<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1999
REGISTRATION NO. 333-78985
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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 Organization) Classification Code Number) Identification 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. / /
------------------------------
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 AUGUST 2, 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>
To the extent that the underwriters sell more than 6,000,000 shares of class
A common stock, the underwriters have the option to purchase up to an additional
855,000 shares of class A common stock from 1-800-FLOWERS.COM and up to an
additional 45,000 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.
------------------------
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, in terms of number of customers and revenue. 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
prominent Internet-focused investment firms, and Waelinvest S.A., an affiliate
of LVMH Moet Hennessy 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
3
<PAGE>
provider 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 total economic interest and 3.8% of the total
voting interest 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 upon the exercise of 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 upon the exercise of 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 MAY SIGNIFICANTLY FLUCTUATE 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, a
majority 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,
including arrangements with BloomNet florists, are not formalized in writing. Of
those relationships which have been formalized in writing, including
arrangements with BloomNet florists, 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 settle our customers' floral orders
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. FTD is one of our
competitors, and any material decrease or elimination of our access to Mercury
by FTD would adversely 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
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substantially all of our assets, and also the power to prevent or cause a change
in control. 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.
MANY GOVERNMENTAL REGULATIONS MAY IMPACT THE INTERNET, WHICH COULD 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 under which an Internet
company agreed to establish programs to implement the principles noted above. We
may become a party 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
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<PAGE>
misappropriations will continue to occur in the future. Furthermore, the
validity, enforceability 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 a party 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 a party
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
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result, investors may experience a material 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
38,642,325 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 $106.9
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 (1) the May 1999 private placement of
984,493 shares of preferred stock for net proceeds of $101.6 million, (2)
the use of $19.0 million of the proceeds from the private placement to
redeem all 348,220 shares of outstanding class C common stock from Chase
Venture Capital Associates and James F. McCann, (3) the investment by
Chase of $14.7 million to purchase 143,053 shares of preferred stock, (4)
the issuance to Chase of 263,452 shares of class A common stock and James
F. McCann of 84,768 shares of class B common stock in connection with the
redemption of the class C common stock, resulting in an adjustment to
retained earnings (deficit) of $3.6 million, and (5) the elective
conversion of 3,836,560 shares of class B common stock into class A common
stock by some of our investors and the automatic conversion of 428,070
shares of class A common stock into class B 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 $18.0 million of existing debt and redeem $8.4
million of outstanding stock and stock options, and (3) the automatic
conversion of each outstanding share of our preferred stock into ten
shares of 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
--------------------------
ACTUAL PRO FORMA
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt and obligations under capital leases, excluding current portion................. $ 28,148 $ 28,148
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
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
Additional paid-in capital................................................................... 3,419 6,046
Retained earnings (deficit).................................................................. (7,148) (10,779)
Deferred compensation........................................................................ (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)
------------ ------------
Total stockholders' equity (deficit)........................................................... (7,919) 108,451
------------ ------------
Total capitalization........................................................................... $ 39,249 $ 136,599
------------ ------------
------------ ------------
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
<S> <C>
Long-term debt and obligations under capital leases, excluding current portion................. $ 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)........................................................................... --
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)............................... --
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)....................................... --
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)................................................... --
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)...................................................................... 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
Additional paid-in capital................................................................... 216,603
Retained earnings (deficit).................................................................. (12,279)
Deferred compensation........................................................................ (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)
------------
Total stockholders' equity (deficit)........................................................... 200,311
------------
Total capitalization........................................................................... $ 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 issuable upon exercise of 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 issuable upon exercise of 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.
19
<PAGE>
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 provider of floral products, gifts, gourmet foods and
home and garden merchandise. 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 majority 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. Our remittance to the fulfilling florist is processed
either through a third-party wire service that reconciles and effects payments
between sending and fulfilling florists, called a clearinghouse, or is directly
paid by us. Consistent with industry practice, we remit 80% of the value of the
merchandise sold to a wire service for settlement with the fulfilling florist.
It is customary for the wire service to retain a 7% fee for its services.
Additionally, when settling directly with the fulfilling florist, we remit
between 71% and 74% of the value of the merchandise sold. It is also 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.
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,
24
<PAGE>
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.
In fiscal 1999, we determined that our online revenues were likely to become
the key revenue and profitability drivers of our business going forward. In
fiscal 1998, our online revenues had reached $26.7 million, or 12.1% of our
total net revenues. This represented an increase of 65.8% over online revenues
of $16.1 million in fiscal 1997. Our online revenues in fiscal 1997 represented
an increase of 62.0% over online revenues of $9.9 million in fiscal 1996, which
in turn represented an increase of 122.3% over online revenues of $4.5 million
in fiscal 1995. Conversely, our telephonic business had slowed from a 27% growth
rate in fiscal 1996 to 16% in fiscal 1997 and to 3% in fiscal 1998, net of $11.4
million of Plow & Hearth revenues in fiscal 1998 resulting from its acquisition.
In addition, because opening new retail stores involved significant capital
investments, management attention and operating losses until the new stores
reached profitability, we determined that our retail stores should be a
complement to an Internet-focused distribution strategy.
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.
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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 provide unaudited quarterly statement of operations
data for the last seven quarters and 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 may experience 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 $18.6 million and were comprised of fees related to
online marketing agreements, co-marketing fees related to airline frequent flier
programs, 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
32
<PAGE>
equity or debt securities. The sale of additional equity or convertible debt
securities could 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 may also experience 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
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.
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".]
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<PAGE>
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
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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 majority 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, including
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. The agreement with the AOL proprietary
online service may be terminated by AOL if revenue thresholds are not met
or by either party upon the other's material breach, insolvency or
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acquisition by a competitor. The agreement with AOL.com may be terminated
by either party upon the other's material breach or insolvency or by AOL
upon an acquisition of 1-800-FLOWERS.COM by any entity that offers
Internet connectivity.
- Microsoft Network. Our products, advertisements and links to our Web site
are prominently featured on Microsoft Network's online shopping channel.
Our 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, including 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:
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[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",
"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 majority 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 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.
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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.
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. The Fry agreement
may be terminated by either party upon the other's material breach. 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.
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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 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;
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- 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-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.
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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.
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
Lawrence V. Calcano............... 36 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
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Productivity and Quality Award Board for Virginia.
KERRY W. COIN has been our Vice President--Retail and Fulfillment since
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.
LAWRENCE V. CALCANO has been one of our directors since August 1999. Mr.
Calcano is a Managing Director and Co-Chief Operating Officer of the High
Technology Department at Goldman, Sachs & Co., a worldwide investment banking
firm. Prior to this appointment in July 1999, Mr. Calcano managed the East Coast
High Technology Group for Goldman from April 1993. Mr. Calcano also serves on
the Investment
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Banking Division's Technology Committee at Goldman and is a director of
Pivotpoint Software International, a private company.
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 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.
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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 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. In August 1999, we granted to each of Messrs. Calcano
and O'Connor options to purchase 10,000 shares and Mr. Minetti 50,000 shares of
class A common stock with an exercise price equal to the price of the class A
common stock sold in this offering.
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
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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 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
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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 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
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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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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 issuable upon
the exercise of options granted 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, after obtaining 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 these
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; and
- 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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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. These 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 underlying 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, pending any required stockholder approval. The 1999 stock incentive
plan will terminate no later than July 6, 2009.
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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 84,768 shares of class B common stock.
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We have entered into an agreement with Bayberry Advisors, Inc., under which
Bayberry provides us with consulting and advisory services. These consulting and
advisory services include advice on capital raising, business expansion and
acquisitions, product line expansion, and on our business plan in general. 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, in both cases
assuming conversion of our preferred stock, 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 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).......................... -- -- -- -- -- --
Lawrence V. Calcano(8)........................ -- -- -- -- * --
Chase Venture Capital
Associates, L.P.(9)......................... 4,065,022 -- 22.9 -- 17.1 --
Benchmark Capital Partners(10)................ 7,399,080 -- 48.1 -- 34.6 --
SOFTBANK America Inc.(11)..................... 3,836,560 -- 25.0 -- 17.9 --
Waelinvest S.A.(12)........................... 2,397,850 -- 15.6 -- 11.2 --
All directors and executive officers as a
group (12 persons)(13)...................... 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 775,000 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.
57
<PAGE>
(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. Mr. McCann has agreed to sell 5,000
shares to Mr. Calcano at the closing of this offering. If the underwriters'
over-allotment option is exercised in full, Mr. McCann will sell 45,000
shares in this offering. Accordingly, in the event the over-allotment option
is exercised in full, and after the sale of shares to Mr. Calcano, Mr.
McCann would beneficially own 3,484,940 shares of class B common stock after
this offering, representing 8.5% of our class B common stock outstanding.
(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 issuable upon the exercise
of 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. The general partner of Chase Venture Capital Associates
is Chase Capital Partners, of which Mr. Walker is a general partner. The
remaining general partners of Chase Capital Partners who are natural persons
are John R. Baron, Christopher C. Behrens, Mitchell J. Blutt, Arnold L.
Chavkin, Michael R. Hannon, Donald J. Hofmann, Stephen P. Murray, John M. B.
O'Connor, Brian J. Richmand, Shahan D. Soghikian, Jonas Steinman and Damion
E. Wicker. 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 94025.
(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
Langley Road, Suite 202, Newton Center, Massachusetts 02459.
(7) Mr. O'Connor's address is c/o DoubleClick, Inc., 41 Madison Ave., 32(nd)
Floor, New York, New York, 10010.
(8) After this offering, Mr. Calcano will own 5,000 shares of class A common
stock. See footnote 2 above. Mr. Calcano's address is c/o Goldman Sachs &
Co., 85 Broad Street, New York, New York 10004.
(9) Includes 2,371,040 shares of class A common stock issuable upon the exercise
of a currently exercisable warrant. The address of Chase is 380 Madison
Avenue, 12th Floor, New York, New York 10017.
(10) 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.
(11) 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 02459.
(12) Waelinvest is indirectly controlled by Mr. Bernard Arnault, who also
controls, indirectly, LVMH Moet Hennessy Louis Vuitton S.A. The address of
Waelinvest is rue Waelhem, 102, 1030 Brussels, Belgium.
(13) 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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<PAGE>
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 does not have 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.
Except as limited by any 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 may be
affected by 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 have 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 will be adjusted 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 governed by 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 persons, for three years following the date
that stockholder became an "interested stockholder" unless:
- the transaction in which that 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 those shares owned by persons who are
directors and also officers; or
60
<PAGE>
- 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 under
Section 174 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 American
Stock Transfer & Trust Company, New York, New York.
LISTING
We have applied to list our class A common stock on the Nasdaq National
Market under the trading symbol "FLWS".
61
<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 they 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 54,017,797 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 1,603,880 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 38,642,325 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
will equal approximately 213,755 shares immediately after this offering;
or
62
<PAGE>
- 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 governed by 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 those 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. This registration statement for the option shares 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 issuable under vested options,
based on options outstanding as of July 7, 1999. Accordingly, shares registered
under such registration statement will, except as they may be limited by 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
<PAGE>
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.
64
<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 July 28, 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, 348,220 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 available-for-sale
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, reflecting the minority interest holders' percentage of
the increase (decrease).
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)
1-800-FLOWERS.COM's minimum obligation under the put liability increases to
$8,400,000 upon the completion of an initial public offering of
1-800-FLOWERS.COM's common stock. Accordingly, the increase in the liability
from $6,300,000 at March 28, 1999 to $8,400,000 will be recorded as $1,500,000
of general and administrative expense and $600,000 as additional goodwill.
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 263,452
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 $97 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, 84,768 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 $92 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 one share 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, at
cost............................................ 918 918 $ 918
Other............................................. -- 46 69
----------- ----------- -----
6,064 6,417 987
Less short-term investments......................... 3,210 5,034 --
----------- ----------- -----
$ 2,854 $ 1,383 $ 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. Additionally, gross realized gains or losses on the sales of
available-for-sale securities were immaterial for all periods presented.
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)
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>
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. 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.
Additionally, subsequent to March 28, 1999, 1-800-FLOWERS.COM issued options to
purchase 270,000 shares of Class A common stock with an exercise price equal to
the price of the shares sold in an initial public offering.
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.
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)
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 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).
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)
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>
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 $5,000,000, $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
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)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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. Accordingly, 428,070 shares of old Class A common stock were
converted into the same number of shares of new Class B common stock.
Additionally, a new series of Class A common stock was established that entitles
the holders to one vote per share. Each share of new Class B common stock shall
automatically convert into one share of new Class A common stock upon transfer,
with limited exception, and at the option of the holder. Holders of 3,836,560
shares of new Class B common stock elected to convert such new Class B common
stock into an equal number of shares of new Class A common stock. Also on July
7, 1999, the board of directors and stockholders approved an amendment to the
certificate of incorporation to be effective on July 28, 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
$19,600,000 of intangibles acquired which are being amortized over 20
years.
(i) Adjustment of $900,000 to provide additional interest expense incurred
on $15,500,000 of borrowings to fund the acquisition at an annual rate of
7.7%. 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 on
the amortization expense described in (h), the interest expense and
related tax benefit decribed in (i) and (j), 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 855,000
shares from 1-800-FLOWERS.COM and up to an additional 45,000 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>
The underwriters expect to deliver the shares of class A common stock
against payment in New York, New York on August , 1999.
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 $10 million worth of common stock for sale
to Mr. O'Connor, a director of 1-800-FLOWERS.COM, full-time and regular
part-time employees, friends and persons having business relationships with
1-800-FLOWERS.COM. Assuming an initial public offering price of $17 per share, a
total of 588,235 shares of class A common stock will be reserved under this
program. 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
U-2
<PAGE>
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.
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.
Mr. Lawrence V. Calcano, a managing director of Goldman, Sachs & Co., is a
member of 1-800-FLOWERS.COM's board of directors. Mr. Calcano was granted
options to purchase 10,000 shares of class A common stock in August 1999 with an
exercise price equal to the price of the class A common stock sold in this
offering and has agreed to purchase 5,000 shares of class A common
stock from Christopher G. McCann at the closing of this offering at a price
equal to the price of the class A common stock sold in this offering.
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 Consolidated 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............................................. 95,000
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.................................................. 184,972
----------
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 June 28, 1996, the Registrant issued 8,476.77 shares of class C
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
2. 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.
3. On June 28, 1998, the Registrant issued 76,293 shares of class B
common stock to James F. McCann as partial repayment for a debt owed by the
Registrant to Mr. McCann.
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 and 3.3 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.
10.21(++) First Amendment to Credit Agreement Waiver and Consent, entered into as of
May 20, 1999, between 1-800-FLOWERS.COM, Inc. and The Chase Manhattan Bank.
10.22(++) Letter Agreements between 1-800-FLOWERS.COM, Inc. (formerly known as Teleway,
Inc.) and Bayberry Advisors, Inc., dated September 30, 1993, March 8, 1995,
May 8, 1996, May 8, 1997, May 8, 1998 and May 8, 1999.
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>
- ------------------------
(+) Confidential treatment 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. 6 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 2nd day of August, 1999.
<TABLE>
<S> <C>
Dated: August 2, 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. 6 to the registration statement has been signed by the following persons in
the capacities indicated below:
<TABLE>
<S> <C>
Dated: August 2, 1999 *
--------------------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: August 2, 1999 /s/ JOHN W. SMOLAK
--------------------------------------------
John W. Smolak
Senior Vice President--Finance and
Administration (Principal Financial and
Accounting Officer)
Dated: August 2, 1999 *
--------------------------------------------
Christopher G. McCann
Director, Senior Vice President
Dated: August 2, 1999 *
--------------------------------------------
T. Guy Minetti
Director
Dated: August 2, 1999 *
--------------------------------------------
Jeffrey C. Walker
Director
Dated: August 2, 1999 *
--------------------------------------------
David Beirne
Director
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
Dated: August 2, 1999 *
--------------------------------------------
Charles R. Lax
Director
Dated: August 2, 1999 *
--------------------------------------------
Kevin J. O'Connor
Director
Dated: August 2, 1999 *
--------------------------------------------
Lawrence Calcano
Director
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ JOHN W. SMOLAK
--------------------------------
John W. Smolak
Attorney-in-fact
</TABLE>
II-6
<PAGE>
POWER OF ATTORNEY
I, the undersigned director of 1-800-FLOWERS.COM, Inc. (the "Company"),
hereby constitute and appoint James F. McCann and John W. Smolak, and each of
them individually, with full powers of substitution and resubstitution, my true
and lawful attorneys, with full powers to them and each of them to sign for me,
in my name and in the capacity indicated below, the registration statement on
Amendment No. 6 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>
<CAPTION>
<S> <C>
Dated: July 30, 1999 /s/ Lawrence Calcano
------------------------
Lawrence Calcano
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 July 28, 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
July 28, 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
Reserve for credits and chargebacks.... 400,000 -- 5,336,000(d) (5,311,000)(e) 425,000
----------- -------------- ---------------- ------------ -----------
$1,332,000 $ 383,000 $ 5,398,000 $(5,311,000) $1,802,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
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
Reserve for credits and chargebacks.... 400,000 -- 5,016,000(d) (5,016,000)(e) 400,000
----------- -------------- ---------------- ------------ -----------
$ 944,000 $ 553,000 $ 5,016,000 $(5,181,000) $1,332,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
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) --
Reserve for credits and chargebacks.... 310,000 -- 3,908,000(d) (3,818,000)(e) 400,000
----------- -------------- ---------------- ------------ -----------
$ 877,000 $ 319,000 $ 3,908,000 $(4,160,000) $ 944,000
----------- -------------- ---------------- ------------ -----------
----------- -------------- ---------------- ------------ -----------
</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.
