if there is no such firm, as furnished by any member of the
National Association of Securities Dealers selected by the Company.
"Applicable Permitted Indebtedness Level" means, with respect
to each Investment, the maximum aggregate amount of Indebtedness of the Company
and its subsidiaries incurred following the date of this Agreement which is
permitted to be outstanding at any time following such Investment, as specified
in the table set forth in Section 6.6(b).
"Applicable Target" for an Investment (other than the initial
Investment hereunder) shall be met if and only if all three of the following
criteria with respect to such Investment shall have been satisfied:
(i) the Retail Test, (ii) the Gross Revenue Test and (iii) the EBITDA Test.
"Business Day" means any day which is not a Saturday, a Sunday
or a day on which banking institutions in the City of New York, New York shall
be permitted or required by law or executive order to be closed.
"Call Price" means cash, with respect to each Warrant Share,
in the amount of the Appraised Value (as defined in the Warrant) thereof, and,
with respect to each Warrant, in the amount of the Warrant Value Per Share (as
defined in the Warrant).
"Cash Inflows" means all cash payments and the fair market
value of all readily marketable securities (excluding any Additional CVCA
Equity) received by CVCA as of the date on which the CVCA Return is being
calculated (a "Measurement Date") with respect to debt and equity securities of
the Company (excluding any Additional CVCA Equity) purchased, directly or
indirectly, by CVCA (whether such payments are received from the Company or from
any third party, and whether such payments are received as interest, dividends,
proceeds with respect to a sale or redemption of securities, upon liquidation of
the Company or its subsidiaries or otherwise).
"Cash Outflows" means the sum of all cash payments and
investments made by CVCA or any affiliate of CVCA, in or in connection with (but
excluding income taxes payable as a result of the disposition of) the
Investments in the Company.
"Class A Common Stock" means the Class A Common Stock, par
value $.01 per share, of the Company.
<PAGE>
"Class B Common Stock" has the meaning set forth in the
recitals.
"Class C Common Stock" has the meaning set forth in the
recitals.
"Class C Shares" means shares of Class C Common Stock.
"Class C Shares Exchange" means an exchange of all the
outstanding Class C Shares, with each such share being exchanged for (a) one
share of Class B Common Stock (such number to be adjusted to reflect any
subdivisions, combinations or reclassifications of the Class C Shares or Class B
Common Stock following the date of this Agreement) and (b) one share of a new
class of preferred stock of the Company (such number to be adjusted to reflect
any subdivisions, combinations or reclassifications of the Class C Shares
following the date of this Agreement), which class shall have an aggregate face
amount and liquidation preference equal to the aggregate Unreturned Original
Cost plus the aggregate Unpaid Yield thereon to the date of exchange, an annual
pay-in-kind dividend rate of 10%, such rights, preferences and other protections
(including requirements as to maturity) as are applicable to the Class C Shares
(other than the right to participate with the other classes of Common Stock in
dividends and other distributions on a pari passu basis in accordance with
paragraph B(1)(c) of Article Fourth of the Amended and Restated Certificate of
Incorporation of the Company as in effect on the date of this Agreement), and
such other terms and provisions as are reasonably acceptable to CVCA.
"Closing" with respect to each Investment, means the closing
of the purchase and sale of the Class C Shares and the Warrant in connection
therewith, as contemplated by this Agreement.
"Closing Date" with respect to the initial Investment
hereunder, means the date of this Agreement, and with respect to each subsequent
Investment hereunder, means the date of the Closing of such Investment in
accordance with Section 2.3(c).
"Code" means the Internal Revenue Code of 1986, as amended
(including any successor thereto), and the rules and regulations promulgated
thereunder.
"Common Stock" means the Class A Common Stock, the Class B
Common Stock and the Class C Common Stock, collectively.
"Company" has the meaning set forth in the introductory
paragraph of this Agreement.
"Company Plan" has the meaning set forth in Section 3.21.
<PAGE>
"contracts and other agreements" means all contracts,
agreements, arrangements, undertakings, indentures, notes, bonds, loans,
instruments, leases, mortgages, commitments or other consensual relationships.
"control" (including the terms "controlling", "controlled by"
and "under common control with") means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of a
person whether through the ownership of voting securities or otherwise.
"CVCA" has the meaning set forth in the introductory paragraph
of this Agreement.
"CVCA Return" means the compound annual interest rate that,
when used to calculate the net present value of all Cash Inflows and Cash
Outflows as of the Measurement Date, causes such net present value to equal
zero, as determined in good faith by CVCA.
"Deterioration Event" occurs with respect to the Company upon
the happening of any of the following events: (a) the Company or any of its
material subsidiaries shall commence any case, proceeding or other action (i)
under any law relating to bankruptcy, insolvency, reorganization,
conservatorship or relief of debtors, seeking to have an order for relief
entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent,
or seeking reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its debts, or
(ii) seeking appointment of a receiver, trustee, custodian, conservator or other
similar official for it or for all or any substantial part of its assets; (b)
the Company or any of its material subsidiaries shall make a general assignment
for the benefit of its creditors; (c) there shall be commenced against the
Company or any of its material subsidiaries any case, proceeding or other action
of a nature referred to in clause (a) above which (i) results in the entry of an
order for relief or any such adjudication or appointment or (ii) remains
undismissed, undischarged or unbonded for a period of 60 days; (d) there shall
be commenced against the Company or any of its material subsidiaries any case,
proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets which results in the entry of an order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending appeal
within 60 days from the entry thereof; (e) the Company or any of its material
subsidiaries shall take any action in furtherance of, or indicating its consent
to, approval of, or acquiescence in, any of the acts set forth in clause (a),
(b), (c) or (d) above; or (f) the Company or any of its material subsidiaries
shall generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as
<PAGE>
they become due.
"Disclosure Schedule" refers to the disclosure schedule
attached as Schedule II, dated the date of this Agreement, delivered by the
Company to CVCA in connection with the execution and delivery of this Agreement.
"Dividend" means any dividend or other distribution on or in
respect of the capital stock of any person and any amount paid by any such
person in respect of the purchase, redemption, retirement or other acquisition
of any share of its capital stock.
"EBITDA" means, for any period, the operating earnings of the
Company and its subsidiaries for such period from continuing operations
(excluding from the calculation thereof any store opening costs with respect to
New Retail Units) before interest, taxes, depreciation and amortization;
PROVIDED, that there shall not be included in EBITDA any operating earnings
attributable to any subsidiary, division, unit or other group of assets of the
Company or its subsidiaries if such subsidiary, division, unit or other group of
assets shall have been sold, transferred or otherwise disposed of prior to the
time of the determination of the Annual Interest Coverage Ratio or the EBITDA
Test in connection with which EBITDA is measured; and PROVIDED, FURTHER, that,
for purposes of the determination of the Annual Interest Coverage Ratio (but not
the EBITDA Test), there shall be included in EBITDA, for the full period for
which EBITDA is measured, any operating earnings attributable to any subsidiary,
division, unit or other group of assets of the Company or its subsidiaries if
such subsidiary, division, unit or other group of assets (i) is owned, directly
or indirectly, by the Company at the time of determination of EBITDA and was
acquired during the period for which EBITDA is measured or (ii) will be acquired
by the Company or any subsidiary of the Company with all or part of the proceeds
of the Indebtedness in connection with which the determination of the Annual
Interest Coverage Ratio is being made.
"EBITDA Test" for an Investment (other than the initial
Investment hereunder) is satisfied, if at the time of determination thereof, the
amount of EBITDA plus advertising expense for the most recently completed 12
month-period is at least equal to the amount set forth opposite such Investment
in Exhibit A.
"Environmental Laws" means, without limitation, the Hazardous
Materials Transportation Act (49 U.S.C. ss.ss. 1802 ET seq.), the Federal
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
ss.ss. 9601 ET seq.), the Federal Water Pollution Control Act (33 U.S.C. ss.sS.
1251 et seq.), the Federal Clean Air Act (42 U.S.C. ss.ss. 7401 ET seq.), the
Federal Solid Waste Disposal Act (including the Resource Conservation and
Recovery Act and the Hazardous and Solid Waste
<PAGE>
Amendments of 1984) (42 U.S.C. ss.ss. 6901 ET seq.), the Federal Toxic
Substances Control Act (15 U.S.C. ss.ss. 2601, ET seq.), the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss.ss. 136 ET seq.), the
Safe Drinking Water Act (42 U.S.C. ss.sS. 300F et seq.), the Occupational Health
and Safety Act (29 U.S.C. ss.ss. 651 ET seq.), each as amended or supplemented
from time to time, and all other environmental statutes enacted by United States
governmental or regulatory bodies and by states and local governmental or
regulatory bodies (including, but not limited to, municipal sewerage
authorities), and any executive orders, ordinances, rules or regulations
promulgated under any of the foregoing, and state tort laws and common law.
"Environmental Matter" means any matter arising out of,
relating to or resulting from pollution, contamination, protection of the
environment or human health and safety, or other related matters, including any
matters relating to the spill, pumping, injection, disposal, dumping, leaching,
migration, emission, discharge, release or threatened release of Hazardous
Materials into the indoor or outdoor environment, including the movement of
Hazardous Materials through or in air, soil, surface water, ground water or
property or the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.
"Equivalent Price" of a share of: (a) Class C Common Stock
proposed to be sold by CVCA pursuant to Section 7.2 in connection with a Sale
Notice relating to the proposed Transfer by McCann of a share of Class B Common
Stock shall be equal to the sum of (i) the amount payable in respect of such
share of Class B Common Stock, (ii) the Unpaid Yield on such share of Class C
Common Stock immediately prior to the proposed Transfer thereof and (iii) the
Unreturned Original Cost of such share of Class C Common Stock immediately prior
to such proposed Transfer; and (b) Class B Common Stock proposed to be sold by
CVCA pursuant to Section 7.2 in connection with a Sale Notice relating to the
proposed Transfer by McCann of a Class C Share shall be equal to the amount
payable in respect of such share of Class C Common Stock minus the sum of (i)
the Unpaid Yield on such share of Class C Common Stock immediately prior to the
proposed Transfer thereof and (ii) the Unreturned Original Cost of such share of
Class C Common Stock immediately prior to such proposed Transfer.
"ERISA" has the meaning set forth in Section 3.21.
"Federal" means of or pertaining to the government of the
United States of America.
"Financials" has the meaning set forth in Section 3.8.
"GAAP" means United States generally accepted accounting
principles, as in effect on the date of this Agreement, consistently applied
throughout the specified period
<PAGE>
and in the immediately prior comparable period, except (with respect to interim
financial statements) for the absence of footnotes and normal occurring year-end
adjustments.
"governmental or regulatory body" means any government or
political subdivision thereof, whether Federal, state, local or foreign, or any
agency or instrumentality of any such government or political subdivision.
"Gross Revenue Test" for an Investment (other than the initial
Investment hereunder) is satisfied, if at the time of determination thereof, the
gross revenues of the Company and its subsidiaries from continuing operations,
determined on a consolidated basis and in accordance with GAAP, for the most
recently completed 12 month-period is at least equal to the amount set forth
opposite such Investment in Exhibit A.
"Hazardous Materials" means any pollutants, contaminants,
hazardous or toxic substances, materials, constituents or chemicals (including
petroleum or any by-products or fractions thereof, any form of natural gas,
asbestos and asbestos-containing materials, polychlorinated biphenyls ("PCBs")
and PCB-containing equipment, radon and other radioactive elements, infectious,
carcinogenic, mutagenic, or etiologic agents, pesticides, defoliants,
explosives, flammables, corrosives and urea formaldehyde) that are regulated by
any Environmental Laws.
"herein," "hereof," "hereto," "hereunder" and other words of
similar import shall be construed to refer to this Agreement as a whole, and not
to any particular section, paragraph or other subdivision.
"Holder" means each party hereto (other than the Company) and
such party's permitted successors and assigns.
"including" and other forms of such terms, with respect to any
matter or thing, shall be construed to mean "including but not limited to" such
matter or thing.
"Indebtedness" means, with respect to any person, (a) all
indebtedness of such person for borrowed money or for the deferred purchase
price of property or services (other than current trade liabilities incurred in
the ordinary course of business), (b) any other indebtedness evidenced by a
note, bond, debenture or similar instrument, (c) all obligations of such person
in respect of outstanding letters of credit, acceptances and similar obligations
created for the account of such person and (d) all liabilities secured by any
lien or other encumbrance on any property owned by such person whether or not
such person has assumed or otherwise become liable for the payment thereof;
PROVIDED that the term "Indebtedness" shall not include (a) Qualifying Seller
Financing, (b) obligations of such person
<PAGE>
pursuant to any lease of real or personal property, or a combination thereof,
which obligations are required to be classified and accounted for as capital
leases on a balance sheet of such person under GAAP, (c) any indebtedness of the
Company existing as of the date of this Agreement, (d) Refinancing Indebtedness
and (e) indebtedness fully secured by cash.
"Indemnitee" has the meaning set forth in Section 11.2.
"Indemnitor" has the meaning set forth in Section 11.2.
"Investment" has the meaning set forth in Section 2.2.
"Investment Schedule" has the meaning set forth in Section
2.2.
"IRS" means the Internal Revenue Service of the United States
of America.
"Issuance Notice" has the meaning set forth in Section 7.3(b).
"Key Events" means the events set forth in Section 6.7.
"Lease" has the meaning set forth in Section 3.14.
"Liabilities" has the meaning set forth in Section 3.19.
"lien or other encumbrance" means any lien, pledge, mortgage,
security interest, claim, lease, charge, option, right of first refusal,
easement, servitude, transfer restriction under any shareholder or similar
agreement or encumbrance.
"Litigation" means any claim, action, suit, proceeding,
arbitration or governmental investigation.
"Losses" means all losses, liabilities, damages, Taxes,
deficiencies, costs, fines and assessments (including interest), penalties,
claims, actions, injuries, suits, judgments and expenses (including reasonable
attorneys' fees and disbursements), howsoever arising, net of any insurance
proceeds received by the person incurring such losses.
"Market Capitalization" means, at the time of determination
thereof, the sum of (i) the Company's consolidated long-term indebtedness at
such time and (ii) the product of (1) the total number of shares of Class B
Common Stock outstanding, on a fully diluted basis, and (2) the Applicable
Market Price; PROVIDED that the Market Capitalization shall be zero until such
time as the Company shall have completed an initial public offering of shares of
the Class B Common Stock.
<PAGE>
"Market Valuation Product" means the product of (i) the per
share price to the public of shares of Class B Common Stock to be sold in a
public offering and (ii) the total number of shares of Class B Common Stock
outstanding, on a fully diluted basis, prior to the issuance of shares of Class
B Common Stock in such public offering.
"Material Adverse Change" occurs when any event, fact or
circumstance occurs or exists which has resulted or could reasonably be expected
to result in any change which is either (i) materially adverse to the Permits,
business, condition (financial or otherwise), assets, liabilities or results of
operations of the Company and its consolidated subsidiaries, taken as a whole,
or (ii) adverse to the ability of the Company or McCann to consummate any of the
transactions contemplated by this Agreement.
"McCann Debt" means the indebtedness of 800-FLOWERS, Inc. to
McCann described in Footnote 3(A) of the June 30, 1994 Financials Statement of
the Company and its subsidiaries included in the Financials, the principal
amount of which on the date of this Agreement, together with accrued and unpaid
interest thereon as of such date, is approximately $4,956,000.
"McCann Debt Exchange Rate" means, for each $100,000 of McCann
Debt exchanged, a number of Class C Shares having an aggregate Original Cost (as
defined in the Amended and Restated Certificate of Incorporation of the Company)
of $100,000, based on the Original Cost per share in effect at such time, and a
number of shares of Class B Common Stock (or a Warrant therefor) equal to the
product of (a) the number of Class C Shares issued upon such exchange and (b)
nine.
The number of shares set forth in this definition shall be adjusted to reflect
any subdivisions, combinations or reclassifications of the Class B Common Stock
and/or the Class C Common Stock following the date hereof.
"New Retail Unit" means any new retail operating unit
(excluding franchises) opened or acquired by the Company directly (or indirectly
through wholly owned subsidiaries) following June 30, 1994.
"Notice" has the meaning set forth in Section 11.2.
"Offer Notice" has the meaning set forth in Section 7.1.
"Offered Common Stock" has the meaning set forth in Section
7.1.
"Permits" means all licenses, permits, orders, approvals,
registrations, authorizations and qualifications with and under all Federal,
state, local or foreign laws and
<PAGE>
governmental or regulatory bodies that are necessary for the conduct of the
business and the ownership of the properties of the Company and its
subsidiaries.
"Permitted Business Combination" means any merger or
consolidation of the Company with any other person in the gift, floral or
sentiment industry (or any other similar business combination transaction with
any such person), provided that McCann (i) is the chief executive officer of the
surviving or resulting person in or as a result of such merger, consolidation or
other business combination and (ii) either (A) has the contractual right,
directly or indirectly, to designate to serve on the Board of Directors of such
surviving or resulting person more directors than any other beneficial owner of
the common stock of such surviving or resulting person (it being understood that
if no other beneficial owner has any such right, McCann must have the right,
directly or indirectly, to designate at least one director to serve on the Board
of Directors of such surviving or resulting person) or (B) beneficially owns a
majority of the voting securities of such surviving or resulting person entitled
to vote in the election of directors.
"Permitted Transfer" means: (i) any Transfer of equity
securities of the Company by any Holder to any affiliate of such Holder and (ii)
any Transfer of securities (including, in the case of McCann, the McCann Debt)
(y) upon the death of an individual Holder, or individual Permitted Transferee
of a Holder, to his or her executors, administrators, testamentary trustees,
legatees or beneficiaries or (z) in compliance with applicable securities laws,
to the Holder's spouse, lineal descendants or other family members of the Holder
by blood, marriage or adoption (or to a trust or custodianship the beneficiaries
of which include only one or more of the Holder, the Holder's spouse, lineal
descendants or other family members of the Holder by blood, marriage or
adoption); PROVIDED, in the case of each of clauses (i) and (ii), that the
Transferee shall have agreed in writing at the time of such Transfer to be bound
by the provisions of this Agreement with respect to the securities so
Transferred; and PROVIDED, FURTHER, that for purposes of this definition, CVCA's
affiliates shall include any Person a majority of whose capital stock or
partnership interests is owned by Chemical Banking Corporation, a Delaware
corporation (or any successor entity), Chemical Venture Partners, a general
partnership organized under the laws of the State of New York (or any successor
entity), and/or any direct or indirect wholly owned subsidiary or partnership of
either.
"person" means and includes any natural person, corporation,
partnership, firm, joint venture, association, joint-stock company, trust,
business trust, unincorporated organization, governmental or political
subdivision, regulatory body or other entity.
<PAGE>
"Pro Forma Interest Expense" means, for the Pro Forma Period
in connection with which the determination thereof is being made, the amount of
interest expense, both expensed and capitalized (including amortization of debt
discount and commissions, discounts and other fees and charges owed with respect
to indebtedness), of the Company and its subsidiaries, determined on a
consolidated basis, in accordance with GAAP, which will accrue for such period
on the aggregate principal amount of the indebtedness of the Company and its
subsidiaries, determined on a consolidated basis, in accordance with GAAP
(including, without limitation, the McCann Debt, any Refinancing Indebtedness,
any Qualifying Selling Financing, any Qualifying Indebtedness then outstanding
and, if applicable, the proposed indebtedness in connection with which the
determination of Pro Forma Interest Expense is being made). To the extent that,
at the time of the determination of the Pro Forma Interest Expense, the rate of
interest to be accrued during the Pro Forma Period is not fixed or otherwise
determinable or estimable with reasonable accuracy by reference to the contracts
and other agreements pursuant to which the Company's and its subsidiaries'
indebtedness is (or is proposed to be) outstanding, such rate shall, for
purposes of calculating the Pro Forma Interest Expense, be assumed to be the
then applicable reference rate and applicable spread payable by the Company to
Chemical Bank (or any substitute lender of the Company) on borrowings under loan
arrangements then in effect.
"Pro Forma Period" means, with respect to each determination
of the Annual Interest Coverage Ratio, the twelve-month period beginning with
the first complete calendar month following such determination.
"Property" means real, personal or mixed property, tangible or
intangible.
"Public Sale" means any sale of the Company's equity
securities to the public pursuant to an offering registered under the Securities
Act or to the public through a broker, dealer or market maker pursuant to the
provisions of Rule 144 (or any successor or similar provision then in effect)
under the Securities Act.
"Qualifying Indebtedness" means any Indebtedness of the
Company and its subsidiaries, if the Annual Interest Coverage Ratio for such
Indebtedness, together with all other Indebtedness of the Company and its
subsidiaries, is not less than two to one.
"Qualifying Seller Financing" shall mean indebtedness of the
Company or its subsidiaries to any person incurred to finance, in whole or in
part, the purchase from such person of (i) all or substantially all of the
assets or business of such person or a unit, division or subsidiary of such
person or (ii) such person's capital stock of (or other equity interest in) any
other person, provided that such capital stock or other equity
<PAGE>
interest constitutes a majority of the equity of such other person.
"Refinancing Indebtedness" means any refinancing of or
replacement indebtedness for any indebtedness of the Company and its
subsidiaries which is outstanding on the date of this Agreement.
"Registrable Securities" shall mean any Class B Common Stock
owned by any Holder thereof, including any Class B Common Stock which may be
issued or distributed by way of stock dividend or stock split or other
distribution, recapitalization or reclassification and including any Warrant
Shares which may be issued or issuable upon exercise of Warrants held by such
Holder. As to any particular Registrable Securities, once issued such securities
shall cease to be Registrable Securities when (i) such securities shall have
been registered under the Securities Act, and the registration statement with
respect to the sale of such securities shall have become effective under the
Securities Act or such securities shall have been sold under circumstances in
which all applicable conditions of Rule 144 (or any similar provision then in
force) under the Securities Act are met, (ii) such securities shall have been
otherwise transferred, new certificates for them not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent disposition of such securities shall not require registration or
qualification of such securities under the Securities Act or any state
securities or blue sky law then in force or (iii) such securities shall cease to
be outstanding.
"Registration Expenses" shall mean all expenses incident to
the Company's performance of or compliance with Section 8, including all SEC and
stock exchange or National Association of Securities Dealers, Inc. registration
and filing fees and expenses, fees and expenses of compliance with securities or
blue sky laws (including reasonable fees and disbursements of counsel for the
underwriters in connection with blue sky qualifications of the Registrable
Securities), rating agency fees, printing expenses, messenger, telephone and
delivery expenses, the fees and expenses incurred in connection with the listing
of the securities to be registered on each securities exchange or national
market system on which similar securities issued by the Company are then listed,
fees and disbursements of counsel for the Company and all independent certified
public accountants (including the expenses of any annual audit, special audit
and "cold comfort" letters required by or incident to such performance and
compliance), securities laws liability insurance (if the Company so desires),
the fees and disbursements of underwriters (including all fees and expenses of
any "qualified independent underwriter" required by the rules of the NASD)
customarily paid by issuers or sellers of securities, the reasonable fees of one
counsel selected by CVCA to represent it in connection with each registration
pursuant to Section 8, the
<PAGE>
reasonable fees and expenses of any special experts retained by the Company in
connection with such registration, fees and expenses of other persons retained
by the Company (but not including any underwriting discounts or commissions or
transfer taxes, if any, attributable to the sale of Registrable Securities by
Holders of such Registrable Securities) and other reasonable out-of-pocket
expenses of Holders.
"Restricted Securities" means the equity securities of the
Company; PROVIDED that such Securities shall cease to be Restricted Securities
when they have (i) been registered and disposed of in accordance with a
registration statement under the Securities Act, (ii) been sold pursuant to Rule
144 (or any successor or similar provision then in force) under the Securities
Act or (iii) been otherwise transferred and new instruments or certificates for
such securities not bearing the legend set forth in Section 6.5 with respect to
the Securities Act have been delivered by the Company.
"Retail Test" for an Investment (other than the initial
Investment hereunder) is satisfied, if at the time of determination thereof, any
of the following is true: (i) the aggregate number of New Retail Units, (ii) the
aggregate square footage of all New Retail Units or (iii) the aggregate gross
revenue of the Company and its subsidiaries from continuing operations of all
New Retail Units, is at least equal to the applicable number or amount set forth
opposite such Investment in Exhibit A.
"Sale Notice" has the meaning set forth in Section 7.2.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
or any successor or similar federal law then in force.
"Stockholders' Agreement" means the Stockholders' Agreement,
dated as of the 1st day of July, 1992, by and among JAP Equities, Inc., McCann
and the Company.
"subsidiary" of any person, means a person 50% or more of the
outstanding voting stock, general partnership interests or other ownership
interests of which are owned, directly or indirectly, by such person or one or
more other subsidiaries of such person. For the purposes of this definition,
"voting stock" means stock that ordinarily has voting power for the election of
directors, whether at all times or only so far as no senior class of stock has
such voting power by reason of any contingency.
"Taxes" means all taxes, charges, fees, levies, or other
similar assessments, including (i) income, gross receipts, ad valorem, premium,
excise, real property, personal property, windfall profit, sales, use, transfer,
licensing, withholding,
<PAGE>
employment, payroll, estimated and franchise taxes imposed by the United States
of America, any state, local, or foreign government, or any subdivision, agency,
or other similar person of the United States, or any such government; and (ii)
any interest, fines, penalties, assessments, or additions to tax resulting from,
attributable to, or incurred in connection with any Tax or any contest, dispute,
or refund thereof.
"Tax Returns" means any report, return, statement, or other
information required to be supplied to a taxing authority in connection with
Taxes.
"Transfer" means, with respect to any interest in Common Stock
or any other capital stock of the Company (or rights in respect thereof), any
sale, transfer, pledge, assignment or other disposition of such interest.
"Unit" has the meaning set forth in Section 2.2.
"Unpaid Yield" has the meaning set forth in the Amended and
Restated Certificate of Incorporation of the Company, as in effect on the date
of this Agreement (a copy of which is attached as Exhibit C).
"Unreturned Original Cost" has the meaning set forth in the
Amended and Restated Certificate of Incorporation of the Company, as in effect
on the date of this Agreement (a copy of which is attached as Exhibit C).
"Warrant" means a Warrant issued by the Company to acquire
upon exercise thereof the number of shares of Class B Common Stock indicated
therein (as adjusted pursuant thereto from time to time), substantially in the
form of Exhibit B, and any Warrant issued upon transfer, division or combination
thereof or in substitution therefor.
"Warrant Shares" means shares of Class B Common Stock issuable
upon exercise of Warrants.
20 AUTHORIZATION PURCHASE AND SALE AND CLOSING.
2.1 AUTHORIZATION. Upon and subject to the terms and
conditions set forth in this Agreement, the Company has authorized the issuance
and sale to CVCA of (a) up to 52,658 Class C Shares and (b) Warrants to acquire
up to 473,922 Warrant Shares (such number of (i) Class C Shares and Warrant
Shares to be adjusted to reflect any subdivisions, combinations or
reclassifications of the Class C Shares or Class B Common Stock following the
date of this Agreement and (ii) Warrant Shares to be adjusted from time to time
pursuant to the Warrant issued by the Company with respect thereto). The Company
has also authorized the issuance of the Additional CVCA Equity.
<PAGE>
2.2 PURCHASE AND SALE. Upon and subject to the terms
and conditions set forth in this Agreement, CVCA hereby agrees to purchase, and
the Company hereby agrees to issue and sell, in units ("Units") of Class C
Shares and Warrant Shares, (i) an aggregate of 52,658 Class C Shares and (ii)
Warrants exercisable for 473,922 Warrant Shares (such number of (i) Class C
Shares and Warrant Shares to be adjusted to reflect any subdivisions,
combinations or, reclassifications of the Class C Shares or Class B Common Stock
following the date of this Agreement and (ii) Warrant Shares to be adjusted from
time to time pursuant to the Warrant issued by the Company with respect
thereto). Such Class C Shares and such Warrants shall be purchased, issued and
sold in a series of investments (each an "Investment"; collectively, the
"Investments") by CVCA made upon and subject to the terms and conditions of this
Agreement, with the purchase price, the number of Class C Shares and the number
of Warrant Shares represented by each Warrant (subject to adjustment from time
to time as set forth above) issued in connection with each such Investment being
as set forth in Schedule I (the "Investment Schedule"). CVCA shall not be
permitted to purchase Warrant Shares (or Warrants) or Class C Shares other than
in Units.
2.3 CLOSING. (a) Each Closing shall take place at the
offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York,
or at such other time and place as may be agreed upon by the parties in
accordance with the terms hereof.
(b) At the Closing of the initial Investment hereunder and at
each subsequent Closing, (i) the Company shall deliver to CVCA, against delivery
of the applicable purchase price therefor set forth in the Investment Schedule,
(1) a single certificate in definitive form representing the Class C Shares to
be purchased at such Closing, registered in CVCA's name (or the name of its
nominee), and (2) the Warrant to be purchased at such Closing, issued in the
name of CVCA or the name of its nominee) and (ii) CVCA shall deliver to the
Company, against delivery of the certificate representing the Class C Shares to
be purchased at such Closing and the Warrant to be purchased at such Closing, by
wire delivery to such account as the Company shall designate and give notice
thereof in writing to CVCA at least two Business Days prior to the Closing Date
with respect to such Closing, such applicable purchase price, payable in
immediately available federal funds in New York City.
(c) Upon and subject to the terms and conditions hereof, the
Company may, at its option, require CVCA to make Investments hereunder upon
written notice from the Company to CVCA requesting that CVCA make an Investment;
PROVIDED, that subject to the terms and conditions hereof, upon satisfaction of
the conditions set forth in Section 9 hereof to the initial Investment, the
Company shall cause CVCA to make such initial
<PAGE>
Investment in accordance with this Section 2.3(c). The Closing of such
Investment shall, upon and subject to the terms and conditions hereof, be held
within ten Business Days following receipt of such notice. At such Closing, (i)
CVCA shall deliver to the Company the applicable purchase price set forth in the
Investment Schedule, payable in immediately available federal funds in New York
City, and (ii) the Company shall deliver to CVCA the documents and certificates
required to be delivered pursuant to Section 9.
30 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to CVCA as follows:
3.1 ORGANIZATION; AUTHORITY AND STANDING. (a) The
Company is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to execute and deliver this Agreement and each
Warrant issuable hereunder, to perform its obligations hereunder and thereunder
and to consummate the transactions contemplated hereby and thereby. The Company
has no subsidiaries other than those set forth in Section 3.1(a) of the
Disclosure Schedule. Each of the Company's subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and, except as set forth in Section 3.1(a) of the
Disclosure Schedule, is qualified or licensed to do business and is in good
standing in each jurisdiction in which the failure to so qualify, be licensed
and in good standing, individually or in the aggregate, has had a Material
Adverse Change.
(b) The Company and each of its subsidiaries has all requisite
corporate power and authority to own, lease and operate its assets, properties
and business and to carry on its business as now being and as proposed to be
conducted by it. The Company is duly qualified or licensed to do business and is
in good standing in each jurisdiction set forth in Section 3.1(b) of the
Disclosure Schedule. Such jurisdictions are the only jurisdictions in which such
qualification or licensing and good standing is required by law, except for any
jurisdictions in which the failure to be so qualified or licensed and in good
standing has not, individually or in the aggregate, had a Material Adverse
Change.
3.2 AUTHORITY; EXECUTION AND DELIVERY. The execution,
delivery and performance by the Company of this Agreement and each Warrant and
the consummation by the Company of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. Each of this Agreement and the Warrants has been
(or, in the case of Warrants issued after the date of this Agreement, will be)
duly executed and delivered by the Company and constitutes (or, in the case of
Warrants issued after the
<PAGE>
date of this Agreement, will constitute) the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except
(i) as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
or by an implied covenant of good faith and fair dealing and (ii) to the extent
that the indemnification rights set forth in Section 8.5 may be limited by
applicable law.
3.3 GOVERNMENTAL CONSENTS AND APPROVALS. The
execution and delivery by the Company of this Agreement and each Warrant, the
performance by the Company of its obligations hereunder and thereunder and the
consummation by the Company of the transactions contemplated hereby and thereby
do not and will not require the Company to obtain any consent, approval or
action of, or make any filing with or give any notice to, any governmental or
regulatory body or judicial authority, except for such consents, approvals,
actions, filings and notices as may be required in connection with the exercise
of registration rights set forth in Section 8.
3.4 NO BREACH. (a) The execution, delivery and
performance by the Company of this Agreement and each Warrant and the
consummation by the Company of the transactions contemplated hereby and thereby
in accordance with the terms and conditions hereof and thereof do not and will
not: (i) violate any provision of the certificate of incorporation or by-laws or
other charter or organizational documents of the Company or any of its
subsidiaries; (ii) violate, conflict with or result in the breach of any of the
provisions of, result in a modification of the effect of, otherwise give any
other contracting party the right to terminate, cancel or accelerate, or
constitute (with or without notice or lapse of time or both) a default under,
any material contract or other agreement to which the Company or any of its
subsidiaries is a party or by or to which the Company or any subsidiary of the
Company or any of their respective assets or properties may be bound or subject;
(iii) violate any existing term or provision of any law, regulation, order,
writ, judgment, injunction or decree applicable to the Company or any of its
subsidiaries or any of their respective assets or properties; or (iv) result in
the breach of any of the terms or conditions of, constitute (with or without
notice or lapse of time or both) a default under, or otherwise cause an
impairment of, any material Permit.
(b) Except for the obligations of McCann and the Company to
JAP Equities, Inc. pursuant to the Stockholders' Agreement (the satisfaction of
such obligations shall be a condition precedent to each Closing hereunder and
the issuance of any securities of the Company pursuant hereto), none of the
issuance of the Class C Shares, the Warrants or the Warrant
<PAGE>
Shares is or will be subject to any preemptive or similar right.
3.5 CAPITAL STOCK; TITLE; AUTHORIZATION AND
RESERVATION OF COMMON STOCK. Section 3.5 of the Disclosure Schedule accurately
sets forth the authorized capital stock of the Company and the number of shares
of each class of capital stock of the Company that are issued and outstanding as
of the date hereof. All of the issued and outstanding shares of capital stock of
the Company are duly authorized, validly issued, fully paid and nonassessable
and are owned of record by the persons set forth in Section 3.5 of the
Disclosure Schedule. Upon delivery of the payment for the Class C Shares on each
of the Closing Dates as herein provided, such Class C Shares will be validly
issued, fully paid and nonassessable, and CVCA will acquire good title thereto,
free and clear of any lien or other encumbrance (other than the restrictions on
Transfer of the Class C Shares expressly set forth in this Agreement). The
Warrant Shares have been reserved for issuance and, when issued upon exercise of
the Warrants, will be validly issued, fully paid and nonassessable, and CVCA
will acquire good title thereto, free and clear of any lien or other encumbrance
(other than the restrictions on Transfer of the Warrant Shares expressly set
forth in this Agreement).
3.6 OPTIONS OR OTHER RIGHTS. Except pursuant to this
Agreement and except as set forth in Section 3.6 of the Disclosure Schedule, (a)
there is no outstanding right, subscription, warrant, call, unsatisfied
preemptive right, option or other agreement of any kind to purchase or otherwise
to receive from the Company or any subsidiary of the Company any of the
outstanding, authorized but unissued, unauthorized or treasury shares of the
capital stock or any other equity security of the Company or any subsidiary of
the Company (or any interest therein), (b) there is no outstanding security of
any kind convertible into or exchangeable for the capital stock of the Company
or any subsidiary of the Company (or any interest therein), and (c) there is no
outstanding contract or other agreement of or binding upon any of the Company,
any subsidiary of the Company or McCann to issue, sell, purchase, redeem or
otherwise acquire any outstanding shares of the capital stock of the Company.
Except as set forth in Section 3.6 of the Disclosure Schedule, there is no
agreement of any kind that gives any person any right to participate in the
equity, value or income of, or to vote (i) in the election of directors or
officers of or (ii) otherwise with respect to the affairs of, the Company.
3.7 CHARTER DOCUMENTS AND BY-LAWS. The Company has
heretofore delivered to CVCA a true and complete copy of (a) the Amended and
Restated Certificate of Incorporation (a copy of which is attached as Exhibit C)
and (ii) the By-laws of the Company, in each case as in effect on the date of
this Agreement.
3.8 FINANCIALS; BOOKS AND RECORDS. (a) The
<PAGE>
audited balance sheets of the Company and its subsidiaries as at June 30, 1994,
1993 and 1992 and the related audited statements of stockholders' equity and
cash flows (including the footnotes thereto), for the period then ended, and the
consolidated statements of operations of the Company for the periods ended June
30, 1994 and 1993 (including the footnotes thereto), all of which have been
delivered to CVCA, present fairly in all material respects the financial
position, results of operations and cash flows of the Company as at such date
and for each such period in accordance with GAAP. The foregoing financial
statements are sometimes herein called the "Financials."
(b) The financial records, ledgers and account books of the
Company have been kept in the ordinary course of business and are true, complete
and accurate in all material respects.
3.9 NO MATERIAL ADVERSE CHANGE. Except as set forth
in Section 3.9 of the Disclosure Schedule, since June 30, 1994, there has not
been a Material Adverse Change.
3.10 COMPLIANCE WITH LAWS. Except as set forth in
Section 3.10 of the Disclosure Schedule, the Company is, and at all times since
July 1, 1992 has been, in compliance with all Federal, state, local or foreign
laws, ordinances or regulations and other requirements (including any writ,
judgment, decree, injunction, or similar order applicable to any of such persons
or the business or assets of such persons) of any governmental or regulatory
body, court or arbitrator applicable to its business, the violation of which,
individually or in the aggregate, has had a Material Adverse Change.
3.11 PERMITS. The Company has or has obtained all
material Permits, no material violation exists or has been recorded in respect
of any such Permit, and no proceeding is pending or, to the knowledge of the
Company, threatened, to suspend, restrict, revoke or limit any such Permit.
3.12 LITIGATION. Except as set forth in Section 3.12
of the Disclosure Schedule, there is no Litigation pending to which the Company
or any subsidiary of the Company is a party or by which the Company or any
subsidiary of the Company or their respective assets or properties are bound by
or before any Federal, state, municipal, foreign or other court or governmental
or regulatory body, or any private tribunal, or, to the knowledge of the
Company, threatened (in writing or, during the 12-month period prior to the date
of this Agreement, orally) against the Company or any subsidiary of the Company,
which if adversely determined would, individually or in the aggregate, have a
Material Adverse Change. Neither the Company or any subsidiary of the Company
nor any officer, director or employee of the Company or any such subsidiary has
been permanently or temporarily enjoined or barred by any order, judgment or
decree of any court or other tribunal or any governmental or regulatory
<PAGE>
body from engaging in or continuing any conduct or practice in connection with
the business conducted by the Company and its subsidiaries.
3.13 CONTRACTS AND OTHER AGREEMENTS. (a) Section
3.13(a) of the Disclosure Schedule sets forth a listing of all of the following
contracts and other agreements (which are currently in force) to which the
Company or any such subsidiary of the Company is a party or by or to which the
Company or any subsidiary of the Company or any of their respective assets or
properties are bound or subject:
(i) contracts and other agreements with any labor union or
association representing any employee;
(ii) contracts and other agreements for the sale or lease
(other than where the Company is a lessee) of any assets or properties
(other than the Leases) or for the grant to any person (other than to
the Company) of any preferential rights to purchase any assets or
properties which provide for payments to the Company of at least
$100,000;
(iii) contracts and other agreements relating to the
acquisition by the Company of any operating business or block of
business of any other person;
(iv) contracts relating to the disposition or acquisition of
any investment (excluding investments in the ordinary course of
business in debt instruments) or any interest in any person outside the
ordinary course of business;
(v) joint venture, partnership, management, consulting and
employment agreements;
(vi) contracts or other agreements under which the Company
agrees to indemnify any party, other than in the ordinary course of
business, consistent with past practice, or to share a Tax liability of
any party;
(vii) contracts and other agreements containing covenants
restricting the Company or any of its subsidiaries from competing in
any line of business or with any person in any geographical area or
requiring the Company or any of its subsidiaries to engage in any line
of business or containing covenants of any other person not to compete
with the Company or any of its subsidiaries in any line of business or
in any geographical area;
(viii) contracts and other agreements containing restrictions
on the incurrence of indebtedness by the Company or any of its
subsidiaries;
<PAGE>
(ix) contracts and other agreements relating to the making of
any loan or advance by the Company or any of its subsidiaries (it being
understood that accounts receivable booked in the ordinary course of
business do not constitute loans or advances for the purpose of this
clause (ix));
(x) other than trade payables incurred in the ordinary course
of business, (a) any contract or other agreement relating to the
borrowing of money by the Company or any of its subsidiaries or (b) the
direct or indirect guaranty by the Company or any of its subsidiaries
of any obligation of $100,000 or more, an agreement by the Company or
any of its subsidiaries to service the repayment of borrowed money, or
any other contingent obligations of the Company or any of its
subsidiaries in respect of indebtedness, of any other person,
including, (1) any agreement or arrangement relating to the maintenance
of compensating balances, (2) any agreement or arrangement with respect
to lines of credit, (3) any agreement to advance or supply funds to any
other person, (4) any agreement to pay for property, products or
services of any other person, whether or not such property, products or
services are conveyed, delivered or rendered, (5) any keep-well,
make-whole or maintenance of working capital or earnings or similar
agreement, (6) any guaranty with respect to any lease or other similar
periodic payments to be made by any such person or (7) agreements
evidencing any obligations pursuant to any lease of real or personal
property, or a combination thereof, which obligations are required to
be classified and accounted for as capital leases under GAAP;
(xi) all contracts or other agreements pursuant to which the
Company or any of its subsidiaries licenses, leases or uses any
computer software or software applications which are material to the
business of the Company and its consolidated subsidiaries, taken as a
whole; and
(xii) all outstanding proxies, powers of attorney, or similar
delegations of authority.
(b) There have been delivered or made available to CVCA true
and complete copies of all of the contracts and other agreements set forth in
Section 3.13(a) of the Disclosure Schedule or in any other Section of the
Disclosure Schedule. Each such contract and other agreement (i) is, to the
Company's knowledge, in full force and effect, (ii) constitutes a legal, valid,
and binding obligation of (1) the Company or the subsidiary of the Company party
thereto and (2) to the Company's knowledge, each other party thereto, and (iii)
is enforceable in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium and
<PAGE>
other similar laws relating to or affecting creditors' rights generally, by
general equitable principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) or by an implied covenant of
good faith and fair dealing, except where the failure of any such contract or
agreement to be enforceable has not, individually or in the aggregate, had a
Material Adverse Change. The Company has not received any notice, whether
written or oral, of termination or intention to terminate from any other party
to such contract or agreement. Neither the Company or any subsidiary of the
Company (as the case may be) nor, to the Company's knowledge, any other party to
any such contract or agreement is in violation or breach of or default under any
such contract or agreement (or with or without notice or lapse of time or both,
would be in violation or breach of or default under any such contract or
agreement), which violation, breach, or default has had, individually or in the
aggregate, a Material Adverse Change.