(d) Recorded as a reduction to revenues.
(e) Reduction in reserve upon authorization of credits and chargebacks.
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 and 3.3 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.
10.21(++) First Amendment to Credit Agreement Waiver and Consent, entered into
as of May 20, 1999, between 1-800-FLOWERS.COM, Inc. and The Chase
Manhattan Bank.
10.22(++) Letter Agreements between 1-800-FLOWERS.COM, Inc. (formerly known as
Teleway, Inc.) and Bayberry Advisors, Inc., dated September 30, 1993,
March 8, 1995, May 8, 1996, May 8, 1997, May 8, 1998 and May 8, 1999.
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>
- ------------------------
(+) Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
(++) Previously filed.
<PAGE>
Exhibit 10.5
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
INTERACTIVE MARKETING AGREEMENT
This Agreement, dated as of May 1, 1997 (the "Effective
Date"), is made and entered into by and between America Online, Inc. ("AOL"), a
Delaware corporation, with its principal offices at 22000 AOL Way, Dulles,
Virginia 20166 and 800 Flowers, Inc. ("FLOWERS"), a New York corporation, with
its principal offices at 1600 Stewart Avenue, Westbury, New York 11590 (each a
"Party" and collectively the "Parties").
INTRODUCTION
AOL and FLOWERS each desires that FLOWERS provide the Online Area on
the AOL Network, subject to the terms and conditions set forth in this
Agreement. Defined terms used but not defined in the body of the Agreement shall
be as defined on Exhibit A attached hereto.
TERMS
1. ONLINE AREA - CONTENT AND PROGRAMMING. The Parties shall have the following
duties and rights with respect to the content and programming of the Online
Area:
1.1 ONLINE AREA. FLOWERS shall work diligently to maintain the
Online Area, consisting of the categories and types of Content
and Products contained within the Online Area as of the
Effective Date, and such other Content and Products as may be
added pursuant to Section 1.2. FLOWERS shall develop any
redesign of the Online Area in consultation with AOL and in
accordance with (i) a mutually agreed upon Design Package and
(ii) any standard design and content publishing guidelines
provided to FLOWERS by AOL. FLOWERS shall not authorize or
permit any third party to distribute the Licensed Content or
any other Content of FLOWERS through the AOL Network absent
AOL's prior written approval; provided that FLOWERS shall not
be prohibited from (a) placing advertisements for Products
with third party content providers on the AOL Service (so long
as such advertisements link only to the Online Area) or (b)
licensing portions of the Licensed Content relating to such
Products to such providers in order to create "mini-store"
screens on those providers' areas (e.g., on the Romance
Channel) (so long as such screens link only to the Online
Area).
1.2 ADDITIONAL CONTENT; ADVERTISING; OTHER TRANSACTIONS. In the
event that FLOWERS wishes to offer any categories or types of
Content or Products (including, without limitation, any
third-party advertising or promotion on the Online Area) in
addition to those categories or types specifically contained
within the Online Area as of the Effective Date (the
"Additional Content"), FLOWERS shall notify AOL in writing.
FLOWERS's right to offer any such Additional Content shall be
subject to AOL's prior written approval, which shall not be
unreasonably withheld. Any third party advertising or
promotion on the Online Area (including, without limitation,
classifieds listings) shall be subject to AOL's then standard
advertising terms and conditions, including, without
limitation, applicable revenue sharing terms (as such terms
are mutually agreed upon).
<PAGE>
1.3 INTERNET AREAS. FLOWERS shall not be permitted to establish
any links between the Online Area and any other area on or
outside of the AOL Network, including, without limitation,
sites on the World Wide Web portion of the Internet, without
the prior written approval of AOL. In the event that AOL
approves any such links or pointers, such approval shall, in
each case, be subject to FLOWERS's compliance with the
then-current terms and conditions for such links or pointers,
as such terms and conditions may be amended by AOL from time
to time; provided that there shall be no fees assessed for
such links or pointers, except as provided in Section 1.2 for
links or pointers relating to third-party advertising or
promotion.
1.4 CONTESTS. FLOWERS shall take all commercially reasonable steps
necessary to ensure that any contest, sweepstakes or similar
promotion conducted or promoted through the Online Area (a
"Contest") complies with all applicable federal, state and
local laws and regulations. FLOWERS shall provide AOL with at
least thirty (30) days prior written notice of any Contest.
1.5 NAVIGATIONAL ICONS. AOL shall be entitled to establish
navigational icons, links and pointers connecting the Online
Area (or portions thereof) with other content areas on or
outside of the AOL Network; provided that the Parties shall
meet following execution hereof and thereafter, as
appropriate, to develop guidelines for such navigational icons
(e.g., pre-approved logos, copy, content categories for
placement of icons, etc.).
1.6 [****] COMMITMENT; SPECIAL OFFERS. FLOWERS shall ensure
that the [****] for Products in the Online Area [****] for
substantially similar Products offered by or on behalf of
FLOWERS through any online or Internet-based interactive
sites. In addition, FLOWERS shall, on a reasonably periodic
basis, promote a reasonable number of special offers
through the Online Area (e.g., free gift certificates to
AOL Members upon the purchase of Product(s) and tie-ins to
AOL's reward or frequent purchaser points program (upon
development of such program by AOL, and on terms of
participation in such program by FLOWERS that are mutually
agreed by the parties), etc.) (the "Special Offers").
FLOWERS shall (a) provide AOL with reasonable prior notice
of Special Offers so that AOL can market the availability
of such Special Offers in the manner AOL deems appropriate
in its editorial discretion and (b) ensure that the Special
Offers are the best offers in all material respects when
compared with any other such offers made available by or on
behalf of FLOWERS through any interactive, online or
Internet media during the same time the Special Offers are
made available; provided that clause (b) shall not apply to
a Special Offer to the extent that FLOWERS cannot make such
offer available in the event such offer requires certain
support technology from AOL which AOL cannot, or elects not
to, provide. In addition, FLOWERS shall provide reasonably
increased support for online contest and other special
promotions, including, without limitation, greater
contribution of flowers and gifts for use as prizes and
give-aways.
2
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
1.7 SERVICE CHARGES. In connection with any Product ordered
through the AOL Network, FLOWERS may not, without the prior
written consent of AOL, require the purchaser to pay (a) any
shipping, handling or similar charges or (b) any processing,
service or similar charges (the "Service Charges") in excess
of (i) the Service Charge assessed for similar orders placed
through FLOWERS telephone order system or (ii) [****] of the
Service Charge assessed by FLOWERS inany online or Internet-
based sales channel; provided that, except as mutually agreed
by the Parties, the AOL Service Charge shall never be lower
than [****].
1.8 DISCLAIMERS. FLOWERS agrees that a product disclaimer in
substantially the following form will be displayed in a legal
notice screen to be placed in a mutually agreed upon spot in
the listbox in the Customer Service portion of the Online
Area:
"AOL AND ITS AFFILIATES WILL NOT BE A PARTY TO ANY
TRANSACTION BETWEEN ANY PURCHASER AND FLOWERS, AND,
EXCEPT AS EXPRESSLY PROVIDED IN AOL'S SHOPPING
CHANNEL SATISFACTION GUARANTEE (AVAILABLE AT KEYWORD
"GUARANTEE"), ALL ASPECTS OF SUCH TRANSACTIONS
INCLUDING BUT NOT LIMITED TO PURCHASE TERMS, PAYMENT
TERMS, WARRANTIES, GUARANTEES, MAINTENANCE, AND
DELIVERY ARE SOLELY BETWEEN PURCHASER AND FLOWERS.
AOL AND ITS AFFILIATES PROVIDE NO GUARANTEES OR
WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE
QUALITY, MAKE, OR PERFORMANCE OF THE PRODUCTS OR
SERVICES AVAILABLE THROUGH THIS AREA. ALL SUCH
GUARANTEES OR WARRANTIES, IF ANY, ARE DIRECTLY
BETWEEN FLOWERS OR CATALOGER AND THE PURCHASER."
1.9 LICENSE. FLOWERS hereby grants AOL a non-exclusive worldwide
license to market, license, distribute, display, perform,
transmit and promote the Online Area contained therein through
the AOL Network solely for the purposes described herein. AOL
Members shall have the right to access and use the Online Area
free of charge during the term of the Agreement. Subject to
such license, FLOWERS retains all right, title to and interest
in the Licensed Content.
1.10 AOL LOOK AND FEEL. FLOWERS acknowledges and agrees that AOL
shall own all right, title and interest in and to the AOL Look
and Feel, subject to FLOWERS's ownership rights in the
Licensed Content, including, without limitation, any "look and
feel" rights of FLOWERS specifically associated with the
Licensed Content and the Online Area.
3
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
2. ONLINE AREA - MANAGEMENT AND MAINTENANCE.
2.1 MANAGEMENT OF ONLINE AREA. FLOWERS shall manage, review,
delete, edit, create, update and otherwise manage all content
and services available on or through the Online Area,
including but not limited to the Licensed Content and message
boards, in a timely and professional manner and in accordance
with the terms of this Agreement and AOL's applicable Terms of
Service. As set forth in further detail in Section 2.1 of
Exhibit C, FLOWERS shall be responsible for all costs and
expenses related to production work for the Online Area.
FLOWERS shall use reasonable efforts to keep the Online Area
current, accurate and well-organized. FLOWERS warrants that
the Online Area (i) will not infringe on or violate any
copyright, U.S. patent or any other third-party right; and
(ii) will not contain any Content which violates any
applicable law or regulation. FLOWERS will use commercially
reasonable best efforts to ensure that the Online Area
conforms to AOL's applicable Terms of Service. AOL shall have
no obligations with respect to the Content available on or
through the Online Area, including, but not limited to, any
duty to review or monitor any such Content.
2.2 ACCESS EQUIPMENT. FLOWERS shall provide all computer,
telephone and other equipment or resources necessary for
FLOWERS to access the AOL Network, except for the AOL
proprietary client software necessary to access the AOL
Network and the publishing tools to be provided by AOL
pursuant to Exhibit C.
2.3 DUTY TO INFORM. FLOWERS shall use all reasonable efforts to
promptly inform AOL of any written information (or any verbal
information received by a senior executive of FLOWERS) related
to the Online Area which could reasonably lead to a claim,
demand, or liability of or against AOL and/or its Affiliates
by any third party.
2.4 OVERHEAD ACCOUNTS. FLOWERS shall be granted a reasonable
number of Overhead Accounts, as mutually determined by AOL and
FLOWERS, for the exclusive purpose of enabling it and its
agents to perform FLOWERS's duties under this Agreement.
FLOWERS shall be responsible for the actions taken under or
through its Overhead Accounts, which actions are subject to
AOL's applicable Terms of Service and for any surcharges,
including, without limitation, all premium charges,
transaction charges, and any applicable communication
surcharges incurred by any Overhead Account issued to FLOWERS,
but FLOWERS shall not be liable for charges incurred by any
Overhead Account relating to AOL's standard monthly usage fees
and standard hourly charges, which charges AOL shall bear.
Upon the termination of this Agreement, all Overhead Accounts,
related screen names and any associated usage credits or
similar rights, shall automatically terminate. AOL shall have
no liability for loss of any data or content related to the
proper termination of any Overhead Account.
2.5 CUSTOMER SERVICE. It is the sole responsibility of FLOWERS to
provide customer service to persons or entities purchasing
Products through the AOL Network
4
<PAGE>
("Customers") regarding any Products or related transactions.
In addition to complying with the Customer Service
Requirements set forth in Exhibit E, and any reasonable
changes thereto that AOL may make from time to time, FLOWERS
shall ensure same-day delivery for orders received before
12:30 p.m. in the time zone where the order is to be
delivered. If same-day service will not be feasible for a
particular order, FLOWERS agrees to use its best efforts
(e-mail, phone, etc.) to notify the customer that the order
will be delivered the next day. Next-day delivery will always
be attempted, even during busy holiday seasons. Furthermore,
the "cut-off" time of 12:30 p.m. may be expanded or contracted
by FLOWERS during holiday periods according to significant
changes in market demand. FLOWERS will use all reasonable
efforts to notify AOL before the "cutoff" time is changed.
FLOWERS agrees that the cutoff time for accepting orders from
AOL customers shall be no sooner than the cutoff time for any
other FLOWERS online or Internet-based partner, subject to
earlier cutoff times for AOL customers during specific
performance failures of the AOL Network (e.g., downtime of
e-mail, Standard Clerk Tools). FLOWERS shall bear all
responsibility for compliance with federal, state and local
laws in the event the Products are out of stock or are no
longer available at the time an order is received. Title to
Product(s) shall remain in FLOWERS and shall be transferred
directly from FLOWERS to the Customers. Payment for FLOWERS
Product(s) shall be collected by FLOWERS directly from
Customer. FLOWERS shall bear the entire economic risk of
shipment and payment for FLOWERS Product(s).
2.6 ERROR RATES. Recognizing the subjective nature of a
custom-made floral order, to the extent that an error does
occur or is alleged to occur by an AOL Member, FLOWERS will
rectify the situation as set forth in Exhibit E. FLOWERS will
use its best efforts to achieve an error rate on orders taken
through the AOL Network that does not exceed [****]
(the "Performance Standard"). For purposes of this paragraph,
an "error" is defined as an order that, due primarily to
the failure of FLOWERS or its florists, (i) is not
delivered pursuant to FLOWERS customary delivery schedules,
(ii) is delivered to an incorrect location, (iii) or does
not arrive in reasonably good condition. In the event that
FLOWERS fails to meet the Performance Standard, as
determined on a monthly basis, for a period of two
consecutive months, then AOL shall send FLOWERS a written
notice specifying the details of any such failures and
affording FLOWERS thirty (30) days to comply with the
Performance Standard. If FLOWERS does not cure said default
within thirty (30) days then AOL shall have the right to
terminate this Agreement. Flowers agrees to use best
efforts in correcting any problems reported by AOL and will
act accordingly to correct any problems. FLOWERS will
provide a monthly report to AOL no later than thirty (30)
days after the end of each calendar month that shows all
known errors and measures the rate of properly-completed
orders versus orders processed with an "error" (as defined
above). Without limiting the foregoing, in the event
(a) the error rate achieved by FLOWERS is above [****] but
below [****] and (b) AOL receives a significant number of
complaints from AOL Members
5
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
regarding errors, the parties shall discuss in good faith the
means by which the error rate may be improved.
2.7 TECHNICAL CONFORMANCE. FLOWERS shall take all commercially
reasonable steps necessary to conform its promotion and sale
of Products through the Online Area to the then-existing
commerce technologies made available to FLOWERS by AOL.
Notwithstanding the foregoing, FLOWERS and AOL shall take all
commercially reasonable efforts to develop and implement a new
order transfer mechanism (to be mutually agreed upon by the
Parties as soon as commercially practicable following
execution hereof) to replace the FTP process currently used by
FLOWERS for receipt of orders from AOL.
2.8 ADDITIONAL TRANSACTION MECHANISMS. FLOWERS shall only be
permitted to promote and/or offer Products to be sold through
the Online Area using AOL's then-available "clerk" transaction
tools ("Standard Clerk Tools"). To the extent the Parties
agree that FLOWERS shall be permitted to sell Products from
FLOWERS's site on the World Wide Web through a hybrid browser
or other similar form, the Parties shall mutually agree upon a
transaction mechanism (an "Alternative Transaction Mechanism")
for the purchase of Products, which Alternative Transaction
Mechanism shall include FLOWERS's plan for reporting
information to AOL regarding sales of Products. In the event
an Alternative Transaction Mechanism is agreed upon, the
parties shall mutually agree on (a) any new revenue-sharing
provisions relating to the sales occurring through such means
and (b) any changes in the revenue targets set forth in
Sections 4 and 10. All sales under the Alternative Transaction
Mechanism shall count towards such revenue targets.
3. MARKETING AND PROMOTION.
3.1 BY FLOWERS. FLOWERS shall use commercially reasonable efforts
to market the Online Area, and shall, at a minimum, perform
the following obligations:
3.1.1 FLOWERS shall cooperate with and reasonably assist
AOL in supplying material for AOL's marketing and
promotional activities which relate to the Online
Area.
3.1.2 FLOWERS shall perform any New Member acquisition
obligations set forth in Exhibit D and shall not
perform any member or subscriber acquisition
obligations on behalf of any interactive, online or
Internet service provider (including, without
limitation, NetCom, EarthLink, CompuServe, Microsoft
Network; and AT&T WorldNet).
3.1.3 FLOWERS shall prominently and regularly promote the
Online Area (making specific mention of its
availability through the America Online(R)service) in
(i) approximately [****] of FLOWERS-controlled
television, radio or print advertisements that are
produced after
6
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
the Effective Date and that specifically mention any
of FLOWERS's online or Internet-based shopping
functionality and (ii) approximately [****] of any
publications, programs, features or other forms of
media under FLOWERS's control (excluding the
advertisements subject to clause (i)). In this
regard, in any instances when FLOWERS makes
promotional reference in any print advertisements to
its World Wide Web site(s) (each a "FLOWERS Web
Site") (each reference, a "Web Reference"), FLOWERS
shall include a specific reference to the Online
Area's availability through the America
Online(R)service of at least equal prominence to the
Web Reference; any listings of the applicable
"URL(s)" for such web site(s) (each a "Web
Reference") shall include a listing of the AOL
"keyword" for the Online Area of at least equal
prominence to the Web Reference. AOL acknowledges
that an occasional, unintentional failure to comply
with the foregoing promotional commitments shall not
be deemed a breach of the Agreement.
3.1.4 FLOWERS shall ensure that (a) AOL is given the
exclusive first opportunity to participate in
[****] of any online or Internet-related marketing
and promotional activities, initiated and/or
controlled by (directly or through an advertising
agency) FLOWERS, which FLOWERS desires to conduct
with any entity which could reasonably be
construed to be or become in competition with AOL
[****] subsequent to execution hereof (so long as
AOL informs FLOWERS of its desire to participate
in any such activity within five (5) business days
following receipt of written notice from FLOWERS
detailing the opportunity) and (b) AOL receives
substantially more promotion and marketing (in
value, duration, prominence, etc.) from FLOWERS
than either [****] receives from FLOWERS. In
addition, FLOWERS shall not affirmatively promote,
market or distribute the products or services of
the following [****]; provided that this provision
shall not prevent FLOWERS from promoting,
marketing, advertising or distributing its own
Products through such entities, subject to Section
1.6. FLOWERS shall not enter into any significant
marketing, distribution, advertising or
promotional arrangement related to either [****]
following the execution hereof (excluding any
business-to-business arrangement).
3.1.5 FLOWERS shall include each of the following
promotions for the Online Area and AOL within each
FLOWERS Web Site during the term of the
7
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
Agreement: (i) a prominent "Try AOL" feature in the
area where FLOWERS mentions its business partners
(which is currently known as "About 1-800-FLOWERS")
where users can obtain promotional information about
AOL products and services and, at AOL's option,
download or order AOL's then-current version of
client software for the America Online(R)brand
service and (ii) a link from the FLOWERS Web Site to
AOL's primary site on the World Wide Web. In
addition, in the event FLOWERS commences the sale of
advertising on any FLOWERS Web Site, FLOWERS shall
reserve no less than fifteen percent (15%) of FLOWERS
unsold advertising inventory on such FLOWERS Web Site
for use by AOL at no cost to AOL.
3.2 BY AOL.
3.2.1 AOL shall provide prominent online promotion for the
Online Area across the AOL Service using promotional
mechanisms chosen from time to time by AOL in its
reasonable discretion from among the following, all
as set forth in Exhibit B (the "Promotional Plan"):
(a) pop-up advertisements within the Personal
Finance, Sports and Shopping channels; (b) the AOL
"Welcome Screen"; and (c) appropriate holiday/theme
areas (including Thanksgiving, Christmas/Hanukkah,
Valentine's Day, Easter, Mother's Day, New Year's and
Secretaries' Week). In addition, also as set forth in
Exhibit B, AOL shall provide FLOWERS with a
consistent and prominent promotional presence in the
following areas on the AOL Service: Shopping
newsletters, Gift Reminder, Lifestyles, Interests,
and Romance. Promptly following execution hereof, AOL
in consultation with FLOWERS shall develop a mutually
agreed detailed promotional plan regarding the above
commitments based on Exhibit B. The parties agree
that Exhibit B is not intended to exclude any
additional promotional mechanisms or plans. On a
periodic basis, no less than quarterly, the parties
shall review and modify, as applicable, the
promotional plan in a continuing effort to have a
current and effective promotional plan. If AOL is
unable to deliver any particular promotion pursuant
to Exhibit B, the Parties will cooperate in good
faith to develop a replacement program that will
include providing FLOWERS with a substitute promotion
of similar quality, nature and value. In addition,
AOL shall use commercially reasonable best efforts to
include FLOWERS when AOL makes promotional references
to online shopping which include references to online
partners in AOL's promotions, marketing or
advertising; provided that AOL shall not be required
to make such inclusion when making promotional
references to (a) a single online partner or (b)
online partners who make up a specific product
category (other than floral products). The Parties
will also explore the creation of [****] on the AOL
Service.
8
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
3.2.2 AOL shall provide FLOWERS with a prominent
promotional position (an "Anchor Tenancy") on the
relevant main screen that is pointed to from the
floral products department/category listed in the
"Shopping Channel" on the AOL Service. Anchor Tenancy
shall entitle FLOWERS to placement that is no less
prominent and favorable in size and position on the
screen than any other third party with an Anchor
Tenancy on such main screen.
3.2.3 AOL shall ensure that, in all areas on the AOL
Service which are owned, maintained or controlled
by AOL (the "AOL-Controlled Areas"), FLOWERS shall
be the exclusive provider of fresh cut flowers and
plants (the "Exclusive Products"). In accordance
with the foregoing, AOL shall not (a) promote,
market or advertise within the AOL-Controlled Areas
any entity that sells the Exclusive Products, or
(b) otherwise allow such entities to sell, or offer
to sell, the Exclusive Products within the
AOL-Controlled Areas. For purposes of this
Section 3.2.3, the terms "promote," "market" and
"advertise" shall include not only their customary
meanings, but also any and all promotional linking
and pointing. Notwithstanding the foregoing, no
provision of this Agreement shall limit AOL's
ability (in the "Shopping Channel" or elsewhere
on or off the AOL Network) to promote, market or
distribute (i) any entity (excluding those entities
listed in Exhibit G) that offers Exclusive
Products as part of a consumer member-based or
consumer subscription-based club or service and
(ii) any aggregator of products and services that
may include Exclusive Products as part of its line
of goods (e.g., a general product retailer)
(excluding those entities listed in Exhibit G);
provided, as to both (i) and (ii), that (a) the
Exclusive Products do not constitute a significant
portion of the revenue collected by such entity
through the AOL Service, (b) AOL shall not promote,
market or advertise the Exclusive Products of such
entity within AOL-Controlled Areas and (c) AOL
shall use commercially reasonable best efforts to
work with such entity toward minimizing or
preventing such entity's promotion, marketing and
advertising of the Exclusive Products within its
online area on the AOL Service, including, without
limitation, the inclusion in AOL's agreement with
such entity of contractual restrictions
substantially similar to Section 1.2 hereof.
3.2.4 AOL shall be entitled, in its reasonable discretion,
to list, promote and offer for the benefit of FLOWERS
individual Products or specific subsets of Products
offered by FLOWERS through features within the AOL
Network managed and maintained by AOL, its Affiliates
or their agents, including without limitation,
special gift collections and product search services.
In the event such listings, promotions or offers
involve text or multimedia descriptions which differ
from the descriptions appearing within the Online
Area, such modified descriptions shall be subject to
the prior approval of FLOWERS, which shall not be
unreasonably withheld or delayed.
9
<PAGE>
3.3 PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit
to the other Party, for its prior written approval, which
shall not be unreasonably withheld or delayed, any marketing,
advertising, press releases and all other promotional
materials related to the Online Area and/or referencing the
other Party and/or its trade names, trademarks, and service
marks (the "Materials"); provided, however, that either
Party's use of screen shots of the Online Area for promotional
purposes shall not require the approval of the other Party so
long as the AOL Network is clearly identified as the source of
such screen shots. Each Party shall solicit and reasonably
consider the views of the other Party in designing and
implementing such Materials. A Party whose approval is sought
shall respond within five (5) business days of its receipt of
the Materials. If such Party fails to respond within such
five-day period, then its consent shall be deemed given. Once
approved, the Materials may be used during the term of this
Agreement by a Party and its affiliates for the purpose of
promoting the Online Area and the content contained therein
and reused for such purpose until such approval is withdrawn
with reasonable prior notice. No press release, public
announcement, confirmation or other public statement regarding
this Agreement or the contents hereof shall be made without
the prior written consent of the other Party, which consent
shall not be unreasonably withheld. It is agreed and
understood that the Parties shall work together to prepare a
press release to be issued as soon as reasonably possible
following execution hereof and in no event more than ten (10)
business days thereafter. Notwithstanding the foregoing,
either Party may issue a press release or other disclosure
without the consent of the other Party, if such disclosure is
required pursuant to Section 6 (and in accordance therewith).
3.4 TRADEMARK LICENSE. In designing and implementing the Materials
and subject to the other provisions contained herein, FLOWERS
shall be entitled to use the following trade names,
trademarks, and service marks of AOL: the "America Online(R)"
(brand service, "AOL(TM)" service/software and AOL's triangle
logo; and AOL and its Affiliates shall be entitled to use the
following trade names, trademarks, and service marks of
FLOWERS solely in connection with this Agreement:
1-800-Flowers, Gift Concierge Service, World's Favorite
Florist, Freshness Care System, Fresh Thoughts (collectively,
together with the AOL marks listed above, the "Marks");
provided that each Party: (i) does not create a unitary
composite mark involving a Mark of the other Party without the
prior written approval of such other Party; (ii) displays
symbols and notices clearly and sufficiently indicating the
trademark status and ownership of the other Party's Marks in
accordance with applicable trademark law and practice; and
(iii) uses the other Party's Marks in accordance with written
guidelines provided to such Party by the other Party.
3.4.1 OWNERSHIP OF TRADEMARKS. Each Party acknowledges the
ownership of the other Party in the Marks of the
other Party and agrees that all use of the other
Party's Marks (including all goodwill associated with
the Marks) shall inure to the benefit, and be on
behalf, of the other Party. Each Party acknowledges
that its utilization of the other Party's
10
<PAGE>
Marks will not create in it, nor will it represent it
has, any right, title, or interest in or to such
Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything
contesting or impairing the trademark rights of the
other Party, including, without limitation, seeking
to register the other Party's Marks as part of a
composite Mark.
3.4.2 QUALITY STANDARDS. Each Party agrees that the nature
and quality of its products and services supplied in
connection with the other Party's Marks shall conform
to quality standards set by the other Party. Each
Party agrees to supply the other Party, upon request,
with a reasonable number of samples of any Materials
publicly disseminated by such Party which utilize the
other Party's Marks. Each Party shall comply with all
applicable laws, regulations, and customs and obtain
any required government approvals pertaining to use
of the other Party's marks.
3.4.3 INFRINGEMENT PROCEEDINGS. Each Party agrees to
promptly notify the other Party of any unauthorized
use of the other Party's Marks of which it has actual
knowledge. Each Party shall have the sole right and
discretion to bring proceedings alleging infringement
of its Marks or unfair competition related thereto;
provided, however, that each Party agrees to provide
the other Party with its reasonable cooperation and
assistance with respect to any such infringement
proceedings.
3.5 ADDITIONAL AGREEMENTS. In order to expand FLOWERS's exposure
on the AOL Service beyond the AOL-Controlled Areas, AOL shall
use commercially reasonable efforts to assist FLOWERS in
establishing promotional, marketing, advertising and/or
distribution relationships with AOL's content providers to be
the provider of the FLOWERS Products to or through such
entities. In addition, the Parties shall work together in good
faith to approach other entities (e.g., those entities in
which AOL has an ownership interest) to promote, market and
distribute FLOWERS and its Products through such entities.
Without limiting the foregoing, AOL shall approach [****]
on behalf of FLOWERS to discuss establishment of a
promotional, marketing, advertising and/or distribution
arrangement. The Parties shall also explore distribution of
the Online Area through AOL's "AOL.COM" brand Internet site
and international versions of the AOL Service. With respect to
all of the foregoing promotional, marketing, advertising or
distribution arrangements that result in a contractual
relationship, (a) AOL shall be entitled to receive a
negotiated percentage (as agreed upon in good faith by the
Parties) of the gross revenues (as defined in any such
contract) and upfront payments (if any) pursuant to any such
arrangements and (b) with respect to arrangements relating to
international versions of the AOL Service, FLOWERS will, for a
period of [****] following execution of the Agreement,
upon AOL's request, work solely with AOL to approach the
operators of such versions and to develop proposed
arrangements therewith. In particular, the Parties agree that
AOL shall extend the terms and conditions of this Agreement to
include distribution of the Online Area through AOL Canada;
11
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
provided that AOL Canada agrees to such terms and conditions.
FLOWERS acknowledges and agrees that AOL does not guarantee
(a) that any of the entities to be approached under this
Section 3.5 will agree to enter an arrangement with FLOWERS,
or (b) that the terms and conditions of any arrangement that
any such entity may agree to enter will resemble in any
respect the terms and conditions of this Agreement (including
without limitation the promotion and exclusivity provisions
hereof).
4. PAYMENTS: REPORTS.
4.1 INITIAL PAYMENTS.
4.1.1 Subject to Section 10, FLOWERS shall pay AOL in
immediately available funds wired to AOL's account
the total non-refundable sum of Ten Million Dollars
(US$10,000,000), as follows: (a) upon execution
hereof, Two Million Five Hundred Thousand Dollars
(US$2,500,000), (b) on June 30, 1998, Two Million
Five Hundred Thousand Dollars (US$2,500,000), (c) on
December 15,1998, Two Million Five Hundred Thousand
Dollars (US$2,500,000) and (d) on June 30, 1999,
Two Million Five Hundred Thousand Dollars
(US$2,500,000). AOL shall earn a portion of the
initial 2,500,000 payment not to exceed Six Hundred
Ninety Thousand Dollars ($690,000) in accordance
with the milestones set forth in Exhibit F.
4.1.2 In the event cumulative Sales Revenues excluding
Service Charges (the "Merchandise Revenues") for the
first year commencing on July 1, 1997 ("Year 1") and
the second year following Year 1 ("Year 2") equal or
exceed [****], FLOWERS shall pay AOL the
non-refundable sum of [****] in equal installments
on the first day of each calendar quarter during
the third year following Year 2 ("Year 3").
4.1.3 In the event (a) cumulative Merchandise Revenues for
Years 1, 2 and 3 equal or exceed [****] or (b)
Merchandise Revenues in Year 3 equal or exceed
[****], FLOWERS shall pay AOL the non-refundable
sum of [****] in equal installments on the first
day of each calendar quarter during the fourth
year following Year 3 ("Year 4").
4.2 SHARING OF SALES REVENUES.
4.2.1 During each of Year 1 and Year 2, FLOWERS shall pay
AOL an amount equal to [****] of all Sales
Revenues in such year; provided that (a) in Year 1
FLOWERS shall pay such amount only for Sales
12
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
Revenues occurring on or after July 1, 1997 (all
revenues prior to such date being accounted for
pursuant to Section 4.5) and (b) in the event Sales
Revenues in either Year 1 or Year 2 equal or exceed
[****] in such year (such amount in each year, a
"Yearly Hurdle"), FLOWERS shall pay AOL an amount
equal to [****] of all Sales Revenues thereafter in
such year. The amount, if any, by which a Yearly
Hurdle in Years 1, 2, 3 or 4 exceeds the total Sales
Revenues in any such year is called a "Yearly
Shortfall." The Yearly Hurdle for each year shall be
increased by the amount of the Yearly Shortfall from
the prior year. The existence of a Yearly Shortfall
in any year shall not in any respect constitute a
breach of this Agreement by either Party.
4.2.2 During Year 3, in the event AOL is entitled to
receive a [****] pursuant to Section 4.1.2,
FLOWERS shall pay AOL (in addition to the [****]) an
amount equal to [****] of all Sales Revenues;
provided that in such event and in the event Sales
Revenues in Year 3 equal or exceed [****] (also,
a "Yearly Hurdle" subject to adjustment as set forth
in Section 4.2.1), FLOWERS shall pay AOL an amount
equal to [****] of all Sales Revenues thereafter in
Year 3. In the event AOL is not entitled to
receive a [****] pursuant to Section 4.1.2, FLOWERS
shall pay AOL an amount equal to [****] of all Sales
Revenues during Year 3 until the total Sales
Revenues during Year 3 equal or exceed the amount
of the Yearly Shortfall in Year 2, at which point
FLOWERS shall pay AOL an amount equal to [****] of
all Sales Revenues thereafter in Year 3.
4.2.3 During Year 4, in the event AOL is entitled to
receive a [****] pursuant to Section 4.1.3, FLOWERS
shall pay AOL (in addition to the [****]) an amount
equal to [****] of all Sales Revenues; provided that
in such event and in the event Sales Revenues in
Year 4 equal or exceed [****] (also, a "Yearly
Hurdle" subject to adjustment as set forth in
Section 4.2.l), FLOWERS shall pay AOL an amount equal
to [****] of all Sales Revenues thereafter in Year 4.
In the event AOL is not entitled to receive a
[****] pursuant to Section 4.1.3, FLOWERS shall pay
AOL an amount equal to [****] of all Sales Revenues
during Year 4 until the total Sales Revenues during
Year 4 equal or exceed the amount of the Yearly
Shortfall in Year 3, at which point FLOWERS shall
pay AOL an amount equal to [****] of all Sales
Revenues thereafter in Year 4.
13
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
4.2.4 In the event at any time during the term of the
Agreement, cumulative Merchandise Revenues equal or
exceed [****], FLOWERS shall pay AOL an amount
equal to [****] of all Sales Revenues thereafter.