3.14 REAL ESTATE. (a) Neither the Company nor any
subsidiary of the Company owns any real estate; (b) all leases, subleases or
other agreements or arrangements (each, a "Lease") relating to real property
used by the Company and its subsidiaries are listed in Section 3.14(a) of the
Disclosure Schedule; (c) there are no unexpired options (excluding options to
extend lease terms) held by, or contractual obligations of, the Company or any
subsidiary of the Company to purchase or acquire any interest in real property;
and (d) there are no unexpired options granted by, or contractual obligations
of, the Company or any subsidiary of the Company to sell or dispose of any
interest in real property. The lessor or lessee under each Lease set forth in
Section 3.14(a) of the Disclosure Schedule is as set forth therein. Each such
Lease (i) is, to the Company's knowledge, in full force and effect, (ii)
constitutes a legal, valid and binding obligation of (1) the Company or the
subsidiary of the Company party thereto and (2) to the Company's knowledge, each
other party thereto, and (iii) is enforceable in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law)
or by an implied covenant of good faith and fair dealing except where the
failure to be enforceable has not, individually or in the aggregate, had a
Material Adverse Change. The Company has not received any notice, whether
written or oral, of termination or intention to terminate from any other party
to such Lease. Neither the Company (or any of its subsidiaries) nor, to the
Company's knowledge, any other party to any such Lease is in violation or breach
of or default thereunder (or with or without notice or lapse of time or both,
would be in violation or breach of or default thereunder), which violation,
breach, or default has had, individually or in the aggregate, a Material Adverse
Change.
<PAGE>
3.15 PERSONAL PROPERTY. (a) The Company (including
through its subsidiaries) is the licensee, or the sole and exclusive owner, of
all trade names, unregistered trademarks and service marks, brand names,
patents, copyrights, registered trademarks and service marks used in the
business of the Company or any subsidiary of the Company, and all applications
for any of the foregoing, and all permits, grants and licenses or other rights
with respect thereto, the absence of which, individually or in the aggregate,
has had a Material Adverse Change, and, except as set forth in Section 3.15 of
the Disclosure Schedule, neither the Company nor any subsidiary of the Company
(i) uses any of such intangible property by consent of any other person, or (ii)
is required to make any payments to others with respect thereto. All such
intangible property is set forth in Section 3.15 of the Disclosure Schedule.
Except as set forth in Section 3.15 of the Disclosure Schedule, neither the
Company nor any subsidiary of the Company has been charged with any infringement
of any intangible property of the character described above and the Company has
not been notified or advised of any claim of any other person relating to any of
such intangible property.
(b) All assets which are used in the conduct of the businesses
of the Company and its subsidiaries, taken as a whole, and have a net book value
of at least $100,000 are in all material respects in good operating order,
usable in the ordinary course of business and adequate to carry out such
businesses as currently conducted and presently contemplated, and adequately
maintained in accordance with the Company's normal practices, except for
ordinary wear and tear in the ordinary course of business.
3.16 OPERATIONS OF THE COMPANY. (a) Except as set
forth in Section 3.16 of the Disclosure Schedule, since June 30, 1994, the
Company has not, directly or indirectly (including through its subsidiaries):
(i incurred any indebtedness for borrowed money;
(ii declared or paid any Dividends or declared or made any
other distributions of any kind to its securityholders or made any
direct or indirect redemption, retirement, purchase or other
acquisition of any shares of its capital stock;
(iii made or permitted any amendment, termination, waiver or
lapse (other than in accordance with its terms) of any material right
of the Company or any subsidiary of the Company under any material
contract or agreement or governmental license, authorization or Permit;
(iv made any loan or advance to its securityholders or to any
of its directors, officers or employees, consultants, agents or other
representatives (other than
<PAGE>
advances made in the ordinary course of business), or made any other
loan or advance, other than in the ordinary course of business
consistent with past practice;
(v entered into any lease (as lessee) under which the Company
or any of its subsidiaries would be obligated to make payments in any
one year of $100,000 or more, sold, abandoned or made any other
disposition of any of its assets or properties (except for sales of
assets in the ordinary course of business), or granted or suffered any
lien or other encumbrance on any of its assets or properties;
(vi made any material acquisition of assets, properties,
securities or business of any other person;
(vii paid, directly or indirectly, any of its material
liabilities before the same became due in accordance with its terms or
other than in the ordinary course of business;
(viii terminated or failed to renew (where renewal was
permitted), or received any written threat (that was not subsequently
withdrawn) to terminate or fail to renew (where renewal was permitted),
any contract or other agreement, the absence of which has had,
individually or in the aggregate, a Material Adverse Change;
(ix entered into any other contract or other agreement or
other transaction that materially increases its liabilities, other than
in the ordinary course of business;
(x modified, changed or terminated its method of accounting or
accounting practices; or
(xi entered into any contract or other agreement to do any of
the foregoing.
(b The Company has previously provided to CVCA a true and
correct list of the employees of the Company whose annual total compensation
exceeds $100,000, which list sets forth the current salary and other
compensation of each of such employees.
3.17 REGULATORY FILINGS. Except as set forth in
Section 3.17 of the Disclosure Schedule, since July 1, 1992, the Company has
filed all reports, statements, documents, registrations, filings or submissions
required to be filed by it with any governmental or regulatory body with respect
to which the failure to so file, individually or in the aggregate, has had a
Material Adverse Change, and all such filings were in compliance with applicable
law in all material respects when made.
3.18 RELATED TRANSACTIONS. Except as disclosed
<PAGE>
in Section 3.18 of the Disclosure Schedule, (i) neither McCann nor any of his
affiliates (which is deemed to include all family members for purposes of this
Section 3.18) (other than the Company) provides or causes to be provided to the
Company any material products, services, equipment, facilities, or similar
items, and (ii) there are no, and since June 30, 1994 there have not been any,
Liabilities, contracts or other agreements or other transactions between the
Company and McCann or any of his affiliates (other than the Company) or any
officer, director or employee of any affiliate of McCann (or other entity in
which McCann or any of his affiliates has a material equity interest).
3.19 LIABILITIES. As of June 30, 1994, the Company
did not have any material direct or indirect indebtedness, liability, claim,
loss, damage, deficiency, obligation or responsibility, fixed or unfixed, choate
or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise ("Liabilities") required by GAAP to be
reflected in, reserved against on, or disclosed in the footnotes to, the balance
sheet at June 30, 1994 included in the Financials which were not so reflected,
reserved or disclosed. Except as set forth in Section 3.19 of the Disclosure
Schedule, since June 30, 1994, the Company has not incurred any material
Liabilities other than in the ordinary course of business, consistent with past
practice.
3.20 BROKERS. No broker or finder has acted directly
or indirectly for the Company nor has the Company incurred any obligation to pay
any brokerage, finder's fee or other commission in connection with the
transactions contemplated by this Agreement.
3.21 EMPLOYEE BENEFITS. (a) Section 3.21(a) of the
Disclosure Schedule lists each "employee benefit plan" (within the meaning of
section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (including pension plans, profit sharing plans, stock bonus plans,
multiemployer plans (within the meaning of ERISA section 3(37)), medical
reimbursement, life, disability and severance pay plans) and all other employee
benefit plans, agreements, programs, policies or other arrangements, whether or
not subject to ERISA (including employment, change-in-control, fringe benefit,
stock purchase, stock option, bonus, incentive and deferred compensation plans
or arrangements and any funding mechanism therefor now in effect or required in
the future as a result of the transactions contemplated by this Agreement or
otherwise), whether formal or informal, oral or written, under which the Company
or any of its subsidiaries has any present or future liability. All such plans,
agreements, programs, policies and arrangements shall be collectively referred
to as the "Company Plans."
(b With respect to each Company Plan, the Company has
<PAGE>
made available to CVCA a current, accurate and complete copy (or, to the extent
no such copy exists, an accurate description) thereof (including all amendments
thereto which will become effective at a later date) and, to the extent
applicable, (i) any related trust agreement, annuity contract or other funding
instrument; (ii) the most recent summary plan description and (iii) the most
recent annual report form (Form 5500 series), financial statement and actuarial
report.
(c (i) Each Company Plan has been established and administered
in accordance with its terms in all material respects, and in substantial
compliance with the applicable provisions of ERISA, the Code and other
applicable laws, rules and regulations (including any continuation coverage
required by the Consolidated Omnibus Reconciliation Act of 1985); (ii) each
Company Plan which is intended to be qualified within the meaning of Code
section 401(a) has received a favorable determination letter as to its
qualification and nothing has occurred which could be expected to adversely
affect such determination; (iii) with respect to any Company Plan, no actions,
suits or claims (other than routine claims for benefits in the ordinary course)
are pending or, to the knowledge of the Company, threatened, the Company does
not know of any facts or circumstances which could give rise to any such
actions, suits or claims and the Company will promptly notify CVCA in writing of
any pending or threatened claims arising between the date hereof and the Closing
Date; (iv) neither the Company nor any other party has engaged in a prohibited
transaction, as such term is defined under Code section 4975 or ERISA section
406, which would subject the Company or CVCA to any material taxes, penalties or
other liabilities under Code section 4975 or ERISA section 409 or 502(i); (v) no
event has occurred and no condition exists that would subject the Company or
CVCA to any material tax under Code sections 4971, 4972, 4976, 4977, 4979 or
4980, or to a material fine under ERISA section 502(c); (vi) all insurance
premiums required with respect to Company Plans as of the Closing Date have been
or will be paid prior thereto or adequate reserves have been provided for on the
Company's balance sheet; (vii) for each Company Plan with respect to which a
Form 5500 has been filed, no material adverse change has occurred with respect
to the matters covered by such Form since the date thereof; and (viii) all
contributions required to be made prior to the Closing Date under the terms of
any Company Plan, the Code, ERISA or other applicable law have been or will be
timely made or adequate reserves have been provided in respect of such Plan on
the Company's balance sheet.
(d (i) Neither the Company nor any member of its Controlled
Group (defined as any organization which is a member of a controlled group of
organizations within the meaning of Code section 414(b), (c), (m) or (o)) has
incurred any "accumulated funding deficiency" as such term is defined in ERISA
section 302 and Code section 412 (whether or not waived) with respect to any
<PAGE>
pension plan (within the meaning of ERISA Section 3(2)); (ii) no amendment has
occurred which has required or could reasonably be expected to require the
Company or any member of its Controlled Group to provide security pursuant to
Code section 401(a)(29); and (iii) neither the Company nor any member of its
Controlled Group has engaged in a transaction which could be expected to subject
the Company to liability under ERISA section 4069.
(e Neither the Company nor any member of its Controlled Group
(i) has incurred any liability which remains outstanding under Title IV of ERISA
(other than for routine payment of premiums, none of which is overdue), (ii)
currently contributes to any multiemployer plan (as defined below), or (iii) has
at any time contributed to, or had any obligation or liability in respect of,
any multiemployer plan (within the meaning of section 4001(a)(3) of ERISA) which
could reasonably be expected to result in liability to the Company or such
member.
(f No transaction contemplated by this Agreement will (either
alone or upon the occurrence of any additional or subsequent events) constitute
an event under any Company Plan that will or may result in any payment (whether
of severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in compensation or benefits or obligation to
fund benefits by the Company.
3.22 ENVIRONMENTAL MATTERS. (a) Except as set forth
in Section 3.22(a) of the Disclosure Schedule, each of the Company and its
subsidiaries is in compliance in all material respects with all applicable
Environmental Laws.
(b To the knowledge of the Company (which means, for purposes
of this Section 3.22(b), the knowledge (after due inquiry) of the officers of
the Company listed in Section 3.22(b) of the Disclosure Schedule), there are no
facts, events, conditions, circumstances, activities, practices, incidents,
actions, omissions or plans (i) that, individually or in the aggregate, would
reasonably be expected to give rise to any material statutory liability of the
Company or any of its subsidiaries under any Environmental Laws or any common
law cause of action against the Company or any of its subsidiaries with respect
to any Environmental Matter, or (ii) that would reasonably be expected to form
the basis of any material claim, action, suit, proceeding, hearing,
investigation or inquiry involving the Company or any of its subsidiaries based
on or related to any Environmental Matter.
(c The Company has not, since July 1, 1992, received any
notice in writing from any governmental or regulatory body that it is or may be
a potentially responsible party at any waste disposal site.
3.23 TAXES. For purposes of this Section 3.23,
<PAGE>
any reference to the Company shall include any corporation which merged or was
liquidated with and into the Company and/or any predecessor thereto; PROVIDED,
however that any reference to the Company shall not include any corporation
(other than the Company) which cannot have any liability for Taxes because all
applicable statutes of limitation for the assessment and collection of Taxes
have expired. Except as previously specifically disclosed to CVCA in writing:
(a All Tax Returns required to be filed by or with respect to
the Company have been timely filed, and all such Tax Returns are true, correct
and complete in all material respects. The Company (i) has timely paid all
material Taxes that are due, or which, to the knowledge of the Company, may be
or have been claimed or asserted by any taxing authority to be due, from or with
respect to it for the periods prior to the date of this Agreement or (ii) has
provided for all material Taxes in its books and records and in accordance with
GAAP. The Company has made (or there has been made on its behalf) all required
current material estimated Tax payments sufficient to avoid any material
underpayment penalties.
(b None of the United States federal income Tax Returns of the
Company and of each affiliated group (within the meaning of the Code) of which
the Company is or has been a member have been audited or examined by the IRS,
and the statute of limitations for all periods through the respective years
specified in Section 3.23 of the Disclosure Schedule has not expired. There are
no outstanding agreements, waivers, or arrangements extending the statutory
period of limitation applicable to any claim for, or the period for the
collection or assessment of, Taxes due from or with respect to the Company for
any taxable period. The Company has delivered or made available to CVCA true and
complete copies of each of (i) any audit report issued to the Company relating
to the United States federal, state, local, or foreign Taxes due from or with
respect to the Company and (ii) the United States federal, state, local, and
foreign Tax Returns, for each of the taxable years of the Company's existence,
filed by the Company or the portions of such returns that relate to the Company
filed by any affiliated, consolidated, combined, or unitary group of which the
Company was then a member. No closing agreement pursuant to Section 7121 of the
Code (or any predecessor provision) or any similar provision of any state,
local, or foreign law has been entered into by or with respect to the Company.
(c No audit or other proceeding by any court, governmental or
regulatory authority, or similar person is pending or, to the knowledge of the
Company, threatened with respect to any material Taxes due from or with respect
to the Company or any Tax Return filed by or with respect to the Company. No
assessment of Tax is proposed against the Company or any of its assets or
properties.
<PAGE>
(d No consent to the application of section 341(f)(2) of the
Code (or any predecessor provision) has been made or filed by or with respect to
the Company or any of its assets or properties. None of the assets or properties
of the Company is an asset or property that is or will be required to be treated
as being (i) owned by any person (other than the Company) pursuant to the
provisions of section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately before the enactment of the Tax Reform Act of 1986, or
(ii) tax-exempt use property within the meaning of section 168(h)(1) of the
Code.
(e The Company has not agreed to and is not required to make
any adjustment pursuant to section 481(a) of the Code (or any predecessor
provision) by reason of any change in any accounting method of the Company, and
there is no application pending with any taxing authority requesting permission
for any changes in any accounting method of the Company. The IRS has not
proposed any such adjustment or change in accounting method.
(f The Company has duly and timely withheld from employee
salaries, wages, and other compensation and paid over to the appropriate taxing
authorities all material amounts required to be so withheld and paid over for
all periods under all applicable laws and regulations.
3.24 DISCLOSURE. Neither (i) the information in any
written statement (other than this Agreement), certificate, schedule, list or
other written information (excluding any projections) furnished or to be
furnished by the Company (or on behalf of the Company by the individuals listed
in Section 3.24 of the Disclosure Schedule) to CVCA in connection herewith,
taken together as a whole, nor (ii) the representations and warranties by the
Company herein, contains or will contain any untrue statement of a material fact
or omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
3.25 OFFERING OF SECURITIES. Assuming the accuracy of
the representation set forth in Section 5.5, the offering, issuance and sale of
the Class C Shares and the Warrants hereunder are exempt from the registration
requirements of the Securities Act.
4. REPRESENTATIONS AND WARRANTIES OF MCCANN. McCann represents
and warrants to CVCA as follows:
4.1 CAPACITY. McCann has the capacity to execute and
deliver this Agreement, to perform his obligations hereunder and to consummate
the transactions contemplated hereby.
4.2 AUTHORITY; EXECUTION AND DELIVERY. This
<PAGE>
Agreement has been duly executed and delivered by McCann and constitutes the
valid and binding obligation of McCann enforceable against him in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, by general equitable principles
(regardless of whether such enforceability is considered in a proceeding in
equity or at law) or by an implied covenant of good faith and fair dealing.
4.3 GOVERNMENTAL CONSENTS AND APPROVALS. The
execution and delivery by McCann of this Agreement, the performance by McCann of
his obligations hereunder and the consummation of the transactions contemplated
hereby do not and will not require McCann to obtain any consent, approval or
action of, or make any filing with or give any notice to, any person,
governmental or regulatory body or judicial authority.
4.4 NO BREACH. The execution, delivery and
performance by McCann of this Agreement and the consummation of the transactions
contemplated hereby in accordance with the respective terms and conditions
hereof do not and will not: (a) (a) violate, conflict with or result in the
breach of any of the terms of, result in a modification of the effect of,
otherwise give any other contracting party the right to terminate, cancel or
accelerate, or constitute (with or without notice or lapse of time or both) a
default under, any material contract or other agreement to which McCann is a
party or by or to which he or any of his assets or properties may be bound or
subject, or (b) violate any existing term or provision of any law, regulation,
order, writ, judgment, injunction or decree applicable to McCann.
5. REPRESENTATIONS AND WARRANTIES OF CVCA. CVCA represents and
warrants to the Company as follows:
5.1 FORMATION. CVCA is a limited partnership, validly
existing and in good standing under the laws of the State of California. CVCA
has all requisite power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
5.2 AUTHORITY; EXECUTION AND DELIVERY. The execution,
delivery and performance of this Agreement and the consummation by CVCA of the
transactions contemplated hereby have been duly and validly authorized by all
necessary partnership action on the part of CVCA. This Agreement has been duly
executed and delivered by CVCA and constitutes the valid and binding obligation
of CVCA enforceable against CVCA in accordance with its terms, except (a) as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law) or by an
implied covenant of good faith and fair dealing and
<PAGE>
(b) to the extent that the indemnification rights set forth in Section 8.5 may
be limited by applicable law.
5.3 GOVERNMENTAL CONSENTS AND APPROVALS. The
execution and delivery by CVCA of this Agreement, the performance by CVCA of its
obligations hereunder and the consummation of the transactions contemplated
hereby do not and will not require CVCA to obtain any consent, approval or
action of, or make any filing with or give any notice to, any person,
governmental or regulatory body or judicial authority, other than filings with
the Small Business Administration and except for such consents, approvals,
actions, filings and notices as may be required in connection with the exercise
of registration rights set forth in Section 8.
5.4 NO BREACH. The execution, delivery and
performance by CVCA of this Agreement and the consummation of the transactions
contemplated hereby in accordance with the respective terms and conditions
hereof do not and will not: (a) violate any provision of the partnership
agreement of CVCA; (b) violate, conflict with or result in the breach of any of
the terms of, result in a modification of the effect of, otherwise give any
other contracting party the right to terminate, cancel or accelerate, or
constitute (with or without notice or lapse of time or both) a default under,
any material contract or other agreement to which CVCA is a party or by or to
which it or any of its assets or properties may be bound or subject; or (c)
violate any existing term or provision of any law, regulation, order, writ,
judgment, injunction or decree applicable to CVCA.
5.5 ACCREDITED INVESTOR; PURCHASE NOT FOR
DISTRIBUTION. CVCA is an "accredited investor," as such term is defined in Rule
501(a) promulgated under the Securities Act. The Class C Shares, the Warrants
and the Warrant Shares to be acquired under the terms of this Agreement will be
acquired by CVCA for its own account and not with a view to distribution. CVCA
will not resell, transfer, assign or distribute the Class C Shares, the Warrants
or the Warrant Shares, except in compliance with the registration requirements
of the Securities Act or pursuant to an available exemption therefrom.
5.6 BROKERS. No broker or finder has acted directly
or indirectly for CVCA, nor has CVCA incurred any obligation to pay any
brokerage, finder's fee or other commission in connection with the transactions
contemplated by this Agreement.
6. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees as follows:
6.1 CORPORATE EXAMINATIONS AND INVESTIGATIONS. (a)
Following the initial Closing hereunder, for so long as CVCA or any of its
affiliates holds any Class C Shares, Warrants or
<PAGE>
Warrant Shares, CVCA shall be entitled, through its employees and
representatives, to make such reasonable investigation of the assets,
liabilities, properties, business and operations of the Company and its
subsidiaries as CVCA reasonably may request. Any such investigation and
examination shall be conducted at reasonable times and under reasonable
circumstances, and the Company shall, and shall cause its subsidiaries to,
cooperate fully therein. In order that CVCA may have full opportunity to make
such business, accounting and legal review, examination or investigation as it
may wish of the business and affairs of the Company, the Company shall furnish
the representatives of CVCA during such period with all such information and
copies of such documents concerning the affairs of the Company as such
representatives may reasonably request and shall cause its officers, employees,
consultants, agents, accountants and attorneys to cooperate fully with such
representatives in connection therewith; PROVIDED that such review and
examination shall not unreasonably interfere with the operation of the business
of the Company and its subsidiaries.
(b) No investigation by CVCA pursuant to this Section 6.1 or
otherwise shall affect any representations or warranties of the parties herein
or the conditions to the obligations of the parties hereto.
6.2 REGULATORY APPROVALS. (a) The Company shall (i)
take all reasonable steps necessary or appropriate, and use all commercially
reasonable efforts, to obtain as promptly as practicable all necessary
approvals, authorizations and consents of governmental and regulatory bodies and
other persons required to be obtained by them to consummate the transactions
contemplated by this Agreement, and (ii) cooperate with CVCA in seeking to
obtain all such approvals, authorizations and consents. The Company shall use
its reasonable best efforts to provide such information and communications to
governmental and regulatory bodies as such agencies or CVCA may reasonably
request.
(b Each of the parties shall provide to the other party copies
of all applications in advance of filing or submission of such applications to
governmental or regulatory bodies in connection with this Agreement.
6.3 INFORMATION. So long as CVCA or any of its
affiliates owns any Class C Shares, Warrants or Warrant Shares, or is or may,
upon satisfaction of conditions set forth herein, become obligated to purchase
any Class C Shares, Warrants or Warrant Shares, the Company will deliver to
CVCA:
(a As soon as available, but in any event not later than 55
days after the end of each of the first three fiscal quarters of each
fiscal year, a condensed consolidated balance sheet of the Company and
its subsidiaries as of the
<PAGE>
end of each such period and a condensed consolidated statement of
operations and statement of cash flows of the Company and its
subsidiaries for the elapsed period in such fiscal year, which
financial statements shall be accompanied by a certificate of an
authorized officer of the Company to the effect that such statements
present fairly in all material respects the financial position, results
of operations and cash flows of the Company as at and for each period
set forth therein, in accordance with GAAP.
(b As soon as available, but in any event within 100 days
after the end of each fiscal year, a consolidated balance sheet of the
Company and its subsidiaries as of the end of such fiscal year and a
consolidated statement of operations and statement of cash flows of the
Company and its subsidiaries for such fiscal year, accompanied by an
opinion with respect to such financial statements of an accounting firm
of recognized national standing selected by the Company.
(c From time to time such additional information regarding the
results of operations, financial condition, business or prospects of
the Company and its subsidiaries as CVCA may reasonably request
(including monthly financial statement information and comparative
annual, quarterly and monthly information), subject to any applicable
restrictions imposed by law, regulation or contracts entered into in
the ordinary course of business of the Company or its subsidiaries.
6.4 USE OF PROCEEDS. The Company shall apply the
proceeds from the sale of each Investment to fund on-going capital expansion
(including through acquisitions) and for working capital purposes of the
business of the Company.
6.5 LEGEND. Each certificate or instrument evidencing
Class C Shares or Warrant Shares, each Warrant and each certificate issued in
exchange for or upon the transfer of the Warrants shall be stamped or otherwise
imprinted with legends in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
AN INVESTMENT AGREEMENT DATED AS OF JANUARY 16, 1995, AMONG
CHEMICAL VENTURE CAPITAL ASSOCIATES, THE ISSUER OF SUCH
SECURITIES (THE "COMPANY") AND A STOCKHOLDER OF THE COMPANY. A
COPY OF SUCH INVESTMENT AGREEMENT WILL BE FURNISHED WITHOUT
CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN
REQUEST."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
TRANSFER OF THE SECURITIES REPRESENTED
<PAGE>
BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN
THE INVESTMENT AGREEMENT AND THE COMPANY RESERVES THE RIGHT TO
REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS
HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF
SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY TO THE
HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE."
The legends set forth above shall be removed from the writing evidencing any
Class C Shares, Warrant Shares or Warrant upon the Transfer of such Class C
Shares, Warrant Shares or Warrant in a Public Sale.
6.6 CERTAIN RESTRICTIVE AGREEMENTS. (a) Without the
prior written consent of CVCA, the Company will not, and will not permit any of
its subsidiaries to:
(i declare, make or pay any Dividends on or in respect of any
of its capital stock (other than (1) Dividends declared on and made or
paid ratably in respect of the Class C Shares, (2) repurchases of
shares of Common Stock from holders of such shares (other than McCann
and his affiliates, which is deemed to include all family members for
the purposes of this Section 6.6, and James R. Poage) in transactions
not involving, in any one case, a purchase price of more than $100,000
and provided that the aggregate purchase price for all such repurchases
pursuant to this clause (2) shall not exceed $1 million, (3)
repurchases of all or a portion of the Common Stock owned by James R.
Poage on the date of this Agreement, (4) Dividends on or in respect of
shares of capital stock of any wholly owned subsidiary of the Company
and (5) Dividends permitted pursuant to Section 6.6(d));
(ii except to the extent permitted in clause (iii) below, make
or permit any of its affiliates to make loans or advances to any person
in excess of $100,000, except to a subsidiary of the Company;
(iii make any loans or advances to its employees, except in
the ordinary course of business as part of compensation;
(iv guarantee or otherwise agree to perform and be responsible
for any obligation of any other person, except for subsidiaries of the
Company in the ordinary course of business;
(v (1) merge or consolidate, or enter into any other
similar business combination, with any other person, other than in
connection with a Permitted Business Combination, or (2) sell or
otherwise transfer to any other person, in one transaction or in a
series or related transactions, all or
<PAGE>
substantially all of its properties or assets, unless such merger,
consolidation, business combination, sale or transfer provides for the
payment to the Holder(s) of the Class C Shares of the aggregate
Unreturned Original Cost thereof plus the aggregate Unpaid Yield
thereon to the date of payment and for the repurchase or cancellation
of the Warrants at a price per Warrant Share equal to the Warrant Value
Per Share (as defined in the Warrant) (provided that for this purpose,
such Warrant Value Per Share shall not be less than the value CVCA
would have received for each Warrant Share if it had exercised the
Warrant with respect to such Warrant Share immediately prior to the
merger, consolidation, business combination, sale or transfer in
connection with which the Warrant Value Per share is being determined);
(vi except as permitted by Section 6.6(d) and other than
exchanges of McCann Debt for shares of Class C Common Stock and Class B
Common Stock at the McCann Debt Exchange Rate, issue or sell any of its
capital stock or rights or options in respect thereof to McCann or any
affiliate of McCann at a price below the fair market value thereof
(other than the issuance to Christopher G. McCann of employee stock
options and shares of Class B Common Stock issuable upon exercise
thereof, provided that (1) such options shall be issued in amounts
consistent with the provisions of the related stock option plan
applicable to employees of his title and responsibility and (2) the
number of shares issuable upon exercise of such options shall not
exceed 598,544 shares (adjusted to reflect any subdivisions,
combinations or reclassifications of the Class B Common Stock following
the date hereof));
(vii except as permitted by Section 6.6(d), issue or sell any
of its Class A Common Stock or any class or series of preferred stock;
or
(viii engage in any transactions with McCann (other than the
payment of employee compensation) or any of his affiliates (other than
(1) transactions on terms and conditions not less favorable to the
Company and its subsidiaries than would be available to the Company or
its subsidiaries in a transaction with an unaffiliated person and (2)
transactions specifically permitted or required pursuant to this
Agreement).
(b Without the prior written consent of CVCA, the Company will
not, and will not permit any of its subsidiaries to, create, incur or assume any
Indebtedness (except for the McCann Debt, Refinancing Indebtedness and,
following the fourth Investment pursuant to this Agreement, except for
Qualifying Indebtedness) in excess of the Applicable Permitted Indebtedness
Level set forth below:
<PAGE>
<TABLE>
<CAPTION>
Applicable Permitted
Investment Indebtedness Level
---------- ------------------
<S> <C>
First $10.0 million
Second $12.5 million
Third $15.0 million
Fourth $20.0 million
Fifth No limit
</TABLE>
(c The consent requirements set forth in clauses (a) and (b)
above shall terminate upon the earlier to occur of (i) the redemption or other
acquisition by the Company of all the Class C Shares, Warrants and Warrant
Shares and (ii) the closing of the first registered offering of the Class B
Common Stock with gross proceeds to the Company of not less than $20 million and
with a Market Valuation Product at least equal to $300 million.
(d Notwithstanding Sections 6.6(a)(i), (vi) and (vii),
provided that the Company has complied with the other provisions of this Section
6.6(d), the Company shall be permitted either to (i) declare and distribute
among the holders of the outstanding shares of the Class A Common Stock and the
Class B Common Stock a contemporaneous one-time stock dividend of 1,878 shares
of Class A Common Stock and 187,800 shares of Class B Common Stock (and one or
more holders may waive any right they may have to receipt of such dividend) or
(ii) issue to McCann, as compensation, 1,878 shares of Class A Common Stock and
187,800 shares of Class B Common Stock (or options in respect thereof). As a
condition to taking the action permitted in the preceding sentence, the Company
shall be required, at or immediately prior to the time of such action, to issue
to CVCA a number of additional Units of Class C Shares and Warrant Shares to be
agreed upon with CVCA in order to avoid the dilutive impact to CVCA of the
issuance of the shares of Class A Common Stock and Class B Common Stock pursuant
to the preceding sentence. Such number shall be determined on a basis consistent
with the methodology and valuations used by CVCA and the Company in determining
the number of shares set forth in the Investment Schedule. In the event the
Company and CVCA are unable to agree to such number of shares, the action
permitted by the first sentence of this Section 6.6(d) shall not be permitted.
6.7 KEY EVENTS. The following shall constitute "Key
Events" for purposes of the Class C Shares: (a) any failure of the Company to
perform any material covenant or agreement in this Agreement which continues
beyond five business days after written notice of such failure is delivered to
the Company; (b) any material breach of any representation or warranty by the
Company or McCann when made; (c) any Deterioration Event shall occur; and (d)
the failure of McCann (other than by reason of death or permanent disability) to
serve as Chief Executive Officer of the Company (or any successor company in a
Permitted
<PAGE>
Business Combination) for a period of 120 days, unless prior to the expiration
of such 120-period a replacement Chief Executive Officer reasonably acceptable
to CVCA is elected to serve in such capacity (it being understood that
Christopher G. McCann is acceptable to CVCA).
7. ADDITIONAL COVENANTS AND AGREEMENTS OF THE PARTIES. The
Company, CVCA and McCann covenant and agree as follows:
7.1 FIRST OFFER RIGHT. If at any time CVCA desires to
effect a Transfer (other than Permitted Transfers or Public Sales) of any Common
Stock, then at least 30 days prior to making any such Transfer, CVCA shall
deliver a written notice (an "Offer Notice") to McCann. The Offer Notice shall
state in reasonable detail the type and number of shares of Common Stock
proposed to be Transferred (the "Offered Common Stock") and the terms and
conditions of such proposed Transfer, including the aggregate purchase price to
be paid for the Offered Common Stock (PROVIDED, that in the case of a sale for
non-cash consideration, McCann shall be permitted at his option to purchase the
Offered Common Stock proposed to be acquired for such non-cash consideration for
cash in an amount equal to the value of such non-cash consideration) and
(subject to compliance with any confidentiality restriction to which CVCA may be
subject) the identity of the prospective Transferee(s). McCann shall have 20
days from the date of delivery of the Offer Notice to deliver a written notice
to CVCA (the "Acceptance Notice"), electing to purchase all (but not less than
all) of the Offered Common Stock on the terms and conditions, and for the
aggregate purchase price, set forth in the Offer Notice, in which event the
closing of the purchase and sale of the Offered Common Stock shall take place as
soon as practicable, but in any event within 30 days following delivery of such
Acceptance Notice. In the event that McCann has not delivered an Acceptance
Notice within the 20-day period set forth above, then during the 120-day period
following the expiration of such 20-day period, CVCA shall be entitled to
Transfer all (but not less than all) of the Offered Common Stock to any person
for an aggregate consideration which is no less than the aggregate consideration
set forth in the Offer Notice and otherwise on terms and conditions no more
favorable to the Transferee thereof than the terms and conditions set forth in
the Offer Notice; PROVIDED that such person shall have agreed in writing at the
time of such Transfer to be bound by the provisions of this Agreement with
respect to the Common Stock so Transferred. If all of such Offered Common Stock
are not Transferred by the expiration of such 120-day period, any subsequent
Transfer shall again be subject to the provisions of this Section 7.1. McCann,
at his option, may effect any purchase and sale of Offered Common Stock pursuant
to the exercise of the right set forth in this Section 7.1 through the Company.
7.2 CO-SALE RIGHTS. (a) Subject to paragraph (d) of
this Section 7.2, at least 30 days prior to any Transfer
<PAGE>
of Class B Common Stock (including any (i) shares of Class A Common Stock to be
converted into shares of Class B Common Stock in connection with the Transfer
thereof in accordance with Section 7.10 and the Amended and Restated Certificate
of Incorporation of the Company and (ii) shares of Class B Common Stock
represented by Warrants issued to McCann in exchange for McCann Debt in
accordance with Section 7.9) by McCann (other than Permitted Transfers or Public
Sales), McCann shall deliver a written notice ("Sale Notice") to CVCA,
specifying in reasonable detail the type and number of shares of Common Stock
proposed to be Transferred, the identity of the prospective Transferee(s), the
number of shares of Common Stock of the Company owned of record by such
Transferee(s), the terms and conditions of the Transfer (including the price and
consideration to be paid for such Common Stock) and (subject to compliance with
any confidentiality restriction to which McCann may be subject) if the
prospective Transferee is not a reporting company under the Securities Exchange
Act of 1934, as amended, such other information regarding such Transferee as
shall have been provided to McCann. Subject to paragraph (d) of this Section
7.2, CVCA may elect to participate in the proposed Transfer on the basis set
forth in paragraphs (b) and, to the extent applicable, (c) of this Section 7.2
by delivering written notice to McCann within 20 days after delivery of the Sale
Notice.
(b If CVCA has elected to participate in such Transfer
pursuant to the terms hereof, CVCA shall be entitled, subject to paragraph (c)
of this Section 7.2, to sell in the proposed Transfer, at the same price and on
the same terms, a number of Class C Shares or Warrant Shares, as the case may
be, equal to the product of (i) a fraction, the numerator of which is the number
of shares of Common Stock owned by CVCA (including Warrant Shares issuable to
CVCA upon the exercise of any Warrants then held by CVCA) and the denominator of
which is the total number of shares of Common Stock owned by CVCA (including
those represented by Warrants as set forth above) and McCann (including any
Warrant Shares issuable to McCann upon the exercise of any Warrants issued to
McCann in accordance with Section 7.9(b)(i)) and (ii) the total number of shares
of Common Stock proposed to be Transferred by McCann. The cost of any Transfer
in which McCann and CVCA participate pursuant to this Section shall be borne PRO
RATA by all Transferors participating in such Transfer.
(c CVCA shall, to the extent it elects to participate in any
Transfer set forth in any Sale Notice, first include in such Transfer Common
Stock of the same class (it being understood that shares of Class A Common Stock
to be converted into shares of Class B Common Stock in connection with the
Transfer thereof in accordance with Section 7.10 and the Amended and Restated
Certificate of Incorporation of the Company shall be treated as shares of Class
B Common Stock for this purpose) as that proposed to be Transferred in such Sale
Notice to the extent of its holdings of such class; thereafter, CVCA shall be
permitted,
<PAGE>
subject to the limitations set forth in paragraph (b) above and in accordance
with this paragraph (c), to include in such Transfer Common Stock of a different
class as that proposed to be Transferred by McCann. Any such shares of Common
Stock of a different class to be included in such Transfer shall be Transferred
on the same basis as shares of the same class except that the price payable for
each such share shall be the Equivalent Price. In the event that the proposed
Transferee is unwilling to purchase such shares of a different class in
accordance with the terms herein set forth, McCann shall either (i) prior to
such Transfer, cause the Company to complete a Class C Shares Exchange and
thereafter permit CVCA to participate in the proposed Transfer or (ii) cancel
the proposed Transfer set forth in the Sale Notice.
(d The provisions of this Section 7.2 shall terminate, with
respect to Transfers of shares of Class B Common Stock by McCann, at such time
as the Company shall have completed an initial Public Sale of shares of the
Class B Common Stock and the Company's Market Capitalization is at least $300
million.
7.3 PRE-EMPTIVE RIGHT. (a) Subject to paragraph (c)
of this Section 7.3, if at any time following the initial Closing hereunder, the
Company proposes to issue any Class B Common Stock (other than: (i) Warrant
Shares issued pursuant to this Agreement; (ii) shares of Class B Common Stock
issued to McCann in accordance with Section 7.9(b)(i) and (iii); (iii) other
than up to 598,544 shares (adjusted to reflect any subdivisions, combinations or
reclassifications of the Class B Common Stock following the date hereof)
issuable upon exercise of employee stock options granted to employees of the
Company other than McCann or (iv) pursuant to Section 6.6(d)), CVCA shall have a
pre-emptive right to purchase a portion of such Class B Common Stock sufficient
to enable CVCA to maintain its percentage interest in the Class B Common Stock
(after giving effect to the issuance of Warrant Shares upon exercise of any
unexercised Warrants then outstanding) immediately prior to such issuance.
(b The Company shall give CVCA at least 60 days' prior written
notice of any such proposed issuance setting forth in reasonable detail the
proposed terms and conditions thereof, including the identity of any known
proposed recipient (the "Issuance Notice"), and shall offer to CVCA the
opportunity to purchase such Class B Common Stock at the same price, on the same
terms, and at the same time as the shares of Class B Common Stock are proposed
to be issued by the Company; PROVIDED that in the case of any proposed issuance
of Class B Common Stock for non-cash consideration, CVCA shall be permitted to
purchase the Class B Common Stock proposed to be issued for cash in an amount
equal to the value of such non-cash consideration, as determined in good faith
by the Board of Directors of the Company. CVCA may exercise its pre-emptive
right by delivery of a written notice to the Company within 30 days after
delivery of an Issuance Notice,
<PAGE>
which exercise shall be irrevocable.
(c The provisions of this Section shall (i) not apply to
issuances pursuant to a registered public offering under the Securities Act and
(ii) terminate at such time as the Company shall have completed an initial
Public Sale of shares of the Class B Common Stock and the Company's Market
Capitalization is at least $300 million.
7.4 NO TRANSFER PERIOD. CVCA shall not Transfer any
Class C Shares or Warrant Shares prior to the first anniversary of the initial
Closing hereunder other than Transfers to Permitted Transferees and other than
in connection with (a) the exercise of rights provided for in Section 7.2 and
Section 8 and (b) a transfer of a portfolio of investments by CVCA.
7.5 CALL OF WARRANTS AND WARRANT SHARES. (a) From and
after the fifth anniversary of the initial Closing hereunder, the Company shall
have the right to purchase all (but not less than all) of the Warrants and
Warrant Shares at the Call Price.
(b) In the event that the Company elects to exercise its right
to purchase the Warrants and the Warrant Shares pursuant to this Section 7.5,
notice of such election shall be mailed to CVCA by first-class mail, postage
prepaid, and mailed not less than 30 days nor more than 60 days prior to the
proposed purchase date. Such notice shall state: (i) the proposed purchase date;
(ii) a preliminary estimate of the aggregate Call Price for all Warrants and
Warrant Shares; and (iii) the place where the closing of such purchase is
proposed to be held. Promptly following receipt by CVCA of such notice, CVCA and
the Company shall determine the Call Price, and within ten Business Days of
making such determination, the closing of the purchase and sale of the Warrants
and the Warrant Shares shall be held at the place set forth in such notice
(unless otherwise agreed to by the parties). At such closing, CVCA shall deliver
to the Company the Warrants and the Warrant Shares, duly endorsed for transfer,
against delivery of by the Company to CVCA of the aggregate Call Price therefor,
in immediately available funds.
(c) In the event that the Company shall, at any time during
the twelve-month period following the closing of the purchase of Warrants and
Warrant Shares pursuant to this Section 7.5, sell shares of Common Stock in a
public offering at a per share price to the public in excess of the Appraised
Value per Warrant Share used for purposes of such purchase, the Company shall be
required to make an Adjusting Payment to CVCA no later than the fifth Business
Day following such sale of Common Stock in a public offering. No sale of shares
of Common Stock following such twelve-month period shall require an Adjusting
Payment.
<PAGE>
7.6 BOARD REPRESENTATION. From and after the initial
Closing hereunder, for so long as CVCA continues to own any Warrants or Warrant
Shares, the board of directors of the Company shall consist of no more than ten
members, at least one of which shall be designated by CVCA at its option. Each
party shall take such action as may be requested by CVCA from time to time to
ensure compliance with this provision. In the event that the right to designate
a member of the board of directors shall lapse and CVCA shall continue to own
any shares of Class C Common Stock, CVCA shall have a right to observe all
meetings of such board (and any committees of such board) for so long as it
shall continue to own any of such shares.
7.7 SECURITIES ACT COMPLIANCE. In connection with the
Transfer of any Restricted Securities (other than a Transfer registered under
the Securities Act), CVCA shall deliver written notice to the Company describing
in reasonable detail the Transfer or proposed Transfer, together with an opinion
of counsel (which counsel shall be reasonably acceptable to the Company)
satisfactory in form and substance to the Company that such Transfer of
Restricted Securities may be effected without registration of such Restricted
Securities under the Securities Act. If, in connection with such Transfer, CVCA
advises the Company that no Transfer of such Restricted Securities subsequent to
such proposed Transfer shall require registration under the Securities Act, the
new instruments or certificates for such Restricted Securities issued by the
Company upon consummation of such proposed Transfer shall not bear the legend
with respect to the Securities Act set forth in Section 6.5 unless counsel to
the Company advises the Company that such a subsequent Transfer shall require
registration under the Securities Act. If the Company is not required to deliver
new certificates for such Restricted Securities not bearing such legend, the
holder thereof shall not Transfer the same until the prospective Transferee has
confirmed to the Company in writing its agreement to be bound by the conditions
contained in this Agreement.
7.8 CONFIDENTIALITY. CVCA will hold and will cause
its officers, employees, auditors and other agents to hold in confidence, unless
compelled to disclose by judicial or administrative process or by other
requirements of law, all documents and information concerning the Company and
its subsidiaries furnished to CVCA in connection with the transactions
contemplated in this Agreement (except to the extent that such information is
(i) previously known by CVCA from sources other than the Company, its directors,
officers, auditors or other agents, (ii) in the public domain through no fault
of the Company or (iii) later lawfully acquired by CVCA on a non-confidential
basis from other sources who are not known by CVCA (after reasonable inquiry) to
be bound by a confidentiality agreement or otherwise prohibited from
transmitting the information to CVCA by a contractual, legal or fiduciary
obligation) and will not release or disclose such information to
<PAGE>
any other person, except its auditors and other advisors in connection with this
Agreement who need to know such information.
7.9 TREATMENT OF MCCANN DEBT. (a) Except as permitted
pursuant to clause (b) below: (i) the Company shall not, and shall not permit
any of its subsidiaries to, repay (in whole or in part), in cash or any other
property, the principal of or pay any interest accrued as of the date of this
Agreement (but not including such interest accrued subsequent to such date) in
respect of the McCann Debt prior to the later of such time as (1) CVCA's
obligations hereunder to make subsequent Investments shall have been terminated
and (2) the aggregate Unreturned Original Cost (plus the aggregate Unpaid Yield
thereon) with respect to each Investment made pursuant to this Agreement shall
have been paid to CVCA; and (ii) McCann shall not seek or accept any payment
from the Company or any subsidiary of the Company inconsistent with the
foregoing.
(b) Notwithstanding the provisions of clause (a) above, the
following transactions with respect to the McCann Debt shall be permitted: (i)
at any time and from time to time, McCann shall be permitted to exchange all or
any portion of the McCann Debt for shares of Class C Common Stock and Class B
Common Stock at the McCann Debt Exchange Rate; (ii) prior to the filing with the
SEC of a registration statement for an initial public offering of shares of the
Class B Common Stock, the Company may repay (without premium or penalty) McCann
Debt at any time and from time to time in an aggregate amount for all repayments
pursuant to this clause (b)(ii) not in excess of $2.5 million; (iii) prior to
the filing with the SEC of a registration statement for an initial public
offering of shares of the Class B Common Stock, the Company may repay (without
premium or penalty) McCann Debt in excess of the amount permitted by clause
(b)(ii) above, provided that as a condition to any such repayment, the Company
shall, immediately prior to such repayment, have issued to CVCA shares of the
Class C Common Stock and Warrant(s) or, at CVCA's option, Warrant Shares,
representing the Additional CVCA Equity; (iv) immediately prior to the filing
with the SEC of a registration statement for an initial public offering of
shares of the Class B Common Stock, the Company may repay (without premium or
penalty) any remaining McCann Debt in whole or in part and from time to time.
(c) The Additional CVCA Equity, if any, shall be forfeited and
returned to the Company if CVCA realizes a CVCA Return with respect to the
Investments (but not the Additional CVCA Equity) of more than 30%. If at any
time and from time to time while the Additional CVCA Equity is issued and
outstanding the Company believes that CVCA has realized such a CVCA Return, CVCA
shall, upon the Company's request, calculate the CVCA Return in good faith and
notify the Company thereof (including reasonable detail of such calculation).
Such calculation shall be accompanied with a certificate of a general partner of
CVCA
<PAGE>
certifying that such calculation has been made in accordance with the terms of
this Agreement.
(d) McCann shall be permitted to Transfer the McCann Debt to
his Permitted Transferees.
7.10 TRANSFERS BY MCCANN OF CLASS A COMMON STOCK.
Neither McCann nor any of his Permitted Transferees shall be permitted to
Transfer (including pursuant to any merger, consolidation or similar business
combination) any shares of Class A Common Stock to any other person (other than
to McCann or any person who is a Permitted Transferee of McCann) without
converting such shares to be transferred into shares of Class B Common Stock
prior thereto.
7.11 LIMITATION ON AMENDMENTS TO CERTIFICATE OF
INCORPORATION. At any time during which CVCA and its Transferees do not own a
majority of the issued and outstanding Class C Shares the Company will not take
any action requiring the consent of the holders of a majority of such Class C
Shares pursuant to the Amended and Restated Certificate of Incorporation of the
Company unless CVCA consents to such action.
8. REGISTRATION RIGHTS.
8.1 DEMAND REGISTRATION RIGHTS. (a) On the conditions
and subject to the limitations contained herein, if at any time after the
registration and sale by the Company pursuant to an effective registration
statement under the Securities Act of shares of the Class B Common Stock, the
Company shall receive a written request therefor from CVCA, the Company shall
prepare and file with the Commission a registration statement under the
Securities Act covering the Registrable Securities requested to be included in
such registration by CVCA covered by such request, and shall use its best
efforts to cause such registration statement to become effective. Such request
shall be in writing and shall specify the number of Registrable Securities to be
registered or qualified and the jurisdictions within the United States in which
such registration or qualification is desired. The Company shall pay all
Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this Section 8.1, and CVCA shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of its Registrable Securities pursuant to a registration
statement effected pursuant to this Section 8.1. The Company shall not be
obligated to effect any registration pursuant to this Section 8.1 at the request
of CVCA on more than one occasion (subject to the other provisions of this
Section 8.1). The managing underwriter of such offering shall be selected by
CVCA, but shall be reasonably satisfactory to the Company.
(b) Upon receipt of request pursuant to Section 8.1(a),
<PAGE>
the Company shall promptly take such steps as are necessary or appropriate to
prepare for a registration or qualification of the Registrable Securities to be
included in the registration and shall, as expeditiously as practicable, in good
faith, use its reasonable best efforts to effect any such registration or
qualification of the aggregate number of such Registrable Securities designated
in such request, all to the extent necessary to permit the disposition (in
accordance with the intended methods thereof) by CVCA with the notification to
or approval of any governmental authority under any federal or state law or any
listing with any securities exchange, which may be required to permit the sale
or disposition of any such Registrable Securities which CVCA proposes to make,
and the Company will keep effective and current such registration or
qualification for the period reasonably necessary to effect the sale of such
shares, such period not to exceed twelve (12) months.
(c) If CVCA determines for any reason not to proceed with a
registration pursuant to this Section 8.1 at any time before a registration
statement in connection therewith has been declared effective by the Commission
and (if (i) such registration statement has then been filed with the SEC or (ii)
provided that the Company has complied with its obligations in Section 8.1(b), a
period of 30 days has elapsed since the date the Company has received from CVCA
a written request for registration pursuant to Section 8.1(a)) agrees to bear
its own expenses incurred in connection therewith and to reimburse the Company
for the expenses incurred by it attributable to the registration of such
Registrable Securities, then CVCA shall not be deemed to have exercised its
right to require the Company to register Registrable Securities pursuant to this
Section 8.1.
(d) If, at the time any written request for registration is
received by the Company pursuant to this Section 8.1, Company by action of its
board of directors or any duly authorized committee thereof has determined to
proceed with the actual preparation and filing of a registration statement under
the Securities Act in connection with the proposed offer and sale for cash of
any of its securities by it, such written request shall be deemed to have been
given pursuant to Section 8.2 rather than this Section 8.1, CVCA's rights with
respect to such request shall be governed by Section 8.2 and CVCA shall not be
deemed to have exercised its right to require the Company to register
Registrable Securities pursuant to this Section 8.1.
(e) If the managing underwriter of an offering covered by a
request for registration under this Section 8.1 advises the Company in writing
that, in its opinion, the aggregate number of Registrable Securities requested
to be included in such registration pursuant to this Section 8.1 should be less
than the aggregate number of shares proposed to be sold in such registration, no
securities other than the Registrable Securities
<PAGE>
proposed to be sold in such registration by CVCA shall be registered in such
registration, and if CVCA is unable to sell at least 75% of the Registrable
Securities requested to be included in such registration, CVCA shall have one
additional right to require the Company to register Registrable Securities
pursuant to this Section 8.1.
8.2 "PIGGY-BACK" REGISTRATION RIGHTS. If the Company
at any time proposes to register any of its Class B Common Stock under the
Securities Act (other than a registration on Form S-8, S-4 or any successor or
similar forms) for public offerings for cash, it will each such time give prompt
written notice to CVCA of its intention to do so and of CVCA's rights under this
Section 8.2, at least 15 days prior to the anticipated date of the initial
filing of the registration statement relating to such registration. Such notice
shall offer CVCA the opportunity to include in such registration statement such
number of Registrable Securities as CVCA may request. Upon the written request
of CVCA made within 10 days after the receipt of the Company's notice (which
request shall specify the number of Registrable Securities intended to be
disposed of by CVCA), the Company shall use its reasonable best efforts to
effect the registration under the Securities Act of all Registrable Securities
which the Company has been so requested to register by CVCA, to permit the
disposition of the Registrable Securities so to be registered; PROVIDED that (i)
if such registration involves an underwritten offering, CVCA must sell its
Registrable Securities proposed to be sold to the underwriters selected by the
Company on the same terms and conditions as apply to the Company (except that
indemnification obligations of CVCA shall be limited to those obligations set
forth below); and (ii) if, at any time after giving written notice of its
intention to register any equity securities pursuant to this Section 8.2 and
prior to the effective date of the registration statement filed in connection
with such registration, the Company shall determine for any reason not to
register such equity securities, the Company shall give written notice to CVCA
and, thereupon, shall be relieved of its obligation to register any Registrable
Securities of CVCA in connection with such registration. The Company shall pay
all Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this Section 8.2, and CVCA shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of its Registrable Securities pursuant to a registration
statement effected pursuant to this Section 8.2.
8.3 PRIORITY IN INCIDENTAL REGISTRATIONS. If a
registration pursuant to Section 8.2 involves an underwritten offering and the
managing underwriter advises the Company that, in its opinion, the number of
equity securities (including all Registrable Securities) which the Company, CVCA
and any other persons propose to include in such registration exceeds the
largest number of securities which can be sold without having an
<PAGE>
adverse effect on such offering, including the price at which such securities
can be sold, the Company will include in such registration up to such maximum
number of securities (i) first, all the securities the Company initially
proposes to sell for its own account or for the account of any security holder
pursuant to any contractual requirement to register securities, and (ii) second,
to the extent that the number of securities referred to in clause (i) is less
than the number of equity securities which the Company has been advised can be
sold in such offering without having the adverse effect referred to above, all
Registrable Securities requested to be included in such registration by CVCA
pursuant to Section 8.2 or by any other holder of securities electing to
register securities pursuant to any similar registration rights agreement;
PROVIDED that if the number of Registrable Securities requested to be included
in such registration by CVCA pursuant to Section 8.2, together with the number
of securities which the Company proposes to sell for its own account or for the
account of any security holder pursuant to any contractual requirement to
register securities to be included in such registration pursuant to clause (i)
of this Section exceeds the number which the Company has been advised can be
sold in such offering without having the adverse effect referred to above, the
number of such Registrable Securities requested to be included in such
registration by CVCA pursuant to Section 8.2 shall be limited to such extent and
shall be allocated PRO RATA among all holders requesting such registration
pursuant to Section 8.2 or any similar registration rights agreement on the
basis of the relative number of securities requested to be included in such
registration.
8.4 HOLDBACK AGREEMENTS. If any equity securities of
the Company are offered to the public pursuant to a registration statement, CVCA
agrees not to effect any public sale or distribution, including any sale
pursuant to Rule 144 under the Securities Act, of any Registrable Securities,
and not to effect any such public sale or distribution of any other equity
security of the Company or of any security convertible into or exchangeable or
exercisable for any equity security of the Company (in each case, unless covered
by such registration statement) during the 30 days prior to, and during the
180-day period beginning on, the effective date of such registration statement.
8.5 INDEMNIFICATION. (a) In the event of any
registration of any Registrable Securities pursuant to this Section 8, the
Company shall indemnify and hold harmless, to the full extent permitted by law,
CVCA, its directors and officers, employees, partners and each other person, if
any, who controls, is controlled by or is under common control with such Holder
within the meaning of the Securities Act, against any and all losses, claims,
damages or liabilities, joint or several, and expenses (including any amounts
paid in any settlement effected
<PAGE>
with the Company's consent) to which CVCA, any such director or officer or
partner or controlling person may become subject under the Securities Act, state
securities or blue sky laws, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof) or
expenses arise out of or are based upon (a) any untrue statement or alleged
untrue statement of any material fact contained, on the effective date thereof,
in any registration statement under which such securities were registered under
the Securities Act, any prospectus contained therein, or any amendment or
supplement thereto, (b) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (c) any violation by the Company of any federal or
state rule or regulation applicable to the Company and relating to action
required of or inaction by the Company in connection with any such registration,
and the Company shall reimburse CVCA and each such director, officer, employee,
partner, or controlling person for any legal or any other expenses reasonably
incurred by them as such expenses are incurred in connection with investigating
or defending such loss, claim, liability, action or proceeding; PROVIDED that
the Company shall not be liable in any such case to the extent that any such
loss, claim, damage, liability (or action or proceeding in respect thereof) or
expense arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made (i) in such registration
statement or amendment or supplement thereto or in any such prospectus in
reliance upon and in conformity with written information furnished to the
Company or its representatives by or on behalf of CVCA or any such director,
officer, employee or partner, for use in the preparation thereof or (ii) in any
preliminary prospectus, if the final prospectus corrects such statement or
omission and an underwriter fails to deliver such final prospectus in accordance
with the Securities Act and the rules and regulations thereunder.
(b) As a condition to the registration of any Registrable
Securities pursuant to this Section 8, the Company shall have received an
undertaking reasonably satisfactory to it from CVCA, to indemnify and hold
harmless (in the same manner and to the same extent as set forth in paragraph
(a) of this Section) the Company and its directors, officers, employees,
partners, controlling persons and all other prospective sellers and their
respective directors, officers, employees, partners, and their respective
controlling persons with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any prospectus
contained therein, or any amendment or supplement, if such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or its
representatives by or on behalf of CVCA or any of its directors, officers,
employees, partners or controlling persons for use in the preparation of such
registration statement, prospectus or amendment or supplement, or a document
incorporated
<PAGE>
by reference into any of the foregoing. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Company or CVCA, underwriters or any of their respective directors, officers,
employees, partners or controlling persons and shall survive the transfer of
such securities by CVCA; PROVIDED, HOWEVER, that CVCA shall not be liable under
this Section for any amounts exceeding the product of the purchase price per
Registrable Security and the number of Registrable Securities being sold
pursuant to such registration statement or prospectus by CVCA.
(c) Promptly after receipt by a party indemnified under this
Section of written notice of the commencement of any action or proceeding with
respect to which a claim for indemnification may be made pursuant to this
Section, such indemnified party shall, if a claim in respect thereof is to be
made against an indemnifying party, promptly give written notice to the latter
of the commencement of such action; PROVIDED that the failure of any indemnified
party to give notice as provided herein shall not relieve the indemnifying party
of its obligations under the preceding paragraphs of this Section, except to the
extent that the indemnifying party is materially prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party shall be entitled to participate in (but not conduct)
and, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, to the extent that it may wish, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof, unless in such indemnified party's
reasonable judgement a conflict of interest between such indemnified and
indemnifying parties arises in respect of such claim after the assumption of the
defense thereof, and the indemnifying party shall not be subject to any
liability for any settlement made without its consent (which consent shall not
be unreasonably withheld). No indemnifying party shall consent to entry of any
judgment or enter into any settlement of any pending or threatened proceeding
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to all indemnified parties of a release from all liability
in respect to such claim or litigation. Notwithstanding anything to the contrary
contained herein, an indemnifying party shall not be obligated to pay the fees
and expenses of more than one counsel (together with appropriate local counsel)
for all parties indemnified by such indemnifying party with respect to such
claim.
<PAGE>
(d) If the indemnification provided for in this Section is
unavailable to an indemnified party under paragraphs (a) or (b) of this Section
(other than by reason of exceptions provided in those paragraphs) in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
each applicable indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other, and
the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative fault of the
indemnifying party on the one hand and of the indemnified party on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or by the indemnified party and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in paragraph (a) of this Section,
any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The Company and
CVCA agree that it would not be just and equitable if contribution pursuant to
this paragraph (d) were determined by pro rata allocation or by any other method
of allocation which does not take account of the equitable considerations
referred to in this paragraph. Notwithstanding the provisions of this paragraph
(d), CVCA shall not be required to contribute any amount in excess of the amount
by which the total price at which the Registrable Securities sold by it and
distributed to the public were offered to the public exceeds the amount of any
damages which it has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
8.6 CLASS C SHARES EXCHANGE. Notwithstanding anything
to the contrary contained in this Section 8, CVCA shall be permitted, in
connection with the exercise of rights provided for in Sections 8.1 and 8.2, to
require the Company to effect a Class C Shares Exchange in order to permit the
registration by CVCA pursuant to such Sections of any shares of Class B Common
Stock issuable pursuant to such Class C Shares Exchange.
<PAGE>
9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF CVCA TO MAKE
INVESTMENTS. The obligation of CVCA to make each Investment following the date
hereof and to consummate the transactions contemplated by this Agreement in
connection therewith shall be subject to the satisfaction or waiver by CVCA of
the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES; COVENANTS AND
AGREEMENTS. (a) The representation and warranty of the Company set forth in
Section 3.9 shall be true, accurate and complete in all respects on and as of
the Closing Date of such Investment, with the same force and effect as though
made on and as of such Closing Date.
(b) The Company and McCann shall have performed and complied
in all material respects with all covenants and agreements required by this
Agreement to be performed or complied with by it and him on or prior to the
Closing Date with respect to such Investment.
9.2 GOVERNMENTAL PERMITS AND APPROVALS; ILLEGALITY.
(a) All necessary approvals, authorizations, consents, Permits and licenses from
governmental and regulatory bodies required for the transactions contemplated by
this Agreement shall have been obtained and shall be in full force and effect
and shall not be subject to any conditions or limitations, and CVCA shall have
been furnished with appropriate evidence, reasonably satisfactory to it and its
counsel, of the granting of such approvals, authorizations, consents, Permits
and licenses.
(b) There shall not be in effect any statute, rule, regulation
or order of any court, governmental or regulatory body which prohibits or makes
illegal the transactions contemplated by this Agreement.
9.3 LITIGATION. There shall be no material Litigation
pending or threatened which seeks to enjoin, restrain or prohibit the
consummation of the transactions contemplated by this Agreement or to impose
limitations on the ability of CVCA to exercise full rights of ownership of the
Class C Shares or the Warrant (or Warrant Shares).
9.4 APPLICABLE TARGET. With respect to Investments
following the initial Investment hereunder, the Company shall have met the
Applicable Target for such Investment (provided that the Company shall be
permitted, with respect to one Investment hereunder after the initial
Investment, to require CVCA to waive this condition). The Chief Executive
Officer of the Company shall have delivered to CVCA a certificate, dated such
Closing Date, signed on behalf of the Company to the foregoing effect, including
a detailed calculation, in form satisfactory to CVCA, of the information
necessary to determine that such Applicable Target has been satisfied.
<PAGE>
9.5 THIRD PARTY CONSENTS. There shall have been
obtained all consents and approvals from parties to contracts or other
agreements with the Company that are required in connection with the performance
by the Company of its obligations under this Agreement, other than such consents
the failure of which to obtain has not had a Material Adverse Change.
9.6 COMPLIANCE WITH STOCKHOLDERS' AGREEMENT. Prior to
each Investment hereunder and the issuance of any Units of securities hereunder,
McCann and the Company shall have fully satisfied (or obtained a waiver), with
respect to such Investment, the obligations to JAP Equities, Inc. set forth in
the Stockholders' Agreement.
9.7 OFFICER'S CERTIFICATE. The Chief Executive
Officer of the Company shall have delivered to CVCA a certificate, dated such
Closing Date, signed on behalf of the Company to the effect of the conditions
applicable to such Investment set forth in this Section 9 (other than Section
9.4).
10. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. CVCA has the
right to rely fully upon the representations, warranties, covenants and
agreements of the Company and McCann contained in this Agreement. The Company
has the right to rely fully upon the representations, warranties, covenants and
agreements of CVCA contained in this Agreement. All such representations and
warranties shall survive the execution and delivery hereof and each Closing
hereunder. All other rights to indemnification contained in this Agreement and
all of the covenants and agreements of the parties contained in this Agreement
to be performed after the initial Closing shall survive such Closing and each
subsequent Closing.
11. INDEMNIFICATION.
11.1 INDEMNIFICATION. The Company shall indemnify and
hold harmless CVCA and its affiliates from and against any Losses incurred or
suffered by them and each of their respective officers, directors, affiliates,
employees, agents and representatives arising out of, resulting from, or
relating to any breach of any representation or warranty made by the Company in
this Agreement and any failure by the Company to perform any of its covenants or
agreements contained herein; PROVIDED that the aggregate amount of Losses for
which the Company shall be responsible pursuant to this Section 11.1 for any and
all breaches of the representations and warranties made by the Company in this
Agreement shall not exceed the sum of the Unpaid Yield and Unreturned Original
Cost with respect to the Investments. The indemnity pursuant to this Section 11
shall be CVCA's sole remedy with respect to any and all breaches of the
representations and warranties made by the Company in this Agreement.
<PAGE>
11.2 PROCEDURE. (a) In the event that any person
shall incur or suffer any Losses in respect of which indemnification may be
sought hereunder, the party seeking to be indemnified hereunder (the
"Indemnitee") shall assert a claim for indemnification by written notice (the
"Notice") to the party from whom indemnification is being sought (the
"Indemnitor") stating the nature and basis of such claim. In the case of Losses
arising or which may arise by reason of any third party claim, promptly after
receipt by an Indemnitee of written notice of the assertion or the commencement
of any Litigation or threat thereof with respect to any matter in respect of
which indemnification may be sought by such party hereunder, the Indemnitee
shall give Notice to the Indemnitor and shall thereafter keep the Indemnitor
reasonably informed with respect thereto, provided that failure of the
Indemnitee to give the Indemnitor prompt notice as provided herein shall not
relieve the Indemnitor of any of its obligations hereunder, except to the extent
that the Indemnitor is prejudiced by such failure. In case any such Litigation
is brought against any Indemnitee, the Indemnitor shall be entitled to assume
the defense thereof, by written notice of its intention to do so to the
Indemnitee within 30 days after receipt of the Notice, in which event the
Indemnitor shall assume all past and future responsibility for such Litigation,
including reimbursing the Indemnitee for all prior reasonable legal expenses in
connection therewith. If the Indemnitor shall assume the defense of such
Litigation, it shall not settle such Litigation unless such settlement includes
as an unconditional term thereof the giving by the claimant or the plaintiff of
a release of the Indemnitee from all liability with respect to such Litigation.
As long as the Indemnitor is contesting any such Litigation in good faith and on
a timely basis, the Indemnitee shall not pay or settle any claims brought under
such Litigation. Notwithstanding the assumption by the Indemnitor of the defense
of any Litigation as provided in this subsection, the Indemnitee shall be
permitted to participate in the defense of such Litigation and to employ counsel
at its own expense; provided, however, that if the defendants in any action
shall include both an Indemnitor and any Indemnitee and such Indemnitee shall
have reasonably concluded that counsel selected by Indemnitor has a conflict of
interest because of the availability of different or additional defenses to such
Indemnitee, such Indemnitee shall have the right to select separate counsel to
participate in the defense of such action on its behalf, at the expense of the
Indemnitor; provided that the Indemnitor shall not be obligated to pay the
expenses of more than one separate counsel for all Indemnitees.
(b) If the Indemnitor shall fail to notify the Indemnitee of
its desire to assume the defense of any such Litigation within the prescribed
period of time and as required above, or shall notify the Indemnitee that it
will not assume the defense of any such Litigation, then the Indemnitee may
continue
<PAGE>
to conduct the defense of any such Litigation, in which event it may do so in
such manner as it may deem appropriate, and the Indemnitor shall be bound by any
determination made in such Litigation or any settlement thereof effected by the
Indemnitee, provided that any such determination or settlement shall not affect
the right of the Indemnitor to dispute the Indemnitee's claim for
indemnification and PROVIDED, FURTHER, that the Indemnitee shall not effect any
such settlement without the prior written consent of the Indemnitor (such
consent not to be unreasonably withheld). The failure of the Indemnitor to
assume the defense of any such Litigation shall not be deemed a concession that
it is required to indemnify the Indemnitee for the subject matter of such
Litigation. The Indemnitor shall be permitted to join in the defense of such
Litigation and to employ counsel at its own expense.
(c) Amounts payable by the Indemnitor to the Indemnitee in
respect of any Losses for which such party is entitled to indemnification
hereunder shall be payable by the Indemnitor as incurred by the Indemnitee.
11.3 NO SET-OFF. An Indemnitee's right to
indemnification under this Section shall not be subject to set-off for any claim
by the Indemnitor against such Indemnitee.
12. TERMINATION.
12.1 TERMINATION AND ABANDONMENT. CVCA may terminate
its obligation to make Investments hereunder (a) in the event of any
misrepresentation when made or material breach of any covenant or agreement by
the Company or McCann hereunder and (b) at any time following January 16, 1999.
12.2 EFFECT OF TERMINATION; EXPENSES. (a) If this
Agreement is terminated and the transactions contemplated hereby are not
consummated as described above, this Agreement shall become void and of no
further force and effect with respect to Investments not made prior to such
termination, except for the provisions of this Section 12.2 and Sections 7.8,
13.1 and 13.2. No party hereto shall have any liability in respect of a
termination of this Agreement, except to the extent that such termination
results from a breach by such party (or another party with whom or which such
party is jointly and severally responsible hereunder) of the representations,
warranties, covenants or agreements of such party (or other party) under this
Agreement or the other Transaction Documents.
(b) The Company will pay, when due and payable, any and all
federal and state stamp, issue, transfer or similar taxes which may be payable
in respect of the issuance of securities hereunder to CVCA.
(c) Except as otherwise specifically provided herein,
<PAGE>
the Company shall pay the initial $50,000 of reasonable legal fees and
out-of-pocket expenses of CVCA counsel incurred in connection with the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby. In addition, at the initial Closing hereunder, the Company
shall reimburse CVCA for its actual out-of-pocket expenses, including
consultants and accountants fees, in an amount not to exceed $25,000.
13. MISCELLANEOUS.
13.1 PUBLICITY. Except as may otherwise be required
by law, no news release or announcement concerning this Agreement or the
transactions contemplated hereby shall be made without advance approval thereof
by the Company and CVCA. The Company and CVCA will cooperate with each other in
the development and distribution of all news releases and other public
announcements with respect to this Agreement or any of the transactions
contemplated hereby.
13.2 NOTICES. Any notice or other communication
required or permitted hereunder shall be in writing and shall be delivered
personally, telegraphed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered, personally, telegraphed or sent by facsimile
transmission or, if mailed, two days after the date of deposit in the United
States mails as follows:
if to CVCA, to:
Chemical Venture Capital Associates
270 Park Avenue, Fifth Floor
New York, New York 10017
Telephone: (212) 270-5622
Telecopy: (212) 270-2327
Attention: Stephen P. Murray
Jonathan Lynch
with a copy to:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
Telephone: (212) 455-2000
Telecopy: (212) 455-2502
Attention: John W. Carr, Esq.
if to the Company or McCann, to:
Teleway, Inc.
<PAGE>
1600 Stewart Avenue
Westbury, New York 11590
Telephone: (516) 237-6000
Telecopy: (516) 237-6005
Attention: James F. McCann
Glenn Reed
with a copy to:
Gallagher & Walker
52 Covert Avenue
Stewart Manor, New York 11530
Telephone: (516) 354-3043
Telecopy: (516) 355-0815
Attention: Gerard M. Gallagher, Esq.
Any party may by notice given in accordance with this
Section to the other parties designate another address or person for receipt of
notices hereunder.
13.3 ENTIRE AGREEMENT. This Agreement (including the
Exhibits and Schedules) contains the entire agreement among the parties with
respect to the transactions contemplated hereby and thereby, and supersede all
prior agreements and understandings, written or oral, with respect thereto.
13.4 WAIVERS AND AMENDMENTS; NONCONTRACTUAL REMEDIES;
PRESERVATION OF REMEDIES. This Agreement may be amended, superseded, cancelled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by the parties or, in the case of a waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof. No waiver on the
part of any party of any such right, power or privilege, and no single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
The rights and remedies herein provided are cumulative and are not exclusive of
any rights or remedies that any party may otherwise have at law or in equity.
13.5 GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereto shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without giving
effect to the conflicts of laws principles thereof. Each party hereto agrees to
submit to the non-exclusive jurisdiction of the courts of the City of New York
in the State of New York in any action or proceeding arising out of or relating
to this Agreement.
13.6 BINDING EFFECT; ASSIGNMENT LIMITED. (a)
<PAGE>
This Agreement shall be binding upon and inure to the benefit of and be
enforceable by the parties hereto and their respective successors and assigns
and legal representatives.
(b) Neither this Agreement, nor any right hereunder, may be
assigned by any party without the written consent of the other parties hereto,
except that CVCA may assign all or portions of its interest in this Agreement to
any direct or indirect subsidiary of CVCA or pursuant to an assignment under
which such assignee assumes and agrees to perform all of the obligations of CVCA
hereunder and thereunder; provided, that, notwithstanding any such assignment,
CVCA shall remain liable to perform all obligations hereunder and thereunder.
13.7 COUNTERPARTS. This Agreement may be executed by
the parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed to be an original and which together shall constitute
one and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
13.8 EXHIBITS AND SCHEDULES. The Exhibits and
Schedules are a part of this Agreement as if fully set forth herein.
13.9 HEADINGS. The article, section and paragraph
headings in this Agreement are for convenience only, and shall not control or
affect the meaning or construction of any provision of this Agreement.
13.10 REMEDIES. The parties hereto agree that money
damages or other remedy at law would not be sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement or the other
Transaction Documents by them and that, in addition to all other remedies
available to them, each of them shall be entitled to an injunction restraining
such breach, violation or default or threatened breach, violation or default and
to any other equitable relief, including specific performance, without bond or
other security being required.
13.11 INVALIDITY OF PROVISION. The invalidity or
unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of this Agreement, including
that provision, in any other jurisdiction. If any restriction or provision of
this Agreement is held unreasonable, unlawful or unenforceable in any respect,
such restriction or provision shall be interpreted, revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
13.12 GRAMMATICAL CONSTRUCTION. Whenever the context
may require, any pronouns used herein shall include the
<PAGE>
corresponding masculine, feminine or neuter forms, and the singular form of
nouns and pronouns shall include the plural and vice versa.
IN WITNESS WHEREOF, the parties have executed this Agreement
on the date first above written.
CHEMICAL VENTURE CAPITAL
ASSOCIATES, a California limited
partnership
By:
--------------------------------
Name:
Title:
TELEWAY, INC.
By:
--------------------------------
Name:
Title:
- --------------------------------
James F. McCann
<PAGE>
SCHEDULE I - INVESTMENT SCHEDULE
<TABLE>
<CAPTION>
Number of
Number of INVESTMENT CLASS C SHARES Number of WARRANT SHARES Amount of INVESTMENT
<S> <C> <C> <C>
First 13,501 121,508 $ 5,000,000
Second 12,844 115,596 $ 5,000,000
Third 9,655 86,895 $ 5,000,000
Fourth 8,378 75,401 $ 5,000,000
Fifth 8,280 74,522 $ 5,000,000
----- ------ -----------
Totals 52,658 473,922 $25,000,000
</TABLE>
<PAGE>
EXHIBIT B
FORM OF WARRANT
NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED
OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT THEREFOR OR AN APPLICABLE EXEMPTION FROM REGISTRATION.
ADDITIONALLY, THE SALE OR TRANSFER OF SUCH SECURITIES ARE SUBJECT TO
THE TERMS AND CONDITIONS OF THE INVESTMENT AGREEMENT, DATED AS OF
JANUARY 16, 1995, AMONG CHEMICAL VENTURE CAPITAL ASSOCIATES, A
CALIFORNIA LIMITED PARTNERSHIP, TELEWAY, INC. AND A STOCKHOLDER OF
TELEWAY, INC., AND NO SALE OR OTHER TRANSFER OF SUCH SECURITIES SHALL
BE VALID OR EFFECTIVE UNTIL SUCH CONDITIONS HAVE BEEN MET. COPIES OF
SUCH AGREEMENT ARE ON FILE AND AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICES OF TELEWAY, INC.
TELEWAY, INC.
Warrant for the Purchase of Shares
of Class B Common Stock
FOR VALUE RECEIVED and subject to the terms and conditions
contained herein, Teleway, Inc. hereby certifies that Chemical Venture Capital
Associates, a California limited partnership, and its permitted assigns, are
entitled to purchase, subject to receipt of all required consents and approvals,
from Teleway, Inc. at any time or from time to time during the Exercise Period
(as defined below) any or all of the Warrant Shares (as defined below) for the
Exercise Price (as defined below). The Exercise Price shall not be subject to
adjustment, except as set forth in paragraph 3 hereof.
1. DEFINITIONS.
As used in this Warrant, the following terms have the
respective meanings set forth below:
"Additional Shares of Class B Common Stock" shall mean any
shares of Class B Common Stock issued by the Company on or after the
date hereof, other than shares of Class B Common Stock issued pursuant
to this Warrant.
<PAGE>
"Aggregate Warrant Price" shall mean, with respect to the
exercise of a portion or all of the Warrant, the Exercise Price
multiplied by the number of Warrant Shares issuable upon such exercise.
"Appraised Value" shall mean, with respect to any Warrant
Shares at a particular date, the fair saleable value of such Warrant
Shares (determined without giving effect to any discount for (i) a
minority interest, (ii) any lack of voting power or (iii) any lack of
liquidity of the Warrant Shares or to the fact that the Company may
have no class of equity securities registered under the Securities and
Exchange Act of 1934, as amended), agreed upon by the Holder and the
Company or, in the absence of such agreement, determined by an
independent investment banking firm of nationally recognized standing
(the fees and expenses of which shall be paid by the Company) selected
by the Holder and reasonably acceptable to the Company (or, if the
Company and the Holder are unable to agree upon an investment banking
firm, mutually selected by an investment banking firm selected by the
Company and an investment banking firm selected by the Holder).
"Book Value" shall mean, at a particular date, the
consolidated book value of the Company as determined in accordance with
GAAP as determined by the Company's independent public accountants (the
fees and expenses of which shall be paid by the Company) as of the last
day of the quarter immediately preceding such date.
"Business Day" shall mean any day that is not a Saturday or
Sunday or a day on which banks are required or permitted to be closed
in New York City.
"Class B Common Stock" shall mean the Class B Common Stock,
par value $.01 per share, of the Company and any capital stock into
which such Class B Common Stock may thereafter be changed, and shall
also include shares of common stock of any successor or acquiring
corporation referred to in paragraph 3(d) received by or distributed to
the holders of such capital stock in the circumstances contemplated by
paragraph 3(d).
"Closing Date" shall mean the date upon which this Warrant is
originally issued.
"Company" shall mean Teleway, Inc., a Delaware corporation, or
any successor corporation by merger or consolidation or otherwise.
"Convertible Securities" shall mean evidences of indebtedness,
shares of stock or other securities which are convertible into or
exchangeable, with or without payment of additional consideration in
cash or property, for Additional Shares of Class B Common Stock, either
immediately or upon the occurrence of a specified date or a specified
event.
"Current Market Price" shall mean, in respect of any share of
Class B Common Stock on any date herein specified, the average of the
daily market prices for 30 consecutive Business Days commencing 45 days
before such date. The daily market price for each such Business Day
shall be (i)
<PAGE>
the last sale price on such day on the principal stock exchange on
which such Class B Common Stock is then listed or admitted to trading,
(ii) if no sale takes place on such day on any such exchange, the
average of the last reported closing bid and asked prices on such day
as officially quoted on any such exchange or, if there is no such bid
and asked prices on such day, on the next preceding date when such bid
and asked prices occurred, (iii) if the Class B Common Stock is not
then listed or admitted to trading on any stock exchange, the average
of the last reported closing bid and asked prices on such day in the
over-the-counter market, as furnished by the National Association of
Securities Dealers Automatic Quotation System or the National Quotation
Bureau, Inc., (iv) if neither such corporation at the time is engaged
in the business of reporting such prices, as furnished by any similar
firm then engaged in such business, or (v) if there is no such firm, as
furnished by any member of the National Association of Securities
Dealers selected by the Company. If there is no daily market price as
described above, the "Current Market Price" shall mean the per share
Book Value.
"CVCA" shall mean Chemical Venture Capital Associates, a
California limited partnership, and any successor by merger or
consolidation or otherwise.
"Exercise Date" shall mean the date on which the Holder
exercises this Warrant, in whole or in part.
"Exercise Period" shall mean the period commencing on the
Closing Date and ending at 5:00 p.m., New York City time, on the
Termination Date.
"Exercise Price" shall mean a price for each Warrant Share
equal to $.02, subject to adjustment hereafter pursuant only to the
provisions of paragraph 3 of this Warrant.
"Fully Diluted Outstanding" shall mean, when used with
reference to Class B Common Stock, at any date as of which the number
of shares thereof is to be determined, all shares of Class B Common
Stock Outstanding at such date and all shares of Class B Common Stock
issuable pursuant to options, warrants or other rights to purchase or
acquire, or securities convertible into, shares of Class B Common
Stock, outstanding on such date (including any Warrant Shares issuable
pursuant to this Warrant).
"GAAP" shall mean generally accepted accounting principles in
the United States of America as from time to time in effect.
"Holder" shall mean CVCA or any transferee of this Warrant.
"Investment Agreement" has the meaning set forth in Section
12.
"Outstanding" shall mean, when used with reference to Class B
Common Stock, at any time as of which the number of shares thereof is
to be determined, all issued shares of Class B Common Stock, except
shares then owned or held by or for the account of the Company or any
subsidiary of the Company, and shall include all shares issuable in
respect of outstanding scrip or any
<PAGE>
certificates representing fractional interests in shares of Class B
Common Stock.
"Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, incorporated organization,
association, corporation, institution, public benefit corporation,
entity or government (whether federal, state, county, city, municipal
or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
"Termination Date" shall mean the earlier of (i) January 16,
2005, and (ii) the date on which all of the Warrant Shares have been
issued to the Holder pursuant to the terms of this Warrant.
"Warrant Shares" shall mean any of the shares of Class B
Common Stock issuable upon exercise of this Warrant. The number of
Warrant Shares shall initially be ____ shares of Class B Common Stock,
subject to adjustment thereafter pursuant only to the provisions of
paragraph 3 of this Warrant.
"Warrant Value Per Share" shall mean, with respect to that
portion of this Warrant which is exercisable for one Warrant Share, the
excess of (a) the Appraised Value of one Warrant Share issuable upon
exercise thereof over (b) the Exercise Price.
2. EXERCISE OF WARRANT. This Warrant may be exercised, in
whole at any time or in part from time to time, during the Exercise Period, by
the Holder by the surrender of this Warrant (with the subscription duly
executed) at the address set forth in paragraph 11(a) hereof, together with
proper payment of the Exercise Price. Payment of the Exercise Price for the
Warrant Shares to be issued shall be made by certified or official bank check
payable to the order of the Company. In lieu of payment of all or part of the
Aggregate Warrant Price with respect to all or part of the Warrant Shares, the
Holder may pay the Exercise Price with respect to such Warrant Shares by
surrendering to the Company that portion of this Warrant having an aggregate
Warrant Value Per Share on the date of exercise equal to the Aggregate Warrant
Price otherwise payable with respect thereto. If this Warrant is exercised in
part, this Warrant must be exercised for a whole number of shares of the Class B
Common Stock, and the Holder is entitled to receive a new Warrant covering the
number of Warrant Shares in respect of which this Warrant has not been
exercised. Upon such surrender of this Warrant, the Company will issue a
certificate or certificates in the name of the Holder for the number of shares
of the Class B Common Stock to which the Holder shall be entitled. The Company
shall not be required to issue a fractional share of Class B Common Stock upon
any exercise of this Warrant.
3. CERTAIN ADJUSTMENTS. The Exercise Price and the kind and
number of shares of Class B Common Stock issuable upon exercise of this Warrant
shall be subject to adjustment as set forth below in this paragraph 3. The
Company shall give the registered Holder notice of any event described below
which requires an adjustment pursuant to this paragraph 3 in accordance with the
provisions of paragraph 4.
<PAGE>
(a) ADJUSTMENT OF EXERCISE PRICE. From the Closing
Date (and subject to such further adjustments, from time to time,
pursuant to the other provisions of this paragraph 3), the Exercise
Price shall be $.02 per Warrant Share.
(b) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS.
If at any time (other than pursuant to Section 6.6(d) of the Investment
Agreement (as defined in Section 12 of this Warrant)) the Company
shall:
(i) fix a record date for the purpose of
determining the holders of its Class B Common Stock entitled
to receive a dividend payable in, or other distribution of,
Additional Shares of Class B Common Stock;
(ii) subdivide its outstanding shares of Class B
Common Stock into a larger number of shares of Class B Common
Stock;
(iii) combine its outstanding shares of Class B
Common Stock into a smaller number of shares of Class B Common
Stock; or
(iv) issue any shares of its capital stock or
other securities by reclassification of the Class B Common
Stock (other than pursuant to paragraph 3(d) below);
then the Exercise Price shall be proportionately decreased in the case
of such a dividend or distribution of Additional Shares of Class B
Common Stock or such a subdivision, or proportionately increased in the
case of such a combination, or the kind of capital stock or other
securities of the Company which may be purchased shall be adjusted in
the case of such a reclassification of the Class B Common Stock, each
on the record date for such dividend or distribution or effective date
of such subdivision, combination or reclassification, as the case may
be, such that the Holder shall be entitled to receive, upon exercise of
this Warrant, the aggregate number and kind of shares of Class B Common
Stock which, if the Warrant had been fully exercised immediately prior
to such date, it would have owned upon such exercise and been entitled
to receive by virtue of such dividend, distribution, subdivision,
combination or reclassification.