4.2.5 Each month, FLOWERS shall pay all amounts owed
pursuant to this Section 4.2 within thirty (30) days
of the end of such month. Each payment to AOL shall
include any reporting required pursuant to Section
4.8 below.
4.3 EXHIBIT C FEES. FLOWERS shall pay AOL in accordance with the
payment terms and conditions agreed upon by the Parties in
connection with the AOL services that may be agreed upon
pursuant to Section 2.1 of Exhibit C.
4.4 NEW MEMBER BOUNTIES. In consideration of FLOWERS's New Member
acquisition efforts pursuant to Section 3.1.5 and Exhibit D,
AOL shall pay FLOWERS a fee of Ten Dollas (US$10.00) for each
New Member acquired as a direct result of such efforts (a
"New Member Bounty").
4.5 OLD AGREEMENT AMOUNTS. Each Party shall pay the other Party
all outstanding amounts due and payable to the other Party
pursuant to Section 1 of the Old Agreement (as defined in
Section 11.8) in the time and manner prescribed therein.
FLOWERS shall pay AOL for sales of Products occurring
hereunder subsequent to the Effective Date and prior to July
1, 1997, based on the structure set forth in Section 1 of the
Old Agreement (i.e., [****]).
4.6 LATE PAYMENTS. All amounts owed hereunder not paid when due
and payable will bear interest from the date such amounts are
due and payable the rate of 8% per year.
4.7 AUDITING RIGHTS. FLOWERS shall maintain complete, clear and
accurate records of all expenses, revenues and fees in
connection with the performance of this Agreement. For the
sole purpose of ensuring compliance with this Agreement, AOL
shall have the right, at its expense, to direct an independent
certified public accounting firm to conduct a reasonable and
necessary inspection of portions of the books and records of
FLOWERS which are relevant to amounts payable to AOL pursuant
to this Agreement. Any such audit may be conducted once per
year after twenty (20) business days, prior written notice.
Any audit shall be at AOL's sole cost and expense unless a
discrepancy of the greater of five percent (5%) or
Twenty-Five Thousand Dollars (US$25,000) is found,
in which case FLOWERS will pay all reasonable costs and
expenses related to the audit, not to exceed Ten Thousand
Dollars (US$10,000).
14
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
4.8 REPORTS. Each Party shall each provide the other Party with
certain reports evidencing the reporting Party's compliance
with its obligations under the Agreement and detailing certain
information, all as set forth below, which may be mutually
amended from time to time by the parties.
4.8.1 SALES REPORTS. Consistent with the reports currently
supplied by FLOWERS to AOL, FLOWERS shall provide AOL
with a periodic report detailing the following
activity in such period: Sales Revenue, chargebacks
and credits for returned or cancelled goods or
services (and, where possible, an explanation of the
type of reason therefor, e.g., bad credit card
information, poor customer service, etc.), and credit
card processing fees charged and/or collected by the
credit card issuer.
4.8.2 PROMOTIONAL REPORTS. Each Party shall provide the
other Party with a quarterly report documenting its
compliance with any promotional commitments it has
undertaken pursuant to the Agreement. In reporting
any promotion, the Party should describe the nature
of promotion, its duration and any other relevant
information regarding the promotion, including any
required information set forth in the description of
each promotion.
4.8.3 FRAUDULENT TRANSACTIONS. To the extent permitted by
applicable laws, FLOWERS shall provide AOL with a
prompt report of any fraudulent order, including the
date, screenname and amount associated with such
order, following FLOWERS obtaining knowledge that the
order is, in fact, fraudulent.
4.8.4 AOL REPORTS. AOL shall provide FLOWERS with monthly
reports specifying for the prior month aggregate
hourly usage within the Online Area and other
mutually agreed-upon information relating to the
Online Area.
4.9 TAXES. FLOWERS shall collect and pay and indemnify and hold
AOL harmless from, any sales, use, excise, import or export
value added or similar tax or duty not based on AOL's net
income, including any penalties and interest, as well as any
costs associated with the collection or withholding thereof,
including reasonable attorneys' fees, in the event litigation
or any regulatory proceeding, investigation or action is
commenced.
15
<PAGE>
5. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any agreement to which such Party is a party or by which it is
otherwise bound; (iii) when executed and delivered by such Party, this Agreement
will constitute the legal, valid and binding obligation of such Party,
enforceable against such Party in accordance with its terms; and (iv) such Party
acknowledges that the other Party makes no representations, warranties or
agreements related to the subject matter hereof that are not expressly provided
for in this Agreement.
6. CONFIDENTIALITY. Each Party acknowledges that Confidential Information may
be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it shall take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a period of [****] following
expiration or termination of this Agreement, to prevent the duplication or
disclosure of Confidential Information of the other Party, other than
duplication by or disclosure to its employees or affiliates who must have
access to such Confidential Information to perform such Party's obligations
hereunder, who shall each agree to comply with this Section 6 of this
Agreement. Notwithstanding the foregoing, either Party may issue a press
release or other disclosure containing Information without the consent of the
other Party, to the extent such disclosure is required by law, rule,
regulation or government or court order, as evidenced by a written opinion of
legal counsel. In such event, the disclosing Party shall provide at least
five (5) business days, prior written notice of such proposed disclosure to
the other Party. Further, in the event such disclosure is required of either
Party under the laws, rules or regulations of the Securities and Exchange
Commission or any other applicable governing body, such Party shall (i)
redact mutually agreed-upon portions of this Agreement to the fullest extent
permitted under applicable laws, rules and regulations and (ii) submit a
request (at the expense of the primary party seeking to limit disclosure) to
such governing body that such portions and other provisions of this Agreement
receive confidential treatment under the laws, rules and regulations of the
Securities and Exchange Commission or otherwise be held in the strictest
confidence to the fullest extent permitted under the laws, rules or
regulations of any other applicable governing body.
7. SOLICITATION/PROMOTION.
7.1 SOLICITATION OF SUBSCRIBERS. During the term of this
Agreement, and for the one-year period following the
expiration or termination of this Agreement, neither
FLOWERS nor its affiliates or agents (such agents
acting at the direction of FLOWERS) will use the AOL
Network to (i) solicit, or participate in the solicitation
of AOL Members when that solicitation is for the benefit
of any AOL Competitor or (ii) promote any services which
could reasonably be construed to be in competition with
the business of AOL in providing Internet, online or
related services. In addition, FLOWERS may not send any
AOL Member e-mail communications through the AOL Network
without a "Prior Business Relationship." For purposes of this
Agreement, a "Prior Business Relationship"
16
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
shall mean that the AOL Member has either (i) engaged in a
transaction with FLOWERS through the AOL Network or (ii)
voluntarily provided information to FLOWERS through a contest,
registration, or other communication, which, in the case of
clause (ii), included notice therein to the AOL Member that
the information provided by the AOL Member could result in an
e-mail being sent to that AOL Member by FLOWERS or its
affiliates or agents. A Prior Business Relationship does not
exist by virtue of an AOL Member's visit to the Online Area
(absent the additional elements described above).
7.2 COLLECTION OF MEMBER INFORMATION. FLOWERS is prohibited from
collecting AOL Member screennames from public or private areas
of the AOL Network, except as specifically provided below;
provided that FLOWERS is allowed to receive screennames within
the Online Area, subject to the provisions below. FLOWERS
shall ensure that any survey, questionnaire or other means of
collecting Member Information including, without limitation,
requests directed to specific AOL Member screennames and
automated methods of collecting screennames (an "Information
Request") complies with (i) all applicable laws and
regulations, (ii) AOL's applicable Terms of Service and (iii)
any privacy policies which have been issued by AOL in writing
during the term of the Agreement and made available to FLOWERS
(the "AOL Privacy Policies"). Each Information Request shall
clearly and conspicuously specify to the AOL Members at issue
the purpose for which Member Information collected through the
Information Request shall be used (the "Specified Purpose").
7.3 USE OF MEMBER INFORMATION. FLOWERS shall restrict use of the
Member Information collected through an Information Request to
the Specified Purpose. In no event shall FLOWERS (i) provide
AOL Member names, screennames, addresses or other identifying
information (excluding any such information (e.g., name) that
was received by FLOWERS from an AOL Member via another FLOWERS
sales channel and was not overlaid against or otherwise
derived from other information received from such member via
the AOL Service or the Online Area) ("Member Information") to
any third party (except to the extent specifically (a)
permitted under the AOL Privacy Policies or (b) authorized by
the members in question), (ii) rent, sell or barter Member
Information, (iii) identify, promote or otherwise disclose AOL
Member names, screennames, addresses or other identifying
information in a manner that identifies AOL Members as
end-users of the AOL Network or (iv) otherwise use any Member
Information in contravention of Section 7.1 above.
8. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION.
8.1 LIABILITY. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE
TO THE OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL,
SPECIAL OR EXEMPLARY DAMAGES (EVEN IF THAT PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM THE
SALE OF PRODUCTS, THE USE OR
17
<PAGE>
INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE OR THE
ONLINE AREA, OR ARISING FROM ANY OTHER PROVISION OF THIS
AGREEMENT, SUCH AS, BUT NOT LIMITED TO, LOSS OF REVENUE OR
ANTICIPATED PROFITS OR LOST BUSINESS. EXCEPT AS PROVIDED IN
SECTION 8.3, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY
FOR MORE THAN THE AGGREGATE AMOUNTS TO BE PAID TO AOL BY
FLOWERS IN ANY YEAR UNDER THIS AGREEMENT.
8.2 NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN
THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY
SPECIFICALLY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES,
EXPRESS OR IMPLIED, REGARDING THE AOL NETWORK, THE AOL SERVICE
OR THE ONLINE AREA, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND
IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF
PERFORMANCE. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
AOL SPECIFICALLY DISCLAIMS ANY WARRANTY REGARDING THE
PROFITABILITY OF THE ONLINE AREA.
8.3 INDEMNITY. Either Party will defend, indemnify, save and hold
harmless the other Party and the officers, directors, agents,
affiliates, distributors, franchisees and employees of the
other Party from any and all third-party claims, demands,
liabilities, costs or expenses, including reasonable
attorneys' fees ("Liabilities"), resulting from the
indemnifying Party's material breach of any duty,
representation, or warranty of this Agreement, except to the
extent Liabilities result from the negligence or misconduct
of, or material breach of any duty, representation, or
warranty of this Agreement by, the other Party.
8.4 CLAIMS. Each Party agrees to (i) promptly notify the other
Party in writing of any indemnifiable claim and give the other
Party the opportunity to defend or negotiate a settlement of
any such claim at such other Party's expense, and (ii)
cooperate fully with the other Party, at that other Party's
expense, in defending or settling such claim. Each Party
reserves the right, at its own expense, to assume the
exclusive defense and control of any matter otherwise subject
to indemnification by the other Party hereunder, and in such
event, such other Party shall have no further obligation to
provide indemnification for such matter hereunder.
8.5 ACKNOWLEDGEMENT. AOL and FLOWERS each acknowledges that the
provisions of this Agreement were negotiated to reflect an
informed, voluntary allocation between them of all risks (both
known and unknown) associated with the transactions
contemplated hereunder. The limitations and disclaimers
related to warranties and liability contained in this
Agreement are intended to limit the circumstances and extent
of liability. The provisions of this Section 8 shall be
18
<PAGE>
enforceable independent of and severable from any other
enforceable or unenforceable provision of this Agreement.
9. AOL TERMS OF SERVICE; UNSPECIFIED CONTENT. AOL shall have the right to
remove, or direct FLOWERS to remove any Content which, as reasonably
determined by AOL (i) violates AOL's then-standard Terms of Service (as
set forth on the AOL Service) or the terms of this Agreement or (ii)
belongs to a type or category of Content not specifically contained
within the Online Areas as of the Effective Date subject further to the
provisions of Section 1.2 hereof.
10. TERM AND TERMINATION.
10.1 TERM. Unless earlier terminated as set forth herein, the term
of this Agreement shall commence on the Effective Date and
expire on June 30, 2001.
10.2 TERMINATION. Either Party may terminate this Agreement at any
time in the event of a material breach by the other Party
which remains uncured after thirty (30) days written notice
thereof (or, in the case of an alleged breach which cannot
with due diligence be cured within a period of thirty (30)
days, so long as the party institutes measures to cure such
breach within such thirty (30) day period and thereafter takes
all reasonable measures to cure such alleged breach, such
party shall have an additional period of sixty (60) days to
cure such alleged breach, subject to Section 11.1. In
addition, either Party may terminate this Agreement
immediately following written notice to the other Party (i) if
the other Party ceases to do business, becomes or is declared
insolvent or bankrupt, is the subject of any proceeding
related to its liquidation or insolvency which is not
dismissed within ninety (90) calendar days or makes an
assignment for the benefit of creditors or (ii) in the event
of consummation of an acquisition of the other Party, or all
or substantially all of the assets of such other Party,
through merger, asset acquisition, stock acquisition or
otherwise, by a direct competitor of the Party giving such
notice. In addition, in the event (a) cumulative Merchandise
Revenues in Years 1 and 2 equal less than [****], (b) total
Merchandise Revenues in Year 2 equal less than [****] in such
year, (c) total Merchandise Revenues in Year 3 equal less than
[****] in such year, or (d) cumulative Merchandise Revenues
for Years 1, 2 and 3 equal less than [****], AOL shall have
the right to terminate the Agreement upon thirty (30) days,
written notice to FLOWERS. In the event AOL desires to
terminate the Agreement pursuant to clauses (a) or (b), the
Agreement shall terminate on the date on which the total Sales
Revenues equal or exceed [****]; provided that (i) in the
event such date has not occurred as of the end of Year 3, the
Agreement shall continue under the same terms except that
during the period following the end of Year 3, Sections 1.6,
1.7, 3.1 and 3.2 shall not apply and (ii) in no event shall
the
19
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
Agreement continue beyond the end of Year 4. In the event
that, prior to the end of Year 2, AOL is considering
termination of the Agreement pursuant to clauses (a) or (b)
above, AOL shall provide FLOWERS with written notice at least
thirty (30) days prior to the end of Year 2 that AOL is
reserving its right to so terminate; in such event, FLOWERS
shall be entitled to withhold the [****] otherwise
due to AOL pursuant to Section 4.1.1, until AOL notifies
FLOWERS that AOL elects not to terminate the Agreement
pursuant to either such clause, at which time FLOWERS shall
pay AOL such amount. In the event AOL desires to terminate the
Agreement pursuant to clause (c) or (d) above, the Agreement
shall terminate on the date on which the total Sales Revenues
equal or exceed [****]; provided that (i) during the period
following the end of Year 3 Sections 1.6, 1.7, 3.1 and 3.2
shall not apply and (ii) in no event shall the Agreement
continue beyond the end of Year 4. In no event shall AOL be
entitled to terminate the Agreement pursuant to clauses (a),
(b), (c) or (d) to the extent that AOL's addition of "sub"
services within the AOL Service renders FLOWERS unable to meet
the revenue targets set forth in such clauses. AOL shall also
have the right of termination specified in Section 2.6. In no
event shall the failure of Merchandise Revenues or Sales
Revenues to equal or exceed certain revenue targets set forth
in Section 4 and this Section 10.2 be deemed a material breach
of the Agreement by either AOL or FLOWERS.
10.3 EFFECT OF TERMINATION. In the event of termination by FLOWERS
based on a material breach of the Agreement by AOL during any
Year (as defined in Section 4), FLOWERS shall not be required
to pay AOL the amounts otherwise due to AOL pursuant to
Section 4.1 for such Year. For example, if FLOWERS terminates
the Agreement in Year 1 on April 15, 1998, FLOWERS shall not
be obligated to pay AOL the [****] required by Section 4.1.1,
nor any fees except those earned as of the date of
termination. In the event of termination by AOL based on a
material breach of the Agreement by FLOWERS during any Year
(as defined in Section 4), FLOWERS shall pay AOL within
thirty (30) days of the date of termination all amounts
otherwise due to AOL pursuant to Section 4.1 for such Year.
For example, if AOL terminates the Agreement in Year 1 on
May 15, 1998, FLOWERS shall pay AOL by June 15, 1998, the
[****] required by Section 4.1.1 (otherwise due to AOL
on June 30, 1998). Notwithstanding the foregoing, each
Party shall be entitled upon termination due to breach of
the Agreement by the other Party to seek all additional
remedies for such breach which the Party may possess at law
or in equity.
11. GENERAL PROVISIONS.
11.1 EXCUSE. Neither Party shall be liable for, or be considered in
breach of or default under this Agreement on account of, any
delay or failure to perform as required
20
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
by this Agreement as a result of any causes or conditions
which are beyond such Party's reasonable control and which
such Party is unable to overcome by the exercise of reasonable
diligence; provided: (i) the delayed Party gives the other
Party written notice of such cause or condition promptly and
(ii) uses its reasonable best efforts to promptly correct such
failure or delay. For purposes of this provision, a delay or
non-performance shall not be deemed beyond the reasonable
control of the Party affected if such delay or non-performance
would not have occurred had the affected Party been performing
in accordance with the provisions of the Agreement.
11.2 INDEPENDENT CONTRACTORS. The Parties to this Agreement are
independent contractors. Neither Party is an agent,
representative, or partner of the other Party. Neither Party
shall have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or
liability of, or to otherwise bind, the other Party. This
Agreement shall not be interpreted or construed to create an
association, agency, joint venture or partnership between the
Parties or to impose any liability attributable to such a
relationship upon either Party.