(c) CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. If at
any time the Company shall fix a record date for the purpose of
determining the holders of its Class B Common Stock entitled to receive
any dividend or other distribution (including any such distribution
made in connection with a consolidation or merger, but excluding any
distribution referred to in subparagraph (b) above) of:
(i) any evidences of indebtedness, any shares
of its capital stock (including Convertible Securities but
excluding Class B Common Stock) or any other securities or
property of any nature whatsoever; or
(ii) any warrants or other rights to subscribe
<PAGE>
for or purchase any evidences of its indebtedness, any shares
of its stock (including Convertible Securities) or any other
of its securities or its property of any nature whatsoever
(other than normal cash dividends or cash distributions
permitted under applicable law);
then the Exercise Price shall be adjusted to equal the Exercise Price
in effect prior to such distribution or dividend multiplied by a
fraction, (1) the numerator of which shall be (A) the Current Market
Price per share of the Class B Common Stock on such record date minus
(B) the amount allocable to one share of Class B Common Stock of the
fair value (as determined in good faith by the Board of Directors of
the Company and supported by an opinion from an investment banking firm
of nationally recognized standing approved by the Holder, which
approval shall not be unreasonably withheld) of any and all such
evidences of indebtedness, shares of stock, other securities or
property or warrants or other subscription or purchase rights so
distributable, and (2) the denominator of which shall be such Current
Market Price per share of Class B Common Stock. Such adjustments shall
be made whenever such a record date is fixed. A reclassification of the
Class B Common Stock (other than a change in par value, or from par
value to no par value or from no par value to par value) into shares of
Class B Common Stock and shares of any other class of stock shall be
deemed a distribution by the Company to the holders of its Class B
Common Stock of such shares of such other class of stock within the
meaning of this subparagraph (c) and, if the outstanding shares of
Class B Common Stock shall be changed into a larger or smaller number
of shares of Class B Common Stock as a part of such reclassification,
such change shall be deemed a subdivision or combination, as the case
may be, of the outstanding shares of Class B Common Stock within the
meaning of subparagraph (b).
(d) CONSOLIDATION OR MERGER. In the case of any
consolidation of the Company with or merger of the Company into another
corporation or in case of any sale or conveyance to another corporation
of the property of the Company as an entirety or substantially as an
entirety, the Company or such successor or purchasing corporation, as
the case may be, shall execute with the Holder an agreement that the
Holder shall have the right thereafter upon payment of the Exercise
Price in effect immediately prior to such action to purchase upon
exercise of the Warrant the kind and amount of shares and other
securities and property that it would have owned or have been entitled
to receive after the happening of such consolidation, merger, sale or
conveyance had such Warrant been exercised immediately prior to such
action. In no event shall the Holder be entitled to receive upon
exercise of the Warrant shares of the surviving corporation unless each
other holder of Class B Common Stock of the Company shall also receive
shares of such surviving corporation in such merger, consolidation,
sale or conveyance. Such agreement shall provide for adjustments, which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this paragraph 3. The provisions of this subparagraph
(d) shall similarly apply to successive consolidations, mergers, sales
or conveyances.
<PAGE>
(e) ISSUANCE OF SHARES, WARRANTS OR OTHER RIGHTS.
Except for the issuance (i) upon exercise of employee stock options of
shares of Class B Common Stock in amounts not in excess of the number
of such shares referred to in Section 7.3(a) of the Investment
Agreement or as permitted by Section 6.6(d), (ii) to CVCA pursuant to
the exercise of rights set forth in Section 7.3 of the Investment
Agreement and (iii) pursuant to Section 7.9(b)(i) of the Investment
Agreement, if at any time the Company shall issue or sell to any Person
any Additional Shares of Class B Common Stock, or warrants or other
similar rights to subscribe for or purchase any Additional Shares of
Class B Common Stock or Convertible Securities, whether or not the
rights to exchange or convert thereunder are immediately exercisable
(but excluding any distributions in subparagraphs (b) or (c) above),
and the price per share of such Class B Common Stock or for which Class
B Common Stock is issuable upon the exercise of such warrants or other
rights or upon conversion or exchange of such Convertible Securities
shall be less than the Current Market Price in effect immediately prior
to the time of such issue or sale, then the Exercise Price shall be
adjusted to equal the Exercise Price multiplied by a fraction (i) the
numerator of which shall be equal to the sum of (A) the number of
shares of Class B Common Stock Outstanding immediately prior to the
issuance of such Additional Shares of Class B Common Stock and (B) the
number of shares of Additional Shares of Class B Common Stock which the
aggregate consideration received for the total number of Additional
Shares of Class B Common Stock issued would purchase at the Current
Market Price and (ii) the denominator of which shall be the number of
shares of Class B Common Stock Outstanding after the issuance of such
Additional Shares of Class B Common Stock. In the case of the issuance
or sale of warrants or other rights or Convertible Securities, such
adjustment shall be made on the basis that (i) the maximum number of
Additional Shares of Class B Common Stock issuable pursuant to all such
warrants or other similar rights or necessary to effect the conversion
or exchange of all such Convertible Securities shall be deemed to have
been issued and outstanding, (ii) the price per share for such
Additional Shares of Class B Common Stock shall be deemed to be the
lowest possible price per share in any range of prices per share at
which such Additional Shares of Class B Common Stock are available to
such holders, and (iii) the Company shall be deemed to have received
all of the consideration payable therefor, if any, as of the date of
the actual issuance of such warrants or other similar rights. No
further adjustments of the Exercise Price shall be made upon the actual
issue of such Class B Common Stock upon exercise of such warrants or
other similar rights or upon the actual issue of such Class B Common
Stock upon such conversion or exchange of such Convertible Securities.
For the purposes of this subparagraph (e), the date as of which the
Current Market Price of Class B Common Stock shall be computed shall be
the earliest of (i) the date on which the Company shall enter into a
firm contract for the issuance of such warrants or other similar rights
or (ii) the date of actual issuance of such warrants or other similar
rights. Such adjustments shall be made upon the date of the issuance or
sale of such warrants or other similar rights.
<PAGE>
(f) ISSUANCE OF CONVERTIBLE SECURITIES. Except for
the issuance of employee stock options for shares of Class B Common
Stock in amounts not in excess of the number of such shares referred to
in Sections 7.3(a) and 6.6(d) of the Investment Agreement and for
issuances of warrants pursuant to Section 7.3 or 7.9(b)(i) of the
Investment Agreement, if at any time the Company shall issue or sell to
any Person any Convertible Securities (other than securities
distributed in a transaction described in subparagraphs (c) and (e)
above), whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the price per share for which Class B
Common Stock is issuable upon such conversion or exchange shall be less
than the Current Market Price in effect immediately prior to the time
of such issue or sale, then the Exercise Price shall be adjusted as
provided in subparagraph (e) above on the basis that (i) the maximum
number of Additional Shares of Class B Common Stock necessary to effect
the conversion or exchange of all such Convertible Securities shall be
deemed to have been issued and outstanding, (ii) the price per share of
such Additional Shares of Class B Common Stock shall be deemed to be
the lowest possible price in any range of prices at which such
Additional Shares of Class B Common Stock are available to such
holders, and (iii) the Company shall be deemed to have received all of
the consideration payable therefor, if any, as of the date of actual
issuance of such Convertible Securities. No adjustment of the Exercise
Price shall be made under this subparagraph (f) upon the issuance of
any Convertible Securities which are issued pursuant to the exercise of
any warrants or other subscription or purchase rights therefor, if any
such adjustment shall previously have been made upon the issuance of
such warrants or other rights pursuant to subparagraph (e) above. No
further adjustments of the Exercise Price shall be made upon the actual
issue of such Class B Common Stock upon conversion or exchange of such
Convertible Securities and, if any issue or sale of such Convertible
Securities is made upon exercise of any warrant or other right to
subscribe for or to purchase any such Convertible Securities for which
adjustments of the Exercise Price have been or are to be made pursuant
to other provisions of this paragraph 3, no further adjustments of the
Exercise Price shall be made by reason of such issue or sale. For the
purposes of this subparagraph (f), the date as of which the Exercise
Price of Class B Common Stock shall be computed shall be the earliest
of (i) the date on which the Company shall enter into a firm contract
for the issuance of such Convertible Securities or (ii) the date of
actual issuance of such Convertible Securities. Such adjustments shall
be made upon each issuance of Convertible Securities and shall become
effective immediately after such issuance.
(g) SUPERSEDING ADJUSTMENT. If, at any time after any
adjustment to the Exercise Price shall have been made pursuant to
subparagraphs (d), (e) or (f) above as the result of any issuance of
warrants, rights or Convertible Securities, and either
(i) such warrants or rights, or the right of
conversion or exchange in any other Convertible Securities,
<PAGE>
shall expire, and all or a portion of such warrants or rights,
or the right of conversion or exchange with respect to all or
a portion of such other Convertible Securities, as the case
may be, shall not have been exercised; or
(ii) the consideration per share for which
shares of Class B Common Stock are issuable pursuant to such
warrants or rights, or the terms of such other Convertible
Securities, shall be increased solely by virtue of provisions
therein contained for an automatic increase in such
consideration per share upon the occurrence of a specified
date or event;
then such previous adjustment shall be rescinded and annulled and the
Additional Shares of Class B Common Stock which were deemed to have
been issued by virtue of the computation made in connection with the
adjustment so rescinded and annulled shall no longer be deemed to have
been issued by virtue of such computation. Thereupon, a recomputation
shall be made of the effect of such rights or options or other
Convertible Securities on the Exercise Price on the basis of
(iii) treating the number of Additional Shares of
Class B Common Stock or other property, if any, theretofore
actually issued or issuable pursuant to the previous exercise
of any such warrants or rights or any such right of conversion
or exchange, as having been issued on the date or dates of any
such exercise and for the consideration actually received and
receivable therefor; and
(iv) treating any such warrants or rights or any
such other Convertible Securities which then remain
outstanding as having been granted or issued immediately after
the time of such increase of the consideration per share for
which shares of Class B Common Stock or other property are
issuable under such warrants or rights or other Convertible
Securities.
(h) ADJUSTMENT OF NUMBER OF WARRANT SHARES. Upon each
adjustment of the Exercise Price, as the case may be, pursuant to
subparagraph (b), (c), (e), (f) or (g) of this paragraph 3, this
Warrant shall be deemed to evidence the right to purchase, at the
adjusted Exercise Price, that number of shares of Class B Common Stock
obtained by multiplying the number of shares of Class B Common Stock
covered by the Warrant immediately prior to such adjustment by the
Exercise Price in effect prior to such adjustment and dividing the
product so obtained by the Exercise Price in effect after such
adjustment.
(i) WHEN ADJUSTMENTS TO BE MADE. No adjustment in the
Exercise Price shall be required by this paragraph 3 if such adjustment
either by itself or with other adjustments not previously made would
require an increase or decrease of less than 1% in such price. Any
adjustment representing a change of less than such minimum amount which
is postponed shall be carried forward and made as soon as such
adjustment, together with other adjustments required by this paragraph
3 and not previously made,
<PAGE>
would result in a minimum adjustment. Notwithstanding the foregoing,
any adjustment carried forward shall be made no later than ten Business
Days prior to the Termination Date. All calculations under this
subparagraph (i) shall be made to the nearest cent. For the purpose of
any adjustment, any specified event shall be deemed to have occurred at
the close of business on the date of its occurrence.
(j) FRACTIONAL INTERESTS. In computing adjustments
under this paragraph 3, fractional interests in Class B Common Stock
shall be taken into account to the nearest whole share.
(k) WHEN ADJUSTMENTS NOT REQUIRED. If the Company
shall fix a record date for the purpose of determining the holders of
its Class B Common Stock entitled to receive a dividend or distribution
and shall, thereafter and before the distribution to stockholders
thereof, legally abandon its plan to pay or deliver such dividend or
distribution, then thereafter no adjustment shall be required by reason
of the taking of such record and any such adjustment previously made in
respect thereof shall be rescinded and annulled.
(l) CERTAIN LIMITATIONS. Subject to the provisions of
paragraph 6, there shall be no adjustment of the Exercise Price
hereunder to the extent that such adjustment would cause the Exercise
Price to be less than the par value per share of the Class B Common
Stock, which par value shall not at any time while this Warrant is
outstanding exceed $.01.
4. NOTICES OF ADJUSTMENTS. Whenever the Exercise Price or the
number of Warrant Shares shall be adjusted pursuant to paragraph 3, the Company
shall forthwith deliver to the Holder a certificate prepared by the Company,
setting forth, in reasonable detail, the event requiring the adjustment and the
method by which such adjustment was calculated (including a description of the
basis on which the Board of Directors of the Company determined the fair value
of any evidences of indebtedness, shares of stock, other securities or property
or warrants or other subscription or purchase rights), specifying the number of
Warrant Shares then issuable hereunder, the Exercise Price after giving effect
to such adjustment and (if such adjustment was made pursuant to paragraph 3(b))
describing the number and kind of any other shares of stock for which the
Warrant is exercisable. In the event that the Holder shall disagree with any
such adjustment or with the terms of any new agreement to be entered into
pursuant to paragraph 3(d), it shall notify the Company thereof and any
disagreement shall be resolved by an investment banking firm of nationally
recognized standing mutually agreeable to the Company and the Holder, or if the
Company and the Holder are unable to agree upon an investment banking firm, an
investment banking firm selected by an investment banking firm chosen by the
Company and an investment banking firm chosen by the Holder.
5. RESERVATION OF WARRANT SHARES. The Company agrees that,
upon commencement of the Exercise Period and prior to the expiration of this
Warrant, the Company will at all times have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of this
Warrant, the shares of
<PAGE>
the Class B Common Stock and other securities and properties as from time to
time shall be receivable upon the exercise of this Warrant, free and clear of
all restrictions on sale or transfer and free and clear of all preemptive
rights.
6. FULLY PAID STOCK; TAXES. The shares of Class B Common Stock
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall, at the time of such delivery, be validly issued
and outstanding, fully paid and nonassessable, and not subject to preemptive
rights, and the Company will take all such actions as may be necessary to assure
that the par value or stated value, if any, per share of the Class B Common
Stock is at all times equal to or less than the then Exercise Price (after
giving effect to all adjustments thereto notwithstanding the provisions of
paragraph 3(l)). The Company further covenants and agrees that it will pay, when
due and payable, any and all federal and state stamp, original issue or similar
taxes which may be payable in respect of the issuance of any Warrant Shares or
certificate therefor.
7. TRANSFERABILITY. This Warrant is not transferable or
assignable by the Holder (other than to a majority-owned subsidiary of the
Holder). Any such permitted transfer or assignment may only be effected in
accordance with applicable securities laws or pursuant to exemptions therefrom.
The Company may treat the registered holder of this Warrant as it appears on the
Company's books at any time as the Holder for all purposes.
8. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity or bond reasonably satisfactory to the Company,
if lost, stolen or destroyed, and upon surrender and cancellation of this
Warrant, if mutilated, the Company shall execute and deliver to the Holder a new
Warrant of the like date, tenor and denomination.
9. HOLDER'S RIGHTS AS A STOCKHOLDER. This Warrant shall not
confer upon the Holder the right to vote or to consent to or receive notice as a
stockholder of the Company, as such.
10. SURRENDER. The Holder may at any time surrender all or a
portion of this Warrant for cancellation by transmitting same to the Company at
its address set forth elsewhere herein accompanied by a written notice setting
forth the Holder's intention to surrender the Warrant (or such portion) for
cancellation and upon such transmittal by the Holder, this Warrant (or such
portion) shall become null and void and of no further force and effect.
11. NOTICES. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Warrant shall be sufficiently given or made if in writing
and either delivered in person with receipt acknowledged or sent by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
(a) the Company at 1600 Stewart Avenue, Westbury, New York
11590, Attention: James F. McCann or Glenn Reed; or
<PAGE>
(b) the Holder at _____________________________
____________________, Attention: _____________________________,
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, or three Business Days after the same
shall have been deposited in the United States mail. Failure or delay in
delivering copies of any notice, demand, request, approval, declaration,
delivery or other communication to the person designated above to receive a copy
shall in no way adversely affect the effectiveness of such notice, demand,
request, approval, declaration, delivery or other communication.
12. INVESTMENT AGREEMENT. The Holder, the Company and certain
stockholders of the Company have entered into an Investment Agreement, dated as
of January 16, 1995 (as amended, supplemented or otherwise modified from time to
time, the "Investment Agreement"), which includes certain provisions relating to
this Warrant and the Warrant Shares.
13. MISCELLANEOUS.
(a) REMEDIES. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by
reason of a breach by it of the provisions of this Warrant and hereby
agrees to waive the defense in any action for specific performance that
a remedy at law would be adequate. Accordingly, it is agreed that the
Holder shall be entitled to an injunction, restraining order or other
equitable relief to prevent breaches of this Warrant and to enforce
specifically the terms and provisions hereof in any court of competent
jurisdiction in the United States or any state thereof. Such remedies
shall be cumulative and non-exclusive and shall be in addition to any
other rights and remedies the parties may have under this Warrant.
(b) NO INCONSISTENT AGREEMENTS. The Company will not
on or after the date of this Warrant enter into any agreement with
respect to its securities which is inconsistent with the rights granted
to the Holder in this Warrant or otherwise conflicts with the
provisions hereof. The rights granted to the Holder hereunder do not in
any way conflict with and are not inconsistent with the rights granted
to the holders of the Company's securities under any such agreements.
(c) SUCCESSORS AND ASSIGNS. Subject to the provisions
of paragraph 7 hereof, this Warrant shall inure to the benefit of and
be binding upon the successors and assigns of each of the parties,
including without limitation and without the need for an express
assignment, subsequent Holders of Warrant Shares.
(d) SEVERABILITY. In the event that any one or more
of the provisions contained herein, or the application thereof in
<PAGE>
any circumstances, is held invalid, illegal or unenforceable, the
validity, legality and enforceability of any such provision in every
other respect and of the remaining provisions contained herein shall
not be affected or impaired thereby.
(e) AMENDMENTS AND WAIVERS. The provisions of this
Warrant, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained
the written consent of the Holder.
(f) ENTIRE AGREEMENT. The provisions of this Warrant
are intended by the parties as a final expression of their agreement
and are intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no restrictions, agreements,
warranties or undertakings, other than those set forth or referred to
herein, including with respect to the registration rights granted by
the Company with respect to the Warrant Shares.
(g) HEADINGS. The headings of this Warrant have been
inserted as a matter of convenience and shall not affect the
construction hereof.
(h) APPLICABLE LAW. This Warrant shall be governed by
and construed in accordance with the laws of the State of New York.
Each party hereto agrees to submit to the non-exclusive jurisdiction of
the courts of the City of New York in the State of New York in any
action or proceeding arising out of or relating to this Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed in its name by its President thereunto duly authorized.
DATED:
TELEWAY, INC.
By: __________________________
Name:
Title:
ACCEPTED BY:
CHEMICAL VENTURE CAPITAL ASSOCIATES,
A CALIFORNIA LIMITED PARTNERSHIP
By: ______________________________
Name:
Title:
<PAGE>
SUBSCRIPTION
The undersigned, _______________________, pursuant to the
provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase
___________ shares of the Class B Common Stock of TELEWAY, INC., covered by said
Warrant, and makes payment therefor in full at the price per share provided by
said Warrant.
Dated: ____________________, 199_ __________________________
(Signature)
__________________________
(Address)
__________________________
ASSIGNMENT
FOR VALUE RECEIVED, ___________________ hereby sells, assigns
and transfers unto ____________________ the foregoing Warrant and all rights
evidenced thereby and does irrevocably constitute and appoint ________________,
attorney, to transfer said Warrant on the books of TELEWAY, INC.
Dated: ____________________, 199_ __________________________
(Signature)
__________________________
(Address)
__________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED, _____________________ hereby assigns and
transfers unto ___________________ the right to purchase _______ shares of the
Class B Common Stock of TELEWAY, INC. by the foregoing Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint ________________,
attorney, to transfer said Warrant on the books of TELEWAY, INC.
Dated: ____________________, 199_ __________________________
(Signature)
__________________________
(Address)
__________________________
<PAGE>
EXHIBIT C
REDEEMABLE PAY-IN-KIND PREFERRED STOCK TERMS
1. CLASS AND AMOUNT. Shares of this class of Preferred Stock
shall be designated as "Redeemable Pay-in-Kind Preferred Stock" (the "Redeemable
PIK Preferred Stock"), and the number of shares constituting such class shall be
_________.
2. RANKING. The Redeemable PIK Preferred Stock shall, with
respect to dividend rights and rights on liquidation, winding up and
dissolution, rank (a) senior to all classes of the Corporation's Common Stock,
no par value (the "Common Stock"), and to all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding, including any
classes or series of Preferred Stock, which by their terms expressly provide
that they are junior to the Redeemable PIK Preferred Stock (collectively, the
"Junior Stock"), (b) junior to all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding, including any
classes or series of Preferred Stock, which by their terms expressly provide
that they are senior to the Redeemable PIK Preferred Stock (collectively, the
"Senior Stock") and (c) PARI PASSU with all classes and series of stock of the
Corporation now or hereafter authorized, issued or outstanding, including any
classes or series of Preferred Stock, which by their terms expressly provide
that they rank on a parity with the Redeemable PIK Preferred Stock
(collectively, the "Parity Stock").
3. DIVIDENDS. (a) The holders of shares of the Redeemable PIK
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors, out of funds legally available therefor, dividends at the
annual rate of $_____ per share. Such dividends shall be cumulative and shall
accrue and be payable in equal quarterly payments of $____ per share (except as
provided in paragraphs (c) and (d) of this Section 3) on March 15, June 15,
September 15 and December 15 in each year (each of such dates being a "Dividend
Payment Date"), to holders of record at the close of business on the date
specified by the Board of Directors at the time such dividend is declared (the
"Record Date"), in preference to dividends on the Junior Stock, commencing on
the Dividend Payment Date next succeeding the date of issuance of such share
(the "Issuance Date"). Any such Record Date shall be no more than 30 days prior
to the relevant Dividend Payment Date to which such Record Date relates.
Dividend payments made with respect to shares of Redeemable PIK Preferred Stock
shall be made in additional shares of Redeemable PIK Preferred Stock at the rate
of .01 share of Redeemable PIK Preferred Stock for each $1.00 of such dividend
[; PROVIDED, HOWEVER, that if the Corporation intends to pay a dividend other
than in Junior Stock on its Common Stock or any other Junior Stock or any Parity
Stock, prior to the payment of such dividend, the Corporation shall first set
aside and irrevocably deposit in trust for the holders of the
<PAGE>
Redeemable PIK Preferred Stock money sufficient to pay the then current
quarterly dividend on the Redeemable PIK Preferred Stock and all subsequent
dividends on the Redeemable PIK Preferred Stock may be paid only in cash.] All
dividends paid with respect to shares of Redeemable PIK Preferred Stock pursuant
to this Section 3 shall be paid pro rata to the holders entitled thereto. All
shares of Redeemable PIK Preferred Stock issued as a dividend with respect to
the Redeemable PIK Preferred Stock will thereupon be duly authorized, validly
issued, fully paid and nonassessable.
(b) In the case of shares of Redeemable PIK Preferred Stock
issued other than in payment of a dividend, dividends shall accrue and be
cumulative from the Issuance Date thereof. In the case of shares of Redeemable
PIK Preferred Stock issued as a dividend, dividends shall accrue and be
cumulative from the Dividend Payment Date in respect of which such shares were
issued as a dividend.
(c) Each fractional share of Redeemable PIK Preferred Stock
outstanding shall be entitled to a ratably proportionate amount of all dividends
accruing with respect to each outstanding share of Redeemable PIK Preferred
Stock pursuant to paragraph (a) of this Section 3, and all such dividends with
respect to such outstanding fractional shares shall be cumulative and shall
accrue (whether or not declared), and shall be payable in the same manner and at
such times as provided for in paragraph (a) of this Section 3 with respect to
dividends on each outstanding share of Redeemable PIK Preferred Stock. Each
fractional share of Redeemable PIK Preferred Stock outstanding shall also be
entitled to a ratably proportionate amount of any other distributions made with
respect to each outstanding share of Redeemable PIK Preferred Stock, and all
such distributions shall be payable in the same manner and at the same time as
distributions on each outstanding share of Redeemable PIK Preferred Stock.
(d) Dividends are cumulative, and, accordingly, all dividends
not paid, whether or not declared, will accumulate until paid, which declaration
and payment may be for all or part of the then accumulated dividends. Accrued
but unpaid dividends for any past dividend periods may be declared by the Board
of Directors and paid on any date fixed by the Board of Directors, whether or
not a regular Dividend Payment Date, to holders of record on the books of the
Corporation on such record date as may be fixed by the Board of Directors, which
record date shall be no more than 30 days prior to the payment date thereof.
Holders of Redeemable PIK Preferred Stock will not be entitled to any dividends
in excess of the full cumulative dividends provided for herein. If any dividend
is not paid on the Dividend Payment Date therefor, interest shall accrue on such
unpaid dividend at the rate of 10% per annum compounded quarterly from the date
of such Dividend Payment Date to the date such dividend is paid. Dividends
payable on the Redeemable PIK Preferred Stock for the first quarterly dividend
period following the Issuance Date (or any other dividend payable for a period
less than a full quarterly period) shall be computed on the basis of a 360-day
year or twelve 30-day months.
<PAGE>
(e) So long as any shares of the Redeemable PIK Preferred
Stock are outstanding, the Corporation shall not declare, pay or set apart for
payment any dividend or make any distribution on any Junior Stock [(other than
dividends or distributions payable in additional shares of Junior Stock), unless
at the time of such dividend or distribution the Corporation shall have paid all
accrued and unpaid dividends on the outstanding shares of Redeemable PIK
Preferred Stock and shall have made provision for payment [in cash] of the then
current quarterly dividend.]
(f) Whenever dividends on the Redeemable PIK Preferred Stock
are in arrears, the Corporation shall not declare dividends on or make any other
distribution in respect of any Parity Stock, except dividends paid pro rata on
the Redeemable PIK Preferred Stock and all other capital stock ranking on a
parity as to dividends and on which dividends are payable in arrears.
(g) The Corporation may not, directly or indirectly, retire,
redeem, purchase or otherwise acquire any Junior Stock unless the Redeemable PIK
Preferred Stock has been redeemed or retired in full.
(h) The Corporation may not retire, redeem, purchase or
otherwise acquire any of its Parity Stock except for mandatory redemptions made
in accordance with the terms of such Parity Stock, provided that at the time of
any such redemption all dividends accrued on the Redeemable PIK Preferred Stock
shall have been paid or set aside for payment.
4. LIQUIDATION PREFERENCE. (a) Upon any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, no distribution shall be made to the holders of shares of capital
stock of the Corporation ranking junior to the Redeemable PIK Preferred Stock
upon liquidation, dissolution or winding up unless, prior thereto, the holders
of shares of Redeemable PIK Preferred Stock shall have received $___ per share
plus an amount equal to accrued and unpaid dividends and distributions thereon
to the date of such payment, whether or not declared. After payment in full of
the liquidation preference of the Redeemable PIK Preferred Stock, holders of
Redeemable PIK Preferred Stock shall not be entitled to receive any additional
cash, property or other assets of the Corporation upon liquidation, dissolution
or winding up of the Corporation.
(b) If, upon any such voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation are not sufficient to pay in full the liquidation payments payable
to the holders of shares of Redeemable PIK Preferred Stock pursuant to Section
4(a), then the holders of all such shares of Redeemable Preferred Stock shall,
together with the holders of shares of any Parity Stock, share PRO RATA in such
distribution of assets, so that the per share amount of such distribution of
assets made to holders of shares of Redeemable PIK Preferred Stock and the per
share amount of such distribution of assets made to holders of shares of Parity
Stock shall bear to each other the same ratio that the per share amount payable
to holders of
<PAGE>
shares of Redeemable PIK Preferred Stock pursuant to Section 4(a) and the per
share liquidation preference payable to holders of shares of Parity Stock bear
to each other.
(c) For the purposes of this Section 4, neither the voluntary
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or assets of
the Corporation nor the consolidation or merger of the Corporation with any
other corporation shall be deemed to be a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, unless such voluntary sale,
conveyance, exchange or transfer shall be in connection with a plan of
liquidation, dissolution or winding up of the Corporation.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION. Upon the occurrence of an Optional
Redemption Event (as defined in the Investment Agreement, dated as of November
__, 1994, among the Corporation, Chemical Venture Capital Associates, a
California limited partnership, and certain stockholders of the Corporation (as
amended, supplemented or otherwise modified from time to time), to the extent
the Corporation shall have funds legally available therefor, any holder of
shares of Redeemable PIK Preferred Stock, at his or its option, may cause the
Corporation to redeem all or part of the shares of Redeemable PIK Preferred
Stock then held by such holder, upon giving notice as hereinafter specified.
(b) MANDATORY REDEMPTION. On November __, in each of the years
2004, 2005 and 2006, the Corporation shall redeem, out of funds legally
available therefor, the following percentage of the shares of Redeemable PIK
Preferred Stock then outstanding: 2004 - 33%; 2005 - 50%; 2006 - 100% (PROVIDED
that the number of such shares required to be redeemed pursuant to this Section
5(b) on each of November __, 2004 and November __, 2005 shall not be less than
____ shares).
If the Corporation is unable or shall fail to discharge its
obligation to redeem outstanding shares of Redeemable PIK Preferred Stock
pursuant to this Section 5(b) (the "Mandatory Redemption Obligation"), the
Mandatory Redemption Obligation shall be discharged as soon as the Corporation
is able to discharge such Mandatory Redemption Obligation. If and so long as the
Mandatory Redemption obligation shall not be fully discharged, the Corporation
shall not declare or pay any dividend or make any distribution on, or, directly
or indirectly, purchase, redeem or satisfy any mandatory redemption, sinking
fund or other similar obligations in respect of (i) Junior Stock (other than as
a result of a reclassification of Junior Stock, or the exchange or conversion of
one class or series of Junior Stock for or into another class or series of
Junior Stock, or other than through the use of the proceeds of a substantially
contemporaneous sale of other Junior Stock) or any warrants, rights or options
exercisable for or convertible into any Junior Stock or (ii) Parity Stock.
(c) The redemption price for shares of Redeemable PIK
Preferred Stock redeemed pursuant to Section 5 shall be equal to $____ per
share. The Corporation shall pay on the date set for redemption, in addition to
the redemption price for such shares, any accrued and
<PAGE>
unpaid dividends on such shares of Redeemable PIK Preferred Stock to the
redemption date.
6. PROCEDURE FOR REDEMPTION. (a) In the event that fewer than
all the outstanding shares of Redeemable PIK Preferred Stock are to be redeemed
at any time pursuant to Section 5(b), the number of shares to be redeemed shall
be determined by the Board of Directors and the shares to be redeemed shall be
selected by lot or pro rata as may be determined by the Board of Directors.
(b) In the event that the Corporation shall redeem shares of
Redeemable PIK Preferred Stock pursuant to Section 5(b) hereof, notice of such
redemption shall be mailed by first-class mail, postage prepaid, and mailed not
less than 30 days nor more than 60 days prior to the redemption date, to the
holders of record of the shares to be redeemed at their respective addresses as
they shall appear in the records of the Corporation; PROVIDED, HOWEVER, that
failure to give such notice or any defect therein or in the mailing thereof
shall not affect the validity of the proceeding for the redemption of any shares
so to be redeemed except as to the holder to whom the Corporation has failed to
give such notice or except as to the holder to whom notice was defective. Each
such notice shall state: (i) the redemption date; (ii) the number of shares of
Redeemable PIK Preferred Stock to be redeemed and, if less than all the shares
held by such holder are to be redeemed, the number of such shares to be
redeemed; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on such redemption date.
(c) In the event that any holder of shares of Redeemable PIK
Preferred Stock shall elect to cause the Corporation to redeem such shares
pursuant to Section 5(a), notice (a "Holder's Notice") of such election to
redeem shall be mailed to the Corporation by first-class mail, postage prepaid,
and mailed not less than 10 days or more than 60 days prior to the date on which
such holder requests that such shares be redeemed. Each such Holder's Notice
shall state: (i) a statement that the holder of shares of Redeemable PIK
Preferred Stock delivering such notice is exercising his or its option to cause
the Corporation to redeem such shares pursuant to Section 5(a) hereof; (ii) the
date on which such requesting holder's shares of Redeemable PIK Preferred Stock
are to be redeemed; and (iii) the number of shares of Redeemable PIK Preferred
Stock then held by such requesting holder and the stock certificate number(s)
representing such shares. Promptly (and in any event within 5 days) following
receipt by the Corporation of a Holder's Notice, the Corporation shall notify
the holder of the shares of Redeemable PIK Preferred Stock to which such
Holder's Notice relates of the place or places where certificates for such
shares are to be surrendered for payment of the redemption price pursuant to
Section 5(a).
(d) Notice by the Corporation having been mailed as provided
in Section 6(b), in the case of redemptions pursuant to Section 5(b), or notice
of election having been mailed by the holders as provided in Section 6(c), and
provided that on or before the applicable redemption date funds necessary for
such redemption shall have been set aside by the Corporation, separate and apart
from its
<PAGE>
other funds, in trust for the pro rata benefit of the holders of the shares so
called for or entitled to redemption, so as to be and to continue to be
available therefor, then, from and after the redemption date (unless the
Corporation defaults in the payment of the redemption price, in which case such
rights shall continue until the redemption price is paid), dividends on the
shares of Redeemable PIK Preferred Stock so called for or entitled to redemption
shall cease to accrue, and said shares shall no longer be deemed to be
outstanding and shall not have the status of shares of Redeemable PIK Preferred
Stock, and all rights of the holders thereof as stockholders of the Corporation
(except the right to receive the applicable redemption price and any accrued and
unpaid dividends from the Corporation to the date of redemption) shall cease.
Upon surrender of the certificates for any shares so redeemed (properly endorsed
or assigned for transfer, if the Board of Directors shall so require and a
notice by the Corporation shall so state), such shares shall be redeemed by the
Corporation at the applicable redemption price as aforesaid. In case fewer than
all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed shares
without cost to the holder thereof.
7. REACQUIRED SHARES. Shares of Redeemable PIK Preferred Stock
that have been issued and reacquired by the Corporation in any manner, including
shares reacquired by purchase or redemption shall be cancelled and retired.
8. VOTING RIGHTS.
(a) NO GENERAL VOTING RIGHTS. [Except as otherwise provided in
this Section 8, or as otherwise from time to time provided by law, the holders
of shares of Redeemable PIK Preferred Stock shall have no voting rights. In
exercising the voting rights provided by law or in this Section 8, each share of
Redeemable PIK Preferred Stock shall have one vote per share.]
(b) VOTING RIGHTS UPON DIVIDEND DEFAULT.
(i) If, at any time six or more quarterly dividends
(whether consecutive or not) on the Redeemable PIK Preferred Stock
shall be in arrears, in whole or in part, or if at any time any
Mandatory Redemption Obligation with respect to the Redeemable PIK
Preferred Stock which has matured shall not have been fulfilled, then
the number of directors constituting the Board of Directors of the
Corporation shall, without further action, be increased by [two] and,
in addition to any other rights to elect directors which the holders of
Redeemable PIK Preferred Stock may have, the holders of all then
outstanding shares of Redeemable PIK Preferred Stock, voting separately
as a class and to the exclusion of the holders of all other classes of
stock of the Corporation, shall be entitled to elect the directors of
the Corporation to fill such newly created directorships.
(ii) Whenever such voting right shall have vested as
aforesaid, such right may be exercised initially either at a special
meeting of the holders of Redeemable PIK Preferred Stock, called as
hereinafter provided, at any annual meeting of
<PAGE>
stockholders held for the purpose of electing directors, or by the
written consent of the holders of Redeemable PIK Preferred Stock
without a meeting pursuant to Section 228 of the Delaware General
Corporation Law and thereafter at such annual meeting or by written
consent. Such voting right shall continue until such time as (A) all
dividends accrued on the Redeemable PIK Preferred Stock shall have been
paid in full through the immediately preceding Dividend Payment Date
and (B) the Corporation has fulfilled all Mandatory Redemption
Obligations to the extent such obligations have matured, at which time
such voting right of the holders of Redeemable PIK Preferred Stock
shall terminate, subject to reinvesting in the event of each and every
subsequent failure of the Corporation for the requisite period of time
fully to pay dividends or to discharge its Mandatory Redemption
Obligations as described above.
(iii) At any time after such voting power shall have been
so vested in shares of Redeemable PIK Preferred Stock and such right
shall not already have been exercised by written consent as aforesaid,
the Secretary of the Corporation may, and upon the written request of
the holders of record of at least 10% of the outstanding shares of
Redeemable PIK Preferred Stock (addressed to the Secretary of the
Corporation at the principal office of the Corporation) shall call a
special meeting of the holders of Redeemable PIK Preferred Stock for
the election of the directors to be elected by them as herein provided.
Such call shall be made by notice to each holder by first-class mail,
postage prepaid at its address as it appears in the records of the
Corporation, and such notice shall be mailed at least 15 days but no
more than 30 days before the date of the special meeting, or as
required by law. Such meeting shall be held at the earliest practicable
date upon the notice required for special meetings of stockholders at
the place designated by the Secretary of the Corporation. If such
meeting shall not be called by a proper officer of the Corporation
within 30 days after receipt of such written request by the Secretary
of the Corporation, then the holders of record of at least 10% of the
shares of Redeemable PIK Preferred Stock then outstanding may call such
meeting at the expense of the Corporation, and such meeting may be
called by such holders upon the notice required for special meetings of
stockholders and shall be held at the place designated in such notice.
Any holder of Redeemable PIK Preferred Stock that would be entitled to
vote at any such meeting shall have access to the stock books of the
Corporation for the purpose of causing a meeting of holders of
Redeemable PIK Preferred Stock to be called pursuant to the provisions
of this clause (iii).
(iv) At any meeting held for the purpose of electing
directors at which the holders of Redeemable PIK Preferred Stock shall
have the right to elect directors as provided herein, the presence in
person or by proxy of the holders of a majority of the then outstanding
shares of Redeemable PIK Preferred Stock shall be required and be
sufficient to constitute a quorum of such class for the election of
directors by such class. At any such meeting or adjournment thereof (x)
the absence of a quorum of the holders of Redeemable PIK Preferred
Stock shall not prevent the election of directors other than the
directors to be
<PAGE>
elected by the holders of Redeemable PIK Preferred Stock, and the
absence of a quorum or quorums of the holders of capital stock entitled
to elect such other directors shall not prevent the election of the
directors to be elected by the holders of Redeemable PIK Preferred
Stock and (y) in the absence of a quorum of the holders of Redeemable
PIK Preferred Stock, a majority of the holders of Redeemable PIK
Preferred Stock present in person or by proxy shall have the power to
adjourn the meeting for the election of directors which such holders
are entitled to elect, from time to time, without notice (except as
required by law) other than announcement at the meeting, until a quorum
shall be present.
(v) The term of office of any director elected by the
holders of Redeemable PIK Preferred Stock pursuant to paragraph (b)(i)
of this Section 8 in office at any time when the aforesaid voting
rights are vested in the holders of Redeemable PIK Preferred Stock
shall terminate upon the election of his successor at any meeting of
stockholders held for the purpose of electing directors. Upon any
termination of the aforesaid voting rights in accordance with paragraph
(b)(ii) of this Section 8, the term of office of the directors elected
by the holders of Redeemable PIK Preferred Stock pursuant to paragraph
(b)(i) of this Section 8 then in office thereupon shall terminate and
upon such termination the number of directors constituting the Board of
Directors, without further action, shall be reduced by [two], subject
always to the increase of the number of directors pursuant hereto in
case of the future right of the holders of Redeemable PIK Preferred
Stock to elect directors as provided herein.
(vi) In case of a vacancy occurring in the office of any
director so elected pursuant to paragraph (b)(i) of this Section 8, the
holders of a majority of the Redeemable PIK Preferred Stock then
outstanding may, at a special meeting of the holders or by written
consent as provided above, elect a successor to hold office for the
unexpired term of such director.
(c) VOTING RIGHTS ON EXTRAORDINARY MATTERS. In addition to any
vote or consent of stockholders required by law, the approval of the holders of
a majority of the outstanding shares of Redeemable PIK Preferred Stock shall be
required (i) to alter or amend any of the provisions of the Certificate of
Incorporation that reflects the terms of this Redeemable PIK Preferred Stock or
(ii) to amend the Certificate of Incorporation in any manner that materially and
adversely affects the Redeemable PIK Preferred Stock.