11.3 NOTICE. Any notice, approval, request, authorization,
direction or other communication under this Agreement shall be
given in writing and shall be deemed to have been delivered
and given for all purposes (i) on the delivery date if
delivered by electronic mail on the AOL Network; (ii) on the
delivery date if delivered personally to the Party to whom the
same is directed; (iii) one business day after deposit with a
commercial overnight carrier, with written verification of
receipt, or (iv) five business days after the mailing date,
whether or not actually received, if sent by U.S. mail, return
receipt requested, postage and charges prepaid, or any other
means of rapid mail delivery for which a receipt is available,
to the address of the Party to whom the same is directed as
such addresses are set forth in the introduction to this
Agreement.
AMERICA ONLINE FLOWERS
Attn: Wendy L. Brown Attn: Christopher G. McCann
Copy to: Donna Iucolano
With copies to: With copy to:
Senior Vice President, Business Affairs and Gerard M. Gallagher
Vice President and General Counsel Gallagher, Walker & Bianco
America Online, Inc. 98 Willis Avenue
22000 AOL Way Mineola, NY 11501
Dulles, VA 20166
11.4 NO WAIVER. The failure of either Party to insist upon or
enforce strict performance by the other Party of any provision
of this Agreement or to exercise any right under this
Agreement shall not be construed as a waiver or relinquishment
to any extent of such Party's right to assert or rely upon any
such
21
<PAGE>
provision or right in that or any other instance; rather, the
same shall be and remain in full force and effect.
11.5 RETURN OF INFORMATION. Upon the expiration or termination of
this Agreement, each Party shall, upon the other Party's
written request, either return or destroy (at the option of
the Party receiving the request) all Confidential Information,
documents, manuals and other materials specified by the other
Party.
11.6 SURVIVAL. Sections 4, 6, 7, 8, 10.3 and 11.5 shall survive the
completion, expiration, termination or cancellation of this
Agreement.
11.7 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement, and supersedes any and all prior agreements of the
Parties with respect to the transactions set forth herein.
Neither Party shall be bound by, and each Party specifically
objects to, any term, condition or other provision which is
different from or in addition to the provisions of this
Agreement (whether or not it would materially alter this
Agreement) and which is proffered by the other Party in any
correspondence or other document, unless the Party to be bound
thereby specifically agrees to such provision in writing.
Notwithstanding the foregoing, FLOWERS shall also be bound by
the Terms of Service except as such Terms of Service are
specifically amended by this Agreement.
11.8 EXPIRATION OF OLD AGREEMENT. Upon the Effective Date, the
Information Provider Agreement dated August 16, 1994, between
the Parties (and any amendments thereto) (the "Old Agreement")
shall be deemed to be terminated and of no further force and
effect, except (a) as expressly set forth in Section 4.5 of
this Agreement or (b) to the extent the Old Agreement contains
any confidentiality provision. Except as provided for in this
Section 11.8, no outstanding obligations or liabilities of
either Party under the Old Agreement shall survive termination
of the Old Agreement.
11.9 AMENDMENT. No change, amendment or modification of any
provision of this Agreement shall be valid unless set forth in
a written instrument signed on behalf of each Party hereto,
and in the case of AOL, by a senior vice president.
11.10 FURTHER ASSURANCES. Each Party shall take such action
(including, but not limited to, the execution, acknowledgment
and delivery of documents) as may reasonably be requested by
any other Party for the implementation or continuing
performance of this Agreement.
11.11 RESERVATION OF REMEDIES. Except where otherwise expressly
specified, the rights and remedies granted to a Party under
this Agreement are cumulative and in addition to, and not in
lieu of, any other rights or remedies which the Party may
possess at law or in equity; provided that, in connection with
any dispute hereunder, neither Party shall be entitled to
offset any amounts that such Party
22
<PAGE>
claims to be due and payable from the other Party against
amounts otherwise payable by the claiming Party to the other
Party.
11.12 HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this
Agreement.
11.13 ASSIGNMENT. Except for assignment, transfer or delegation by
either Party to an affiliate or successor by way of merger,
consolidation or sale of all or substantially all of such
Party's outstanding voting securities or assets, neither Party
shall assign (voluntarily, by operation of law or otherwise)
this Agreement or any right, interest or benefit under this
Agreement without the prior written consent of the other
Party. Subject to the foregoing, this Agreement shall be fully
binding upon, inure to the benefit of and be enforceable by
the Parties hereto and their respective successors and
assigns.
11.14 CONSTRUCTION. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is
to be construed or if any such provision is held invalid by a
court with jurisdiction over the Parties to this Agreement,
such provision shall be deemed to be restated to reflect as
nearly as possible the original intentions of the Parties in
accordance with applicable law, and the remainder of this
Agreement shall remain in full force and effect.
11.15 APPLICABLE LAW; JURISDICTION. This Agreement shall be
interpreted, construed and enforced in all respects in
accordance with the laws of the Commonwealth of Virginia
except for its conflicts of laws principles.
11.16 COUNTERPARTS. This Agreement may be executed in facsimile
counterparts, each of which shall be deemed an original and
all of which together shall constitute one and the same
document.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the Effective Date.
AMERICA ONLINE, INC. 800 FLOWERS, INC.
By: /s/ David M. Colburn By: /s/ Christopher McCann
------------------------------- -------------------------------
Print Name: David M. Colburn Print Name: Christopher McCann
------------------------ ------------------------
Title: Senior Vice President Title: Vice President
----------------------------- -----------------------------
Date: 7/1/97 Date: 7/1/97
------------------------------ ------------------------------
23
<PAGE>
EXHIBIT A
DEFINITIONS. The following definitions shall apply to this Agreement:
1.1 AFFILIATE. Any agent, distributor, or franchisee of AOL, or an
entity in which AOL holds at least a [****] equity interest.
1.2 AOL LOOK AND FEEL. The elements of graphics, design,
organization, presentation, layout, user interface, navigation
and stylistic convention (including the digital
implementations thereof) which are generally associated with
online areas within the AOL Service.
1.3 AOL MEMBER(S). Authorized users of the AOL Network, including
any sub-accounts using the AOL Network under an authorized
master account.
1.4 AOL NETWORK. The AOL Service and any other information,
communication, transaction or other related service owned,
operated, distributed or authorized to be distributed by or
through AOL or its Affiliates throughout the world through
which AOL elects to offer the Online Area (including, without
limitation, any CD-ROM merchandising products which may be
distributed by AOL).
1.5 AOL SERVICE. The U.S. version of the America Online(R) brand
service (excluding Digital City, AOL.com, NetFind and any
similar "sub" service that may be distributed by or through
the America Online(R) brand service) (so long as any such
additional "sub" services do not have a material adverse
impact on FLOWERS).
1.6 CONFIDENTIAL INFORMATION. Any information relating to or
disclosed in the course of the Agreement, which is or should
be reasonably understood to be confidential or proprietary to
the disclosing Party, including, but not limited to, the
material terms of this Agreement, information about AOL
Members and FLOWERS customers, technical processes and
formulas, source codes, product designs, sales, cost and other
unpublished financial information, product and business plans,
projections, and marketing data. "Confidential Information"
shall not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed
in published materials, (c) generally known to the public, or
(d) lawfully obtained from any third party.
1.7 CONTENT. Information, materials, features, Products,
advertisements, promotions, links, pointers and software,
including any modifications, upgrades, updates, enhancements
and related documentation.
1.8 LICENSED CONTENT. All content, services and Products offered
through the Online Area pursuant to this Agreement, including
any modifications, upgrades, updates, enhancements, and
related documentation.
24
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
1.9 NEW MEMBER. Any person or entity (a) who registers for the AOL
Network using FLOWERS's special promotion identifier and (b)
from whom AOL or an Affiliate of AOL collects at least three
monthly usage fees for the use of the AOL Network.
1.10 ONLINE AREA. The specific area within the AOL Network where
FLOWERS can market and complete transactions regarding
FLOWERS's Products, as more fully described in Section 2. The
Online Area shall be developed, managed and marketed by
FLOWERS pursuant to this Agreement, including, but not limited
to [****].
1.11 OVERHEAD ACCOUNTS. Accounts of AOL Members for which AOL does
not require payment of standard AOL subscription and usage
charges.
1.12 PRODUCTS. Any product, good or service which FLOWERS offers,
sells or licenses to AOL Members through the Online Area.
1.13 SALES REVENUES. Aggregate amounts paid by AOL Members in
connection with the sale, licensing, distribution or provision
of any Products, including, in each case, handling, shipping,
Service Charges, and excluding, in each case, (a) amounts
collected for sales or use taxes or duties, (b) credit card
processing fees to the extent charged and/or collected by the
credit card issuer and (c) credits and chargebacks for
returned or cancelled goods or services, but not excluding
cost of goods sold or any similar cost.
25
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT B
PROMOTIONAL PLAN
AOL shall provide online promotion for the Online Area totaling at least
[****] impressions per year using a combination of the following
promotional vehicles (and any other agreed upon promotional vehicles or
methods); provided that AOL shall not be obligated to provide in excess of
[****] impressions in any year.
o Banner advertising in Holiday/Theme Areas (including Thanksgiving,
Christmas/Hanukkah, Valentine's Day, Easter, Mother's Day, New Year's
and Secretaries Day) - total of [****] annual impressions
o 1 Sports Channel Pop-up ([****] impressions each) in February
(Valentine's) and May (Mother's Day)
o 1 Personal Finance Channel Pop-up ([****] impressions each) in February
(Valentine's) and May (Mother's Day)
o [****] total days of Shopping Channel "Deal of the Day" Pop-ups during
the months of November (Thanksgiving), December (Winter Holidays),
February (Valentine's) and May (Mother's Day).
o Banner advertising in Sports Channel - [****] annual impressions
o Banner advertising in Personal Finance Channel - [****] annual
impressions
o Banner advertising in News Area - [****] annual impressions
o Banner advertising in Women's Channel - [****] annual impressions
o Banner advertising in Family Channel - [****] annual impressions
o Banner advertising in Lifestyles Channel - [****] annual impressions
o Banner advertising in Interests Channel - [****] annual impressions
o Banner advertising in Romance Channel - [****] annual impressions
o E-Mail banner advertising - [****] annual impressions u Gift
Reminder Impressions ([****]/month).
o Shopping Channel Newsletter Impressions ([****]/month)
o Welcome Screen ([****] hours/year) (approximately [****] during floral
holiday periods)
26
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT C
AOL SERVICES
1. TECHNOLOGY ENHANCEMENT.
The Parties will schedule a technology meeting promptly following execution
hereof to discuss and order priorities regarding operational enhancements to be
made according to the time, manner and payment terms agreed upon by the Parties.
[****]
2. ADDITIONAL PRODUCTION: TRAINING, SUPPORT AND REPORTING.
2.1 PRODUCTION WORK. In the event that FLOWERS requests AOL's
production assistance (including the enhancements set forth in
Section 1 of this Exhibit C) in connection with (i) ongoing
programming and maintenance related to the Online Area, (ii) a
redesign of or addition to the Online Area (e.g., a change to
an existing screen format or construction of a new custom
form), (iii) production to modify work performed by a
third-party provider or (iv) any other type of production
work, FLOWERS shall work with AOL to develop a detailed
production plan for the requested production assistance (the
"Production Plan"). Following receipt of the final Production
Plan, AOL shall notify FLOWERS of (i) AOL's availability to
perform the requested production work, (ii) the proposed fee
or fee structure for the requested production and maintenance
work and (iii) the estimated development schedule for such
work. To the extent the Parties reach agreement regarding
implementation of an agreed-upon Production Plan, such
agreement shall be reflected in a separate work order signed
by the Parties. To the extent FLOWERS elects to retain a
third-party provider to perform any such production work, work
produced by such third-party provider must generally
27
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
conform to AOL's production Standards & Practices (a copy of
which will be supplied by AOL to FLOWERS upon request). The
specific production resources which AOL allocates to any
production work to be performed on behalf of FLOWERS shall be
as determined by AOL in its sole discretion.
2.2 TRAINING. AOL shall make available to FLOWERS standard AOL
training programs related to FLOWERS's management and
maintenance of the Online Area (including, without limitation,
the technical production classes for AOL publishing tools
described below). In addition, FLOWERS will pay its own travel
and lodging costs associated with its participation in any AOL
training programs (including AOL's reasonable travel and
lodging costs when training is conducted at the FLOWERS's
offices).
2.3 PUBLISHING TOOLS. AOL grants FLOWERS a non-exclusive,
royalty-free license during the term of the Agreement to use
publishing tools, which are then made generally available by
AOL to its interactive content providers, solely to be used in
connection with FLOWERS's construction and maintenance of its
Online Area. FLOWERS recognizes that (i) AOL provides all such
publishing tools on an "as is" basis, without warranties of
any kind and (ii) AOL may withdraw or modify its publishing
tools at any time. FLOWERS shall be required to complete AOL's
then-standard technical production training classes prior to
receiving access to the AOL publishing tools.
3. OTHER PROVISIONS RELATED TO THE DELIVERY OF SERVICES.
3.1 COOPERATION. FLOWERS shall cooperate with AOL by, among other
things, making available, as reasonably requested by AOL,
management decisions, responsive information and approvals to
enable AOL to provide the services described above. In return,
AOL shall cooperate with FLOWERS by, among other things,
making available, as reasonably necessary depending on the
particular services to be provided by AOL, management
decisions, responsive information and approvals in connection
with such services.
3.2 INTELLECTUAL PROPERTY. AOL will not, by virtue of the
performance of any of the services described herein, transfer,
assign, forfeit or otherwise relinquish any intellectual
property rights it may possess. FLOWERS will not, by virtue of
the performance of any of the services described herein,
transfer, assign, forfeit or otherwise relinquish its
intellectual property rights in any Licensed Content or any
other intellectual or other proprietary rights it may possess.
28
<PAGE>
EXHIBIT D
NEW MEMBER ACQUISITION
FLOWERS's New Member acquisition responsibilities shall include the following:
o Promotion of AOL via retail displays containing AOL software in all company
and participating franchise stores. Extension of such an offer to be made
to BloomNet florists as well as 24,000 AFS shops throughout the U.S.
(compensation to be paid by FLOWERS from the bounty payment it receives
from AOL).
o Placement of AOL software in every Fresh Kit that accompanies floral orders
and insertion of reply cards (or other promotional material) in mailings as
appropriate; provided that an occasional, unintentional failure to place
such software in such kits shall not be deemed a material breach of the
Agreement.
o AOL access to customer lists (in a mutually agreeable format) of FLOWERS
(and related partners, if allowed pursuant to FLOWERS's contractual
arrangements and applicable law) in connection with member acquisition
programs.
o Inserting the AOL software in appropriate FLOWERS's direct marketing
efforts (AOL to cover all incremental costs associated with bundling (if
any) and mailing).
o AOL to pay costs associated with shipment of AOL software to distribution
points for the programs.
o AOL to consult with FLOWERS to test promotion of AOL Service subscription
offerings with FLOWERS's inbound telemarketing efforts. Nothing herein is
intended to obligate FLOWERS to agree to any testing which AOL may suggest.
o FLOWERS to consult with AOL to test inclusion of FLOWERS gift certificates
in appropriate AOL Service marketing efforts. Nothing herein is intended to
obligate AOL to agree to any testing which FLOWERS may suggest.
29
<PAGE>
EXHIBIT E
CUSTOMER SERVICE REQUIREMENTS
1. Commercially reasonable best efforts to process orders electronically
within one hour from receipt (if between 7 A.M. and 7 P.M. EST) and to
promptly transmit orders to the receiving supplier.
2. Deliver all merchandise in professional packaging. All packages should
arrive undamaged, well packed and neat (barring any shipping
disasters).
3. Make available customer service personnel dedicated to the online
medium (i.e., people whose primary concern is the online customer's
orders) and make at least one customer service representative available
from 9:00 p.m. - midnight E.S.T. during the week before each peak
holiday period such as Thanksgiving, Christmas/Hanukkah, Valentine's
Day, Easter, Mother's Day, New Year's and Secretaries' Week, to answer
questions in an "online conference room" set up specifically for the
FLOWERS store. Online customers need to be given as much priority as
customers coming through any other sales channel.
4. Respond promptly and professionally to questions, comments, complaints
and other reasonable requests from Customers regarding the Products,
including, at a minimum, best efforts to receive and respond to e-mails
within 24 hours of receipt via a computer available to the customer
service staff.
5. Provide the customer with an order confirmation within 24 hours of
receipt. Order confirmation should include any information such as
order status (temporary back order or out-of-stock situations), and
expected delivery times.
6. Have the ability to handle volumes in excess of 25% to 50% of your
average daily order volumes.
7. Regularly monitor on-line store to minimize/eliminate the promotion of
out-of-stock merchandise.
8. Ship the displayed product at the price displayed in the Online Area
without substituting.
9. Offer all AOL Members who purchase Products through the Online Area a
100% satisfaction guarantee to all AOL Members, pursuant to which,
FLOWERS agrees to replace or refund orders upon the customer's or AOL's
request, in accordance with FLOWERS's standard customer service policy.