<PAGE>
TABLE OF CONTENTS
Page
----
1. Definitions................................................................1
2. Authorization Purchase and Sale and Closing...............................15
2.1 Authorization...................................................15
2.2 Purchase and Sale...............................................15
2.3 Closing 16
3. Representations and Warranties of the Company.............................17
3.1 Organization; Authority and Standing............................17
3.2 Authority; Execution and Delivery...............................17
3.3 Governmental Consents and Approvals.............................18
3.4 No Breach.......................................................18
3.5 Capital Stock; Title; Authorization and Reservation
of Common Stock.................................................18
3.6 Options or Other Rights.........................................19
3.7 Charter Documents and By-laws...................................19
3.8 Financials; Books and Records...................................19
3.9 No Material Adverse Change......................................20
3.10 Compliance With Laws............................................20
3.11 Permits 20
3.12 Litigation......................................................20
3.13 Contracts and Other Agreements..................................20
3.14 Real Estate.....................................................23
3.15 Personal Property...............................................23
3.16 Operations of the Company.......................................24
3.17 Regulatory Filings..............................................25
3.18 Related Transactions............................................25
3.19 Liabilities.....................................................26
3.20 Brokers 26
3.21 Employee Benefits...............................................26
3.22 Environmental Matters...........................................28
3.23 Taxes 28
3.24 Disclosure......................................................30
3.25 Offering of Securities..........................................30
4. Representations and Warranties of McCann..................................30
4.1 Capacity........................................................30
4.2 Authority; Execution and Delivery...............................30
4.3 Governmental Consents and Approvals.............................30
4.4 No Breach.......................................................31
5. Representations and Warranties of CVCA....................................31
5.1 Formation.......................................................31
5.2 Authority; Execution and Delivery...............................31
5.3 Governmental Consents and Approvals.............................31
5.4 No Breach.......................................................31
5.5 Accredited Investor; Purchase Not for Distribution..............32
5.6 Brokers 32
6. Covenants and Agreements of the Company....................................32
<PAGE>
6.1 Corporate Examinations and Investigations.......................32
6.2 Regulatory Approvals............................................33
6.3 Information.....................................................33
6.4 Use of Proceeds.................................................34
6.5 Legend 34
6.6 Certain Restrictive Agreements..................................34
6.7 Key Events......................................................37
7. Additional Covenants and Agreements of the Parties.........................37
7.1 First Offer Right...............................................37
7.2 Co-Sale Rights..................................................38
7.3 Pre-emptive Right...............................................39
7.4 No Transfer Period..............................................40
7.5 Call of Warrants and Warrant Shares.............................40
7.6 Board Representation............................................41
7.7 Securities Act Compliance.......................................41
7.8 Confidentiality.................................................42
7.9 Treatment of McCann Debt........................................42
7.10 Transfers by McCann of Class A Common Stock.....................43
7.11 Limitation on Amendments to Certificate of Incorporation........43
8. Registration Rights.......................................................43
8.1 Demand Registration Rights......................................43
8.2 "Piggy-back" Registration Rights................................45
8.3 Priority in Incidental Registrations............................46
8.4 Holdback Agreements.............................................46
8.5 Indemnification.................................................47
8.6 Class C Shares Exchange.........................................50
9. Conditions Precedent to the Obligations of CVCA to Make Investments.......50
9.1 Representations and Warranties; Covenants and Agreements........50
9.2 Governmental Permits and Approvals; Illegality..................50
9.3 Litigation......................................................51
9.4 Applicable Target...............................................51
9.5 Third Party Consents............................................51
9.6 Compliance with Stockholders' Agreement.........................51
9.7 Officer's Certificate...........................................51
10. Survival of Representations and Warranties...............................51
11. Indemnification..........................................................52
11.1 Indemnification................................................52
11.2 Procedure......................................................52
11.3 No Set-Off.....................................................53
12. Termination..............................................................53
12.1 Termination and Abandonment....................................53
12.2 Effect of Termination; Expenses................................53
13. Miscellaneous............................................................54
13.1 Publicity......................................................54
13.2 Notices........................................................54
13.3 Entire Agreement...............................................55
13.4 Waivers and Amendments; Noncontractual Remedies;
<PAGE>
Preservation of Remedies.......................................56
13.5 Governing Law..................................................56
13.6 Binding Effect; Assignment Limited.............................56
13.7 Counterparts...................................................56
13.8 Exhibits and Schedules.........................................56
13.9 Headings.......................................................56
13.10 Remedies.......................................................57
13.11 Invalidity of Provision........................................57
13.12 Grammatical Construction.......................................57
<PAGE>
SCHEDULE
Schedule I - Investment Schedule
Schedule II - Disclosure Schedule
EXHIBITS
Exhibit A Applicable Targets
Exhibit B Form of Warrant
Exhibit C Form of Amended and Restated Certificate of Incorporation
<PAGE>
Exhibit 10.3
EXECUTION COPY
CONSENT AND AMENDMENT NO. 1 TO
INVESTMENT AGREEMENT
THIS CONSENT AND AMENDMENT NO. 1 TO INVESTMENT AGREEMENT (this
"CONSENT AND AMENDMENT"), dated as of May 20, 1999, among Chase Venture Capital
Associates, a California limited partnership formerly known as Chemical Venture
Capital Associates ("CHASE"), 1-800-FLOWERS.COM, Inc., a Delaware corporation
formerly known as Teleway, Inc. ("FLOWERS"), and James F. McCann ("MCCANN").
WHEREAS, McCann and the predecessor entities of Chase and
Flowers are party to the Investment Agreement, dated January 16, 1995 (the
"INVESTMENT AGREEMENT"), whereby Flowers issued to Chase 26,345 shares of its
Class C Common Stock, par value $0.01 per share (the "CLASS C COMMON STOCK") and
warrants (the "WARRANTS") to purchase 237,104 shares of its Class B Common
Stock, par value $0.01 per share (the "CLASS B COMMON STOCK"); and
WHEREAS, Flowers and McCann desire to sell certain shares of
Flowers capital stock to Chase and certain other investors in a private
placement offering (the "PRIVATE PLACEMENT"), and
WHEREAS, Flowers desires to register shares of its capital
stock under the Securities Act of 1933, as amended, for sale to the public in an
initial public offering (the "IPO"); and
WHEREAS, in connection with the Private Placement and the IPO,
Flowers deems it necessary to recapitalize its capital stock (the
"RECAPITALIZATION"); and
WHEREAS, Chase considers the consummation of the Private
Placement, the IPO and the Recapitalization to be in the best interests of
Flowers and to be in its best interests as a stockholder of Flowers; and
WHEREAS, as certain provisions of the Investment Agreement
would inhibit or prevent the consummation of the Private Placement, the IPO and
the Recapitalization, the parties desire to amend the Investment Agreement and
consent to certain events as provided herein;
NOW THEREFORE, for good and valuable consideration, the
receipt of which is hereby recognized, the parties agree as follows:
1. AMENDMENTS TO INVESTMENT AGREEMENT.
1.1. REFERENCES IN INVESTMENT AGREEMENT.All references in the
Investment Agreement to CVCA shall be deemed references to Chase and all
references to the Company
<PAGE>
shall be deemed references to Flowers.
1.2. RECAPITALIZATION. Upon a Recapitalization Event (as
defined in section 2.1 below), section 7.11 of the Investment Agreement shall be
terminated in its entirety.
1.3. ELIMINATION OF CERTAIN COVENANTS. Upon the consummation
of the IPO, (the "IPO CLOSING"), sections 6.1, 6.3 and 6.6(d) of the Investment
Agreement shall be terminated in their entirety. In addition, section 6.6(c) is
hereby amended and restated in its entirety as follows:
"The consent requirements set forth in clauses (a) and (b)
above shall terminate upon a Recapitalization Event (as defined in the
Consent and Amendment No. 1 to Investment Agreement, dated May 20,
1999)."
1.4. REGISTRATION RIGHTS. Upon the consummation of the Private
Placement (the "PRIVATE PLACEMENT Closing"), section 8 of the Investment
Agreement shall be terminated in its entirety. In connection with the Private
Placement, Chase, Flowers and the investors purchasing capital stock in the
Private Placement shall enter into an Investors' Rights Agreement, substantially
in the form of EXHIBIT B hereto, providing Chase with the investors' rights set
forth therein.
1.5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES;
INDEMNIFICATION. Section 10 of the Investment Agreement is hereby amended and
restated in its entirety as follows:
"SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
All representations and warranties contained in this Agreement will
terminate on the date hereof. All rights to indemnification arising
under this Agreement shall terminate on the date hereof."
1.6. BOARD REPRESENTATION. Upon a Recapitalization Event,
section 7.6 of the Investment Agreement shall be terminated in its entirety.
1.7. CONVERSION OF CLASS A COMMON STOCK; TREATMENT OF DEBT.
Upon a Recapitalization Event, sections 7.9 and 7.10 of the Investment Agreement
shall be terminated in their entirety.
2. CONSENTS.
2.1. CONSENT TO SECOND AND THIRD AMENDED AND RESTATED
CERTIFICATES.
(a) At the earlier of (i) the closing of the first registered
offering of a class of common stock of the Company with gross proceeds
to the Company of not less than $25 million (a "QUALIFIED PUBLIC
OFFERING") or (ii) the closing of a private placement of securities of
the Company with gross proceeds to the Company of not less than $50
million (the earlier of such events, the "RECAPITALIZATION EVENT"), the
Company's Amended and Restated Certificate of Incorporation shall be
amended and restated in the
<PAGE>
form of the Second Amended and Restated Certificate of Incorporation
attached hereto as EXHIBIT A-1 (the "SECOND AMENDED AND RESTATED
CERTIFICATE"), and Chase hereby consents to the amendment and
restatement of the Amended and Restated Certificate of Incorporation in
the form of such Second Amended and Restated Certificate and the filing
thereof with the Secretary of State of the State of Delaware upon a
Recapitalization Event. Following the date on which all of the waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(the "HSR Act") have expired or been terminated relating to the filings
made thereunder by the Company and certain investors in connection with
the Private Placement, the Second Amended and Restated Certificate
shall be amended and restated in the form of the Third Amended and
Restated Certificate of Incorporation attached hereto as EXHIBIT A-2
(the "Third Amended and Restated Certificate"), and Chase hereby
consents to the amendment and restatement of the Second Amended and
Restated Certificate in the form of such Third Amended and Restated
Certificate and the filing thereof with the Secretary of State of the
State of Delaware at such time.
(b) RECAPITALIZATION. In accordance with the terms of the
Second Amended and Restated Certificate, the Company's capital stock
shall be reclassified upon a Recapitalization Event as follows:
(i) each share of Class A Common Stock shall, without
further action on the part of the holder thereto, convert into
one share of class A common stock, $0.01 par value, with
rights and privileges thereto as described in the Second
Amended and Restated Certificate (the "NEW CLASS A");
(ii) each share of Class B Common Stock shall,
without further action on the part of the holder thereto,
convert into one share of Class B common stock, $0.01 par
value, with rights and thereto as described in the Second
Amended and Restated Certificate (the "NEW CLASS B"); and
(iii) each share of Class C Common Stock shall,
without further action on the part of the holder thereto,
convert into one share of New Class B and one share of series
C preferred stock, with rights and privileges thereto as
described in the Second Amended and Restated Certificate (the
"SERIES C PREFERRED STOCK"). In accordance with the Second
Amended and Restated Certificate, the shares of Series C
Preferred Stock owned by Chase shall be automatically redeemed
by the Company immediately upon their issuance for an amount
equal to $14,914,753.00.
(iv) after the reclassification of the Company's
capital stock as provided herein, all references in the
Investment Agreement to the Class A Common Stock and Class B
Common Stock shall be deemed to be references to the New Class
A and New Class B, consistent with the above.
(d) WARRANTS AND WARRANT SHARES.
(i) Upon a Recapitalization Event and the
reclassification of
<PAGE>
the Company's capital stock as provided in paragraph (b)
above, the Warrants shall be automatically amended to provide
that upon exercise, each Warrant shall represent the right to
acquire a share of New Class B and shall no longer represent
the right to acquire a share of Class B Common Stock; and
(ii) Upon the subsequent effectiveness of the Third
Amended and Restated Certificate, the Warrants shall be
automatically amended to provide that upon exercise, each
Warrant shall represent the right to acquire a share of class
A common stock, $0.01 par value, with rights and preferences
thereto as described in the Third Amended and Restated
Certificate, and shall no longer represent the right to
acquire a share of New Class B.
(e) Upon the effectiveness of the Third Amended and Restated
Certificate, Chase shall immediately convert each and every share of
New Class B owned by it, pursuant to Section B.4(a) of Article IV of
the Third Amended and Restated Certificate, into one share of class A
common stock, $0.01 par value, with rights and privileges thereto as
described in the Third Amended and Restated Certificate.
2.2. WAIVER AND TERMINATION OF CO-SALE RIGHTS. Chase hereby
waives all of its rights contained in section 7.2 in connection with the Private
Placement. Upon a Recapitalization Event, section 7.2 of the Investment
Agreement shall be terminated in its entirety.
2.3. WAIVER AND TERMINATION OF CERTAIN PRE-EMPTIVE RIGHTS.
Chase hereby waives all of its rights contained in section 7.3 in connection
with the Private Placement. Upon a Recapitalization Event, section 7.3 of the
Investment Agreement shall be terminated in its entirety.
2.4. EFFECTIVENESS. The effectiveness of this Consent and
Amendment is conditioned upon the execution and delivery by Flowers and Chase of
the Stock Purchase Agreement and the Investors' Rights Agreement, each dated as
of May 20, 1999, among Chase, Flowers, James F. McCann, Chris G. McCann, and
certain other investors, in connection with the Private Placement.
3. MISCELLANEOUS
3.1. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York, exclusive of the provisions
thereof governing conflicts of laws.
3.2. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3.3. NOTICES. Any notice, request, demand or other
communication required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery to the party to be
notified, upon the date of transmittal of services via telecopy
<PAGE>
to the party to whom notice is being given, or on the fifth day after deposit in
the United States Post Office, by registered or certified mail, with postage and
fees prepaid, return receipt requested, and addressed to the other party to:
(a) if to Flowers and McCann, to James F. McCann,
Chief Executive Officer, 1-800-FLOWERS.COM, Inc., 1600 Stewart
Avenue, Westbury, New York, 11590, with a copy to Jerry
Gallagher, Gallagher, Walker, Bianco & Plastaras, 98 Willis
Avenue, New York 11501, and Alexander D. Lynch, Brobeck,
Phleger & Harrison LLP, 1633 Broadway New York, New York,
10019.
(b) if to Chase, to Jeffrey C. Walker, 380 Madison
Avenue, 12th Floor, New York, New York 10017, with a copy to
William E. Curbow, Simpson Thacher & Bartlett, 425 Lexington
Avenue, New York, New York 10017.
3.4. REMEDIES; SEVERABILITY. It is specifically understood and
agreed that any breach of the provisions of this Consent and Amendment by any
person subject hereto will result in irreparable injury to the other parties
hereto, that the remedy at law alone will be an inadequate remedy for such
breach, and that, in addition to any other remedies which they may have, such
other parties may enforce their respective rights by actions for specific
performance (to the extent permitted by law). Whenever possible, each provision
of this Consent and Amendment shall be interpreted in such a manner as to be
effective and valid under applicable law, but if any provision of this Consent
and Amendment shall be deemed prohibited or invalid under such applicable law,
such provision shall be ineffective to the extent of such prohibition or
invalidity, and such prohibition or invalidity shall not invalidate the
remainder of such provision or the other provisions of this Consent and
Amendment.
3.5. AMENDMENTS, WAIVERS AND CONSENTS. For the purposes of
this Amendment and Consent and all agreements executed pursuant hereto, no
course of dealing between or among any of the parties hereto and no delay on the
part of any party hereto in exercising any rights hereunder or thereunder shall
operate as a waiver of the rights hereof and thereof. No provision hereof may be
waived otherwise than by a written instrument signed by the party or parties so
waiving such covenant or other provision as contemplated herein. No amendment to
this Consent and Amendment may be made without the written consent of the
Flowers, McCann and Chase. Except as provided in this Consent and Amendment, all
provisions contained in the Investment Agreement shall remain in full force and
effect and shall be unaffected by the provisions hereof.
3.6. NO THIRD-PARTY BENEFICIARIES. The parties hereto
specially acknowledge and agree that there are no intended third-party
beneficiaries to this Consent and Amendment.
3.7. ENTIRE AGREEMENT. This Consent and Amendment and all
documents and instruments referred to herein constitute the entire agreement
among the parties and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein.
<PAGE>
[Remainder of this page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Consent and
Amendment to be duly executed and delivered as of the date first above written.
1-800-FLOWERS.COM, INC.
By: /s/ James F. McCann
Name: James F. McCann
Title: Chief Executive Officer
CHASE VENTURE CAPITAL ASSOCIATES
By: /s/ Jeffrey C. Walker
Name: Jeffrey C. Walker
Title: Managing Partner
Address: 380 Madison Avenue, 12th Floor
New York, New York 10017
JAMES F. MCCANN
/s/ James F. McCann
_____________________________________
Address: c/o: 1-800-FLOWERS.COM, Inc.
1600 Stewart Avenue
Westbury, New York 11590
<PAGE>
Exhibit 10.12
FIRST AMENDMENT TO STOCKHOLDERS' AGREEMENT
FIRST AMENDMENT dated as of March 27, 1999 (this "AMENDMENT") to the
Stockholders' Agreement dated as of April 3, 1998 (the Stockholders' Agreement,
as amended hereby, the "STOCKHOLDERS' AGREEMENT"), by and among THE PLOW &
HEARTH, INC. , a Virginia corporation having an address at Route 230 West,
Madison, Virginia 22727 (the "COMPANY"), 1-800-FLOWERS, INC., a Delaware
corporation, having an address at 1600 Stewart Avenue, Westbury, New York 11590
("FLOWERS") and the other Persons set forth on the signature page hereof;
W I T N E S S E T H:
WHEREAS, the parties hereto desire to amend the Stockholders' Agreement
in accordance with the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the following and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein and not
defined herein which are defined in the Stockholders' Agreement, shall have the
same meaning herein as in the Stockholders' Agreement.
2. AMENDMENT OF DEFINITIONS. (a) Section 1.1(k) of the
Stockholders' Agreement hereby is amended by deleting it in its entirety and
replacing it with the following:
(k) "COMPANY VALUE" shall mean the product of (i)
seven (7) multiplied by (ii) the EBIT of the Company for the twelve-month period
ending on the last day of the calendar month preceding (A) in the case of a Put
Option, the Put Event or the Put Period Trigger Date, as the case may be; (B) in
the case of a Call Option, the Call Event, or the Call Period Trigger Date, as
the case may be; (C) in the case of a Call Option triggered by the circumstances
described in Section 1.1(e)(ii), the later of the Put Period Trigger Date or the
Delayed Call Event; (D) in the case of a Cash Out Option, the Effective Date or
the Consummation Date, as the case may be, or (E) in the case of Section 2.2(b),
the Investment Date, or if any such date is the last day of a month, on such
date; PROVIDED, HOWEVER that the parties hereto have agreed that in no event
shall the Company Value be less than $21,000,000.
3. RESTATEMENT OF STOCKHOLDERS' AGREEMENT. The Stockholders'
Agreement, as amended hereby, remains in full force and effect until terminated
in accordance with Article 11 thereof. All other terms of the Stockholders'
Agreement are hereby restated.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
THE PLOW & HEARTH, INC.
By: /s/ Peter Rice
_____________________________
1-800-FLOWERS, INC.
By: /s/ James F. McCann
_____________________________
MANAGEMENT STOCKHOLDERS:
/s/ Donald C. Beck
_________________________________
Donald C. Beck
/s/ Michael E. Burns
_________________________________
Michael E. Burns
/s/ Carol A. Cate
_________________________________
Carol A. Cate
/s/ Dawn M. Cottrell
_________________________________
Dawn M. Cottrell, as Joint Tenant with
Right of Survivorship
/s/ Ronald J. Cottrell
_________________________________
Ronald J. Cottrell, as Joint Tenant with
Right of Survivorship
/s/ James K. Kepchar
_________________________________
James K. Kepchar
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
LASAHANE INVESTMENTS
By: Frank Borden Hanes, Jr., its Managing
Partner
By: /s/ Frank Borden Hanes, Jr.
_____________________________
Name: Frank Borden Hanes, Jr.
Title: Managing Partner
Peter G. Rice
THE PETER VAN S. RICE FAMILY TRUST
By: /s/ Peter G. Rice
________________________________
Name: Peter G. Rice
Title: as Trustee
Steven R. Wagner
TUCKER ANTHONY, INC., CUSTODIAN FBO/C.
CARTER WALKER, JR. IRA
By: /s/ Steven R. Wagner
________________________________
Name: Steven R. Wagner
Title: as Trustee
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
OPTIONHOLDERS:
/s/ Anna M. Allen
______________________________
Anna M. Allen
/s/ Caroline C. Busick
______________________________
Caroline C. Busick
/s/ Dawn M. Cottrell
______________________________
Dawn M. Cottrell
/s/ Thomas M. Freshwater
______________________________
Thomas M. Freshwater
/s/ Norman D. Hensel
______________________________
Norman D. Hensel
/s/ Robert G. Kohler
______________________________
Robert G. Kohler
/s/ Margaret S. Rice
______________________________
Margaret S. Rice
/s/ Peter M. Rice
______________________________
Peter M. Rice
/s/ Richard N. VanSantvoord
______________________________
Richard N. VanSantvoord
/s/ John H. Whitlow
______________________________
John H. Whitlow
<PAGE>
SECOND AMENDMENT TO STOCKHOLDERS' AGREEMENT
SECOND AMENDMENT dated as of May 17, 1999 (this "AMENDMENT") to the
Stockholders' Agreement dated as of April 3, 1998, as amended on March 27, 1999
(the Stockholders' Agreement, as amended hereby, the "STOCKHOLDERS' AGREEMENT"),
by and among THE PLOW & HEARTH, INC. , a Virginia corporation having an address
at Route 230 West, Madison, Virginia 22727 (the "COMPANY"), 1-800-FLOWERS.COM,
INC., a Delaware corporation (formerly known as 1-800-Flowers, Inc.), having an
address at 1600 Stewart Avenue, Westbury, New York 11590 ("FLOWERS") and the
other Persons set forth on the signature page hereof;
W I T N E S S E T H:
WHEREAS, in anticipation of a possible IPO of Flowers, the parties
hereto desire to amend the Stockholders' Agreement in accordance with the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the following and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein and not
defined herein which are defined in the Stockholders' Agreement, shall have the
same meaning herein as in the Stockholders' Agreement.
2. AMENDMENT OF DEFINITIONS. (a) Section 1.1(h) of the
Stockholders' Agreement hereby is amended by deleting it in its entirety and
replacing it with the following:
"(h) "CASH OUT PRICE" shall mean: (i) generally, with
respect to any Management Stockholder or Optionholder, (A) the product of the
Company Value multiplied by such Management Stockholder's or Optionholder's
Proportionate Interest, less (B) any loans, advances or similar monetary
obligations owed or otherwise outstanding from such Management Stockholder or
Optionholder or their respective Related Employee or Affiliates (whether or not,
otherwise due and payable) to the Company or its Affiliates, and any amounts
owed by such Management Stockholder, Optionholder or their respective Related
Employee to the Company or its Affiliates with respect to the exercise of
Options or other Purchase Rights; and (ii) for a Qualifying IPO, with respect to
any Management Stockholder or Optionholder, (A) the product of $28,000,000
multiplied by such Management Stockholder's or Optionholder's Proportionate
Interest, less (B) any loans, advances or similar monetary obligations owed or
otherwise outstanding from such Management Stockholder or Optionholder or their
respective Related Employee or Affiliates (whether or not, otherwise due and
payable) to the Company or its Affiliates, and any amounts owed by such
Management Stockholder, Optionholder or their respective Related Employee to the
Company or its Affiliates with respect to the exercise of Options or other
Purchase Rights."
<PAGE>
(b) Section 1.1(aj) of the Stockholders' Agreement hereby is
amended by deleting it in its entirety and replacing it with the following:
"(aj) "PROPORTIONATE INTEREST" with respect to any
Person, shall mean: (i) generally, a fraction, the numerator of which is the
total of number of Shares and Option Shares being sold by such Person and the
denominator of which is the total number of Shares and Option Shares then
outstanding and (in the case of Optionholders) deemed outstanding on a Fully
Diluted Basis; and (ii) for a Qualifying IPO, in calculating the Cash Out Price
for the Stockholder Cash Out Option, a fraction, the numerator of which is the
total of number of Shares and Option Shares being sold by such Person and the
denominator of which is the total number of Shares, Option Shares and shares of
Common Stock which are issuable upon exercise of vested options pursuant to the
terms of the New Plan, as amended ("NEW OPTION SHARES"), then outstanding and
(in the case of Optionholders and holders of New Option Shares) deemed
outstanding on a Fully Diluted Basis." (c) Section 1.1 of the Stockholders'
Agreement shall be amended by adding the following paragraph (aq-1) immediately
following paragraph (aq):
"(aq-1) "QUALIFYING IPO" shall mean an IPO of
Flowers, for which Goldman, Sachs & Co. serves as the lead managing underwriter,
which is completed on or before December 31, 1999, and as a result of which
Flowers receives gross offering proceeds of not less than $80,000,000."
3. AMENDMENT OF SECTION 9. Section 9 of the Stockholders'
Agreement is deleted in its entirety and replaced by the following new Section
9:
9. MANAGEMENT STOCKHOLDERS CONVERSION AND CASH OUT OPTIONS
9.1 CONVERSION AND CASH OUT OPTIONS. (a) MANAGEMENT
STOCKHOLDER OPTIONS. (i) Upon the occurrence of the first to occur of an IPO of
Flowers (Flowers is sometimes referred to in this Section 9 as an "ISSUER"), or
the Sale of Flowers, each of the Management Stockholders and Optionholders shall
(A) in the case of a Sale of Flowers or an IPO that is not a Qualifying IPO,
have the option to cause (1) all (but not less than all) of its Shares and
Option Shares to be converted into that number of shares of capital stock of the
Issuer to be determined by applying the Conversion Ratio to the Shares and the
Option Shares of such Management Stockholders and Optionholders (the
"STOCKHOLDER CONVERSION OPTION") or (2) in the event of an IPO and subject to
approval of the managing underwriter of the IPO in its sole discretion, the
Issuer to purchase for cash, all of its Shares and Option Shares at the Cash Out
Price (the "STOCKHOLDER CASH OUT OPTION" and, collectively, together with the
Stockholder Conversion Option, the "STOCKHOLDER OPTIONS") and (B) in the case of
a Qualifying IPO, shall exercise the Stockholder Cash Out Option, in each case
in accordance with the provisions hereof.
<PAGE>
(ii) Upon the occurrence of a "PRIVATE SALE"
prior to the termination of the Put Period, each Management Stockholder and
Optionholder shall have the right to cause the Company to purchase all (but not
less than all) of its Shares and Option Shares (the "PRIVATE SALE PUT OPTION")
at the Put Price. A "Private Sale" shall mean the Sale of the Issuer as a result
of which Management Stockholders and Optionholders would receive in
consideration for their Shares or Option Shares (or securities of the Issuer
into which such Shares or Option Shares would be converted) equity securities of
the acquiring or surviving entity which are not traded on a United States or
foreign securities exchange or traded or reported on the Nasdaq National Market
or the Nasdaq Stock Market or substantially equivalent foreign automated
quotation system.
(iii) If an Optionholder exercises a Stockholder
Option or Private Sale Put Option, it shall exercise all of its Options so that
the Options Shares thereunder may be converted or sold in accordance with the
provisions hereof, which exercise shall be conditioned upon, and shall be deemed
effective immediately prior to, the consummation of the conversion or sale, as
the case may be, of such Option Shares.
(b) ISSUER OPTION. If any Management Stockholder or
Optionholder has elected not to exercise its Stockholder Conversion Option,
Stockholder Cash Out Option or Private Sale Put Option in connection with a
Stockholder Option Event, then the Issuer shall have the option to cause all
(but not less than all) of the Shares and Option Shares of such Management
Stockholder or Optionholder to be converted into capital stock of the Issuer in
accordance with the provisions hereof (the "ISSUER CONVERSION OPTION"; and,
collectively together with the Stockholder Conversion Option, the "CONVERSION
OPTIONS"). If the Issuer exercises its Issuer Conversion Option, each
Optionholder shall exercise all of its Options so that the Option Shares
thereunder may be converted into Issuer Shares in accordance with the provisions
hereof, which exercise shall be conditioned upon, and shall be deemed effective
immediately prior to, the consummation of the conversion of the Option Shares.
9.2 EXERCISE OF MANAGEMENT STOCKHOLDER OPTIONS. (a) The Issuer
shall notify the Management Stockholders and Optionholders of a proposed IPO or
Sale not later than twenty (20) days prior to the anticipated Effective Date or
Consummation Date, as the case may be ("TRANSACTION NOTICE") and (i) in the case
of an IPO that is not a Qualifying IPO or a Sale, shall set forth in such notice
(A) to the extent known, the Conversion Ratio; (B) to the extent known, the
estimated range of the public offering price of the Issuer's securities to be
sold in the IPO, or the purchase price of, and the terms of payment of the
purchase price of, the Sale, as the case may be; and (C) whether the managing
underwriter of the IPO will permit Management Stockholders to exercise
Stockholder Cash Out Options and (ii) in the case of a Qualifying IPO, shall
provide to the Management Stockholders and Optionholders together with the
Transaction Notice a copy of the latest preliminary prospectus filed by the
Issuer with the SEC in connection with such IPO, or if the Issuer has not yet
filed a preliminary prospectus with the SEC, the Issuer shall provide such
preliminary prospectus within a reasonable period of time after it has been
filed with the SEC. If the Conversion Ratio, estimated range of the public
offering price of the IPO or the purchase price and/or terms of payment of the
purchase price of the Sale are not known at the time the Transaction Notice is
sent, the Issuer shall notify the Management
<PAGE>
Stockholders and Optionholders of such Conversion Ratio, range or such price and
terms, as the case may be, within a reasonable period of time after such
information is known to the Issuer.
(b) In the case of an IPO that is not a Qualifying
IPO or a Sale of Flowers, within fifteen (15) business days after receipt of the
Transaction Notice, each Management Stockholder and Optionholder shall notify
the Issuer in writing whether it shall elect irrevocably to exercise its
Stockholder Conversion Option or (if available) its Stockholder Cash Out Option
or (if available) its Private Sale Put Option with respect to all of its Shares
and Option Shares (the "STOCKHOLDER EXERCISE NOTICE").
(c) In the case of a Qualifying IPO or if a
Management Stockholder or Optionholder has elected to exercise a Stockholder
Option or a Private Sale Put Option in connection with an IPO that is not a
Qualifying IPO or a Sale of Flowers, it shall deliver to the Issuer, together
with the Stockholder Exercise Notice, if applicable, the exercise price due and
payable for the purchase of each Option Share (to the extent such Option
exercise price is required to, or otherwise will, be paid in cash) together with
certificates representing all of its Shares and Option Shares together with such
other documents as the Issuer shall reasonably request so as to effect the
conversion of the Shares and Option Shares into shares of capital stock of the
Issuer (collectively, the "CONVERSION DOCUMENTS") or so as to effect the cash
out of the Management Stockholders and Optionholders Shares and Option Shares,
including but not limited to, evidence that the Shares and Option Shares shall
be purchased free and clear of all Liens (collectively, the "CASH-OUT
DOCUMENTS"), or so as to effect the sale of the Shares and Option Shares to the
Company pursuant to the Private Sale Put Option free and clear of all Liens (the
"PRIVATE SALE PUT DOCUMENTS"), as the case may be. Any Management Stockholder
who fails to exercise a Stockholder Option in accordance with the foregoing
provisions, shall be deemed to have elected to waive its right to exercise
Stockholder Options.
9.3 EXERCISE OF ISSUER CONVERSION OPTION. The Issuer shall
have the right at any time up to five (5) business days prior to the Effective
Date or Consummation Date, as the case may be, to exercise its Issuer Conversion
Option with respect to any Shares and Option Shares for which Management
Stockholders and Optionholders have not properly exercised Stockholder
Conversion Options, Stockholder Cash Out Options or Private Sale Put Options
hereunder. The Issuer shall exercise its Issuer Conversion Option by delivery of
written notice thereof to the Management Stockholders and Optionholders with
respect to whom the Issuer is exercising its option (the "ISSUER CONVERSION
NOTICE"). Promptly upon receipt of the Issuer Conversion Notice, Management
Stockholders and Optionholders shall deliver to the Issuer certificates
representing all of its Shares and Option Shares together with the Conversion
Documents.
9.4 CONVERSION OF SHARES ON IPO CLOSING DATE AND CONSUMMATION
DATE.
(a) On the IPO Closing Date, all Shares and Option
Shares with respect to which Conversion Options have been properly exercised,
automatically, without any further action on the part of the Management
Stockholders or Optionholders, the Issuer or any other Person, shall be
converted into the type and number of shares of capital stock of the Issuer
<PAGE>
as shall be calculated by applying the Conversion Ratio to the Shares and Option
Shares held by such Management Stockholders and Optionholders.
(b) On the Consummation Date, all Shares and Option
Shares with respect to which Conversion Options have been properly exercised,
automatically, without any further action on the part of the Management
Stockholders, Optionholders, the Issuer or any other Person, shall be converted
into the type and number of shares of capital stock of the Issuer as shall be
calculated by applying the Conversion Ratio to the Shares and Option Shares, to
the total number of Shares and Option Shares in such class held by the
Management Stockholders and Optionholders. Such conversion shall be deemed to
occur on the Consummation Date immediately prior to the Consummation Time or at
such earlier time so as to enable such converting Management Stockholders and
Optionholders to participate in the Sale as a stockholder of the Issuer. In the
event that subsequent to such conversion it is determined that the Sale shall
not be consummated, then automatically and without any action on the part of the
Management Stockholders or the Optionholders, the Issuer or any other Person,
the conversion of the Shares and Option Shares into capital stock of the Issuer
shall be deemed null and void AB INITIO and of no force and effect, and each of
the Issuer, the Stockholders, the Optionholder and the Company shall take all
such actions as the Company shall deem necessary or desirable to nullify such
conversion.
(c) In the case of a conversion of Shares or Option
Shares into capital stock of Flowers, the Shares and Option Shares shall be
converted, into such class of capital stock of Flowers as is being registered in
the IPO or being sold in the Sale.
(d) (i) In connection with an IPO, the Conversion
Ratio shall be determined by the managing underwriter of the IPO, or if the
managing underwriter, in its discretion, shall permit, and the Management
Director shall so request, by such other investment bank, financial advisor or
appraiser as the Issuer shall select and the Management Director shall approve,
which approval shall not be unreasonably withheld, and such determination shall
be binding upon the Issuer, the Management Stockholders and the Optionholders.
(ii) In the event of an IPO, the
determination of the Conversion Ratio shall be made by valuing the Company, on
the one hand, and the Issuer, on the other hand, as separate entities. Although
the Issuer is the entity actually engaged in the IPO, in valuing the Company,
the managing underwriter shall also value the Company as if the Company itself
were being valued in connection with an initial public offering of its own
equity securities pursuant to a Registration Statement filed with the SEC
pursuant to the 1933 Act. In valuing the Company and the Issuer, the managing
underwriter shall take into account, among other factors: (A) the historical and
projected earnings and cash flow (as measured by EBIT or other appropriate
measurement standards) of each of the Company and Issuer respectively; (B)
multiples or other formulas typically used in valuing public companies that are
comparable (by virtue of the nature of business, size, years of operations
and/or other appropriate characteristics) to the Company, on the one hand, and
Issuer, on the other hand, (notwithstanding the fact that the Company is then a
privately held company); and (C) to the extent not already included in the
calculations made pursuant to clauses (A) and (B) above, the impact on the value
of each of the Company and
<PAGE>
Issuer of the synergies and economies of scale which have resulted and are
projected to result from the affiliation of the Company and the Issuer. In
addition, in valuing the Company, the managing underwriter shall ignore any
discount that might otherwise apply as a result of the Issuer's control of the
Company or the lack of liquidity or transferability of the Shares created by
such control or this Agreement.
(e) (i) In connection with a Sale, the Conversion
Ratio shall be determined by the Issuer's investment banker or other financial
advisor retained in connection with such Sale, or if there is no such banker or
advisor, or if such banker or advisor, in its discretion, shall permit, and the
Management Director shall so request, by such other investment banker or
financial advisor or appraiser as the Issuer shall select and the Management
Director shall approve, which approval shall not be unreasonably withheld, and
such determination shall be binding upon the Issuer and the Management
Stockholders and the Optionholders.
(ii) In the event of a Sale, the
determination of the Conversion Ratio shall be made by valuing the Company, on
the one hand, and the Issuer, on the other hand, as separate entities. In
valuing the Company and the Issuer, the investment banker shall take into
account, among other factors: (A) the historical and projected earnings and cash
flow (as measured by EBIT or other appropriate measurement standards) of each of
the Company and Issuer respectively; (B) multiples or other formulas typically
used in transactions of this nature to value companies that are comparable (by
virtue of the nature of business, size, years of operations and/or other
appropriate characteristics) to the Company, on the one hand, and Issuer, on the
other hand; and (C) to the extent not already included in the calculations made
pursuant to clauses (A) and (B) above, the impact on the value of each of the
Company and Issuer of the synergies and economies of scale which have resulted
and are projected to result from the affiliation of the Company and the Issuer.
In addition, in valuing the Company, the investment banker shall ignore any
discount that might otherwise apply as a result of the Issuer's control of the
Company or the lack of liquidity or transferability of the Shares created by
such control or this Agreement.
(f) The Issuer shall bear the cost of determining the
Conversion Ratio.
(g) (i) The Issuer shall issue to the Management
Stockholders and Optionholders who are the subject of Conversion Options
in connection with an IPO, stock certificates representing the Issuer capital
stock into which their Shares and Option Shares have been converted within
fifteen (15) business days following the IPO Closing Date provided that the
Management Stockholders and Optionholders have provided to the Issuer all
required Conversion Documents.
(ii) The Issuer shall issue to Management
Stockholders and Optionholders who are the subject of Conversion Options
in connection with a Sale, stock certificates representing the Issuer capital
stock into which their Shares and Option Shares have been converted within such
time as is necessary to enable the Management Stockholders and Optionholders to
participate in the Sale as stockholders of the Issuer; PROVIDED, HOWEVER, that
the Issuer shall not be required to issue any such certificates if (A) such
certificates shall not be
<PAGE>
required to enable the Management Stockholders and Optionholders to so
participate in the Sale or (B) a Management Stockholder or Optionholders has not
provided the Issuer with all required Conversion Documents.
9.5 CASH OUT OF SHARES. If a Management Stockholder or
Optionholder has properly elected to exercise its Stockholder Cash Out Option in
connection with an IPO or a Qualifying IPO, within fifteen (15) business days
after the IPO Closing Date, the Issuer shall pay to such Management Stockholder
or Optionholder the Cash Out Price by check against delivery to the Issuer of
all Cash Out Documents.
9.6 PURCHASE OF SHARES ON PRIVATE SALE CONSUMMATION DATE. If a
Management Stockholder or Optionholder has properly exercised its Private Sale
Put Option in connection with a Private Sale, within forty-five (45) days after
the Private Sale Consummation Date, the Issuer shall pay to the Management
Stockholder or Optionholder the Put Price in accordance with the provisions of
Section 6.1(c), (d), and (e) each of which shall be applicable fully to the
exercise and closing of the Private Sale Put Option.
4. RIGHT TO EXERCISE STOCKHOLDER CASH OUT OPTION. The parties
acknowledge and agree that in connection with a Qualifying IPO, Goldman, Sachs &
Co. has advised Flowers that Management Stockholders and Optionholders can be
paid the Cash Out Price pursuant to their Stockholder Cash Out Option.
5. APPLICABILITY OF THIS AMENDMENT. Notwithstanding anything
herein to the contrary, the parties acknowledge and agree that:
(a) this Amendment is being entered into solely in
contemplation of a Qualifying IPO currently being planned by Flowers; and
(b) If a Qualifying IPO is not completed on or before
December 31, 1999, this Amendment shall be terminated and of no further force
and effect, and each of the amendments to the Stockholders' Agreement effected
hereby automatically, without any further action on the part of the Management
Stockholders or Optionholders, the Issuer or any other Person, shall be deemed
null and void AB INITIO, and the Stockholders' Agreement as in effect
immediately prior to the execution of this Amendment shall be reinstated and be
deemed to be in full force and effect.
6. RESTATEMENT OF STOCKHOLDERS' AGREEMENT. The Stockholders'
Agreement, as amended hereby, remains in full force and effect until terminated
in accordance with Article 11 thereof. All other terms of the Stockholders'
Agreement are hereby restated.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
THE PLOW & HEARTH, INC.
By: /s/ Peter Rice
______________________________
1-800-FLOWERS, INC.
By: /s/ James F. McCann
______________________________
MANAGEMENT STOCKHOLDERS:
/s/ Donald C. Beck
__________________________________
Donald C. Beck
/s/ Michael E. Burns
__________________________________
Michael E. Burns
/s/ Carol A. Cate
__________________________________
Carol A. Cate
/s/ Dawn M. Cottrell
__________________________________
Dawn M. Cottrell, as Joint Tenant with
Right of Survivorship
/s/ Ronald J. Cottrell
__________________________________
Ronald J. Cottrell, as Joint Tenant with
Right of Survivorship
/s/ James K. Kepchar
__________________________________
James K. Kepchar
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
LASAHANE INVESTMENTS
By: Frank Borden Hanes, Jr., its Managing
Partner
By: /s/ Frank Borden Hanes, Jr.
__________________________________
Name: Frank Borden Hanes, Jr.
Title: Managing Partner
Peter G. Rice
THE PETER VAN S. RICE FAMILY TRUST
By: /s/ Peter G. Rice
__________________________________
Name: Peter G. Rice
Title: as Trustee
Steven R. Wagner
TUCKER ANTHONY, INC., CUSTODIAN FBO/C.
CARTER WALKER, JR. IRA
By: /s/ Steven R. Wagner
__________________________________
Name: Steven R. Wagner
Title: as Trustee
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
as of the date first above written.
OPTIONHOLDERS:
/s/ Anna M. Allen
______________________________
Anna M. Allen
/s/ Caroline C. Busick
______________________________
Caroline C. Busick
/s/ Dawn M. Cottrell
______________________________
Dawn M. Cottrell
/s/ Thomas M. Freshwater
______________________________
Thomas M. Freshwater
/s/ Norman D. Hensel
______________________________
Norman D. Hensel
/s/ Robert G. Kohler
______________________________
Robert G. Kohler
/s/ Margaret S. Rice
______________________________
Margaret S. Rice
/s/ Peter M. Rice
______________________________
Peter M. Rice
/s/ Richard N. VanSantvoord
______________________________
Richard N. VanSantvoord
/s/ John H. Whitlow
______________________________
John H. Whitlow
<PAGE>
1-800-FLOWERS.COM, INC.
INVESTORS' RIGHTS AGREEMENT
DATED AS OF
MAY 20, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS.................................................................1
1.1 Capitalized Terms..................................................1
1.2 Definitions........................................................1
2. registration rights.........................................................3
2.1 Demand Registration Rights.........................................3
2.2 Company Registration...............................................5
2.3 Obligations of the Company.........................................6
2.4 Furnish Information................................................8
2.5 Expenses of Registration...........................................8
2.6 Underwriting Requirements..........................................9
2.7 Damages............................................................9
2.8 Indemnification....................................................9
2.9 Reports Under Securities Exchange Act of 1934.....................11
2.10 Form S-3 Registration.............................................12
2.11 Assignment of Registration Rights.................................13
2.12 Limitations on Subsequent Registration Rights.....................13
2.13 "Market Stand-Off"Agreement.......................................13
2.14 Amendments........................................................14
2.15 Termination of Registration Rights................................14
3. Covenants of the Company AND THE INVESTORS.................................14
3.1 Pre-emptive Rights................................................14
3.2 Delivery of Financial Statements..................................16
3.3 Inspection........................................................16
3.4 Right of First Refusal............................................16
4. MISCELLANEOUS..............................................................17
4.1 Survival of Covenants.............................................17
4.2 Legend on Securities..............................................17
4.3 Successors and Assigns............................................17
4.4 Governing Law.....................................................18
4.5 Counterparts......................................................18
4.6 Titles and Subtitles; Gender......................................18
4.7 Notices...........................................................18
4.8 Expenses..........................................................18
4.9 Amendments and Waivers............................................19
4.10 Severability......................................................19
4.11 Aggregation of Stock..............................................19
4.12 Entire Agreement; Amendment; Waiver...............................19
i
<PAGE>
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made as
of the 20th day of May, 1999, by and between 1-800-FLOWERS.COM, Inc., a Delaware
corporation (the "Company"), Mr. James F. McCann and Mr. Christopher G. McCann
(collectively, the "Management Stockholders"), and the persons designated as
Investors on the signature pages hereto (each, an "Investor" and, collectively,
the "Investors").
RECITALS
WHEREAS, the Company, the Management Stockholders and the
Investors are parties to the Stock Purchase Agreement of even date herewith (the
"Purchase Agreement"); and
WHEREAS, in order to induce the Company and the Management
Stockholders to enter into the Purchase Agreement and to induce the Investors
that are parties to the Purchase Agreement to invest funds in the Company
pursuant to the Purchase Agreement, the Investors, the Management Stockholders
and the Company hereby agree that this Agreement shall govern the rights of the
Investors and the Management Stockholders to cause the Company to register
shares of Common Stock issued or issuable to the Investors and the Management
Stockholders and certain other matters as set forth herein.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. DEFINITIONS.
1.1 CAPITALIZED TERMS. Capitalized terms used herein but not
defined herein shall have the meanings ascribed to such terms in the Purchase
Agreement.
1.2 DEFINITIONS. The following capitalized terms as used in
this Agreement shall have the meanings set forth below.
(a) An "Affiliate" of any Person means a Person that directly
or indirectly, through one or more intermediaries, controls, is controlled by or
is under common control with the first mentioned Person. A Person shall be
deemed to control another Person if such first Person possesses directly or
indirectly the power to direct, or cause the direction of, the management and
policies of the second Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) The term "Board of Directors" means the Board of Directors
of the Company.
(c) The term "Class B Common Stock" shall mean the Class B
Common Stock of the Company, par value $0.01 per share, and any other securities
into which the Class B Common Stock may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or otherwise.
<PAGE>
(d) The term "Common Stock" (including the shares of Class A
Common Stock issued or issuable upon conversion of the Class B Common Stock and
the Preferred Stock) shall mean the Class A Common Stock of the Company, par
value $0.01 per share, and any other securities into which the Class A Common
Stock may be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(e) The term "Form S-3" means such form under the Securities
Act as in effect on the date hereof or any registration form under the
Securities Act subsequently adopted by the SEC in lieu of such form as currently
in effect which similarly permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(f) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 2.11 hereof.
(g) The term "Initial Public Offering" shall mean the initial
sale of securities pursuant to an effective registration statement filed by the
Company under the Securities Act (as hereinafter defined) in connection with a
firm commitment underwritten offering of its securities to the general public.
(h) The term "Investor" shall mean an Investor or its
Permitted Transferees.
(i) The term "1934 Act" shall mean the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder.
(j) The term "Permitted Transferee" shall mean (i) with
respect to any Management Stockholder or an Investor, (A) the spouse, children,
grandchildren or parents thereof, or a trust of which such Management
Stockholder or Investor is the settlor and a trustee for the benefit of such
spouse, children or parents, provided that any such trust does not require or
permit distribution of any Registrable Securities during the term of this
Agreement, or (B) the heirs, executors, administrators, guardians or
conservators thereof, and (ii) with respect solely to the Investors, (A) any
such Investor's affiliates, partners, members, directors, employees, general
partners or managing members of such Investor; (B) a liquidating trust
established for the benefit of any partners or members of such Investor; or (C)
any investment fund or other entity controlled or managed by an Affiliate of
such Investor.
(k) The term "Person" shall mean an individual, a corporation,
a partnership, a joint venture, a trust, an unincorporated organization, a
limited liability company, and any other entity or organization, governmental or
otherwise.
(l) The term "Preferred Stock" (including the shares of Series
A Preferred Stock issued or issuable upon conversion of the Series B Preferred
Stock) shall mean the Series A Preferred Stock of the Company, and any other
securities into which the Preferred Stock may be converted or exchanged pursuant
to a plan or recapitalization, reorganization, merger, sale of assets or
otherwise.
(m) The term "Pro Rata Share" shall mean the percentage that
the Shares held by the Investors then represents of all Shares, giving effect to
the conversion of convertible
2
<PAGE>
securities and assuming the exercise of all vested outstanding options, warrants
or subscription rights.
(n) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
(o) The term "Registrable Securities" means (i) the Common
Stock now held or issuable or issued upon conversion of the Preferred Stock and
held by the Investors or their Permitted Transferees (it being understood that
for purposes of this Agreement, a Person will be deemed to be a holder of
Registrable Securities whenever such Person has the right to then acquire or
obtain from the Company any Registrable Securities, whether or not such
acquisition has actually been effected), (ii) any shares of Common Stock held by
the Management Stockholders and any Permitted Transferees (including Common
Stock issued upon conversion of the Class B Common Stock), (iii) any shares of
Common Stock issued or issuable upon the exercise of warrants held by the
Investors or their Permitted Transferees; and (iv) any shares of Common Stock
issued or issuable with respect to any such shares described in clause (i) or
(ii) above by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization; provided, however, that notwithstanding anything to the contrary
contained herein, "Registrable Securities" shall not at any time include any
securities (i) registered and sold pursuant to the Securities Act, or (ii) sold
to the public pursuant to Rule 144 promulgated under the Securities Act.
(p) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(q) The term "SEC" shall mean the Securities and Exchange
Commission.
(r) The term "Securities Act" means the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.
(s) The term "Shares" means the shares of Common Stock and any
other equity securities now or hereafter issued by the Company, together with
any options thereon and any other shares of stock issued or issuable with
respect thereto (whether by way of a stock dividend, stock split or in exchange
for or upon conversion of such shares or otherwise in connection with a
combination of shares, recapitalization, merger, consolidation or other
corporate reorganization).
2. REGISTRATION RIGHTS.
2.1 DEMAND REGISTRATION RIGHTS.
(a) If the Company shall receive at any time after one (1)
year after the effective date of the first registration statement for an Initial
Public Offering of securities of the Company, a written request from the
Investors or their Permitted Transferees holding at least a
3
<PAGE>
majority of the Registrable Securities held in the aggregate by the Investors
and their Permitted Transferees that the Company file a registration statement
under the Securities Act covering the registration of at least that number of
Registrable Securities yielding gross proceeds of $10,000,000, then the Company
shall:
(i) within ten (10) days of the receipt thereof, give
written notice of such request to all Investors; and
(ii) use its best efforts to file, as soon as
practicable and in any event within sixty (60) days of the receipt of such
request, a registration statement with the SEC under the Securities Act covering
all Registrable Securities which the Investors request to be registered (within
twenty (20) days of the mailing of such notice by the Company in accordance with
Section 4.7) subject to the limitations of Section 2.1(b), and thereafter to use
its best efforts to cause the registration statement to be declared effective as
soon as practicable.
(b) If the Holders initiating the registration request
hereunder (the "Initiating Holders") intend to distribute the Registrable
Securities by means of an underwriting, they shall so advise the Company as a
part of their request made pursuant to Section 2.1(a) and the Company shall
include such information in the written notice referred to in Section 2.1(a).
The managing underwriter will be selected by the Company and shall be reasonably
acceptable to a majority in interest of the Initiating Holders. In such event,
the right of any Investor to include his Registrable Securities in such
registration shall be conditioned upon such Investor's participation in such
underwriting and the inclusion of such Investor's Registrable Securities in the
underwriting (unless otherwise mutually agreed by a majority in interest of the
Initiating Holders and such Investor) to the extent provided herein. All
Investors proposing to distribute their securities through such underwriting
shall (together with the Company as provided in Section 2.3(j)) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for such underwriting. Notwithstanding any other provision of this
Section 2.1, if the underwriter advises the Initiating Holders in writing that
marketing factors require a limitation of the number of shares to be
underwritten, then the number of shares of Registrable Securities that may be
included in the underwriting shall be reduced to a number deemed satisfactory by
such managing underwriter, provided that the shares to be excluded shall be
determined in the following sequence: (i) first, securities held by any other
Persons (other than the Investors holding Registrable Securities) having a
contractual, incidental "piggy back" right to include such securities in the
registration statement, (ii) second, shares sought to be registered by the
Company, (iii) third, Registrable Securities of Holders who are not Investors,
and (iv) fourth, Registrable Securities held by the Investors, it being
understood that no shares shall be registered for the account of the Company or
any stockholder other than the Investors unless all Registrable Securities for
which Investors have requested registration have been registered. Any reduction
of the number of Registrable Securities pursuant to clauses (ii), (iii) or (iv)
shall be made with respect to each tranche on a pro rata basis within each
tranche (based upon the aggregate number of shares of Common Stock or
Registrable Securities held by the holders in each tranche).
(c) Notwithstanding the foregoing, if the Company shall
furnish to the Initiating Holders a certificate signed by the Chief Executive
Officer of the Company stating that in the good faith judgment of the Board of
Directors of the Company it would be materially
4
<PAGE>
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than one hundred and twenty
(120) days after receipt of the request of the Initiating Holders; provided,
however, that the Company may not utilize this right more than twice in any
twelve (12) month period.
(d) In addition, the Company shall not be obligated to effect,
or to take any action to effect, any registration pursuant to this Section 2.1:
(i) After the Company has effected one (1)
registration pursuant to this Section 2.1 and such registration has been
declared or ordered effective;
(ii) During the period starting with the date thirty
(30) days prior to the Company's good faith estimate of the date of filing of,
and ending on a date ninety (90) days after the effective date of, a
registration subject to Section 2.2 hereof; provided that the Company is
actively employing in good faith its best efforts to cause such registration
statement to become effective; or
(iii) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 2.10 below.
2.2 COMPANY REGISTRATION.If the Company at any time proposes
to register (including for this purpose a registration effected by the Company
for stockholders other than the Holders) any of its stock or other securities
under the Securities Act in connection with a firm commitment underwritten
public offering of such securities (other than an Initial Public Offering
consummated by December 31, 1999 or a registration statement relating either to
the sale of securities to employees of the Company pursuant to a stock option,
stock purchase or similar plan or a SEC Rule 145 transaction), the Company
shall, at such time, promptly give each Holder at least thirty (30) days written
notice of its intention to do so. Upon the written request of each Holder given
within twenty (20) days after receipt of such notice by the Holder in accordance
with Section 4.7, the Company shall use its best efforts to cause to be
registered under the Securities Act all of the Registrable Securities that each
such Holder has requested to be registered; PROVIDED, HOWEVER, that if the
Company is advised in writing in good faith by the managing underwriter of the
Company's securities that the amount to be sold by persons other than the
Company (collectively, "Selling Stockholders") is greater than the amount which
can be offered without adversely affecting the offering, the Company may reduce
the amount offered for the accounts of Selling Stockholders (including such
holders of Registrable Securities) to a number deemed satisfactory by such
managing underwriter; and PROVIDED FURTHER, that the shares to be excluded shall
be determined in the following order of priority: (i) first, securities held by
any Persons not having any such contractual, incidental registration rights,
(ii) second, securities held by any Persons having contractual, incidental
registration rights pursuant to an agreement which is not this Agreement, and
(iii) third, Registrable Securities held by the Management Stockholders and the
Investors PRO RATA based upon the aggregate number of Registrable Securities
requested to be registered pursuant to this Section 2.2.
5
<PAGE>
2.3 OBLIGATIONS OF THE COMPANY. Whenever required under this
Section 2 to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as possible:
(a) Use its best efforts to prepare and file with the SEC a
registration statement on the appropriate form under the Securities Act with
respect to such securities, which form shall comply in all material respects
with the requirements of the SEC, and use its best efforts to cause such
registration statement to become and remain effective until the completion of
the proposed offering (but for no more than One Hundred Eighty (180) days);
provided, however, that (i) such One Hundred Eighty (180) day period shall be
extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such One Hundred Eighty
(180) day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities are sold, provided
that Rule 415, or any successor rule under the Securities Act, permits an
offering on a continuous or delayed basis, and provided further that applicable
rules under the Securities Act governing the obligation to file a post-effective
amendment permit, in lieu of filing a post-effective amendment which (I)
includes any prospectus required by Section 10(a)(3) of the Securities Act or
(II) reflects facts or events representing a material or fundamental change in
the information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the 1934
Act in the registration statement;
(b) Use its best efforts to prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the sale or
other disposition of all of the securities covered by such registration
statement;
(c) Furnish to the Holders and the underwriters, if any, such
numbers of copies of such registration statement, any amendments thereto, any
documents incorporated by reference therein, the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as they may reasonably request in order to
facilitate the sale or other disposition of the securities owned by them;
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders and do any and all other acts and things that may be necessary under
such securities and blue sky laws to enable such selling Holders to consummate
the sale or other disposition of the securities owned by them; provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act;
6
<PAGE>
(e) Within a reasonable time before each filing of the
registration statement or prospectus or amendments or supplements thereto with
the SEC, furnish to counsel selected by any holders of Registrable Securities
copies of such documents proposed to be filed, which documents shall be subject
to the reasonable approval of such counsel and any written comments from the SEC
with respect to such documents;
(f) Promptly notify each selling Holder of Registrable
Securities, such selling Holder's counsel and any underwriter and (if requested
by any such Person) confirm such notice in writing, of the happening of any
event which makes any statement made in the registration statement or related
prospectus untrue or which requires the making of any changes in such
registration statement or prospectus so that they will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in the light of the
circumstances under which they were made not misleading; and, as promptly as
practicable thereafter, prepare and file with the SEC and furnish a supplement
or amendment to such prospectus so that, as thereafter deliverable to the
purchasers of such Registrable Securities, such prospectus will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading;
(g) Use its best efforts to prevent the issuance of any order
suspending the effectiveness of a registration statement and, if one is issued,
use its best efforts to obtain the withdrawal of any order suspending the
effectiveness of a registration statement at the earliest possible moment;
(h) If requested by the managing underwriter or underwriters
(if any), any selling holder, or such selling Holder's counsel, promptly
incorporate in a prospectus supplement or post-effective amendment such
information as such Person requests to be included therein with respect to the
selling Holder or the securities being sold, including, without limitation, with
respect to the securities being sold by such selling Holder to such underwriter
or underwriters, the purchase price being paid therefor by such underwriter or
underwriters and with respect to any other terms of an underwritten offering of
the securities to be sold in such offering, and promptly make all required
filings of such prospectus supplement or post-effective amendment;
(i) Make available to each selling Holder, any underwriter
participating in any disposition pursuant to a registration statement, and any
attorney, accountant or other agent or representative retained by any such
selling Holder or underwriter (collectively, the "Inspectors"), upon request,
all financial and other records, pertinent corporate documents and properties of
the Company (collectively, the "Records"), as shall be reasonably necessary to
enable them to exercise their due diligence responsibility, and cause the
Company's officers, directors and employees to supply all information reasonably
requested by any such Inspector in connection with such registration statement
subject, in each case, to such confidentiality agreements as the Company shall
reasonably request;
(j) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter or underwriters of such offering;
7
<PAGE>
(k) Use its best efforts to cause all such Registrable
Securities registered pursuant to such registration statement to be listed on
each securities exchange or quoted on the quotation system on which the
Company's Common Stock is then listed or quoted (or if the Common Stock of the
Company is not yet listed or quoted, then on such exchange or quotation system
as the selling Holders of Registrable Securities and the Company shall mutually
agree);
(l) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration;
(m) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 2, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Section 2, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders requesting
registration of Registrable Securities, and (ii) a letter dated such date, from
the independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and to the Holders requesting registration of Registrable Securities;
(n) Otherwise use its commercially reasonable efforts to
comply with all applicable rules and regulations of the SEC and make generally
available to its security holders an earnings statement of the Company which
will satisfy the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any comparable successor provisions); and
(o) Otherwise cooperate with the underwriter(s), the SEC and
other regulatory agencies and take all reasonable actions and execute and
deliver or cause to be executed and delivered all documents reasonably necessary
to effect the registration of any securities under this Agreement.
2.4 FURNISH INFORMATION. It shall be a condition precedent to
the obligations of the Company to take any action pursuant to this Section 2
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it, and the intended method of disposition of
such securities as shall reasonably be required to effect the registration of
such Holder's Registrable Securities.
2.5 EXPENSES OF REGISTRATION. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 2.1 or Section 2.2
(which right may be assigned as provided in Section 2.11), including (without
limitation) all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of
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a single counsel for the selling Holders shall be borne by the Company. The
Investors shall bear the expenses with respect to registrations pursuant to
Section 2.10 PRO RATA.
2.6 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 2.2 to include any of the Holders'
securities in such underwriting unless such Holders accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
the Company.
2.7 DAMAGES. The Company recognizes and agrees that each
holder of Registrable Securities will not have an adequate remedy if the Company
fails to comply with the terms and provisions of this Agreement and that damages
will not be readily ascertainable, and the Company expressly agrees that, in the
event of such failure, it shall not oppose an application by any holder of
Registrable Securities or any other Person entitled to the benefits of this
Agreement requiring specific performance of any and all provisions hereof or
enjoining the Company from continuing to commit any such breach of this
Agreement.
2.8 INDEMNIFICATION. In the event any Registrable Securities
are included in a registration statement under this Section 2:
(a) The Company shall indemnify and hold harmless each selling
Holder, each underwriter (as defined in the Securities Act) and each Person who
participates in the offering of securities under such registration statement,
and each other Person, if any, who controls (within the meaning of the
Securities Act) such seller, underwriter or participating Person (individually
and collectively, the "Indemnified Person"), against any losses, claims, damages
or liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (joint or several), or actions in
respect thereof, to which such Indemnified Person may become subject under the
Securities Act or any other statute or at common law which arise out of or are
based upon: (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, (iii) any violation or alleged violation by the Company
of the Securities Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act or any state
securities law or (iv) any breach of any representation, warranty, agreement or
covenant made by the Company in this Agreement, and the Company shall pay to
each such Indemnified Person, as incurred, any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action; provided, however, that the
Company shall not be liable to any Indemnified Person in any such case for any
such loss, claim, damage, liability, or action to the extent that it arises out
of or is based upon any untrue statement or alleged untrue statement or omission
or alleged omission in such registration statement, preliminary or final
prospectus, or amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by such Person
expressly for use therein.
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(b) To the extent permitted by law, each selling Holder of
Registrable Securities included in such registration being effected shall
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each underwriter, any other
Holder selling securities in such registration statement and any Person who
controls (within the meaning of the Securities Act) the Company, such
underwriter or such Holder (individually or collectively, also the "Indemnified
Person"), against any losses, claims, damages, or liabilities (joint or
several), or actions in respect thereof, to which they may become subject, under
the Securities Act or any other statute or at common law, which arise out of or
are based upon any other statute or at common law, which arises out of or is
based upon: (i) any untrue statement or alleged untrue statement of any material
fact contained, on the effective date thereof, in any registration statement
under which securities were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, (ii) any omission or alleged omission by such selling Holder to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading under the circumstances in which such
statements were made or (iii) any breach of any representation, warranty,
agreement or covenant made by such Holder in this Agreement; in the case of (i)
and (ii) to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in such
registration statement, preliminary or final prospectus, amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
the Company by such selling holder specifically for use therein; and such
selling holder shall reimburse any Indemnified Person for any legal fees
incurred in investigating or defending any such liability; provided, however,
that such selling Holder's obligations hereunder shall be limited to an amount
equal to the proceeds (net of underwriting discounts, commissions and expenses)
to such selling Holder of the securities sold in any such registration; and
provided further, that no selling Holder shall be required to indemnify any
Person against any liability arising from any untrue or misleading statement or
omission contained in any preliminary prospectus if such deficiency is corrected
in the final prospectus or for any liability which arises out of the failure of
any Person to deliver a prospectus as required by the Securities Act.
(c) Promptly after receipt by an indemnified party under this
Section 2.8 of a complaint, claim or notice of the commencement of any liability
or action (including any governmental action), such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 2.8, promptly notify the indemnifying party of such complaint, claim,
notice or action, and such indemnifying party shall have the right to
investigate and assume the defense thereof with counsel mutually satisfactory to
the parties; provided, however, that an indemnified party (together with all
other indemnified parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The Person claiming indemnification shall have the right to employ
separate counsel in any such action and to participate in the defense thereof
but the fees and the expenses of such counsel shall not be at the expense of the
Person against whom indemnification is sought (unless the indemnifying party
fails to promptly defend, in which case the reasonable fees and expenses of such
separate counsel shall be borne by the Person against whom indemnification is
sought). The failure to deliver written notice to the
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indemnifying party within a reasonable time of the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party for
any losses, claims, damages or liabilities for which indemnification would
otherwise be available under this Section 2.8, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 2.8.
In no event shall a Person against whom indemnification is sought be obligated
to indemnify any Person for any settlement of any claim or action effected
without the indemnifying Person's prior written consent which shall not be
unreasonably withheld.
(d) If the indemnification provided for in this Section 2.8 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then each indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
Company, the respective selling Holders of Registrable Securities, severally and
not jointly, and the underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, expenses or liabilities, as well
as any other relevant equitable considerations. The relative fault of the
Company, the respective selling Holders of Registrable Securities, severally and
not jointly, and the underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the selling Holders of Registrable
Securities or the underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the selling Holders of Registrable Securities
agree that it would not be just and equitable if contribution pursuant to this
Section 2.8 were determined by pro rata or per capita allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. In no event, however, shall
a Selling Stockholder be required to contribute any amount under this Section
2.8 in excess of the proceeds (net of underwriting discounts, commissions and
expenses) received by such Selling Stockholder from its sale of Registrable
Securities under such registration statement. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.
(e) If one or more of the Holders enter into an underwriting
agreement in connection with the registration of their Registrable Securities,
the provisions of such underwriting agreement concerning indemnification shall
supercede the provisions of this Section 2.8. The obligations of the Company and
Holders under this Section 2.8 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 2, and
otherwise, and the termination of this Agreement.
2.9 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view
to making available to the Holders the benefits of Rule 144 (together, with any
successor rule, Rule 144) promulgated under the Securities Act and any other
rule or regulation of the SEC that may at any
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time permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to
use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, at all times after ninety (90) days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public, and take all
action as may be required as a condition to the availability of SEC Rule 144;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the 1934 Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities, such
action to be taken as soon as practicable after the end of the fiscal year in
which the first registration statement filed by the Company for the offering of
its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act;
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144 (at
any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Securities Act and the 1934
Act (at any time after it has become subject to such reporting requirements), or
that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time after it so qualifies), (ii) a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
so filed by the Company, and (iii) such other information as may be reasonably
requested in availing any Holder of any rule or regulation of the SEC which
permits the selling of any such securities without registration or pursuant to
such form; and
(e) facilitate and expedite transfers of Registrable
Securities pursuant to SEC Rule 144, including providing timely notice to its
transfer agent to expedite such transfers.
2.10 FORM S-3 REGISTRATION. After the first public offering of
its securities registered under the Securities Act, the Company shall use its
commercially reasonable efforts to qualify and remain qualified to register
securities on Form S-3 (or any successor form) under the Securities Act. In case
the Company shall receive from any Holder or Holders a written request or
requests that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company shall use its best
efforts to:
(a) promptly give at least thirty (30) days written notice of
the proposed registration, and any related qualification or compliance, to all
other Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within fifteen (15) days after receipt of such written notice from the Company;
provided, however, that
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the Company shall not be obligated to effect any such registration,
qualification or compliance, pursuant to this Section 2.10: (1) if Form S-3 is
not available for such offering by the Holders; (2) if the Holders, together
with the holders of any other securities of the Company entitled to inclusion in
such registration, propose to sell Registrable Securities and such other
securities (if any) at an aggregate price to the public (net of any
underwriters' discounts or commissions) of less than One Million Dollars
($1,000,000); (3) if the Company shall furnish to the Holders a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company, it would be materially
detrimental to the Company and its stockholders for such Form S-3 Registration
to be effected at such time, in which event the Company shall have the right to
defer the filing of the Form S-3 registration statement for a period of not more
than ninety (90) days after receipt of the request of the Holder or Holders
under this Section 2.10; provided, however, that the Company shall not utilize
this right more than once in any twelve (12) month period; (4) if the Company
has, within the twelve (12) month period preceding the date of such request,
already effected two (2) registrations on Form S-3 for the Holders pursuant to
this Section 2.10; or (5) in any particular jurisdiction in which the Company
would be required to qualify to do business or to execute a general consent to
service of process in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall use its best
efforts to file a registration statement covering the Registrable Securities and
other securities so requested to be registered as soon as practicable after
receipt of the request or requests of the Holders. Registrations effected
pursuant to this Section 2.10 shall not be counted as demands for registration
or registrations effected pursuant to Sections 2.1 or 2.2, respectively.
2.11 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register Registrable Securities pursuant to this Section 2 may be
assigned (but only with all related obligations) by a Holder to (i) a Permitted
Transferee (as defined above) of such Registrable Securities or (ii) a
transferee who acquires at least 60,000 shares of Registrable Securities
(adjusted for any stock dividend, combination, stock split or reclassification),
provided in both cases: (a) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; and (b) such transferee or assignee
agrees in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 2.13 below.
2.12 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Investors holding of a majority of the outstanding
Registrable Securities held by the Investors, (a) allow purchasers of the
Company's securities to become a party to this Agreement or (b) grant any other
registration rights to any third parties other than subordinate piggyback
registration rights.
2.13 "MARKET STAND-OFF" AGREEMENT. Each Investor and
Management Stockholder hereby agrees that, during the period of duration
specified by the Company and the managing underwriter of Common Stock or other
securities of the Company, following the date of the first sale to the public
pursuant to a registration statement of the Company filed under the Securities
Act, it shall not, to the extent requested by the Company and such underwriter,
directly or indirectly sell, offer to sell, contract to sell (including, without
limitation, any short sale), grant
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any option to purchase or otherwise transfer or dispose of (other than to donees
who agree to be similarly bound) any securities of the Company held by it at any
time during such periods except Common Stock included in such registration;
provided, however, that:
(a) officers and directors of the Company, and all holders of
more than Five Percent (5%) of the outstanding capital stock of the Company,
enter into similar written agreements; and
(b) for the Initial Public Offering, such market stand-off
time period shall not exceed one hundred eighty (180) days, and for any other
offering, such period shall not exceed ninety (90) days.
In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
the Investors (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period. Notwithstanding the
foregoing, the obligations described in this Section 2.13 shall not apply to a
registration relating solely to employee benefit plans on Form S-8 or similar
forms which may be promulgated in the future, or a registration relating solely
to a SEC Rule 145 transaction on Form S-4 or similar forms which may be
promulgated in the future.
2.14 AMENDMENTS. The provisions of this Section 2 may be
amended, and the Company may take any action herein prohibited or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of (i) each of the Investors and (ii) the
Management Stockholders.
2.15 TERMINATION OF REGISTRATION RIGHTS. The rights set forth
in Sections 2.1, 2.2. and 2.10 herein shall terminate with respect to a Holder
upon the earlier of (i) the third anniversary of the Initial Public Offering,
and (ii) the date on which such Holder may sell all of its Registrable
Securities pursuant to Rule 144 under the Securities Act.
3. COVENANTS OF THE COMPANY AND THE INVESTORS.
The Company agrees for the benefit of the Investors that it
shall comply with the covenants set forth in Sections 3.1, 3.2 and 3.3 and each
of the Investors agrees for the benefit of the Company that it shall comply with
the covenants set forth in Section 3.4, provided that all covenants set forth in
this Section 3 shall terminate as of the closing of the earlier of (i) the
Company's Initial Public Offering with an aggregate offering price of at least
$25,000,000 and (ii) the acquisition of the Company by another entity by means
of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation) that results in the
transfer of fifty percent (50%) or more of the outstanding voting power of the
Company, or a sale of all or substantially all of the assets of the Company.
3.1 PRE-EMPTIVE RIGHTS. So long as an Investor holds at least
60,000 Registrable Securities or at least 60,000 shares of Series B Preferred
Stock (adjusted for any stock dividend, combination, stock split or
reclassification), the Company hereby grants such Investor certain pre-emptive
rights with respect to future sales of equity securities by the Company. The
Company agrees that it will not sell or issue any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Securities"),
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unless the Company shall first submit a written offering of such Securities to
the Investors in accordance with the following provisions:
(1) The Company shall deliver a notice by certified
mail ("Notice") to the Stockholders stating (i) that the Company is offering
such Securities, (ii) the number of such Securities to be offered, and (iii) the
price and material terms, if any, upon which it proposes to offer such
Securities, and offering the Stockholders the opportunity to purchase their Pro
Rata Share of the Securities on terms and conditions, including price, not less
favorable than those on which the Company proposes to sell such Securities to a
third party or parties.
(2) Within twenty (20) days after receipt of the
Notice, the Stockholders may elect to purchase or obtain, at the price and on
the terms and conditions specified in the Notice, up to their Pro Rata Share of
such Securities. The Company shall promptly, in writing, inform each Stockholder
who purchases all the Securities available to it (each a "Fully Exercising
Stockholder") of any other Stockholder's failure to do likewise. During the ten
(10) day period commencing after the receipt of such information, each Fully
Exercising Stockholder shall be entitled to obtain that portion of the
Securities not subscribed for by the other Stockholders which is equal to the
proportion that the number of Shares issued and held by, or issuable to, such
Fully Exercising Stockholder bears to the total number of Shares issued and held
by, or issuable to, all Fully Exercising Stockholders who wish to purchase some
of the unsubscribed Securities.
(3) If all Securities referred to in the Notice which
the Stockholders are entitled to obtain pursuant to Section 3.1(1) are not
elected to be obtained as provided in Section 3.1(2) hereof, the Company may,
during the sixty (60) day period following the expiration of the period provided
in Section 3.1(2) hereof, offer the remaining unsubscribed portion of such
Securities to any person or persons at a price not less than, and upon terms and
conditions no more favorable to the offeree than those specified in the Notice.
If the Company does not consummate a sale of the Securities within such sixty
(60) day period, the right provided hereunder shall be deemed to be revived and
such Shares shall not be offered unless first re-offered to the Stockholders in
accordance herewith.
(4) The pre-emptive rights in this Section 3.1 shall
not be applicable (i) to the issuance or sale of Common Stock (or the grant of
options therefor) under the Company's stock option and stock purchase plans
currently in effect or hereinafter adopted (collectively, the "Plans"), (ii) to
the issuance of securities pursuant to the conversion or exercise of convertible
or exercisable securities outstanding as of the date hereof, (iii) to the
issuance of securities pursuant to strategic alliances or other partnering
agreements approved by the Board of Directors, (iv) to the issuance of
Securities pursuant to an acquisition of all or substantially all of the stock
or assets of another entity, (v) to issuances of Securities within 40 days of
the date hereof; PROVIDED, such issuances are made on no more favorable terms
than the terms of the Securities issued to the Investors under the Purchase
Agreement, or (vi) issuances of Class A Common Stock upon the conversion of
Preferred Stock, and issuances of Series A Preferred Stock upon the conversion
of Series B Preferred Stock.
(5) The pre-emptive rights set forth in this Section
3.1 may not be assigned or transferred except by the Investors to a Permitted
Transferee.
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3.2 DELIVERY OF FINANCIAL STATEMENTS. The Company will
maintain a comparative system of accounts in accordance with generally accepted
accounting principles, keep full and complete financial records and furnish to
the Investors the following reports:
(a) as soon as available and in any event within one hundred
twenty (120) days after the end of each fiscal year, a copy of the balance sheet
of the Company as of the end of such year, together with statements of income
and retained earnings and cash flow of the Company for such year, audited and
reported on by independent public accountants of recognized national standing
reasonably satisfactory to the Board of Directors, prepared in accordance with
generally accepted accounting principles and practices consistently applied;
(b) as soon as available and in any event within fifty-five
(55) days after the end of each quarter of each fiscal year, a copy of the
balance sheet of the Company as of the end of such quarter, together with
statements of income and retained earnings and cash flow of the Company for the
period commencing at the end of the previous fiscal quarter and ending with the
end of such fiscal quarter, all in reasonable detail and duly certified (subject
to year-end audit adjustments) by the chief financial officer of the Company as
having been prepared in a manner consistent with generally accepted accounting
principles and practices consistently applied;
(c) at least thirty (30) days prior to the beginning of each
fiscal year, monthly financial projections for the upcoming fiscal year in
detail reasonably satisfactory to the Investors; and
(d) such other information relating to the financial
condition, business, prospects or results of operations as Investors holding a
majority of the Registrable Securities then held by the Investors may reasonably
request.
3.3 INSPECTION. For so long as an Investor holds at least
60,000 Registrable Securities or at least 60,000 shares of Series B Preferred
Stock (adjusted for any stock dividend, combination, stock split or
reclassification), the Company will, upon reasonable prior notice to the
Company, permit authorized representatives (including, without limitation,
accountants and legal counsel) of such Investor, at the Investor's expense, to
visit and inspect any of the properties of the Company, including its books of
account (and to make copies thereof and take extracts therefrom), and to discuss
its affairs, finances and accounts with its officers, administrative employees
and independent accountants, all at such reasonable times during normal business
hours and as often as may be reasonably requested by the Investors; provided,
that the Company may, as a condition to the exercise of such visitation or
inspection rights, require such persons to execute a standard form
non-disclosure agreement in form and substance satisfactory to the Company.
3.4 RIGHT OF FIRST REFUSAL. If at any time an Investor desires
to transfer any shares of Registrable Securities or Series B Preferred Stock
other than to a Permitted Transferee, then such Investor shall deliver a written
notice to the Company (the "Offer Notice"). The Offer Notice shall state in
reasonable detail the type and number of Registrable Securities to be
transferred (the "Offered Securities") and the terms and conditions of such
proposed transfer, including the aggregate purchase price to be paid for the
Offered Securities and the identity of the proposed transferee(s). The Company
shall have twenty (20) days from the date of delivery
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of the Offer Notice to deliver a written notice to such Investor (the
"Acceptance Notice"), electing to purchase all or a portion of the Offered
Securities on the terms and conditions, and for the aggregate purchase price,
set forth in the Offer Notice, in which case the closing of the purchase by the
Company of such shares shall take place as soon as practicable but in no event
more than 30 days after delivery of the Acceptance Notice. In the event that the
Company does not deliver an Acceptance Notice within 20 days of receipt of the
Offer Notice, the Investor shall offer (the "Second Offer Notice") the Offered
Securities to the remaining Investors and the Management Stockholders on a pro
rata basis. The remaining Investors and the Management Stockholders shall have
twenty (20) days from the receipt of such Second Offer Notice to deliver a
written notice to the offering Investor electing to purchase all or a portion of
the Offered Securities offered to such Investor or Management Stockholder in the
Second Offer Notice on the terms and conditions, and for the aggregate purchase
price, set forth in the Second Offer Notice, in which case the closing of the
purchase by the other Investors and Management Stockholders of such shares shall
take place as soon as practicable but in no event more than 30 days after
delivery of their Acceptance Notice. Any Offered Securities not purchased by the
Company, the other Investors or the Management Stockholders may be sold by the
offering Investor to third parties on terms no less favorable to the offering
Investor for a period of sixty (60) days.
4. MISCELLANEOUS.
4.1 SURVIVAL OF COVENANTS. Each of the parties hereto agrees
that each covenant and agreement made by it in this Agreement or in any
certificate, instrument or other document delivered pursuant to this Agreement
is material, shall be deemed to have been relied upon by the other parties and,
except as provided herein, shall remain operative and in full force and effect
after the date hereof regardless of any investigation. This Agreement shall not
be construed so as to confer any right or benefit upon any Person other than the
parties hereto and their respective successors and permitted assigns to the
extent contemplated herein.
4.2 LEGEND ON SECURITIES. The Company, the Investors and the
Management Stockholders acknowledge and agree that the following legend shall be
typed on each certificate evidencing any of the securities issued hereunder held
at any time by any of the Investors, the Management Stockholders or their
Permitted Transferees:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE
PROVISIONS OF AN INVESTORS' RIGHTS AGREEMENT DATED AS OF MAY 20, 1999, INCLUDING
THEREIN CERTAIN RESTRICTIONS ON TRANSFER. A COMPLETE AND CORRECT COPY OF THIS
AGREEMENT IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND
WILL BE FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
4.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties
(including transferees of any securities). Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
17
<PAGE>
4.4 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York, exclusive of the provisions
thereof governing conflicts of laws.
4.5 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.6 TITLES AND SUBTITLES; GENDER. The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement. The use in this
Agreement of the masculine pronoun in reference to a party hereto shall be
deemed to include the feminine member, and vice versa as the context may
require.
4.7 NOTICES. Any notice, request, demand or other
communication required or permitted hereunder shall be given in writing and
shall be deemed effectively given upon personal delivery to the party to be
notified, upon the date of transmittal of services via telecopy to the party to
whom notice is being given, or on the fifth day after deposit in the United
States Post Office, by registered or certified mail, with postage and fees
prepaid, return receipt requested, and addressed to the other party to:
(a) if to the Company, c/o 1-800-FLOWERS.COM, Inc., 1600
Stewart Avenue, Westbury, New York 11590, attention to Chief Executive Officer,
with a copy to Brobeck, Phleger & Harrison LLP, New York, New York 10019,
attention to Alexander D. Lynch, or such other address designated by the Company
to the Investors and the other parties hereto in writing;
(b) if to the Investors, at the mailing address as shown on
the signature pages hereto, with a copy to (i) Cleary, Gottlieb, Steen &
Hamilton, One Liberty Plaza, New York, New York 10006, attention to Laurent
Alpert, (ii) Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, 155
Constitution Drive, Menlo Park, California 94025, attention to Steve Spurlock,
(iii) Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York
10017, attention to William Curbow, and (iv) Sullivan & Cromwell, 125 Broad
Street, New York, New York 10004, attention to Stephen A. Grant, or at such
other address designated by an Investor to the Company and the other Investors
in writing.
(c) if to the Management Stockholders, attention to James F.
McCann and Christopher G. McCann, c/o 1-800-FLOWERS.COM, Inc., 1600 Stewart
Avenue, Westbury, New York 11590, with a copy to Brobeck, Phleger & Harrison
LLP, New York, New York 10019, attention to Alexander D. Lynch, and Gallagher,
Walker, Bianco & Plastaras, 98 Willis Avenue, Mineola, New York 11501, attention
to Jerry Gallagher, or such other address designated by the Management
Stockholders to the Company and the Investors hereto in writing.
4.8 EXPENSES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the prevailing party shall
be entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
18
<PAGE>
4.9 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of (i) the Company, (ii)
Management Stockholders (or their Permitted Transferees) representing a majority
in interest of the Common Stock held by all Management Stockholders (or their
Permitted Transferees), and (iii) each of the Investors (or their Permitted
Transferees) holding eighty-five percent (85%) of the sum of Registrable
Securities and Series B Preferred Stock then outstanding and held by the
Investors (or their Permitted Transferees). Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under the Purchase Agreement then outstanding, each future
holder of all such securities, and the Company.
4.10 SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
4.11 AGGREGATION OF STOCK. All shares of Registrable
Securities held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.
4.12 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement and
the documents referred to herein constitute the entire agreement among the
parties with regard to the subjects hereof and thereof.
[Remainder of this page intentionally left blank]
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Investors'
Rights Agreement to be duly executed and delivered as of the date first above
written.
1-800-FLOWERS.COM, INC.
By: /s/ James F. McCann
__________________________________
Name: James F. McCann
Title: Chief Executive Officer
MANAGEMENT STOCKHOLDERS:
________________________
JAMES F. MCCANN
/s/ James F. McCann
_____________________________________
Address: 1600 Stewart Avenue
Westbury, NY 11590
CHRISTOPHER G. MCCANN
/s/ Christopher G. McCann
_____________________________________
Address: 1600 Stewart Avenue
Westbury, NY 11590
INVESTORS' RIGHTS AGREEMENT
<PAGE>
SOFTBANK AMERICA INC.
By: /s/ Steven J. Murray
________________________________
Name: Steven J. Murray
Title: Treasurer
INVESTORS' RIGHTS AGREEMENT
<PAGE>
FORUM HOLDING AMSTERDAM B.V.
By: /s/ Jean-Bernard Tellio
_______________________________________
Name: Jean-Bernard Tellio
Address: Lokatellikade 1
Parnassustoren
1076 AZ Amsterdam
THE NETHERLANDS
INVESTORS' RIGHTS AGREEMENT
<PAGE>
CHASE VENTURE CAPITAL ASSOCIATES
By: Chase Capital Partners,
its General Partner
By: /s/ Stephen P. Murray
__________________________________
Stephen P. Murray
General Partner
INVESTORS' RIGHTS AGREEMENT
<PAGE>
BENCHMARK CAPITAL PARTNERS II, L.P.
as nominee for
Benchmark Capital Partners II, L.P.
Benchmark Founders' Fund II, L.P.
Benchmark Founders' Fund II-A, L.P.
Benchmark Members' Fund, L.P.
By: Benchmark Capital Management Co. II, L.L.C.,
its general partner
By: /s/ Kevin Harvey
_________________________________________
Managing Member
BENCHMARK CAPITAL PARTNERS III, L.P.
as nominee for
Benchmark Capital Partners III, L.P.
Benchmark Founders' Fund III, L.P.
Benchmark Founders' Fund III-A, L.P.
Benchmark Members' Fund III, L.P.
By: Benchmark Capital Management Co. III, L.L.C.,
its general partner
By: /s/ Kevin Harvey
_________________________________________
Managing Member
BENCHMARK INVESTORS III, L.P.
By: Benchmark Capital Management Co. III, L.L.C.,
its general partner
By: /s/ Kevin Harvey
_________________________________________
Managing Member
INVESTORS' RIGHTS AGREEMENT
<PAGE>
BROBECK, PHLEGER & HARRISON LLP
By: /s/ Alexander D. Lynch
_________________________________________
Name: Alexander D. Lynch
Title: Partner
INVESTORS' RIGHTS AGREEMENT
<PAGE>
/s/ T. Guy Minetti
-----------------------------------------
T. Guy Minetti
/s/ Gerard M. Gallagher
-----------------------------------------
Gerard M. Gallagher
/s/ Alexander D. Lynch
-----------------------------------------
Alexander D. Lynch
/s/ Kenneth R. McVay
-----------------------------------------
Kenneth R. McVay
INVESTORS' RIGHTS AGREEMENT
<PAGE>
Exhibit 10.17
1-800-FLOWERS.COM, INC.