10. Comply with the following requirements of California disclosure law (if
applicable to FLOWERS):
30
<PAGE>
o Before accepting payment or processing debit/credit transactions,
FLOWERS must disclose: (a) its return and refund policy; (b) FLOWERS's
legal name; and (c) the complete street address of the location where
FLOWERS's business is actually conducted.
o The legal name and address information must appear on one of the
following screens: (a) the first screen displayed when the Online Area
is accessed; (b) the screen on which the goods or services are first
offered; (c) the order screen; or (d) a screen where the purchaser
inputs payment information (credit card number, etc.).
o The font size of the notice cannot be smaller than that used in the
text offering the goods and services.
o The legal name and address must also include a statement "describing
how the buyer can receive information at the buyer's e-mail address."
FLOWERS must provide requested disclosure information at the
purchaser's e-mail address within 5 days of receiving the purchaser's
request.
o FLOWERS must maintain on-screen access to all the above information
until all orders have been filled or 30-day notices sent.
31
<PAGE>
EXHIBIT F
PERFORMANCE MILESTONES
Milestone Amount
- --------- ------
Entering exclusive negotiations with
FLOWERS following April 1, 1997 [****]
Production and development work relating to [****]
the Online Area during the period from
April 1, 1997 through June 30, 1997
Fulfillment and operational support [****]
- ----------
(1) This amount represents "Clerk2" development work performed, and to be
performed, by AOL as described below. These activities will require
approximately [****] labor hours, which valued at [****] equates to [****].
o Order Efficiency Phase I (installed 4/1/97) - included free extended
context (increased simultaneous shoppers supported in current
configuration), "max qty 1" then "no qty" screen (reduced number of
screens for stores geared toward selling quantity = 1 product);
o Seamless Credit Card Billing (installed 5/1/97) - security feature
which stores credit card information and does not require re-display;
and
o Fast Checkout (to be installed on approximately 6/26/97) - enables
quick sell of 1 item at a time (no shopping cart required to purchase
more than 1 item).
(2) This amount represents the establishment of a single point of contact within
AOL Operations for any FLOWERS file transfer concerns (available 24/7 via
pager), which resulted in incremental hours spent to support FLOWERS by the
single contact as well as other operations staff (managers and staff who consult
and assist the single contact). These activities required [****] labor hours,
which valued at [****] equates to [****].
32
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT G
EXCLUDED ENTITIES
[****]
These entities also include any of their affiliates whose primary business is
the sale of the Exclusive Products. During the first two (2) years following
execution hereof, FLOWERS can replace any of the above bullet points with
another entity whose primary business is the sale of the Exclusive Products.
33
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
Exhibit 10.6
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
EXECUTION COPY
CONFIDENTIAL
INTERACTIVE MARKETING AGREEMENT
This Interactive Marketing Agreement (the "Agreement"), dated as of
January 1, 1998 (the "Effective Date"), is between America Online, Inc. ("AOL"),
a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166,
and 800-Flowers, Inc. ("1-800-Flowers"), a New York corporation, with its
principal offices at 1600 Stewart Avenue, Westbury, New York 11590. AOL and
1-800-Flowers may be referred to individually as a "Party" and collectively as
"Parties."
INTRODUCTION
AOL and 1-800-Flowers are parties to the Interactive Marketing
Agreement, dated May 1, 1997 (the "Existing Agreement"), whereby AOL promotes
and distributes an interactive site referred to in the Existing Agreement as the
Online Area. AOL and 1-800-Flowers each desires to enter into a separate
interactive marketing relationship whereby AOL will promote and distribute an
interactive site referred to (and further defined) herein as the Affiliated
1-800-Flowers Site. This relationship is further described below and is subject
to the terms and conditions set forth in this Agreement. Defined terms used but
not defined in the body of the Agreement will be as defined on Exhibit B
attached hereto.
TERMS
1. PROMOTION, DISTRIBUTION AND MARKETING.
1.1. AOL PROMOTION OF AFFILIATED 1-800-FLOWERS SITE. AOL will
provide 1-800-Flowers with the promotions on AOL.com for the
Affiliated 1-800-Flowers Site which are described on Exhibit A
(the "Promotions"). AOL reserves the right to redesign or
modify the organization, structure, "look and feel,"
navigation and other elements of the AOL Network at any time.
In the event such modifications materially and adversely
affect any specific Promotion, AOL will work with
1-800-Flowers to provide 1-800-Flowers, as its sole remedy, a
comparable promotional placement (i.e., placement which is no
less valuable than the Promotion being replaced).
1.2. IMPRESSIONS. With respect to any Impressions targets specified
on Exhibit A, AOL will not be obligated to provide in excess
of any of such target amounts in any year. Any shortfall in
Impressions at the end of a year will not be deemed a breach
of the Agreement by AOL; such shortfall will be added to the
Impressions target for the subsequent year. In the event there
is a shortfall in Impressions as of the end of the Term (a
"Final Shortfall"), AOL will provide 1-800-Flowers, as its
sole remedy, with advertising placements through "run of
service" advertising on the AOL Network which have a total
value, based on an advertising rate of [****] per thousand
Impressions, equal to the value of the Final Shortfall
(determined by multiplying the percentage of Impressions that
were not delivered by the total, guaranteed payment provided
for below).
1.3. CONTENT OF PROMOTIONS. The Promotions will link only to the
Affiliated 1-800-Flowers Site and will promote only those
Products 1-800-Flowers is allowed to sell pursuant to Section
2.1. The specific 1-800-Flowers Content to be contained within
the Promotions (including, without limitation, advertising
banners and contextual promotions) (the "Promo Content") will
be determined by 1-800-Flowers, subject to AOL's technical
limitations, the terms of this Agreement and AOL's
then-applicable policies relating to advertising and
promotions. 1-800-Flowers will consistently update the Promo
Content on no less than twice per week, and the Parties will
jointly consult regarding the Promo Content to ensure that it
is designed to maximize performance. Except to the extent
expressly described herein (e.g., the placements described in
Exhibit A), the specific form, placement,
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
duration and nature of the Promotions will be as determined by
AOL in its reasonable editorial discretion (consistent with
the editorial composition of the applicable screens).
2. AFFILIATED FLOWERS SITE.
2.1. CONTENT. In the event that 1-800-Flowers wishes to offer any
categories or types of Content or Products in addition to
those categories or types specifically allowed pursuant to the
Existing Agreement (the "Additional Content"), 1-800-Flowers
will notify AOL in writing. 1-800-Flowers' right to offer any
such Additional Content will be subject to AOL's prior written
approval, which shall not be unreasonably withheld.. In
addition, 1-800-Flowers acknowledges and agrees that (a) its
ability to sell or promote [****] products [****] may be
limited by AOL's arrangements with third-party [****]
product retailers and (b) in the event 1-800-Flowers
desires to create an area or sub-area related to [****]
within the Affiliated 1-800-Flowers Site that is promoted
hereunder by AOL, 1-800-Flowers will not be entitled to do
so until the Parties have mutually agreed in writing upon
the terms and conditions relating to such area. All sales
of Products through the Affiliated 1-800-Flowers Site will
be conducted through a direct sales format; 1-800-Flowers
will not promote, sell, offer or otherwise distribute any
products through any format other than a direct sales format
[****] without the prior written consent of AOL. 1-800-Flowers
will review, delete, edit, create, update and otherwise manage
all Content available on or through the Affiliated
1-800-Flowers Site in accordance with the terms of this
Agreement. 1-800-Flowers will ensure that the Affiliated
1-800-Flowers Site does not in any respect promote, advertise,
market or distribute the products, services or content of any
other Interactive Service.
2.2. PRODUCTION WORK. Except as agreed to in writing by the Parties
pursuant to the "Production Work" section of the Standard
Legal Terms & Conditions attached hereto as Exhibit F,
1-800-Flowers will be responsible for all production work
associated with the Affiliated 1-800-Flowers Site, including
all related costs and expenses.
2.3. HOSTING; COMMUNICATIONS. 1-800-Flowers will be responsible for
all communications, hosting and connectivity costs and
expenses associated with the Affiliated 1-800-Flowers Site. In
addition, 1-800-Flowers will provide all computer, telephone
and other equipment or resources necessary for 1-800-Flowers
to access the AOL Network. In the event that 1-800-Flowers
elects to create a mirrored version of the Affiliated
1-800-Flowers Site in order to comply with the terms of this
Agreement, 1-800-Flowers will bear responsibility for the
implementation, management and cost of such mirrored site.
1-800-Flowers will utilize a dedicated high speed connection
to maintain quick and reliable transport of information to and
from the 1-800-Flowers data center and AOL's designated data
center.
2.4. TECHNOLOGY. 1-800-Flowers will take all reasonable steps
necessary to conform its promotion and sale of Products
through the Affiliated 1-800-Flowers Site to the then-existing
technologies identified by AOL which are optimized for the AOL
Service. AOL will be entitled to require reasonable changes to
the Content (including, without limitation, the features or
functionality) within any linked pages of the Affiliated
1-800-Flowers Site to the extent such Content will, in AOL's
good faith judgment, adversely affect any operational aspect
of the AOL Network. AOL reserves the right to review and test
the Affiliated 1-800-Flowers Site from time to time to
determine whether the site is compatible with AOL's
then-available client and host software and the AOL Network.
2.5. PRODUCT OFFERING. Subject to Section 2.1, 1-800-Flowers will
use all commercially reasonable efforts to ensure that the
Affiliated 1-800-Flowers Site includes substantially
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
all of the Products including any features, offers or contests
that are then made available by or on behalf of 1-800-Flowers
through any Additional 1-800-Flowers Channel; provided,
however, that (a) such inclusion will not be required where it
is commercially or technically impractical to either Party
(i.e., inclusion would cause either Party to incur substantial
incremental costs) or where it is prohibited as of the
Effective Date by a then-existing written agreement; (b) the
specific changes in scope, nature and/or offerings required by
such inclusion will be subject to AOL's review and approval
and the terms of this Agreement; and (c) in the event a third
party promotes, markets or distributes its products or Content
through a 1-800-Flowers Additional Channel, 1-800-Flowers will
offer AOL a substantially similar opportunity.
2.6. [****] AND TERMS; [****] 1-800-Flowers will ensure that the
[****] for Products in the Affiliated 1-800-Flowers Site do
[****] the [****] for the Products or substantially similar
Products offered by or on behalf of 1-800-Flowers through
any Additional 1-800-Flowers Channel. For purposes of
judging 1-800-Flowers' compliance with the foregoing, to
the extent 1-800-Flowers charges any shipping, handling or
similar charges or any processing, service or similar
charges (collectively, the "Service Charges"), the Service
Charges will not be considered as part of the prices for
the Products in the Affiliated 1-800-Flowers Site; provided,
however, that 1-800-Flowers must comply with Section 1.7
of the Existing Agreement.
2.7. SPECIAL OFFERS. 1-800-Flowers will, on a reasonably periodic
basis, promote through the Affiliated 1-800-Flowers Site
special offers exclusively available to AOL Members and/or AOL
Users (the "Special Offers"). 1-800-Flowers will provide AOL
with reasonable prior notice of Special Offers so that AOL can
market the availability of such Special Offers in the manner
AOL deems appropriate in its editorial discretion, subject to
the terms and conditions hereof. 1-800-Flowers will ensure
that the Special Offers are [****] made available by or on
behalf of 1-800-Flowers through any Additional
1-800-Flowers Channel during the same time the Special
Offers are made available; provided that the foregoing
shall not apply to a Special Offer to the extent that
1-800-Flowers cannot make such offer available in the event
such offer requires certain support technology from AOL
which AOL cannot, or elects not to, provide.
2.8. OPERATING STANDARDS. 1-800-Flowers will ensure that the
Affiliated 1-800-Flowers Site complies at all times with the
standards set forth in Sections 2.5, 2.6 and 2.7 of the
Existing Agreement and with Exhibit D hereto.
2.9. ADVERTISING SALES. Neither Party will sell promotions,
advertisements, links, pointers or similar services or rights
through the Affiliated 1-800-Flowers Site unless and until the
Parties have mutually agreed upon a written advertising
program whereby the Parties coordinate to establish
advertising inventory space and share mutually agreed revenues
generated from such advertising sales.
2.10. TRAFFIC FLOW. 1-800-Flowers will take reasonable efforts to
ensure that AOL traffic is either kept within the Affiliated
1-800-Flowers Site or channeled back into the AOL Network
(with the exception of advertising links sold and implemented
pursuant to the Agreement). The Parties will work together on
implementing mutually acceptable links from the Affiliated
1-800-Flowers Site back to the AOL Service.
3. AOL EXCLUSIVITY OBLIGATIONS. 1-800-Flowers will be the
exclusive provider of fresh-cut flowers and Gift Plants on
AOL.com (the "AOL.com Exclusive Products"), as follows:
AOL will not (i) promote, market or advertise within
AOL.com any entity (other than 1-800-Flowers) that provides
"AOL.com Exclusive Products," including but not limited to
any entity listed on Exhibit C (each entity so listed, a
"1-800-Flowers Competitor") and (ii) will not allow any
provider of the AOL.com Exclusive Products, including but
not limited to any 1-800-Flowers Competitor, to sell, or
offer to sell the AOL.com Exclusive Products within AOL.com;
except that, to the extent that any provider of AOL.com
Exclusive Products (other than a 1-800-Flowers Competitor)
(e.g., a general product retailer) sells products or
services other than the AOL.com Exclusive Products
("Other Products"), such provider will be entitled to
promote, market and advertise such Other Products within
AOL.com For purposes of this Section 3, the terms
"promote," "market" and "advertise" shall include not
only their customary meanings, but also any and all
promotional linking and pointing.
<PAGE>
4. PAYMENTS.
4.1. GUARANTEED PAYMENTS. During the Term of this Agreement,
1-800-Flowers will pay AOL a total guaranteed amount of
US$1,500,000, as follows: during the first eighteen (18)
months of the Term and during each of the two (2) twelve-month
periods thereafter (each of the foregoing three periods, a
"Payment Period"), 1-800-Flowers will pay AOL $500,000 as
follows: (i) 1-800-Flowers will pay AOL an amount equal to
[****] of all Transaction Revenues in each quarter of each
Payment Period (such amount, an "AOL.com Revenue Share"),
payable within thirty (30) days of the end of such quarter;
and (ii) as of the end of such Payment Period, if the
cumulative AOL.com Revenue Share during such Payment Period
pursuant to clause (i) does not equal or exceed $500,000,
1-800-Flowers will pay AOL the shortfall within thirty (30)
days of the end of such Payment Period.
4.2. ALTERNATIVE REVENUE STREAMS. In the event 1-800-Flowers or any
of its affiliates (a) receives or desires to receive, directly
or indirectly, any compensation in connection with the
Affiliated 1-800-Flowers Site other than Transaction Revenues
[****] (an "Alternative Revenue Stream"), 1-800-Flowers
will promptly inform AOL in writing, and the Parties will
negotiate in good faith regarding whether 1-800-Flowers
will be allowed to market Products producing such
Alternative Revenue Stream through the Affiliated
1-800-Flowers Site, and if so, the equitable portion of
revenues from such Alternative Revenue Stream (if
applicable) that will be shared with AOL. In the event the
Parties cannot in good faith reach agreement regarding such
Alternative Revenue Stream within ten (10) days of AOL's
request to negotiate, either Party will have the right to
have such matter submitted to dispute resolution pursuant
to Section 6.
4.3. LATE PAYMENTS. All amounts owed hereunder not paid when due
and payable will bear interest from the date such amounts are
due and payable at [****] in effect at such time.
4.4. AUDITING RIGHTS. 1-800-Flowers shall maintain complete, clear
and accurate records of all expenses, revenues and fees in
connection with the performance of this Agreement. For the
sole purpose of ensuring compliance with this Agreement, AOL
shall have the right, at its expense, to direct an independent
certified public accounting firm to conduct a reasonable and
necessary inspection of portions of the books and records of
1-800-Flowers which are relevant to amounts payable to AOL
pursuant to this Agreement. Any such audit may be conducted
once per year after twenty (20) business days prior written
notice; provided that no such audit shall occur during the
months of July or August. Any audit shall be at AOL's sole
cost and expense unless a discrepancy of the greater of
[****] is found, in which case 1-800-Flowers will pay all
reasonable costs and expenses related to the audit, not to
exceed [****]. In the event 1-800-Flowers has good faith
grounds to question AOL's tracking and reporting of
Impressions, 1-800-Flowers will be
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
entitled to a report issued by a qualified independent auditor
describing AOL's methodologies regarding tracking and
reporting of Impressions and certifying AOL's compliance with
those methodologies and AOL's compliance with its obligations
hereunder. (These reports are currently being provided to AOL
for distribution to its partners by the Audit Bureau of
Circulations).
4.5. TAXES. 1-800-Flowers will collect and pay and indemnify and
hold AOL harmless from, any sales, use, excise, import or
export value added or similar tax or duty not based on AOL's
net income, including any penalties and interest, as well as
any costs associated with the collection or withholding
thereof, including attorneys' fees.
4.6. REPORTS. Each Party will each provide the other Party with
reports evidencing the reporting Party's compliance with its
obligations under the Agreement. All reports will be provided
in the form and manner that each Party is obligated to provide
pursuant to Section 4.8 of the Existing Agreement.