STOCK PURCHASE AGREEMENT
MAY 20, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purchase and Sale of Stock............................................1
1.1. Sale and Issuance of Series B Preferred Stock and Class
B Common Stock...............................................1
1.2. Closing......................................................1
2. Representations and Warranties of the Company.........................2
2.1. Organization, Good Standing and Qualification................2
2.2. Capitalization and Voting Rights.............................2
2.3. Subsidiaries.................................................3
2.4. Authorization................................................3
2.5. Valid Issuance of Series B Preferred Stock...................3
2.6. Governmental Consents........................................4
2.7. Offering.....................................................4
2.8. Litigation and Government Proceedings........................4
2.9. Patents and Trademarks.......................................4
2.10. Compliance with Other Instruments............................5
2.11. Related-Party Transactions...................................5
2.12. Financial Statements.........................................5
2.13. Changes......................................................6
2.14. Tax Returns, Payments and Elections..........................7
2.15. Permits......................................................8
2.16. Environmental Matters........................................8
2.17. Registration Rights..........................................8
2.18. Corporate Documents; Minute Books............................8
2.19. Title to Property and Assets.................................9
2.20. Insurance....................................................9
2.21. Employee Benefit Plans.......................................9
2.22. Labor Matters................................................9
2.23. Year 2000 Compliance........................................10
2.24. Disclosure..................................................10
3. Representations and Warranties of the McCanns........................10
3.1. Title to Stock..............................................10
3.2. Authorization...............................................10
3.3. Title Upon Transfer.........................................11
3.4. Governmental Consents.......................................11
3.5. Compliance with Other Instruments...........................11
3.6. Litigation..................................................11
4. Representations and Warranties of the Investors......................11
4.1. Authorization...............................................11
<PAGE>
4.2. Purchase Entirely for Own Account...........................11
4.3. Disclosure of Information...................................12
4.4. Investment Experience.......................................12
4.5. Accredited Investor.........................................12
4.6. Restricted Securities.......................................12
4.7. Further Limitations on Disposition..........................12
4.8. Legends.....................................................13
4.9. Further Representations by Foreign Investors................13
5. Conditions of Investor's Obligations at Closing......................13
5.1. Representations and Warranties..............................14
5.2. Performance.................................................14
5.3. Compliance Certificate......................................14
5.4. Qualifications..............................................14
5.5. Proceedings and Documents...................................14
5.6. Opinion of Company Counsel..................................14
5.7. Investors'Rights Agreement..................................14
5.8. Chase Consent and Amendments................................14
5.9. Management Rights...........................................14
6. Conditions of the Company's and the McCanns'Obligations at Closing...14
6.1. Representations and Warranties..............................15
6.2. Payment of Purchase Price...................................15
6.3. Qualifications..............................................15
6.4. Investors'Rights Agreement..................................15
7. Post-Closing Covenants...............................................15
7.1. Hart-Scott-Rodino...........................................15
7.2. Filing of Third Amended and Restated Certificate............15
7.3. Mandatory Election to Convert Class B Common Stock..........15
7.4. Conversion of Series B Preferred Stock......................15
7.5. Board of Directors..........................................16
8. Miscellaneous........................................................16
8.1. Survival....................................................16
8.2. Successors and Assigns......................................16
8.3. Governing Law...............................................16
8.4. Titles and Subtitles........................................16
8.5. Notices.....................................................16
8.6. Finder's Fee................................................16
8.7. Expenses....................................................17
8.8. Amendments and Waivers......................................17
8.9. Severability................................................17
8.10. Entire Agreement............................................17
8.11. Counterparts................................................17
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made on
the 20th day of May, 1999, by and among 1-800-FLOWERS.COM, Inc., a Delaware
corporation (the "Company"), James F. McCann, Christopher G. McCann (with James
F. McCann, the "McCanns") and the investors listed on SCHEDULE A hereto (each,
an "Investor" and collectively, the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
1.1. SALE AND ISSUANCE OF SERIES B PREFERRED STOCK AND CLASS B
COMMON STOCK.
(a) The Company shall adopt and file with the Secretary
of State of Delaware on or before the Closing (as defined below) the Second
Amended and Restated Certificate of Incorporation in the form attached hereto as
EXHIBIT A-1 (the "Restated Certificate").
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees, severally, to purchase at the Closing and the
Company agrees to sell and issue to each Investor at the Closing, that number of
shares of the Company's Series B Preferred Stock, par value $0.01 per share (the
"Series B Preferred Stock"), set forth opposite each Investor's name on SCHEDULE
A hereto for the purchase price set forth thereon.
(c) Subject to the terms and conditions of this
Agreement, Benchmark Capital Partners II, L.P., Benchmark Capital Partners III,
L.P. and Benchmark Investors III, L.P. (collectively, "Benchmark") and SOFTBANK
America Inc. ("Softbank") agree, severally, to purchase at the Closing and James
F. McCann and Christopher G. McCann each agree to sell to Benchmark and Softbank
at the Closing, that number of shares of the Company's Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock" and with the Series B
Preferred Stock, the "Stock"), set forth opposite such Investor's name on
SCHEDULE A hereto for the purchase price set forth thereon.
1.2. CLOSING. The purchase and sale of the Stock shall take
place at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, New
York, New York 10019, at 12:00 p.m., on May 20, 1999, or at such other time and
place as the Company, the McCanns and the Investors acquiring in the aggregate
more than half the shares of Stock sold pursuant hereto mutually agree upon
orally or in writing (which time and place are designated as the "Closing"). At
the Closing, the Company and the McCanns shall deliver to each Investor a
certificate representing the Series B Preferred Stock and Class B Common Stock,
as the case may be, that such Investor is purchasing against payment of the
purchase price therefor by wire transfer to an account or accounts specified by
the Company and the McCanns one day prior to the Closing.
<PAGE>
2. Representations and Warranties of the Company. The Company
hereby represents and warrants to each Investor that, except as set forth on the
Schedule of Exceptions (the "Schedule of Exceptions") furnished each Investor
and special counsel for the Investors prior to execution hereof and attached
hereto as SCHEDULE B, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION. The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has all requisite corporate power
and authority to carry on its business as now conducted. The Company and its
subsidiaries are duly qualified to transact business and are in good standing in
each jurisdiction in which the failure to so qualify would have a Material
Adverse Effect (as defined in Section 2.8).
2.2. CAPITALIZATION AND VOTING RIGHTS. The authorized capital
of the Company consists, or will consist immediately prior to the Closing, of:
(a) Preferred Stock. Two million four hundred thirty
four thousand eight hundred twenty two (2,434,822) shares of Preferred Stock,
par value $0.01 (the "Preferred Stock"), of which (i) one million two hundred
thousand (1,200,000) shares have been designated Series A Preferred Stock (the
"Series A Preferred Stock"), (ii) one million two hundred thousand (1,200,000)
shares have been designated Series B Preferred Stock, of which up to 1,122,746
will be sold pursuant to this Agreement, and (ii) thirty four thousand eight
hundred and twenty two (34,822) shares have been designated Series C Preferred
Stock (the "Series C Preferred Stock"). The shares of Series C Preferred Stock
shall be automatically redeemed by the Company upon their issuance. The rights,
privileges and preferences of the Series A Preferred Stock and the Series B
Preferred Stock will be as stated in the Company's Restated Certificate.
(b) Common Stock. 400,000,000 shares of common stock,
par value $0.01 (the "Common Stock"), of which (i) two hundred million
(200,000,000) shares have been designated Class A Common Stock (the "Class A
Common Stock"), of which 42,807 shares are issued and outstanding, and (ii) two
hundred million (200,000,000) shares have been designated Class B Common Stock
(the "Class B Common Stock" and with the Class A Common Stock, the "Common
Stock"), of which 4,391,814 shares are issued and outstanding.
(c) Prior to the filing of the Restated Certificate, the
outstanding shares of Common Stock are owned by the stockholders and in the
numbers specified on Schedule 2.2 hereto.
(d) The outstanding shares of Common Stock are all duly
and validly authorized and issued, fully paid and nonassessable, and were issued
in compliance with all applicable state and federal laws concerning the issuance
of securities.
<PAGE>
Except for (i) the conversion privileges of the Series B
Preferred Stock to be issued under this Agreement, (ii) the rights provided in
Section 2 of the Investors' Rights Agreement, (iii) currently outstanding
options to purchase 123,750 shares of Class B Common Stock granted to employees
pursuant to the Company's 1997 Stock Option Plan (the "Option Plan"), and (iv) a
currently outstanding warrant to purchase 237,104 shares of Class B Common
Stock, there are no outstanding options, warrants, rights (including conversion
or preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
options, the Company has reserved an additional 474,794 shares of Class B Common
Stock for purchase upon exercise of options to be granted in the future under
the Option Plan. The parties hereby acknowledge that the Company intends to
terminate its authority to issue options under the Option Plan, to adopt stock
option and other employee incentive plans in connection with its initial public
offering and to reserve up to an aggregate of fifteen percent (15%) of its
fully-diluted, post-initial public offering Class A Common Stock for issuance
under such plans. Except as set forth on Schedule 2.2, the Company is not a
party or subject to any agreement or understanding, and, to the Company's
knowledge, there is no agreement or understanding between any persons and/or
entities, which affects or relates to the voting or giving of written consents
with respect to any security or by a director of the Company.
2.3. SUBSIDIARIES. Other than as set forth on the Schedule of
Exceptions, each of the Company's subsidiaries is duly organized and existing
under the laws of its jurisdiction of organization and is in good standing under
such laws. Schedule 2.3 of the Schedule of Exceptions contains a list of all of
the Company's direct and indirect subsidiaries. None of the Company's
subsidiaries owns or leases property or engages in any activity in any
jurisdiction that might require its qualification to do business as a foreign
corporation and in which the failure so to qualify would have a Material Adverse
Effect.
2.4. AUTHORIZATION. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Investors'
Rights Agreement, the performance of all obligations of the Company hereunder
and thereunder, and the authorization (or reservation for issuance), sale and
issuance of the Stock being sold hereunder, the Series A Preferred Stock
issuable upon conversion of the Series B Preferred Stock and the Class A Common
Stock issuable upon conversion of the Series A Preferred Stock has been taken or
will be taken prior to the Closing. This Agreement and the Investors' Rights
Agreement constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Investors' Rights Agreement may be
limited by applicable federal or state securities laws.
<PAGE>
2.5. VALID ISSUANCE OF SERIES B PREFERRED STOCK. The Series B
Preferred Stock that is being purchased from the Company by the Investors
hereunder, when issued, sold and delivered in accordance with the terms of this
Agreement for the consideration expressed herein, will be duly and validly
issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions on transfer under this Agreement and the
Investors' Rights Agreement, and under applicable state and federal securities
laws. The Series A Preferred Stock issuable upon conversion of the Series B
Preferred Stock purchased under this Agreement and the Class A Common Stock
issuable upon conversion of the Series A Preferred Stock have been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Restated Certificate, will be duly and validly issued, fully paid and
nonassessable and will be free of restrictions on transfer, other than
restrictions on transfer under this Agreement and the Investors' Rights
Agreement and under applicable state and federal securities laws.
2.6. GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for: (i) filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period, and (ii) filings under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
2.7. OFFERING. Subject in part to the truth and accuracy of
each Investor's representations set forth in Section 4 of this Agreement, the
offer, sale and issuance of the Stock as contemplated by this Agreement are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Act"), and the qualification or registration requirements of
applicable blue sky laws. Neither the Company nor any authorized agent acting on
its behalf will take any action hereafter that would cause the loss of such
exemptions.
2.8. LITIGATION AND GOVERNMENT PROCEEDINGS. Except as set
forth on Schedule 2.8 of the Schedule of Exceptions, there is no action, suit,
proceeding or investigation pending, or to the Company's knowledge, currently
threatened against the Company or its subsidiaries that questions the validity
of this Agreement or the Investors' Rights Agreement or the right of the Company
to enter into such agreements or to consummate the transactions contemplated
hereby or thereby, or that could reasonably be expected to result, either
individually or in the aggregate, in a material adverse change in the business,
assets or condition, financially or otherwise, of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"), or any change in
the current equity ownership of the Company or its subsidiaries. The Company and
its subsidiaries are not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or governmental
<PAGE>
agency or instrumentality that could be reasonably likely to result in a
Material Adverse Effect.
2.9. PATENTS AND TRADEMARKS. To the best of its knowledge (but
without having conducted any special investigation or patent search), the
Company and its subsidiaries have sufficient title, ownership or rights to use
all patents, trademarks, service marks, trade names, copyrights, trade secrets
and proprietary rights necessary for their business as now conducted without any
conflict with or infringement of the rights of others, except where such
conflict or infringement would not have a Material Adverse Effect. Other than
franchise agreements or agreements with "BloomNet" florists, in each case
entered into in the ordinary course of business, except as set forth on Schedule
2.9 there are no outstanding options, licenses, or agreements of any kind
relating to the foregoing, nor is the Company or its subsidiaries bound by or a
party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets and
proprietary rights of any other person or entity, in any case where such
agreement involves payments by the Company in excess of $1 million per year. The
Company has not received any communications within the past twelve (12) months
alleging that the Company or its subsidiaries have violated any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity, which violations could be
reasonably likely to have a Material Adverse Effect. Neither the execution nor
delivery of this Agreement or the Investors' Rights Agreement, nor the carrying
on of the Company's business by the key employees and executive officers of the
Company, will, to the best of the Company's knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any contract, covenant or instrument under which any of such key
employees and executive officers is now obligated which could be reasonably
likely to have a Material Adverse Effect.
2.10. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation of any provision of its Restated Certificate or Bylaws. No third party
consents or waivers are required to be obtained in connection with the
consummation of the transactions contemplated by this Agreement or the
Investors' Rights Agreement which will not be obtained prior to the Closing. To
its knowledge, the Company and its subsidiaries are not in violation of any
instrument, judgment, order, writ, decree or contract, statute, rule or
regulation to which the Company or its subsidiaries are subject and a violation
of which could be reasonably likely to have a Material Adverse Effect. The
execution, delivery and performance of this Agreement and the Investors' Rights
Agreement and the consummation of the transactions contemplated hereby and
thereby will not result in any such violation, or be in conflict with or
constitute, with or without the passage of time and giving of notice, either a
default under any such provision or an event that results in the creation of any
lien, charge or encumbrance upon any assets of the Company or its subsidiaries
or the suspension, revocation,
<PAGE>
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company or its subsidiaries, their
respective business or operations or any of their respective material assets or
properties.
2.11. RELATED-PARTY TRANSACTIONS . Except as set forth on the
Schedule of Exceptions, no stockholder, employee, officer or director of the
Company or member of his or her immediate family is indebted to the Company or
any of its subsidiaries, nor is the Company or any of its subsidiaries indebted
(or committed to make loans or extend or guarantee credit) to any of them, in
both cases in an amount greater than $60,000. Except as set forth on the
Schedule of Exceptions, to the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company or any of its subsidiaries is affiliated or with which
the Company or any of its subsidiaries has a business relationship, or any firm
or corporation that competes with the Company, except that employees,
stockholders, officers or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. Except as set forth on the Schedule of Exceptions, no
stockholder, employee, officer or director of the Company or any member of the
immediate family of any employee, officer or director of the Company is directly
or indirectly interested in any material contract or transaction with the
Company or any of its subsidiaries in which the amount involved exceeds $60,000.
2.12. FINANCIAL STATEMENTS.
(a) The Company has delivered to each Investor its
audited consolidated financial statements (balance sheet and statement of
operations, statement of stockholders' equity and statement of cash flows,
including notes thereto) at June 28, 1998 and for the fiscal year then ended,
and unaudited consolidated financial statements at and for the nine-month period
ended March 27, 1999 (the "Financial Statements"). The Financial Statements have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods indicated and with each
other. The Financial Statements fairly present the financial condition and
operating results of the Company and its subsidiaries as of the dates, and for
the periods, indicated therein. Except as set forth in the Financial Statements,
the Company and its subsidiaries have no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to March 27, 1999 and (ii) obligations under contracts and
commitments incurred in the ordinary course of business and not required under
generally accepted accounting principles to be reflected in the Financial
Statements, which, in both cases, individually or in the aggregate, are not
material to the financial condition or operating results of the Company. Except
as disclosed in the Financial Statements, neither the Company nor any of its
subsidiaries is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation. The Company maintains and will continue to maintain
a standard system of accounting established and administered in accordance with
generally accepted accounting principles.
<PAGE>
(b) The Company has delivered its restated Financial
Statements (the "Restated Financial Statements") to the Investors. The Restated
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
indicated and with each other. The Restated Financial Statements fairly present
the financial condition and operating results of the Company and its
subsidiaries as of the dates, and for the periods, indicated therein. Except as
set forth in the Restated Financial Statements, the Company and its subsidiaries
have no material liabilities, contingent or otherwise, other than (i)
liabilities incurred in the ordinary course of business subsequent to March 27,
1999 and (ii) obligations under contracts and commitments incurred in the
ordinary course of business and not required under generally accepted accounting
principles to be reflected in the Restated Financial Statements, which, in both
cases, individually or in the aggregate, are not material to the financial
condition or operating results of the Company. Except as will be disclosed in
the Restated Financial Statements, neither the Company nor any of its
subsidiaries is a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation.
2.13. CHANGES. Except as set forth on Schedule 2.13 of the
Schedule of Exceptions, since March 27, 1999 there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company or its subsidiaries from that
reflected in the Financial Statements or the Restated Financial Statements which
has caused a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not
covered by insurance, resulting in a Material Adverse Effect;
(c) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company or its subsidiaries,
except in the ordinary course of business and that has not caused and that will
not cause a Material Adverse Effect;
(d) any material change or amendment to a material
contract or arrangement by which the Company or its subsidiaries or any of their
respective assets or properties is bound or subject which involves payment by
the Company or its subsidiaries in excess of $1 million per year;
(e) any material change in any compensation arrangement
or agreement with any executive officer;
(f) any sale, assignment or transfer (other than to its
subsidiaries) of any material patents, trademarks, copyrights, trade secrets or
other intangible assets;
(g) any resignation or termination of employment of any
key executive officer of the Company; and the Company, to the best of its
knowledge, does not know of the impending resignation or termination of
employment of any officer;
<PAGE>
(h) any receipt of notice that there has been a loss of,
or material order cancellation by, any major customer of the Company or its
subsidiaries that has caused or will cause a Material Adverse Effect;
(i) any mortgage, pledge, transfer of a security
interest in, or lien, created by the Company or its subsidiaries, with respect
to any of their material properties or assets, except liens for taxes not yet
due or payable;
(j) any material indebtedness, including any loans or
guarantees, made by the Company or any of its subsidiaries to or for the benefit
of the Company's employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(k) except as contemplated by the Restated Certificate,
any declaration, setting aside or payment or other distribution in respect of
any of the Company's capital stock, or any direct or indirect redemption,
purchase or other acquisition of any of such stock by the Company;
(l) to the best of the Company's knowledge, any other
event or condition of any character that could be reasonably likely to have a
Material Adverse Effect; or
(m) any agreement or commitment by the Company to do any
of the things described in this Section 2.13.
2.14. TAX RETURNS, PAYMENTS AND ELECTIONS. Except as set forth
on the Schedule of Exceptions: The Company and its subsidiaries have filed all
tax returns and reports (including information returns and reports) as required
by law. These returns and reports are true and correct in all material respects
except to the extent that a reserve has been reflected on the Financial
Statements in accordance with generally accepted accounting principles. The
Company and its subsidiaries have paid all taxes and other assessments due,
except those contested by it in good faith and except to the extent that a
reserve has been reflected on the Financial Statements in accordance with
generally accepted accounting principles. The provision for taxes of the Company
and its subsidiaries as shown in the Financial Statements is, and in the
Restated Financial Statements will be, adequate for taxes due or accrued as of
the date thereof. The Company has not elected pursuant to the Internal Revenue
Code of 1986, as amended (the "Code"), to be treated as a Subchapter S
corporation or a collapsible corporation pursuant to Section 1362(a) or Section
341(f) of the Code, nor has it made any other elections pursuant to the Code
(other than elections that relate solely to methods of accounting, depreciation
or amortization) that would have Material Adverse Effect. The Company and its
subsidiaries have never had any tax deficiency proposed or assessed against any
of them and have not executed any waiver of any statute of limitations on the
assessment or collection of any tax or governmental charge. None of the
Company's and its subsidiaries' federal income tax returns and none of their
respective state income or franchise tax or sales or use tax returns has ever
been audited by governmental authorities. Since March 27, 1999, the Company and
its subsidiaries have not incurred any taxes, assessments or governmental
charges other than in the ordinary course of business and the Company has made
adequate provisions on
<PAGE>
their books of account for all taxes, assessments and governmental charges with
respect to their business, properties and operations for such period. The
Company and its subsidiaries have withheld or collected from each payment made
to each of their employees the amount of all taxes (including, but not limited
to, federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes) required to be withheld or collected therefrom, and
have paid the same to the proper tax receiving officers or authorized
depositories, unless the failure to do so could not reasonably be likely to have
a Material Adverse Effect.
2.15. PERMITS. The Company and its subsidiaries have all
franchises, permits, licenses and any similar authority necessary for the
conduct of their business, the lack of which could be reasonably likely to
result in a Material Adverse Effect. The Company and its subsidiaries are not in
default in any material respect under any of such franchises, permits, licenses
or other similar authority which could be reasonably likely to result in a
Material Adverse Effect.
2.16. ENVIRONMENTAL MATTERS. The Company and its subsidiaries
are in compliance in all material respects with all applicable statutes, laws or
regulations relating to the environment or occupational health and safety and,
to its knowledge, there are no facts, events, conditions, circumstances,
activities, practices, incidents, actions, omissions or plans (a) that,
individually or in the aggregate, would reasonably be expected to give rise to
any statutory liability of the Company or any of its subsidiaries under any
environmental or occupational health and safety law or (b) that would reasonably
be expected to form the basis of any material claim, action, suit, proceeding,
hearing, investigation or inquiry involving the Company or its subsidiaries, in
each case of (a) and (b) except where such liability, claim, action, suit,
proceeding, hearing, investigation or inquiry would not be reasonably likely to
have a Material Adverse Effect.
2.17. REGISTRATION RIGHTS. Except as provided in the
Investors' Rights Agreement or as provided in the Schedule of Exceptions, the
Company has not granted or agreed to grant any registration rights, including
piggyback rights, to any person or entity.
2.18. CORPORATE DOCUMENTS; MINUTE BOOKS. The Restated
Certificate and Bylaws of the Company are in the form of Exhibits A-1 and B
attached hereto. The minute books of the Company made available to the Investors
contain a summary of all meetings of directors and stockholders since 1992 and
all matters voted on in such minutes are accurately reflected in such minutes.
2.19. TITLE TO PROPERTY AND ASSETS. The property and assets
the Company and its subsidiaries own are owned by the Company and its
subsidiaries, respectively, free and clear of all mortgages, liens, loans and
<PAGE>
encumbrances, except (i) as reflected in the Financial Statements or the
Restated Financial Statements, (ii) for statutory liens for the payment of
current taxes that are not yet delinquent, and (iii) for liens, encumbrances and
security interests that arise in the ordinary course of business and minor
defects in title, none of which, individually or in the aggregate, could be
reasonably likely to have a Material Adverse Effect. With respect to the
property and assets they lease, the Company and its subsidiaries are in material
compliance with such leases and, to the Company's knowledge, hold a valid
leasehold interest free of any liens, claims or encumbrances, subject to clauses
(i)-(iii).
2.20. INSURANCE. The Company and its subsidiaries have in full
force and effect fire and casualty insurance policies, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow them to
replace any of their material properties that might be damaged or destroyed. The
Company and its subsidiaries have in full force and effect products liability
and errors and omissions insurance in amounts customary for companies similarly
situated.
2.21. EMPLOYEE BENEFIT PLANS. The Company and its subsidiaries
do not maintain or contribute to any employee benefit plan, fringe benefit,
stock option, bonus or incentive plan, severance pay policy or agreement,
deferred compensation agreement, or any similar plan or agreement (an "Employee
Benefit Plan") other than the Employee Benefit Plans identified and described on
the Schedule of Exceptions. The terms and operation of each Employee Benefit
Plan have complied in all material respects with all applicable laws and
regulations relating to such Employee Benefit Plans. There are no unfunded
obligations of the Company or its subsidiaries under any retirement, pension,
profit-sharing, deferred compensation plan or similar program. The Company and
its subsidiaries are not required to make any payments or contributions to any
Employee Benefit Plan pursuant to any collective bargaining agreement or, to the
knowledge of the Company, any applicable labor relations law, and all Employee
Benefit Plans are terminable at the discretion of the Company or its
subsidiaries without liability to the Company or its subsidiaries upon or
following such termination. The Company and its subsidiaries have never
maintained or contributed to any Employee Benefit Plan providing or promising
any health or other nonpension benefits to terminated employees.
2.22. LABOR MATTERS. Except as set forth on the Schedule of
Exceptions, neither the Company nor its subsidiaries are bound by or subject to
(and none of its assets or properties is bound by or subject to) any written or
oral, express or implied, contract, commitment or arrangement with any labor
union and no labor union has requested or, to the Company's knowledge, has
sought to represent any of the employees, representatives or agents of the
Company or its subsidiaries. There is no strike or other labor dispute involving
the Company or its subsidiaries pending, or to the Company's knowledge,
threatened, that could be reasonably likely to have a Material Adverse Effect,
nor is the Company aware of any labor organization activity involving its
employees or the employees of its subsidiaries. The Company is not aware that
any executive officer intends
<PAGE>
to terminate his employment with the Company, nor does the Company have a
present intention to terminate the employment of any of the foregoing. The
employment of each officer and employee of the Company is terminable at the will
of the Company. To the best of its knowledge, the Company and its subsidiaries
have complied in all material respects with all applicable state and federal
equal employment opportunity and other laws related to employment, labor, fair
employment practices and wages and hours. The Company is not a party to or bound
by any currently effective employment contract, deferred compensation agreement,
bonus plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation agreement with any of its executive officers or key
employees.
2.23. YEAR 2000 COMPLIANCE. The Company is in the process of
reviewing its operations and that of its subsidiaries and any third parties with
which the Company or any of its subsidiaries has a material relationship to
evaluate the extent to which the business or operations of the Company or any of
its subsidiaries will be affected by the Year 2000 Problem. As a result of such
review to date, the Company has no reason to believe, and does not believe, that
the Year 2000 Problem could reasonably be likely to have a Material Adverse
Effect. The "Year 2000 Problem" as used herein means any significant risk that
computer hardware or software used in the receipt, transmission, processing,
manipulation, storage, retrieval, retransmission or other utilization of data or
in the operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring prior to
January 1, 2000.
2.24. DISCLOSURE. The Company has provided each Investor with
all the information that such Investor has requested for deciding whether to
purchase the Class B Common Stock and Series B Preferred Stock. Neither this
Agreement, the Investors' Rights Agreement, nor any other statements or
certificates made or delivered in connection herewith or therewith contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements herein or therein not misleading.
3. Representations and Warranties of the McCanns. The McCanns
hereby, severally, represent and warrant to each Investor that:
3.1. TITLE TO STOCK. Immediately prior to the Closing, James
F. McCann is the lawful owner of at least 372,674 shares of Class B Common Stock
and Christopher G. McCann is the lawful owner of at least 10,982 shares of Class
B Common Stock, and each has, or at the Closing will have, good and clear title
to such shares of Class B Common Stock, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever, except
restrictions on transfer imposed under this Agreement and the Investors' Rights
Agreement and under applicable state and federal securities laws.
<PAGE>
3.2. AUTHORIZATION. All action on the part of the McCanns
necessary for the authorization, execution and delivery of this Agreement and
the Investors' Rights Agreement, the performance of all obligations of the
McCanns hereunder and thereunder, and the sale of the Class B Common Stock being
sold hereunder by the McCanns has been taken or will be taken prior to the
Closing. This Agreement and the Investors' Rights Agreement constitute a valid
and legally binding obligations of the McCanns, enforceable in accordance with
its terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) to the extent the indemnification provisions contained in the
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
3.3. TITLE UPON TRANSFER. Upon delivery of and payment for the
Class B Common Stock to be sold by the McCanns pursuant to this Agreement, good
and clear title to such shares of Class B Common Stock will pass to the
Investors, free of all restrictions on transfer, liens, encumbrances, security
interests, equities and claims whatsoever, except restrictions on transfer
imposed under this Agreement and the Investors' Rights Agreement and under
applicable state and federal securities laws.
3.4. GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the McCanns is required in connection with the consummation of the transactions
contemplated by this Agreement, except for: (i) filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period, and (ii) filings under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
3.5. COMPLIANCE WITH OTHER INSTRUMENTS. The McCanns are not in
violation of any instrument, judgment, order, writ, decree or contract, statute,
rule or regulation to which they are subject. The execution, delivery and
performance of this Agreement and the Investors' Rights Agreement and the
consummation of the transactions contemplated hereby and thereby will not result
in any such violation, or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision
or an event that results in the creation of any lien, charge or encumbrance upon
any assets of the McCanns.
<PAGE>
3.6. LITIGATION. There is no action, suit, proceeding or
investigation pending against the McCanns, or to the McCanns' knowledge,
currently threatened against the McCanns that questions the validity of this
Agreement or the Investors' Rights Agreement or the right of the McCanns to
enter into such agreements or to consummate the transactions contemplated
hereby or thereby.
4. Representations and Warranties of the Investors.
Each Investor hereby represents, warrants and covenants that:
4.1. AUTHORIZATION. Such Investor has full power and authority
to enter into this Agreement and the Investors' Rights Agreement, and each such
agreement constitutes its valid and legally binding obligation, enforceable in
accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
4.2. PURCHASE ENTIRELY FOR OWN ACCOUNT. This Agreement is made
with such Investor in reliance upon such Investor's representation to the
Company, which by such Investor's execution of this Agreement such Investor
hereby confirms, that the Stock to be received by such Investor, the Class A
Common Stock issuable upon conversion of the Class B Common Stock, the Class A
Common Stock issuable upon conversion of the Series A Preferred Stock and the
Series A Preferred Stock issuable upon conversion of the Series B Preferred
Stock (collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
4.3. DISCLOSURE OF INFORMATION. Such Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Stock. Such Investor further represents that it has had
an opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Stock and the business,
properties, prospects and financial condition of the Company, and the Company
has not refused any reasonable request made by the Investors to provide such
information. The foregoing, however, does not limit or modify the
representations and warranties of the Company in Section 2 or by the McCanns of
<PAGE>
Section 3 of this Agreement or the right of the Investors to rely thereon.
4.4. INVESTMENT EXPERIENCE. Such Investor is an investor in
securities and acknowledges that it is able to fend for itself, can bear the
economic risk of its investment, and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Stock.
4.5. ACCREDITED INVESTOR. Such Investor is an "accredited
investor" within the meaning of Securities and Exchange Commission ("SEC") Rule
501 of Regulation D, as presently in effect.
4.6. RESTRICTED SECURITIES. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In the absence of an effective
registration statement covering the Securities or an available exemption from
registration under the Act, the Stock (and any Class A Common Stock issued on
conversion of the Series A Preferred Stock) must be held indefinitely. In this
connection, such Investor represents that it is familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act, including without limitation the Rule 144 condition that current
information about the Company be available to the public.
4.7. FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the representations set forth above, such Investor further agrees not
to make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
and comply with this Section 4 and the Investors' Rights Agreement, and:
(a) There is then in effect a registration statement
under the Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Such Investor shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
<PAGE>
(c) Notwithstanding the provisions of Section 4.2 or
subsections (a) and (b) above, no such registration statement or opinion of
counsel shall be necessary for a transfer by (i) an Investor that is a
partnership to a partner of such partnership or a retired partner of such
partnership who retires after the date hereof, or to the estate of any such
partner or retired partner or the transfer by gift, will or intestate succession
of any partner to his or her spouse or to the siblings, lineal descendants or
ancestors of such partner or his or her spouse, or (ii) an Investor to any other
Investor or to any Permitted Transferee (as defined in the Investors' Rights
Agreement), if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if the transferee were an original Investor
hereunder.
4.8. LEGENDS. It is understood that the certificates
evidencing the Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
Any legend required by the laws of the State of Delaware,
including any legend required by the Delaware General Corporation Law.
4.9. FURTHER REPRESENTATIONS BY FOREIGN INVESTORS. If an
Investor is not a United States person, such Investor hereby represents that it
has satisfied itself as to the full observance of the laws of its jurisdiction
in connection with any invitation to subscribe for the Securities or any use of
this Agreement, including (i) the legal requirements within its jurisdiction for
the purchase of the Securities, (ii) any foreign exchange restrictions
applicable to such purchase, (iii) any governmental or other consents that may
need to be obtained, and (iv) the income tax and other tax consequences, if any,
that may be relevant to the purchase, holding, redemption, sale or transfer of
the Securities. Such Investor's subscription and payment for, and its continued
beneficial ownership of the Securities, will not violate any applicable
securities or other laws of its jurisdiction.
5. Conditions of Investor's Obligations at Closing. The
obligations of each Investor under subsection 1.1(b) of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent in writing thereto:
5.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 and of the McCanns in Section 3
of this Agreement shall be true on and as of the Closing with the
<PAGE>
same effect as though such representations and warranties had been made on and
as of the date of such Closing.
5.2. PERFORMANCE. The Company and the McCanns shall have
performed and complied with all agreements, obligations and conditions contained
in this Agreement that are required to be performed or complied with by them on
or before the Closing.
5.3. COMPLIANCE CERTIFICATE. The Chief Executive Officer of
the Company shall deliver to each Investor at the Closing a certificate stating
that the conditions specified in Sections 5.1 and 5.2 have been fulfilled and
stating that there shall have been no Material Adverse Effect since March 27,
1999.
5.4. QUALIFICATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Stock pursuant to this Agreement shall be duly obtained and effective as
of the Closing.
5.5. PROCEEDINGS AND DOCUMENTS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing and
all documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request. This may include, without limitation, good standing
certificates of the jurisdiction of incorporation and certification by the
Company's Secretary regarding the Restated Certificate and By-laws and Board of
Director and stockholder resolutions and consents.
5.6. OPINION OF COMPANY COUNSEL. Each Investor shall have
received from Brobeck, Phleger & Harrison LLP, counsel for the Company, an
opinion, dated as of the Closing, in the form attached hereto as Exhibit C.
5.7. INVESTORS' RIGHTS AGREEMENT. The Company and the McCanns
shall have entered into the Investors' Rights Agreement in the form attached as
Exhibit D.
5.8. CHASE CONSENT AND AMENDMENTS. The Company, the McCanns
and Chase Venture Capital Associates shall have entered into the Consent and
Amendment No. 1 to Investment Agreement.
<PAGE>
5.9. MANAGEMENT RIGHTS. The Company shall have executed a
"management rights" letter in favor of Benchmark substantially in the form
previously provided to the Company.
6. Conditions of the Company's and the McCanns' Obligations at
Closing. The obligations of the Company and the McCanns to each Investor under
this Agreement are subject to the fulfillment on or before the Closing of each
of the following conditions by that Investor:
6.1. REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 4 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
6.2. PAYMENT OF PURCHASE PRICE. The Investors shall have
delivered the purchase price specified in Section 1.2.
6.3. QUALIFICATIONS. All authorizations, approvals or permits,
if any, of any governmental authority or regulatory body of the United States or
of any state that are required in connection with the lawful issuance and sale
of the Securities pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
6.4. INVESTORS' RIGHTS AGREEMENT. Each Investor shall have
entered into the Investors' Rights Agreement in the form attached as EXHIBIT D.
7. Post-Closing Covenants
7.1. HART-SCOTT-RODINO. To the extent necessary, the parties
hereto shall promptly and diligently take all actions necessary to file as soon
as practicable all notifications, filings and other documents required to obtain
all governmental authorizations, approvals, consents or waivers under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), and to
respond as promptly as practicable to any inquiries received by the Federal
Trade Commission, the Antitrust Division of the Department of Justice and any
other governmental entity for additional information or documentation in
connection therewith.
<PAGE>
7.2. FILING OF THIRD AMENDED AND RESTATED CERTIFICATE. The
Company shall promptly file with the Secretary of State of Delaware the Third
Amended and Restated Certificate of Incorporation in the form attached hereto
as EXHIBIT A-2 (the "Third Amended and Restated Certificate") following the
termination or expiration of all waiting periods under the HSR Act applicable
to the Company, the McCanns and holders of Series B Preferred Stock required
to obtain such HSR Act clearance as provided herein.
7.3. MANDATORY ELECTION TO CONVERT CLASS B COMMON STOCK. Upon
the effectiveness of the Third Amended and Restated Certificate, each Investor
shall immediately convert each and every share of Class B Common Stock owned by
it, pursuant to Section B.4(a) of Article IV of the Third Amended and Restated
Certificate, into one share of class A common stock, $0.01 par value, with
rights and privileges thereto as described in the Third Amended and Restated
Certificate.
7.4. CONVERSION OF SERIES B PREFERRED STOCK. No Investor may
convert any share of Series B Preferred Stock owned by it into shares of Series
A Preferred Stock pursuant to Section B.3(c) of Article IV of the Restated
Certificate until immediately prior to the effectiveness of the Third Amended
and Restated Certificate, at which time each Investor shall immediately convert
each and every share of Series B Preferred Stock owned by it pursuant to such
Section B.3(c) into one share of Series A Preferred Stock, with rights and
privileges thereto as described in the Restated Certificate.
7.5. BOARD OF DIRECTORS. The Company shall take all necessary
corporate action such that promptly following the expiration or earlier
termination of the Hart-Scott-Rodino waiting period, the directors of the
Company shall be James F. McCann, Christopher G. McCann, T. Guy Minetti, Jeffrey
C. Walker, one nominee of Benchmark and one nominee of Softbank. The directors
nominated by Benchmark and Softbank shall be classified as "Class II" directors
as described in the Company's By-laws.
8. Miscellaneous.
8.1. SURVIVAL. The warranties, representations and covenants
of the Company, the McCanns and the Investors contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors, the McCanns or the
Company.
8.2. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the terms and conditions of this
<PAGE>
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including transferees of any Securities).
Nothing in this Agreement, express or implied, is intended to confer upon any
party, other than the parties hereto or their respective successors and assigns,
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
8.3. GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of New York as applied to agreements among
New York residents entered into and to be performed entirely within New York.
The parties hereto hereby irrevocably consent to the jurisdiction of any court
of the County of New York, State of New York or the United States District Court
for the Eastern District of the State of New York.
8.4. TITLES AND SUBTITLES. The titles and subtitles used in
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
8.5. NOTICES. All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient, if not, then on
the next business day; (iii) five days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (iv) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt. All communications shall be sent
to the address as set forth on the signature page hereof or at such other
address as such party may designate by ten days advance written notice to the
other parties hereto.
8.6. FINDER'S FEE. Each Investor agrees to indemnify and to
hold harmless the Company from any liability for any commission or compensation
in the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which such Investor or any of its
officers, partners, employees or representatives is responsible. The Company
agrees to indemnify and hold harmless each Investor from any liability for any
commission or compensation in the nature of a finders' fee (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is responsible.
8.7. EXPENSES. Irrespective of whether the Closing is
effected, each party shall pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of
<PAGE>
this Agreement. If the Closing is effected, the Company shall reimburse the
reasonable fees and expenses of special counsel for (i) Benchmark, not to exceed
$25,000, (ii) Forum Holding BV, not to exceed $25,000, and (iii) Softbank, not
to exceed $10,000. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the Investors' Rights Agreement or the
Restated Certificate, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
8.8. AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the McCanns and
each of the Investors. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any securities purchased under
this Agreement at the time outstanding (including securities into which such
securities are convertible), each future holder of all such securities and the
Company.
8.9. SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
8.10. ENTIRE AGREEMENT. This Agreement and the documents
referred to herein constitute the entire agreement among the parties and no
party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein.
8.11. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stock
Purchase Agreement as of the date first above written.
1-800-FLOWERS.COM, INC.
By: /s/ James F. McCann
_______________________________
Name: James F. McCann
Title: Chief Executive Officer
JAMES F. MCCANN
/s/ James F. McCann
____________________________________
Address: 1600 Stewart Avenue
Westbury, NY 11590
CHRISTOPHER G. MCCANN
/s/ Christopher G. McCann
____________________________________
Address: 1600 Stewart Avenue
Westbury, NY 11590
STOCK PURCHASE AGREEMENT
<PAGE>
SOFTBANK AMERICA INC.
By: /s/ Steven J. Murray
_______________________________
Name: Steven J. Murray
Title: Treasurer
STOCK PURCHASE AGREEMENT
<PAGE>
FORUM HOLDING AMSTERDAM B.V.
By: /s/ Jean-Bernard Tellio
___________________________________
Name: Jean-Bernard Tellio
Address: Lokatellikade 1
Parnassustoren
1076 AZ Amsterdam
THE NETHERLANDS
STOCK PURCHASE AGREEMENT
<PAGE>
CHASE VENTURE CAPITAL ASSOCIATES
By: Chase Capital Partners,
its General Partner
By: /s/ Stephen P. Murray
_________________________________
Stephen P. Murray
General Partner
STOCK PURCHASE AGREEMENT
<PAGE>
BENCHMARK CAPITAL PARTNERS II, L.P.
as nominee for
Benchmark Capital Partners II, L.P.
Benchmark Founders' Fund II, L.P.
Benchmark Founders' Fund II-A, L.P.
Benchmark Members' Fund, L.P.
By: Benchmark Capital Management Co. II, L.L.C.,
its general partner
By: /s/ Andrew Rachleff
_________________________________________
Managing Member
BENCHMARK CAPITAL PARTNERS III, L.P.
as nominee for
Benchmark Capital Partners III, L.P.
Benchmark Founders' Fund III, L.P.
Benchmark Founders' Fund III-A, L.P.
Benchmark Members' Fund III, L.P.
By: Benchmark Capital Management Co. III, L.L.C.,
its general partner
By: /s/ Andrew Rachleff
_________________________________________
Managing Member
BENCHMARK INVESTORS III, L.P.