5. TERM; RENEWAL; TERMINATION.
5.1. TERM. Unless earlier terminated as set forth herein, the term
of this Agreement will commence on the Effective Date and
expire on June 30, 2001 (the "Term").
5.2. TERMINATION FOR BREACH. Except as expressly provided elsewhere
in this Agreement, either Party may terminate this Agreement
at any time in the event of a material breach of the Agreement
by the other Party which remains uncured after thirty (30)
days written notice thereof to the other Party (or such
shorter period as may be specified elsewhere in this
Agreement); provided that the cure period with respect to
either Party's failure to make any payment to the other Party
required hereunder shall be ten (10) days from the date
receipt of written notice regarding such payment provided for
herein. Notwithstanding the foregoing, in the event of a
material breach of a provision that expressly requires action
to be completed within an express period shorter than 30 days,
either Party may terminate this Agreement if the breach
remains uncured for the applicable time period after written
notice thereof to the other Party.
5.3. TERMINATION FOR BANKRUPTCY/INSOLVENCY. Either Party may
terminate this Agreement immediately following written notice
to the other Party if the other Party (i) ceases to do
business in the normal course, (ii) becomes or is declared
insolvent or bankrupt, (iii) is the subject of any proceeding
related to its liquidation or insolvency (whether voluntary or
involuntary) which is not dismissed within ninety (90)
calendar days or (iv) makes an assignment for the benefit of
creditors.
5.4. TERMINATION ON CHANGE OF CONTROL. In the event of a Change of
Control of 1-800-Flowers resulting in control of 1-800-Flowers
by an Interactive Service, AOL may terminate this Agreement by
providing thirty (30) days prior written notice of such intent
to terminate.
6. MANAGEMENT COMMITTEE/ARBITRATION. If the Parties are unable to resolve
any dispute, controversy or claim arising under this Agreement
(excluding any disputes relating to intellectual property rights or
confidentiality) (each a "Dispute"), such Dispute shall be submitted to
the Management Committee for resolution. If the Management Committee is
unable to resolve the Dispute within ten (10) business days after
submission to them, the Dispute shall be solely and finally settled by
expedited arbitration in New York, New York, under the auspices of the
American Arbitration Association; provided that the Federal Rules of
Evidence shall apply IN TOTO to any such Dispute and, subject to the
arbitrators' discretion to limit the time for and scope of discovery,
the Federal Rules of Civil Procedure shall apply with respect to
discovery; and
<PAGE>
provided further that, consistent with the parties' desire to avoid
waste of time and unnecessary expense, any Dispute arising from any
provision of the Agreement which expressly provides for the parties to
reach mutual agreement as to certain terms therein shall not be
submitted to arbitration but shall be resolved in good faith by the
Management Committee. The arbitrator may enter a default decision
against any Party who fails to participate in the arbitration
proceedings. For purposes herein, the "Management Committee" shall mean
a committee made up of a senior executive from each of the Parties for
the purpose of resolving Disputes under this Section and generally
overseeing the relationship between the Parties contemplated by this
Agreement.
7. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set
forth on Exhibit E attached hereto and Standard Legal Terms &
Conditions set forth on Exhibit F attached hereto are each hereby made
a part of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
AMERICA ONLINE, INC. 800-FLOWERS, INC.
By: /s/ David M. Colburn By: /s/ Christopher McCann
------------------------------- -------------------------------
Print Name: David M. Colburn Print Name: Christopher McCann
------------------------ ------------------------
Title: Senior Vice President Title: Senior Vice President
----------------------------- -----------------------------
<PAGE>
EXHIBIT A
PLACEMENT/PROMOTION
<TABLE>
<CAPTION>
- ------------------------------------------------------ ----------------------------- -----------------------
PLACEMENT FLIGHT IMPRESSIONS(1)
DATES
- ------------------------------------------------------ ----------------------------- -----------------------
<S> <C> <C>
HOLIDAY BLITZ PROGRAM - allocated to run-of-site [****] [****] PER FLIGHT
banner advertising(2)
- ------------------------------------------------------ ----------------------------- -----------------------
SHOPPING CHANNEL ANCHOR TENANT POSITION (STANDARD [****]
ANCHOR TENANT PACKAGE, INCLUDES PROMOTIONS AND
PLACEMENT FOR 1-800-FLOWERS IN SHOPPING CHANNEL
DEPARTMENT)
- ------------------------------------------------------ ----------------------------- -----------------------
SEARCH RESULTS
- ------------------------------------------------------ ----------------------------- -----------------------
Search Results Pages - [****] of banner ads for
following search terms (the "1-800-Flowers Search [****]
Terms"):
[****]
- ------------------------------------------------------ ----------------------------- -----------------------
</TABLE>
- ----------
(1) The holiday blitz promotional commitments will be deemed
fulfilled once the Impression estimates have been reached. Prior to November
of each year, in order to avoid imbalanced allocation of 1-800-Flowers' [****]
annual Impressions, the Parties will work together to mutually agree upon a
media plan that allocates such Impressions among specific holiday periods.
(2) The holiday blitz will include promotion on an AOL.com homepage button
during the [****] preceding Valentine's Day and the [****] period preceding
Mother's Day and the combined Impressions from such [****] will not exceed
[****] without 1-800-Flowers' prior written approval.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------ ----------------------------- -----------------------
<S> <C> <C>
Search Results Pages - [****] rotation on banner ads [****]
for following additional search terms during
specified flight dates:
[****]
- ------------------------------------------------------ ----------------------------- -----------------------
</TABLE>
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT B
DEFINITIONS
The following definitions will apply to this Agreement:
ADDITIONAL 1-800-FLOWERS CHANNEL. Any other online or Internet-based
distribution channel (e.g., an Interactive Service other than AOL) through which
1-800-Flowers makes available an offering comparable in nature to the Affiliated
1-800-Flowers Site.
AFFILIATED 1-800-FLOWERS SITE. The specific area to be promoted and distributed
by AOL hereunder through which 1-800-Flowers can market and complete
transactions regarding its Products.
AOL INTERACTIVE SITE. Any Interactive Site which is managed, maintained, owned
or controlled by AOL or its agents.
AOL LOOK AND FEEL. The elements of graphics, design, organization, presentation,
layout, user interface, navigation and stylistic convention (including the
digital implementations thereof) which are generally associated with Interactive
Sites within the AOL Service or AOL.com.
AOL MEMBER. Any authorized user of the AOL Network, including any sub-accounts
using the AOL Network under an authorized master account.
AOL NETWORK. (i) The AOL Service, (ii) AOL.com and (iii) any other product or
service owned, operated, distributed or authorized to be distributed by or
through AOL or its affiliates worldwide through which AOL elects to offer the
Affiliated 1-800-Flowers Site (and including those properties excluded from the
definitions of the AOL Service or AOL.com).
AOL PURCHASER. Any person or entity who enters the Affiliated 1-800-Flowers Site
from the AOL Network including, without limitation, from any third party area
therein (to the extent entry from such third party area is traceable through
both Parties' commercially reasonable efforts), and generates Transaction
Revenues (regardless of whether such person or entity provides an e-mail address
during registration which includes a domain other than an "AOL.com" domain).
AOL SERVICE. The narrow-band U.S. version of the America Online(R) brand
service, specifically excluding (a) AOL.com or any other AOL Interactive Site,
(b) the international versions of the AOL Service (e.g., AOL Japan), (c)
"Driveway," "AOL NetFind(TM)," "AOL Instant Messenger(TM)" or any similar
product or service offered by or through the U.S. version of the America
Online(R) brand service, (d) any programming or content area offered by or
through the U.S. version of the America Online(R) brand service over which AOL
does not exercise complete or substantially complete operational control (e.g.,
third-party Content areas, any Interactive Site containing "members.aol.com" as
part of its URL and "Digital City(TM)," "WorldPlay(TM)," "Entertainment
Asylum(TM)," the "Hub(TM)," or any similar "sub-service"), (e) any yellow pages,
white pages, classifieds or other search, directory or review services or
Content offered by or through the U.S. version of the America Online(R) brand
service and (f) any co-branded or private label branded version of the U.S.
version of the America Online(R) brand service, (g) any version of the U.S.
version of the America Online(R) brand service distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer and (h) any property, feature, product or service which AOL
may acquire subsequent to the Effective Date.
AOL USER. Any user of the AOL Service, AOL.com or the AOL Network.
AOL.COM. AOL's primary Internet-based Interactive Site marketed under the
"AOL.COM" brand (or any successor or substitute brand for the "AOL.COM" brand),
specifically excluding (a) the AOL Service, (b)
<PAGE>
any international versions of AOL.com, (c) "Driveway," "AOL Instant
Messenger(TM)" or any similar product or service offered by or through such site
or any other AOL Interactive Site, (d) any programming or content area offered
by or through such site or any other AOL Interactive Site over which AOL does
not exercise complete or substantially complete operational control (e.g.,
third-party Content areas, any Interactive Site containing "members.aol.com" as
part of its URL and "Digital City(TM)," "WorldPlay(TM)," "Entertainment
Asylum(TM)," the "Hub(TM)," or any similar "sub-service"), (e) any yellow pages,
white pages, classifieds or other search, directory or review services or
Content offered by or through such site or any other AOL Interactive Site, (f)
any co-branded or private label branded version of such site (other than a
version otherwise prohibited by Section 3 hereof, e.g., a version distributed by
FTD), (g) any version of such site distributed through any broadband
distribution platform or through any platform or device other than a desktop
personal computer (other than a platform or device otherwise prohibited by
Section 3 hereof, e.g., a platform owned by FTD), (h) any property, feature,
product or service which AOL may acquire subsequent to the Effective Date and
(i) any version of "AOL NetFind(TM)" distributed through any Interactive Site
other than AOL.com.
CHANGE OF CONTROL. (a) The consummation of a reorganization, merger or
consolidation or sale or other disposition of substantially all of the assets of
a party; or (b) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1933,
as amended) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) of more than 50% of either (i) the then outstanding
shares of common stock of such party; or (ii) the combined voting power of the
then outstanding voting securities of such party entitled to vote generally in
the election of directors.
CONFIDENTIAL INFORMATION. Any information relating to or disclosed in the course
of the Agreement, which is or should be reasonably understood to be confidential
or proprietary to the disclosing Party, including, but not limited to, the
material terms of this Agreement, information about AOL Members, AOL Users, AOL
Purchasers and 1-800-Flowers customers, technical processes and formulas, source
codes, product designs, sales, cost and other unpublished financial information,
product and business plans, projections, and marketing data. "Confidential
Information" will not include information (a) already lawfully known to or
independently developed by the receiving Party, (b) disclosed in published
materials, (c) generally known to the public, or (d) lawfully obtained from any
third party.
CONTENT. Information, materials, features, Products, advertisements, promotions,
links, pointers and software, including any modifications, upgrades, updates,
enhancements and related documentation.
GIFT PLANT. A live flowering plant which is promoted by a party as a gift
purchase. For example, the following items are Gift Plants (so long as each is
promoted by a party as a gift purchase): azalea plant, gardenia plant,
juniper bonsai, lavender plant, hibiscus (in a cache pot), chrysanthemum
plant, kalanchoe in a window box and "dish gardens". The following items,
however, are not Gift Plants: wreaths, bulbs, bare-root materials, dried
flowers, seeds, trees, herbs, shrubs and topiaries. Subject to the
restrictions on 1-800-Flowers relating to gardening products set forth in
Section 2.1, 1-800-Flowers may sell any plant, whether Gift Plant or not,
through the Affiliated 1-800-Flowers Site. Notwithstandig the foregoing,
1-800-Flowers shall at all times be entitled to sell wreaths and topiaries
through the Affiliated 1-800-Flowers Site.
IMPRESSION. User exposure to the page containing the applicable promotion or
advertisement, as such exposure may be reasonably determined and measured by AOL
in accordance with its standard methodologies and protocols.
INTERACTIVE SERVICE. Any entity that offers online or Internet connectivity
(or any successor form of connectivity), aggregates and/or distributes a
broad selection of third-party interactive Content, or provides interactive
navigational services (including, without limitation, any online service
providers, Internet service providers, [****], [****] or other broadband
providers, search or directory providers, "push" product providers such as
the [****] or providers of interactive navigational environments such as
[****]).
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
INTERACTIVE SITE. Any interactive site or area, including, by way of example and
without limitation, (i) a 1-800-Flowers site on the World Wide Web portion of
the Internet or (ii) a channel or area delivered through a "push" product such
as the Pointcast Network or interactive environment such as Microsoft's Active
Desktop.
LICENSED CONTENT. All Content offered through the Affiliated 1-800-Flowers Site
pursuant to this Agreement or otherwise provided to AOL by 1-800-Flowers for
related purposes (e.g., Promotions, AOL "slideshows" , etc.), including in each
case, any modifications, upgrades, updates, enhancements, and related
documentation.
1-800-FLOWERS INTERACTIVE SITE. Any Interactive Site (other than the Affiliated
1-800-Flowers Site) which is managed, maintained, owned or controlled by
1-800-Flowers or its affiliates.
1-800-FLOWERS LOOK AND FEEL. The elements of graphics, design, organization,
presentation, layout, user interface, navigation and stylistic convention
(including the digital implementations thereof) which are generally associated
with Interactive Sites owned, maintained or operated by 1-800-Flowers.
PRODUCT. Any product, good or service which 1-800-Flowers (or others acting on
its behalf or as distributors) offers, sells, provides, distributes or licenses
to AOL Users directly or indirectly through (i) the Affiliated 1-800-Flowers
Site (including through any Interactive Site linked thereto), (ii) any other
electronic means directed at AOL Users (e.g., e-mail offers), or (iii) an
"offline" means (e.g., toll-free number) for receiving orders related to
specific offers within the Affiliated 1-800-Flowers Site requiring purchasers to
reference a specific promotional identifier or tracking code, including, without
limitation, products sold through surcharged downloads (to the extent expressly
permitted hereunder).
TRANSACTION REVENUES. Aggregate amounts paid by AOL Purchasers in connection
with the sale, licensing, distribution or provision of any product, good or
service which 1-800-Flowers or its agent offers, sells or licenses to AOL Users
through the Affiliated 1-800-Flowers Site, including, in each case, handling,
shipping, service charges, and excluding, in each case, (a) amounts collected
for sales or use taxes or duties, (b) credit card processing fees to the extent
charged and/or collected by the credit card issuer and (c) credits and
chargebacks for returned or cancelled goods or services, but not excluding cost
of goods sold or any similar cost.
SITE REVENUES. The combination of Transaction Revenues, Advertising Revenues and
Additional Revenues.
<PAGE>
EXHIBIT C
LIST OF 1-800-FLOWERS COMPETITORS
[****]
These entities also include any of their affiliates whose primary business is
the sale of the AOL.com Exclusive Products. During the first two (2) years
following execution hereof, FLOWERS can replace any of the above bullet points
with another entity whose primary business is the sale of the AOL.com Exclusive
Products.
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under
Rule 406 of the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT D
OPERATING STANDARDS
1. [intentionally omitted].
2. HOSTING; CAPACITY. 1-800-Flowers will provide all computer servers, routers,
switches and associated hardware in an amount reasonably necessary to meet
anticipated traffic demands, adequate power supply (including generator back-up)
and HVAC, adequate insurance, adequate service contracts and all necessary
equipment racks, floor space, network cabling and power distribution to support
the Affiliated 1-800-Flowers Site.
3. SPEED; ACCESSIBILITY. 1-800-Flowers will ensure that the performance and
availability of the Affiliated 1-800-Flowers Site (a) is monitored on a
continuous, 24/7 basis and (b) remains competitive in all material respects with
the performance and availability of other similar sites based on similar form
technology. 1-800-Flowers will use commercially reasonable to ensure that: (a)
the functionality and features within the Affiliated 1-800-Flowers Site are
optimized for the client software then in use by AOL Users; and (b) the
Affiliated 1-800-Flowers Site is designed and populated in a manner that
minimizes delays when AOL Users attempt to access such site.
4. USER INTERFACE. 1-800-Flowers will maintain a graphical user interface within
the Affiliated 1-800-Flowers Site that is competitive in all material respects
with interfaces of other similar sites based on similar form technology. AOL
reserves the right to conduct focus group testing to assess compliance herewith.
5. SERVICE LEVEL RESPONSE. 1-800-Flowers agrees to use commercially reasonable
efforts to provide the following service levels in response to problems with or
improvements to the Affiliated 1-800-Flowers Site:
o For material functions of software that are or have become
substantially inoperable, 1-800-Flowers will provide a bug fix or
workaround within two (2) business days after the first report of such
error.
o For functions of the software that are impaired or otherwise fail to
operate in accordance with agreed upon specifications, 1-800-Flowers
will provide a bug fix or workaround within three (3) business days
after the first report of such error.
o For errors disabling only certain non-essential functions,
1-800-Flowers will provide a bug fix or workaround within sixty (60)
days after the first report of such error.
o For all other errors, 1-800-Flowers will address these requests on a
case-by-case basis as soon as reasonably feasible.
6. MONITORING. AOL Network Operations Center will work with a
1-800-Flowers-designated technical contact in the event of any performance
malfunction or other emergency related to the Affiliated 1-800-Flowers Site and
will either assist or work in parallel with Flowers' contact using 1-800-Flowers
tools and procedures, as applicable. The Parties will develop a process to
monitor performance and member behavior with respect to access, capacity,
security and related issues both during normal operations and during special
promotions/events.