By: Benchmark Capital Management Co. III, L.L.C.,
its general partner
By: /s/ Andrew Rachleff
_________________________________________
Managing Member
STOCK PURCHASE AGREEMENT
<PAGE>
BROBECK, PHLEGER & HARRISON LLP
By: /s/ Alexander D. Lynch
_________________________________________
Name: Alexander D. Lynch
Title: Partner
STOCK PURCHASE AGREEMENT
<PAGE>
/s/ T. Guy Minetti
_______________________________________
T. Guy Minetti
/s/ Gerard M. Gallagher
_______________________________________
Gerard M. Gallagher
/s/ Alexander D. Lynch
_______________________________________
Alexander D. Lynch
/s/ Kenneth R. McVay
_______________________________________
Kenneth R. McVay
STOCK PURCHASE AGREEMENT
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Class B Common Series B Preferred
Total
Shares Purchase Price Shares Purchase Price Purchase Price
<S> <C> <C> <C> <C> <C>
Benchmark Capital Partners II, L.P. 32,503 $ 3,388,762.78 62,684 $ 6,535,433.84 $ 9,924,196.62
Benchmark Capital Partners III, L.P. 86,840 $ 9,053,938.40 167,477 $17,461,152.02 $26,515,090.42
Benchmark Investors III, L.P. 133,309 $13,898,796.34 257,095 $26,804,724.70 $40,703,521.04
Forum Holding Amsterdam B.V -- -- 239,785 $24,999,984.10 $24,999,984.10
SOFTBANK America Inc. 131,004 $13,658,477.04 252,652 $26,341,497.52 $39,999,974.56
Chase Venture Capital Associates -- -- 143,053 $14,914,705.78 $14,914,705.78
Brobeck, Phleger & Harrison LLP -- -- 960 $ 100,089.60 $ 100,089.60
T. Guy Minetti -- -- 960 $ 100,089.60 $ 100,089.60
Gerard M. Gallagher -- -- 960 $ 100,089.60 $ 100,089.60
Alexander D. Lynch -- -- 960 $ 100,089.60 $ 100,089.60
Kenneth R. McVay -- -- 960 $ 100,089.60 $ 100,089.60
</TABLE>
<PAGE>
Exhibit 10.19
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of July 1, 1999,
between 1-800-FLOWERS.COM, INC., a Delaware corporation (the "Company"), and
JAMES F. MCCANN (the "Executive")
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and valuable
consideration, it is hereby agreed as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, upon the terms and
conditions set forth herein.
2. TERM. Subject to the provisions of Section 10 hereof, the
period of the Executive's employment under this Agreement shall be from July 1,
1999 through June 30, 2004, as may be extended as hereinafter provided (the
"Term"). As of June 30, 2000 and each subsequent June 30 (June 30, 2000 and each
subsequent June 30 hereinafter called a "Renewal Date"), the Term shall be
automatically extended by one additional year (i.e. to include a period of 60
months commencing on each Renewal Date) unless, at least 180 days prior to any
such Renewal Date, the Company shall deliver to the Executive or the Executive
shall deliver to the Company written notice that the Term will not be further
extended.
3. POSITION AND DUTIES.
(a) During the Term, the Executive shall serve as the
Chief Executive Officer of the Company and shall have such duties consistent
with such office as from time to time may be prescribed by the Board of
Directors of the Company (the "Board"). During the Term, the Executive and the
Company agree that the Executive shall serve as the Chairman of the Board and
Chairman of the Board of Directors of any of the Affiliates (as such term is
defined herein) of the Company and as chairman of any committee or committees of
the Board and the Board of Directors of any of the Affiliates of the Company,
subject in each case to the Executive's election as such.
<PAGE>
(b) During the Term, the Executive shall perform and
discharge the duties that may be assigned to him by the Board from time to time
in accordance with this Agreement, and the Executive shall devote his best
talents, efforts and abilities to the performance of his duties hereunder.
(c) During the Term, the Executive shall perform such
duties on a full-time basis. Notwithstanding the foregoing, the Executive shall
not be precluded from engaging in other outside business activities, provided
that such activities do not materially interfere with the Executive's
performance of his duties hereunder.
4. COMPENSATION.
(a) For the Executive's services hereunder, the
Company shall pay the Executive a minimum annual salary (as the same shall be
increased from time to time, the "Base Salary") of $1,000,000, payable in
accordance with the customary payroll practices of the Company.
(b) The Base Salary shall be increased by 10% (or
such greater percentage as the Board may determine) on July 1, 2000 and each
subsequent July 1 during the Term.
5. BONUSES.
(a) BONUSES. During the Term, the Executive shall be
eligible to participate in the Management Incentive Plan of the Company or such
other bonus arrangements as the Company may make available to its executive
employees (individually and collectively, the "Bonus Arrangement"), in
accordance with the terms and conditions of the Bonus Arrangement, as they may
exist from time to time.
6. OTHER BENEFITS. During the Term, the Company shall provide
the Executive with the following benefits:
(a) STOCK OPTION PLANS AND STOCK OPTIONS. The
Executive shall be eligible to participate in any stock option plans maintained
by the Company, including, without limitation, the 1-800-FLOWERS.COM INC.1999
Stock Option Plan (the "Option Plan"), in accordance with the terms and
conditions thereof, as applicable to other executive officers of the Company.
(b) MEDICAL AND HEALTH INSURANCE BENEFITS. The
Company shall, at its own expense, provide the Executive and his eligible
dependents with the medical, health and dental insurance coverage generally
provided by the Company to its other executive employees.
<PAGE>
(c) SPLIT DOLLAR LIFE INSURANCE. The Company shall
pay on the Executive's behalf all premiums that become due during the Term that
are required to maintain in effect a whole life insurance policy on the
Executive's life with a face value of up to $2,000,000 (the "Split Dollar
Policy"); provided, however, that the Executive executes an irrevocable
collateral assignment and split dollar agreement in a form prescribed by the
Company and acceptable to the Executive assigning to the Company the right to
recover, following the earlier of the Executive's death or the Executive's
cancellation of the Split Dollar Policy, from the cash value and any death
proceeds of the Split Dollar Policy, any and all amounts paid by the Company
with respect to the Split Dollar Policy and otherwise setting forth the terms
and conditions of maintaining this split dollar life insurance program.
(d) DISABILITY AND ACCIDENT INSURANCE BENEFITS. The
Company shall provide the Executive with long term disability insurance
(providing 100% Base Salary replacement coverage), business travel accident and
accidental death and dismemberment insurance coverage.
(e) 401(K) PLAN. The Executive shall be entitled to
participate in the Company's 401(k) Plan in accordance with the terms and
conditions of such plan.
(f) OTHER BENEFITS. The Company shall make available
to the Executive any and all other employee or fringe benefits (in accordance
with their terms and conditions) which the Company may generally make available
to its other executive employees.
(g) KEY-MAN LIFE INSURANCE. The Company may purchase
one or more "key man" insurance policies on the Executive's Life ("key man
policies"), each of which will be payable to and owned by the Company. The
Company, in its sole discretion, may select the amount and type of key man
policies purchased, and the Executive will have no interest in any key man
policies. The Executive agrees to reasonably cooperate with the Company in
securing the key man policies, by submitting to all reasonably requested medical
examinations, supplying all reasonably requested information and executing all
documents in order for the Company to secure the key man policies.
7. TRANSPORTATION. During the Term, the Company shall
reimburse the Executive for expenses he incurs in connection with his
acquisition and/or maintenance of two automobiles, such as automobile lease or
loan payments, plus such amount(s) as may be required to reimburse the Executive
for expenses such as registration, insurance, repairs, maintenance, license
fees, parking, gasoline and oil incurred by the Executive incident to the use of
such automobiles. In addition, the Company shall provide the Executive, at the
Company's sole expense, such air transportation as the Executive may require, in
his sole
<PAGE>
discretion, whether for business or personal reasons, via any aircraft
fractional ownership or similar program to which the Company subscribes.
8. REIMBURSEMENT OF EXPENSES. During the Term, the Company
shall pay or reimburse the Executive for all reasonable travel (at first class
level), entertainment and other business expenses actually incurred or paid by
the Executive in the performance of his duties hereunder upon presentation of
expense statements and/or such other supporting information as the Company may
reasonably require of the Executive.
9. VACATIONS. The Executive shall be entitled to no less than
four weeks of paid vacation during each full calendar year of the Term (and a
pro rata portion thereof for any portion of the Term that is less than a full
calendar year). Unused vacation may be carried over to successive years.
10. TERMINATION. The employment hereunder of the Executive may
be terminated prior to the expiration of the Term in the manner described in
this Section 10.
(a) TERMINATION BY THE COMPANY FOR GOOD CAUSE. The
Company shall have the right to terminate the employment of the Executive for
Good Cause (as such term is defined herein) by written notice to the Executive
specifying the particulars of the circumstances forming the basis for such Good
Cause.
(b) TERMINATION UPON DEATH. The employment of the
Executive hereunder shall terminate immediately upon his death.
(c) VOLUNTARY RESIGNATION BY THE EXECUTIVE. The
Executive shall have the right to voluntarily resign his employment hereunder
for other than Good Reason (as such term is defined herein) by written notice to
the Company.
(d) TERMINATION BY THE COMPANY WITHOUT GOOD CAUSE.
The Company shall have the right to terminate the Executive's employment
hereunder without Good Cause by written notice to the Executive.
(e) RESIGNATION BY THE EXECUTIVE FOR GOOD REASON. The
Executive shall have the right to terminate his employment for Good Reason by
written notice to the Company specifying the particulars of the circumstances
forming the basis for such Good Reason.
(f) TERMINATION DATE. The "Termination Date" is the
date as of which the Executive's employment with the Company terminates. Any
notice of termination given pursuant to the provisions of this Agreement shall
specify the Termination Date.
<PAGE>
(g) CERTAIN DEFINITIONS. For purposes of this
Agreement, the following terms shall have the following meanings:
(i) "Person" means any individual,
corporation, partnership, association, joint-stock company, trust,
unincorporated organization, joint venture, court, government (or political
subdivision or agency thereof) or other entity.
(ii) "Good Cause" shall exist if, and only
if, the Executive (A) willfully and repeatedly fails in any material respect to
perform his obligations hereunder as provided herein, provided that such Good
Cause shall not exist unless the Company shall first have provided the Executive
with written notice specifying in reasonable detail the factors constituting
such material failure and such material failure shall not have been cured by the
Executive within 30 days after such notice or, if impracticable of being cured
within such 30 day period, such longer period as may reasonably be necessary to
accomplish the cure; (B) has been convicted of a crime which constitutes a
felony under applicable law or has entered a plea of guilty or nolo contendere
with respect thereto; or (C) is unable, by reason of physical or mental illness,
to perform his material duties and responsibilities under this Agreement for a
period of 180 consecutive days or a period of in excess of 180 days (whether or
not consecutive) during any calendar year during the Term or is determined by a
court of competent jurisdiction either to be of unsound mind or otherwise is
incapable of carrying out his duties and responsibilities as Chief Executive
Officer of the Company.
(iii) "Good Reason" means the occurrence of
any of the following events:
(A) the assignment to the Executive
of any duties inconsistent in any material respect with the Executive's then
position (including status, offices, titles and reporting relationships),
authority, duties or responsibilities, or any other action or actions by the
Company which when taken as a whole results in a significant diminution in the
Executive's position, authority, duties or responsibilities, excluding for this
purpose any isolated, immaterial and inadvertent action not taken in bad faith
and which is remedied by the Company immediately after receipt of notice thereof
given by the Executive;
(B) a material breach by the Company
of one or more provisions of this Agreement, provided that such Good Reason
shall not exist unless the Executive shall first have provided the Company with
written notice specifying in reasonable detail the factors constituting such
material breach and such material breach shall not have been cured by the
Company within 30 days after such notice or, if impracticable of being cured
within such 30 day period, such longer period as may reasonably be necessary to
accomplish the cure;
(C) the Company requiring the
Executive to be based at
<PAGE>
any location other than within 25 miles of the Company's current executive
office location, except for requirements of temporary travel on the Company's
business to an extent substantially consistent with the Executive's business
travel obligations existing immediately prior to the date of this Agreement; and
(D) any purported termination by the
Company of the Executive's employment otherwise than as expressly permitted by
this Agreement.
(iv) "Affiliate" shall mean with respect to
any Person, any other Person, who directly or indirectly, is in control of, is
controlled by or is under common control with, such Person. For the purposes of
this definition, "CONTROL" (including, with correlative meanings, the terms
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of capital stock, by contract or otherwise.
11. OBLIGATIONS OF COMPANY ON TERMINATION. Notwithstanding
anything in this Agreement to the contrary, the Company's obligations on
termination of the Executive's employment shall be as described in this Section
11.
(a) OBLIGATIONS OF THE COMPANY IN THE CASE OF
TERMINATION WITHOUT GOOD CAUSE OR RESIGNATION BY THE EXECUTIVE FOR GOOD REASON.
In the event that prior to the expiration of the Term, the Company terminates
the Executive's employment pursuant to Section 10(d), or pursuant to Section
10(e), the Company shall provide the Executive with the following:
(i) AMOUNT OF SEVERANCE PAYMENT. Within 10
days following the Termination Date, the Company shall pay the Executive a
single lump sum cash payment (the "Severance Payment") equal to the sum of the
following:
(A) $2,500,000, plus the Base Salary
otherwise payable to the Executive for the then remaining duration of the Term;
and
(B) any Base Salary, Bonus
Arrangement bonuses, vacation and unreimbursed expenses accrued but unpaid as of
the Termination Date.
(ii) MEDICAL AND HEALTH INSURANCE. The
Company shall, at its sole expense, provide the Executive (and his dependents)
with the highest level of coverage provided to any executive employee of the
Company under (and in accordance with the terms and conditions of) the Company's
medical and health insurance plans, as in effect from time to time, for the
otherwise remaining duration of the Term; provided that to the extent such
coverage may be unavailable under such medical and health insurance plans due
<PAGE>
to restrictions imposed by the insurer(s) under such plans, the Company shall
provide equivalent coverage, if such coverage is available.
(iii) SPLIT DOLLAR LIFE INSURANCE. For the
otherwise remaining duration of the Term, the Company shall continue to pay all
premiums required to maintain the Split Dollar Policy as though the Executive's
employment hereunder had not terminated.
(b) OBLIGATIONS OF THE COMPANY IN CASE OF TERMINATION
FOR DEATH, VOLUNTARY RESIGNATION OR GOOD CAUSE. Upon termination of the
Executive's employment pursuant to Section 10(b), pursuant to Section 10(c) or
pursuant to Section 10(a), the Company shall have no payment or other
obligations hereunder to the Executive, except for the payment of any Base
Salary, Bonus Arrangement bonuses, benefits or unreimbursed expenses accrued but
unpaid as of the date of such termination.
12. RESTRICTIVE COVENANTS.
(a) NONCOMPETITION. In the event of the termination
of the Executive's employment pursuant to Section 10(c) or pursuant to Section
10(a), during the one-year period commencing on the Termination Date, the
Executive shall not own, manage, control or participate in the ownership,
management or control of, or be employed, consult to or engaged by or otherwise
affiliated or associated with, whether as a sole proprietor, shareholder (except
as a holder of not more than five percent of any class of the outstanding shares
of a publicly held corporation), owner, partner, joint venturer, employee,
agent, manager, salesman, consultant, advisor, independent contractor, officer,
director, promoter or otherwise, whether or not for compensation, with respect
to any corporation, partnership, proprietorship, firm, association or other
business entity which is engaged primarily in the business of selling floral
products which are the same or substantially similar to the floral products
offered for sale by the Company and/or any Affiliate of the Company.
(b) CONFIDENTIAL INFORMATION. The Executive
recognizes and acknowledges that, in connection with his employment with the
Company, he has had and will continue to have access to valuable trade secrets
and confidential information of the Company and its Affiliates, including, but
not limited to, management reports, customer, supplier and mailing lists,
business methods and processes, advertising, marketing, promotional, pricing and
financial information and data relating to officers, employees, agents and
consultants (collectively, "CONFIDENTIAL INFORMATION") and that such
Confidential Information is being made available to the Executive only in
connection with the furtherance of his employment with the Company and/or its
Affiliates. The Executive agrees that he will not at any time, directly or
indirectly, use for any purpose, disclose or make available to any person any of
such Confidential Information, except that disclosure of Confidential
Information will be permitted: (i) to the Company an/or its Affiliates and the
advisors of the
<PAGE>
Company and/or its Affiliates; (ii) if such Confidential Information has
previously become available to the public through no fault of the Executive;
(iii) if required by any court or governmental agency or body or is otherwise
required by law; (iv) if necessary to establish or assert the rights of the
Executive hereunder; (v) if expressly consented to in writing by the Company; or
(vi) if necessary to carry on the Company's business in the ordinary course or
to perform the Executive's duties hereunder.
13. SEVERABILITY. Should any provision of this Agreement be
held, by a court of competent jurisdiction, to be invalid or unenforceable, such
invalidity or unenforceability shall not render the entire Agreement invalid or
unenforceable, and this Agreement and each other provision hereof shall be
enforceable and valid to the fullest extent permitted by law.
14. ARBITRATION. Any and all disputes, controversies or claims
arising out of or relating to this agreement, or the enforcement or breach
thereof, shall be settled by arbitration conducted in the County of Nassau, in
the State of New York, and in accordance with the Commercial Arbitration Rules
(the "Arbitration Rules") of the American Arbitration Association ("AAA") and
the Supplementary Procedures for Large, Complex Disputes; provided, however,
that any dispute, controversy or claim with respect to Section 12, may not be
submitted to arbitration and shall only be submitted to a court in accordance
with Section 15. The arbitral tribunal shall consist of three arbitrators. The
Company and the Executive shall each select and appoint one arbitrator within 30
days of initiation of the arbitration and those arbitrators shall jointly
appoint a third arbitrator within 30 days of their selection and appointment. If
the third arbitrator is not appointed as provided above, such arbitrator shall
be appointed by the AAA as provided in the Arbitration Rules.
Any decision or award of the arbitral tribunal shall be final
and binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any tribunal. The parties hereto agree that the arbitral
award may be enforced against the parties to the arbitration proceeding or their
assets wherever they may be found and that a judgment upon the arbitral award
may be entered in court in accordance with the provisions of Section 15 hereof.
15. CONSENT TO JURISDICTION. Subject to Section 14 hereof, the
Company and the Executive irrevocably and voluntarily submit to personal
jurisdiction in the State of New York and in the Federal and state courts in
such state located in the Eastern District of New York in any action or
proceeding arising out of or relating to this Agreement and agree that all
claims in respect of such action or proceeding may be heard and determined in
any such court. The Company and the Executive further consent and agree that the
parties hereto may be served with process in the same manner as a notice may be
given under Section 19.
<PAGE>
The Company and the Executive agree that any action or proceeding instituted by
one party against the other party with respect to this Agreement will be
instituted exclusively in the state courts located in, and in the United States
District Court for the Eastern District of New York. The Company and the
Executive irrevocably and unconditionally waive and agree not to plead, to the
fullest extent permitted by law, any objection that they may now or hereafter
have to the laying of venue or the convenience of the forum of any action or
proceeding with respect to this Agreement in any such courts.
16. SUCCESSORS AND ASSIGNS.
(a) This Agreement and all rights under this
Agreement are personal to the Executive and shall not be assignable other than
by will or the laws of descent. All of the Executive's rights under the
Agreement shall inure to the benefit of his heirs, personal representatives,
designees or other legal representatives, as the case may be.
(b) This Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns. Any Person
succeeding to the business of the Company by merger, purchase, consolidation or
otherwise shall assume by contract or operation of law the obligations of the
Company under this Agreement.
17. GOVERNING LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of New York, without
regard to the conflicts of laws rules thereof.
18. NOTICES. All notices, requests and demands given to or
made upon the respective parties hereto shall be deemed to have been given or
made three business days after the date of mailing when mailed by registered or
certified mail, postage prepaid, or on the date of delivery if delivered by
hand, or one business day after the date of delivery by Federal Express or other
reputable overnight delivery service, addressed to the parties at their
addresses set forth below or to such other addresses furnished by notice given
in accordance with this Section 18: (a) if to the Company, to 1-800-FLOWERS.COM,
1600 Stewart Avenue, Garden City, New York 11590, and (b) if to the Executive,
to James F. McCann, 15 West Drive, Plandome, New York 11030.
19. WITHHOLDING. All payments required to be made by the
Company to the Executive under this Agreement shall be subject to withholding
taxes, social security and other payroll deductions in accordance with
applicable law and the Company's policies applicable to executive employees of
the Company.
20. COMPLETE UNDERSTANDING. Except as expressly provided
below, this Agreement supersedes any prior contracts, understandings,
discussions and agreements relating to employment between the Executive and the
Company, and constitutes the
<PAGE>
complete understanding between the parties with respect to the subject matter
hereof. No statement, representation, warranty or covenant has been made by
either party with respect to the subject matter hereof except as expressly set
forth herein.
21. MODIFICATION; WAIVER.
(a) This Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by the
party against whom the waiver is to be effective. Any such waiver shall be
effective only to the extent specifically set forth in such writing.
(b) No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
22. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of this Agreement.
23. COUNTERPARTS. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument. This Agreement
shall become effective when each party hereto shall have received counterparts
hereof signed by the other party hereto.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.
1-800 FLOWERS.COM, INC.
_________________________ By:______________________________
Witness
/s/ James F. McCann
_________________________ _________________________________
Witness James F. McCann
<PAGE>
Exhibit 10.20
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of July 1, 1999,
between 1-800-FLOWERS.COM, INC., a Delaware corporation (the "Company"), and
CHRISTOPHER G. MCCANN (the "Executive")
W I T N E S S E T H
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment, on the terms and conditions set
forth herein.
NOW, THEREFORE, in consideration of the mutual promises,
representations and warranties set forth herein, and for other good and valuable
consideration, it is hereby agreed as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the
Executive, and the Executive hereby accepts such employment, upon the terms and
conditions set forth herein.
2. TERM. Subject to the provisions of Section 10
hereof, the period of the Executive's employment under this Agreement shall
be from July 1, 1999 through June 30, 2004, as may be extended as hereinafter
provided (the "Term"). As of June 30, 2000 and each subsequent June 30 (June
30, 2000 and each subsequent June 30 hereinafter called a "Renewal Date"),
the Term shall be automatically extended by one additional year (i.e. to
include a period of 60 months commencing on each Renewal Date) unless, at
least 180 days prior to any such Renewal Date, the Company shall deliver to
the Executive or the Executive shall deliver to the Company written notice
that the Term will not be further extended.
3. POSITION AND DUTIES.
(a) During the Term, the Executive shall serve as a
Senior Vice President of the Company and shall have such duties consistent with
such office as from time to time may be prescribed by the Board of Directors of
the Company (the "Board"). During the Term, the Executive and the Company agree
that the Executive shall serve as a member of the Board and a member of the
Board of Directors of any of the Affiliates (as such term is defined herein) of
the Company and as a member of any committee or committees of the Board and the
Board of Directors of any of the Affiliates of the Company, subject in each case
to the Executive's election as such.
<PAGE>
(b) During the Term, the Executive shall perform and
discharge the duties that may be assigned to him by the Board from time to time
in accordance with this Agreement, and the Executive shall devote his best
talents, efforts and abilities to the performance of his duties hereunder.
(c) During the Term, the Executive shall perform such
duties on a full-time basis. Notwithstanding the foregoing, the Executive shall
not be precluded from engaging in other outside business activities, provided
that such activities do not materially interfere with the Executive's
performance of his duties hereunder.
4. COMPENSATION.
(a) For the Executive's services hereunder, the
Company shall pay the Executive a minimum annual salary (as the same shall be
increased from time to time, the "Base Salary") of $250,000, payable in
accordance with the customary payroll practices of the Company.
(b) The Base Salary shall be increased by 10% (or
such greater percentage as the Board may determine) on July 1, 2000 and each
subsequent July 1 during the Term.
5. BONUSES.
(a) BONUSES. During the Term, the Executive shall be
eligible to participate in the Management Incentive Plan of the Company or such
other bonus arrangements as the Company may make available to its executive
employees (individually and collectively, the "Bonus Arrangement"), in
accordance with the terms and conditions of the Bonus Arrangement, as they may
exist from time to time.
6. OTHER BENEFITS. During the Term, the Company shall
provide the Executive with the following benefits:
(a) STOCK OPTION PLANS AND STOCK OPTIONS. The
Executive shall be eligible to participate in any stock option plans maintained
by the Company, including, without limitation, the 1-800-FLOWERS.COM INC.1999
Stock Option Plan (the "Option Plan"), in accordance with the terms and
conditions thereof, as applicable to other executive officers of the Company.
Simultaneously with the consummation of the initial public offering of shares of
Class A Common Stock of the Company, the Executive shall be granted
non-qualified stock options under the Option Plan (the "Options") for the
purchase of 200,000 shares of Class A Common Stock of the Company ("Common
Stock") which options shall vest at the rate of twenty-five percent (25%) a
year. The per share exercise price of the Options shall be the initial public
offering price set forth for said shares of Class
<PAGE>
A Common Stock in the final prospectus under the Company's Registration
Statement on Form S-1, initially filed with the Securities Exchange Commission
on May 21, 1999.
(b) MEDICAL AND HEALTH INSURANCE BENEFITS. The
Company shall, at its own expense, provide the Executive and his eligible
dependents with the medical, health and dental insurance coverage generally
provided by the Company to its other executive employees.
(c) SPLIT DOLLAR LIFE INSURANCE. The Company shall
pay on the Executive's behalf all premiums that become due during the Term that
are required to maintain in effect a whole life insurance policy on the
Executive's life with a face value of up to $1,000,000 (the "Split Dollar
Policy"); provided, however, that the Executive executes an irrevocable
collateral assignment and split dollar agreement in a form prescribed by the
Company and acceptable to the Executive assigning to the Company the right to
recover, following the earlier of the Executive's death or the Executive's
cancellation of the Split Dollar Policy, from the cash value and any death
proceeds of the Split Dollar Policy, any and all amounts paid by the Company
with respect to the Split Dollar Policy and otherwise setting forth the terms
and conditions of maintaining this split dollar life insurance program.
(d) DISABILITY AND ACCIDENT INSURANCE BENEFITS. The
Company shall provide the Executive with long term disability insurance
(providing 100% Base Salary replacement coverage), business travel accident and
accidental death and dismemberment insurance coverage.
(e) 401(k) PLAN. The Executive shall be entitled to
participate in the Company's 401(k) Plan in accordance with the terms and
conditions of such plan.
(f) OTHER BENEFITS. The Company shall make available
to the Executive any and all other employee or fringe benefits (in accordance
with their terms and conditions) which the Company may generally make available
to its other executive employees.
(g) KEY-MAN LIFE INSURANCE. The Company may purchase
one or more "key man" insurance policies on the Executive's Life ("key man
policies"), each of which will be payable to and owned by the Company. The
Company, in its sole discretion, may select the amount and type of key man
policies purchased, and the Executive will have no interest in any key man
policies. The Executive agrees to reasonably cooperate with the Company in
securing the key man policies, by submitting to all reasonably requested medical
examinations, supplying all reasonably requested information and executing all
documents in order for the Company to secure the key man policies.
7. TRANSPORTATION. During the Term, the Company shall
reimburse the
<PAGE>
Executive for expenses he incurs in connection with his acquisition and/or
maintenance of two automobiles, such as automobile lease or loan payments, plus
such amount(s) as may be required to reimburse the Executive for expenses such
as registration, insurance, repairs, maintenance, license fees, parking,
gasoline and oil incurred by the Executive incident to the use of such
automobiles.
8. REIMBURSEMENT OF EXPENSES. During the Term, the
Company shall pay or reimburse the Executive for all reasonable travel (at
first class level), entertainment and other business expenses actually
incurred or paid by the Executive in the performance of his duties hereunder
upon presentation of expense statements and/or such other supporting
information as the Company may reasonably require of the Executive.
9. VACATIONS. The Executive shall be entitled to no
less than four weeks of paid vacation during each full calendar year of the
Term (and a pro rata portion thereof for any portion of the Term that is less
than a full calendar year). Unused vacation may be carried over to successive
years.
10. TERMINATION. The employment hereunder of the
Executive may be terminated prior to the expiration of the Term in the manner
described in this Section 10.
(a) TERMINATION BY THE COMPANY FOR GOOD CAUSE. The
Company shall have the right to terminate the employment of the Executive for
Good Cause (as such term is defined herein) by written notice to the Executive
specifying the particulars of the circumstances forming the basis for such Good
Cause.
(b) TERMINATION UPON DEATH. The employment of the
Executive hereunder shall terminate immediately upon his death.
(c) VOLUNTARY RESIGNATION BY THE EXECUTIVE. The
Executive shall have the right to voluntarily resign his employment hereunder
for other than Good Reason (as such term is defined herein) by written notice to
the Company.
(d) TERMINATION BY THE COMPANY WITHOUT GOOD CAUSE.
The Company shall have the right to terminate the Executive's employment
hereunder without Good Cause by written notice to the Executive.
(e) RESIGNATION BY THE EXECUTIVE FOR GOOD REASON. The
Executive shall have the right to terminate his employment for Good Reason by
written notice to the Company specifying the particulars of the circumstances
forming the basis for such Good Reason.
(f) TERMINATION DATE. The "Termination Date" is the
date as of
<PAGE>
which the Executive's employment with the Company terminates. Any notice of
termination given pursuant to the provisions of this Agreement shall specify the
Termination Date.
(g) CERTAIN DEFINITIONS. For purposes of this
Agreement, the following terms shall have the following meanings:
(i) "Person" means any individual,
corporation, partnership, association, joint-stock company, trust,
unincorporated organization, joint venture, court, government (or political
subdivision or agency thereof) or other entity.
(iii) "Change of Control" with respect to
the Company, means the occurrence of any of the following, other than in
connection with the initial public offering of the Common Stock, (A) the
acquisition directly or indirectly (in one or more related transactions) by any
Person (other than the Executive), or two or more Persons (other than the
Executive) acting as a group, of beneficial ownership (as that term is defined
in Rule 13d-3 under the Securities Exchange Act of 1934) of outstanding capital
stock of the Company which possess at least 30% of the total voting power of all
such outstanding capital stock ("Voting Shares"); (B) the merger or
consolidation of the Company with one or more other corporations as a result of
which the holders of the outstanding Voting Shares of the Company immediately
before the merger hold less than 50% of the Voting Shares of the surviving or
resulting corporation; (C) the sale of all or substantially all of the assets of
the Company; (D) the Company or any of its shareholders enters into any
agreement providing for any of the foregoing and the transaction contemplated
thereby is ultimately consummated; or (E) individuals who as of the date of this
Agreement constitute the Board of Directors of the Company cease for any reason
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's stockholders, of each new director was
approved by a vote of a majority of the directors then still in office who were
directors as of the date of this Agreement.
(iiii) "Good Cause" shall exist if, and only
if, the Executive (A) willfully and repeatedly fails in any material respect to
perform his obligations hereunder as provided herein, provided that such Good
Cause shall not exist unless the Company shall first have provided the Executive
with written notice specifying in reasonable detail the factors constituting
such material failure and such material failure shall not have been cured by the
Executive within 30 days after such notice or, if impracticable of being cured
within such 30 day period, such longer period as may reasonably be necessary to
accomplish the cure; (B) has been convicted of a crime which constitutes a
felony under applicable law or has entered a plea of guilty or nolo contendere
with respect thereto; or (C) is unable, by reason of physical or mental illness,
to perform his material duties and responsibilities under this Agreement for a
period of 180 consecutive days or a period of in excess of 180 days (whether or
not consecutive) during any calendar year during the Term or is determined by a
<PAGE>
court of competent jurisdiction either to be of unsound mind or otherwise is
incapable of carrying out his duties and responsibilities as a Senior Vice
President of the Company.
(iv) "Good Reason" means the occurrence of
any of the following events:
(A) the assignment to the Executive
of any duties inconsistent in any material respect with the Executive's then
position (including status, offices, titles and reporting relationships),
authority, duties or responsibilities, or any other action or actions by the
Company which when taken as a whole results in a significant diminution in the
Executive's position, authority, duties or responsibilities, excluding for this
purpose any isolated, immaterial and inadvertent action not taken in bad faith
and which is remedied by the Company immediately after receipt of notice thereof
given by the Executive;
(B) a material breach by the Company
of one or more provisions of this Agreement, provided that such Good Reason
shall not exist unless the Executive shall first have provided the Company with
written notice specifying in reasonable detail the factors constituting such
material breach and such material breach shall not have been cured by the
Company within 30 days after such notice or, if impracticable of being cured
within such 30 day period, such longer period as may reasonably be necessary to
accomplish the cure;
(C) the Company requiring the
Executive to be based at any location other than within 25 miles of the
Company's current executive office location, except for requirements of
temporary travel on the Company's business to an extent substantially consistent
with the Executive's business travel obligations existing immediately prior to
the date of this Agreement;
(D) any purported termination by the
Company of the Executive's employment otherwise than as expressly permitted by
this Agreement; and
(E) a Change of Control of the
Company, provided that the Termination Date occurs no later than one year
following such Change of Control.
(iv) "Affiliate" shall mean with respect to
any Person, any other Person, who directly or indirectly, is in control of, is
controlled by or is under common control with, such Person. For the purposes of
this definition, "CONTROL" (including, with correlative meanings, the terms
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of capital stock, by contract or otherwise.
<PAGE>
11. OBLIGATIONS OF COMPANY ON TERMINATION.
Notwithstanding anything in this Agreement to the contrary, the Company's
obligations on termination of the Executive's employment shall be as
described in this Section 11.
(a) OBLIGATIONS OF THE COMPANY IN THE CASE OF
TERMINATION WITHOUT GOOD CAUSE OR RESIGNATION BY THE EXECUTIVE FOR GOOD REASON.
In the event that prior to the expiration of the Term, the Company terminates
the Executive's employment pursuant to Section 10(d), or pursuant to Section
10(e), the Company shall provide the Executive with the following:
(i) AMOUNT OF SEVERANCE PAYMENT. Within 10
days following the Termination Date, the Company shall pay the Executive a
single lump sum cash payment (the "Severance Payment") equal to the sum of the
following:
(A) $500,000, plus the Base Salary
otherwise payable to the Executive for the then remaining duration of the Term;
and
(B) any Base Salary, Bonus
Arrangement bonuses, vacation and unreimbursed expenses accrued but unpaid as of
the Termination Date.
(ii) MEDICAL AND HEALTH INSURANCE. The
Company shall, at its sole expense, provide the Executive (and his dependents)
with the highest level of coverage provided to any executive employee of the
Company under (and in accordance with the terms and conditions of) the Company's
medical and health insurance plans, as in effect from time to time, for the
otherwise remaining duration of the Term; provided that to the extent such
coverage may be unavailable under such medical and health insurance plans due to
restrictions imposed by the insurer(s) under such plans, the Company shall
provide equivalent coverage, if such coverage is available.
(iii) SPLIT DOLLAR LIFE INSURANCE. For the
otherwise remaining duration of the Term, the Company shall continue to pay all
premiums required to maintain the Split Dollar Policy as though the Executive's
employment hereunder had not terminated.
(b) OBLIGATIONS OF THE COMPANY IN CASE OF TERMINATION
FOR DEATH, VOLUNTARY RESIGNATION OR GOOD CAUSE. Upon termination of the
Executive's employment pursuant to Section 10(b), pursuant to Section 10(c) or
pursuant to Section 10(a), the Company shall have no payment or other
obligations hereunder to the Executive, except for the payment of any Base
Salary, Bonus Arrangement bonuses, benefits or unreimbursed expenses accrued but
unpaid as of the date of such termination.
12. RESTRICTIVE COVENANTS.
<PAGE>
(a) NONCOMPETITION. In the event of the termination
of the Executive's employment pursuant to Section 10(c) or pursuant to Section
10(a), during the one-year period commencing on the Termination Date, the
Executive shall not own, manage, control or participate in the ownership,
management or control of, or be employed, consult to or engaged by or otherwise
affiliated or associated with, whether as a sole proprietor, shareholder (except
as a holder of not more than five percent of any class of the outstanding shares
of a publicly held corporation), owner, partner, joint venturer, employee,
agent, manager, salesman, consultant, advisor, independent contractor, officer,
director, promoter or otherwise, whether or not for compensation, with respect
to any corporation, partnership, proprietorship, firm, association or other
business entity which is engaged primarily in the business of selling floral
products which are the same or substantially similar to the floral products
offered for sale by the Company and/or any Affiliate of the Company.
(b) CONFIDENTIAL INFORMATION. The Executive
recognizes and acknowledges that, in connection with his employment with the
Company, he has had and will continue to have access to valuable trade secrets
and confidential information of the Company and its Affiliates, including, but
not limited to, management reports, customer, supplier and mailing lists,
business methods and processes, advertising, marketing, promotional, pricing and
financial information and data relating to officers, employees, agents and
consultants (collectively, "CONFIDENTIAL INFORMATION") and that such
Confidential Information is being made available to the Executive only in
connection with the furtherance of his employment with the Company and/or its
Affiliates. The Executive agrees that he will not at any time, directly or
indirectly, use for any purpose, disclose or make available to any person any of
such Confidential Information, except that disclosure of Confidential
Information will be permitted: (i) to the Company an/or its Affiliates and the
advisors of the Company and/or its Affiliates; (ii) if such Confidential
Information has previously become available to the public through no fault of
the Executive; (iii) if required by any court or governmental agency or body or
is otherwise required by law; (iv) if necessary to establish or assert the
rights of the Executive hereunder; (v) if expressly consented to in writing by
the Company; or (vi) if necessary to carry on the Company's business in the
ordinary course or to perform the Executive's duties hereunder.
13. SEVERABILITY. Should any provision of this
Agreement be held, by a court of competent jurisdiction, to be invalid or
unenforceable, such invalidity or unenforceability shall not render the
entire Agreement invalid or unenforceable, and this Agreement and each other
provision hereof shall be enforceable and valid to the fullest extent
permitted by law.
14. ARBITRATION. Any and all disputes, controversies
or claims arising out of or relating to this agreement, or the enforcement or
breach thereof, shall be settled by arbitration conducted in the County of
Nassau, in the State of New York, and in
<PAGE>
accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of
the American Arbitration Association ("AAA") and the Supplementary Procedures
for Large, Complex Disputes; provided, however, that any dispute, controversy or
claim with respect to Section 12, may not be submitted to arbitration and shall
only be submitted to a court in accordance with Section 15. The arbitral
tribunal shall consist of three arbitrators. The Company and the Executive shall
each select and appoint one arbitrator within 30 days of initiation of the
arbitration and those arbitrators shall jointly appoint a third arbitrator
within 30 days of their selection and appointment. If the third arbitrator is
not appointed as provided above, such arbitrator shall be appointed by the AAA
as provided in the Arbitration Rules.
Any decision or award of the arbitral tribunal shall be final
and binding upon the parties to the arbitration proceeding. The parties hereto
hereby waive to the extent permitted by law any rights to appeal or to seek
review of such award by any tribunal. The parties hereto agree that the arbitral
award may be enforced against the parties to the arbitration proceeding or their
assets wherever they may be found and that a judgment upon the arbitral award
may be entered in court in accordance with the provisions of Section 15 hereof.
15. CONSENT TO JURISDICTION. Subject to Section 14
hereof, the Company and the Executive irrevocably and voluntarily submit to
personal jurisdiction in the State of New York and in the Federal and state
courts in such state located in the Eastern District of New York in any
action or proceeding arising out of or relating to this Agreement and agree
that all claims in respect of such action or proceeding may be heard and
determined in any such court. The Company and the Executive further consent
and agree that the parties hereto may be served with process in the same
manner as a notice may be given under Section 19. The Company and the
Executive agree that any action or proceeding instituted by one party against
the other party with respect to this Agreement will be instituted exclusively
in the state courts located in, and in the United States District Court for
the Eastern District of New York. The Company and the Executive irrevocably
and unconditionally waive and agree not to plead, to the fullest extent
permitted by law, any objection that they may now or hereafter have to the
laying of venue or the convenience of the forum of any action or proceeding
with respect to this Agreement in any such courts.
16. SUCCESSORS AND ASSIGNS.
(a) This Agreement and all rights under this
Agreement are personal to the Executive and shall not be assignable other than
by will or the laws of descent. All of the Executive's rights under the
Agreement shall inure to the benefit of his heirs, personal representatives,
designees or other legal representatives, as the case may be.
(b) This Agreement shall inure to the benefit of and
be binding
<PAGE>
upon the Company and its successors and assigns. Any Person succeeding to the
business of the Company by merger, purchase, consolidation or otherwise shall
assume by contract or operation of law the obligations of the Company under this
Agreement.
17. GOVERNING LAW. This Agreement shall be construed
in accordance with and governed by the laws of the State of New York, without
regard to the conflicts of laws rules thereof.
18. NOTICES. All notices, requests and demands given
to or made upon the respective parties hereto shall be deemed to have been
given or made three business days after the date of mailing when mailed by
registered or certified mail, postage prepaid, or on the date of delivery if
delivered by hand, or one business day after the date of delivery by Federal
Express or other reputable overnight delivery service, addressed to the
parties at their addresses set forth below or to such other addresses
furnished by notice given in accordance with this Section 18: (a) if to the
Company, to 1-800-FLOWERS.COM, 1600 Stewart Avenue, Garden City, New York
11590, and (b) if to the Executive, to Christopher G. McCann, 37 Baldwin
Road, Bayville, New York 11709.
19. WITHHOLDING. All payments required to be made by
the Company to the Executive under this Agreement shall be subject to
withholding taxes, social security and other payroll deductions in accordance
with applicable law and the Company's policies applicable to executive
employees of the Company.
20. COMPLETE UNDERSTANDING. Except as expressly
provided below, this Agreement supersedes any prior contracts,
understandings, discussions and agreements relating to employment between the
Executive and the Company, and constitutes the complete understanding between
the parties with respect to the subject matter hereof. No statement,
representation, warranty or covenant has been made by either party with
respect to the subject matter hereof except as expressly set forth herein.
21. MODIFICATION; WAIVER.
(a) This Agreement may be amended or waived if, and
only if, such amendment or waiver is in writing and signed, in the case of an
amendment, by the Company and the Executive or in the case of a waiver, by the
party against whom the waiver is to be effective. Any such waiver shall be
effective only to the extent specifically set forth in such writing.
(b) No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
<PAGE>
22. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not control or affect the meaning or
construction of this Agreement.
23. COUNTERPARTS. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective when each party hereto shall have
received counterparts hereof signed by the other party hereto.
[THE REST OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed in its corporate name by one of its officers duly authorized to
enter into and execute this Agreement, and the Executive has manually signed his
name hereto, all as of the day and year first above written.
1-800 FLOWERS.COM, INC.
_________________________ By:______________________________
Witness
/s/ Christopher G. McCann
_________________________ _________________________________
Witness Christopher G. McCann
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 20, 1999, except for the second paragraph of
Note 12--Capital Transactions as to which the date is , 1999, in
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-78985) and
related Prospectus of 1-800-FLOWERS.COM, Inc. dated July 9, 1999.
Ernst & Young LLP
Melville, New York
------------------------------------
The foregoing consent is in the form that will be signed upon the completion
of the restatement of capital accounts described in Note 12--Capital
Transactions to the consolidated financial statements.
/s/ Ernst & Young LLP
Melville, New York
July 9, 1999
<PAGE>
EXHIBIT 23.3
ACCOUNTANTS' CONSENT
The Board of Directors
1-800-FLOWERS.COM, Inc.
We consent to the use of our report on the consolidated financial statements
of The Plow & Hearth, Inc., included herein and to the reference to our firm
under the heading "Experts" in the prospectus.
/s/ KPMG LLP
Roanoke, Virginia
July 9, 1999