7. TELECOMMUNICATIONS. The Parties agree to explore encryption methodology to
secure data communications between the Parties' data centers. The network
between the Parties will be configured such that no single component failure
will significantly impact AOL Users. The network will be sized such that no
single line runs at more than 70% average utilization for a 5-minute peak in a
daily period.
8. SECURITY REVIEW. 1-800-Flowers and AOL will work together to perform an
initial security review of, and to perform tests of, the 1-800-Flowers system,
network, and service security in order to evaluate the security risks and
provide recommendations to 1-800-Flowers, including periodic follow-up reviews
as reasonably required by 1-800-Flowers or AOL. 1-800-Flowers will use
commercially reasonable best efforts to fix any security risks or breaches of
security as may be identified by AOL's Operations Security. Specific services to
be performed on behalf of AOL's Operations Security team will be as determined
by AOL in its sole discretion.
9. TECHNICAL PERFORMANCE. 1-800-Flowers will perform the following technical
obligations (and any reasonable updates thereto from time to time by AOL):
o 1-800-Flowers will design the Affiliated 1-800-Flowers Site to support
the Windows version of the Microsoft Internet Explorer 4.0 browser, and
make commercially reasonable efforts to support all other AOL browsers
listed at: "http://webmaster.info.aol.com/BrowTable.html."
o 1-800-Flowers will configure the server from which it serves the site
to examine the HTTP User-Agent field in order to identify the "AOL
Member-Agents" listed at: "http://webmaster.
info.aol.com/Brow2Text.html."
o 1-800-Flowers will design its site to support HTTP 1.0 or later
protocol as defined in RFC 1945 (available at
"http://ds.internic.net/rfc/rfc1945.text") and to adhere to AOL's
parameters for refreshing cached information listed at
"http://webmaster.info.aol.com/CacheText.html."
<PAGE>
EXHIBIT E
STANDARD ONLINE COMMERCE TERMS & CONDITIONS
1. AOL NETWORK DISTRIBUTION. 1-800-Flowers will not authorize any third party to
distribute or promote the Affiliated 1-800-Flowers Site or any 1-800-Flowers
Interactive Site through the AOL Network absent AOL's prior written approval.
The Promotions and any other promotion or advertisement purchased from or
provided by AOL will link only to the Affiliate 1-800-Flowers Site (or the
1-800-Flowers Interactive Site under the Existing Agreement, as applicable).
2. PROVISION OF OTHER CONTENT. In the event that AOL notifies 1-800-Flowers that
(i) as reasonably determined by AOL, any Content within the Affiliated
1-800-Flowers Site violates AOL's then-standard Terms of Service (as set forth
on the America Online(R) brand service), the terms of this Agreement or any
other standard, written AOL policy or (ii) AOL reasonably objects to the
inclusion of any Content within the Affiliated 1-800-Flowers Site (other than
any specific items of Content which may be expressly identified in this
Agreement), then 1-800-Flowers will take commercially reasonable steps to block
access by AOL Users to such Content using Flowers' then-available technology. In
the event that 1-800-Flowers cannot, through its commercially reasonable
efforts, block access by AOL Users to the Content in question, then
1-800-Flowers will provide AOL prompt written notice of such fact. AOL may then,
at its option, restrict access from the AOL Network to the Content in question
using technology available to AOL. 1-800-Flowers will cooperate with AOL's
reasonable requests to the extent AOL elects to implement any such access
restrictions.
3. CONTESTS. 1-800-Flowers will take all steps necessary to ensure that any
contest, sweepstakes or similar promotion conducted or promoted through the
Affiliated 1-800-Flowers Site (a "Contest") complies with all applicable
federal, state and local laws and regulations.
4. NAVIGATIONAL ICONS. Subject to the prior consent of 1-800-Flowers, which
consent will not be unreasonably withheld, AOL will be entitled to establish
navigational icons, links and pointers connecting the Affiliated 1-800-Flowers
Site (or portions thereof) with other content areas on or outside of the AOL
Network.
5. DISCLAIMERS. Upon AOL's request, 1-800-Flowers agrees to include within the
Affiliated 1-800-Flowers Site a product disclaimer (the specific form and
substance to be mutually agreed upon by the Parties) indicating that
transactions are solely between 1-800-Flowers and AOL Users purchasing Products
from 1-800-Flowers.
6. LOOK AND FEEL. 1-800-Flowers acknowledges and agrees that AOL will own all
right, title and interest in and to the AOL Look and Feel, subject to Flowers'
ownership rights in any 1-800-Flowers trademarks or copyrighted material within
the Affiliated 1-800-Flowers Site and the 1-800-Flowers Look and Feel. AOL
acknowledges and agrees that 1-800-Flowers will own all right, title and
interest in and to the 1-800-Flowers Look and Feel and the 1-800-Flowers
Affiliated Site, subject to the AOL Look and Feel.
7. MANAGEMENT OF THE AFFILIATED 1-800-FLOWERS SITE. 1-800-Flowers will manage,
review, delete, edit, create, update and otherwise manage all Products available
on or through the Affiliated 1-800-Flowers Site, in a timely and professional
manner and in accordance with the terms of this Agreement. 1-800-Flowers will
ensure that each Affiliated 1-800-Flowers Site is current, accurate and
well-organized at all times. 1-800-Flowers warrants that the Products and other
Content contained therein: (i) will not infringe on or violate any copyright,
trademark, U.S. patent or any other third party right, including without
limitation, any music performance or other music-related rights; (ii) will not
violate AOL's then-applicable Terms of Service; and (iii) will not violate any
applicable law or regulation, including those relating to contests, sweepstakes
or similar promotions. Additionally, 1-800-Flowers represents and warrants that
it owns or has a valid license to all rights to any Licensed Content used in AOL
"slideshow" or other formats embodying elements such as graphics, animation and
sound, free and clear of all encumbrances and without violating the rights of
any other person or entity. 1-800-Flowers also warrants that a reasonable basis
exists for all Product performance or comparison claims appearing through the
Affiliated 1-800-Flowers Site. AOL will have no obligations with respect to the
Products available on or through the Affiliated 1-800-Flowers Site, including,
but not limited to, any duty to review or monitor any such Products.
8. DUTY TO INFORM. 1-800-Flowers will promptly inform AOL of any information
related to the 1-800-Flowers Service or Affiliated 1-800-Flowers Site which
could reasonably lead to a claim, demand, or liability of or against AOL and/or
its affiliates by any third party.
9. CUSTOMER SERVICE. It is the sole responsibility of 1-800-Flowers to provide
customer service to persons or entities purchasing Products through the AOL
Network ("Customers"). 1-800-Flowers will bear full responsibility for all
customer service, including without limitation, order
<PAGE>
processing, billing, fulfillment, shipment, collection and other customer
service associated with any Products offered, sold or licensed through the
Affiliated 1-800-Flowers Site, and AOL will have no obligations whatsoever with
respect thereto. 1-800-Flowers will receive all emails from Customers via a
computer available to Flowers' customer service staff and generally respond to
such emails within one business day of receipt. 1-800-Flowers will receive all
orders electronically and generally process all orders within one business day
of receipt, provided Products ordered are not advance order items. 1-800-Flowers
will ensure that all orders of Products are received, processed, fulfilled and
delivered on a timely and professional basis. 1-800-Flowers will offer AOL Users
who purchase Products through such Affiliated 1-800-Flowers Site a money back
satisfaction guarantee. 1-800-Flowers will bear all responsibility for
compliance with federal, state and local laws in the event that Products are out
of stock or are no longer available at the time an order is received.
1-800-Flowers will also comply with the requirements of any federal, state or
local consumer protection or disclosure law. Payment for Products will be
collected by 1-800-Flowers directly from customers. Flowers' order fulfillment
operation will be subject to AOL's reasonable review.
10. PRODUCTION WORK. In the event that 1-800-Flowers requests AOL's production
assistance in connection with (i) ongoing programming and maintenance related to
the Affiliated 1-800-Flowers Site, (ii) a redesign of or addition to the
Affiliated 1-800-Flowers Site (e.g., a change to an existing screen format or
construction of a new custom form), (iii) production to modify work performed by
a third party provider or (iv) any other type of production work, 1-800-Flowers
will work with AOL to develop a detailed production plan for the requested
production assistance (the "Production Plan"). Following receipt of the final
Production Plan, AOL will notify 1-800-Flowers of (i) AOL's availability to
perform the requested production work, (ii) the proposed fee or fee structure
for the requested production and maintenance work and (iii) the estimated
development schedule for such work. To the extent the Parties reach agreement
regarding implementation of agreed-upon Production Plan, such agreement will be
reflected in a separate work order signed by the Parties. To the extent
1-800-Flowers elects to retain a third party provider to perform any such
production work, work produced by such third party provider must generally
conform to AOL's production Standards & Practices (a copy of which will be
supplied by AOL to 1-800-Flowers upon request). The specific production
resources which AOL allocates to any production work to be performed on behalf
of 1-800-Flowers will be as determined by AOL in its sole discretion.
11. OVERHEAD ACCOUNTS. To the extent AOL has granted 1-800-Flowers any overhead
accounts on the AOL Service, 1-800-Flowers will be responsible for the actions
taken under or through its overhead accounts, which actions are subject to AOL's
applicable Terms of Service and for any surcharges, including, without
limitation, all premium charges, transaction charges, and any applicable
communication surcharges incurred by any overhead Account issued to
1-800-Flowers, but 1-800-Flowers will not be liable for charges incurred by any
overhead account relating to AOL's standard monthly usage fees and standard
hourly charges, which charges AOL will bear. Upon the termination of this
Agreement, all overhead accounts, related screen names and any associated usage
credits or similar rights, will automatically terminate. AOL will have no
liability for loss of any data or content related to the proper termination of
any overhead account.
12. AOL USER COMMUNICATIONS. To the extent 1-800-Flowers sends any targeted
form of communications to AOL Users, 1-800-Flowers will promote the
Affiliated 1-800-Flowers Site as the location at which to purchase Products
(as compared to any more general or other site or location). In addition,
1-800-Flowers will not send any targeted form of communications that
encourages AOL Users to take any action inconsistent with the scope and
purpose of this Agreement, including without limitation, the following
actions: (a) using Content other than the Licensed Content; (b) bookmarking
of Interactive Sites other than the Affiliated 1-800-Flowers Site; (c) using
Interactive Sites other than those covered by the revenue-sharing provisions
herein; (d) changing the default home page on the AOL browser; or (e) using
any Interactive Service other than AOL. This section 12 will not affect
1-800-Flowers' ability to send mailings to its general customer base (e.g.,
print catalog).
13. MERCHANT CERTIFICATION PROGRAM. 1-800-Flowers will participate in any
generally applicable "Certified Merchant" program operated by AOL or its
authorized agents or contractors. Such program may require merchant participants
on an ongoing basis to meet certain reasonable, generally applicable standards
relating to provision of electronic commerce through the AOL Network (including,
as a minimum, use of 40-bit SSL encryption and if requested by AOL, 128-bit
encryption) and may also require the payment of certain reasonable certification
fees to the applicable entity operating the program. Each Certified Merchant in
good standing will be entitled to place on its affiliated Interactive Site an
AOL designed and approved button promoting the merchant's status as an AOL
Certified Merchant.
<PAGE>
EXHIBIT F
STANDARD LEGAL TERMS & CONDITIONS
1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party will submit to the other
Party, for its prior written approval, which will not be unreasonably withheld
or delayed, any marketing, advertising, press releases, and all other
promotional materials related to the Affiliated 1-800-Flowers Site and/or
referencing the other Party and/or its trade names, trademarks, and service
marks (the "Materials"); provided, however, that either Party's use of screen
shots of the Affiliated 1-800-Flowers Site for promotional purposes will not
require the approval of the other Party so long as America Online(R)is clearly
identified as the source of such screen shots. Each Party will solicit and
reasonably consider the views of the other Party in designing and implementing
such Materials. Once approved, the Materials may be used by a Party and its
affiliates for the purpose of promoting the Affiliated 1-800-Flowers Site and
the content contained therein and reused for such purpose until such approval is
withdrawn with reasonable prior notice. In the event such approval is withdrawn,
existing inventories of Materials may be depleted. Notwithstanding the
foregoing, either Party may issue press releases and other disclosures as
required by law or as reasonably advised by legal counsel without the consent of
the other Party and in such event, prompt notice thereof will be provided to the
other Party.
2. LICENSE. During the Term of this Agreement, 1-800-Flowers hereby grants
AOL a non-exclusive worldwide license to market, license, distribute, reproduce,
display, perform, transmit and promote the Licensed Content (or any portion
thereof) through such areas or features of the AOL Network solely in accordance
with the terms and conditions hereof. 1-800-Flowers acknowledges and agrees that
the foregoing license permits AOL to distribute portions of the Licensed Content
in synchronism or timed relation with visual materials prepared by 1-800-Flowers
or by AOL on behalf of 1-800-Flowers solely at Flowers' request (e.g., as part
of an AOL "slideshow"). Subject to such license, 1-800-Flowers retains all
right, title and interest in the Licensed Content. In addition, AOL Users will
have the right to access and use the Affiliated 1-800-Flowers Site.
3. TRADEMARK LICENSE. In designing and implementing the Materials and
subject to the other provisions contained herein, 1-800-Flowers will be entitled
to use the following trade names, trademarks, and service marks of AOL: the
"America Online(R)" brand service, "AOL(TM)" service/software and AOL's triangle
logo; and AOL and its affiliates will be entitled to use the following trade
names, trademarks, and service marks of 1-800-Flowers (collectively, together
with the AOL marks listed above, the "Marks"): 1-800-1-800-Flowers, Gift
Concierge Service, World's Favorite Florist, Freshness Care System and Fresh
Thoughts; provided that each Party: (i) does not create a unitary composite mark
involving a Mark of the other Party without the prior written approval of such
other Party; and (ii) displays symbols and notices clearly and sufficiently
indicating the trademark status and ownership of the other Party's Marks in
accordance with applicable trademark law and practice.
4. OWNERSHIP OF TRADEMARKS. Each Party acknowledges the ownership of the
other Party in the Marks of the other Party and agrees that all use of the
other Party's Marks will inure to the benefit, and be on behalf, of the other
Party. Each Party acknowledges that its utilization of the other Party's
Marks will not create in it, nor will it represent it has, any right, title,
or interest in or to such Marks other than the licenses expressly granted
herein. Each Party agrees not to do anything contesting or impairing the
trademark rights of the other Party, including, without limitation, seeking
to register the other Party's Marks as part of a composite mark.
5. QUALITY STANDARDS. Each Party agrees that the nature and quality of its
products and services supplied in connection with the other Party's Marks will
conform to quality standards set by the other Party. Each Party agrees to supply
the other Party, upon request, with a reasonable number of samples of any
Materials publicly disseminated by such Party which utilize the other Party's
Marks. Each Party will comply with all applicable laws, regulations, and customs
and obtain any required government approvals pertaining to use of the other
Party's marks.
6. INFRINGEMENT PROCEEDINGS. Each Party agrees to promptly notify the other
Party of any unauthorized use of the other Party's Marks of which it has actual
knowledge. Each Party will have the sole right and discretion to bring
proceedings alleging infringement of its Marks or unfair competition related
thereto; provided, however, that each Party agrees to provide the other Party
with its reasonable cooperation and assistance with respect to any such
infringement proceedings.
7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the
other Party that: (i) such Party has the full corporate right, power and
authority to enter into this Agreement and to perform the acts required of it
hereunder; (ii) the execution of this Agreement by such Party, and the
performance by such Party of its obligations and duties hereunder, do not and
will not violate any
<PAGE>
agreement to which such Party is a party or by which it is otherwise bound;
(iii) when executed and delivered by such Party, this Agreement will constitute
the legal, valid and binding obligation of such Party, enforceable against such
Party in accordance with its terms; and (iv) such Party acknowledges that the
other Party makes no representations, warranties or agreements related to the
subject matter hereof that are not expressly provided for in this Agreement.
8. CONFIDENTIALITY. Each Party acknowledges that Confidential Information
may be disclosed to the other Party during the course of this Agreement. Each
Party agrees that it will take reasonable steps, at least substantially
equivalent to the steps it takes to protect its own proprietary information,
during the term of this Agreement, and for a period of two years following
expiration or termination of this Agreement, to prevent the duplication or
disclosure of Confidential Information of the other Party, other than by or
to its employees or agents or affiliates who must have access to such
Confidential Information to perform such Party's obligations hereunder, who
will each agree to comply with this section. Notwithstanding the foregoing,
either Party may issue a press release or other disclosure containing
Confidential Information without the consent of the other Party, to the
extent such disclosure is required by law, rule, regulation or government or
court order. In such event, the disclosing Party will provide at least five
(5) business days prior written notice of such proposed disclosure to the
other Party. Further, in the event such disclosure is required of either
Party under the laws, rules or regulations of the Securities and Exchange
Commission or any other applicable governing body, such Party will (i) redact
mutually agreed-upon portions of this Agreement to the fullest extent
permitted under applicable laws, rules and regulations and (ii) submit a
request to such governing body that such portions and other provisions of
this Agreement receive confidential treatment under the laws, rules and
regulations of the Securities and Exchange Commission or otherwise be held in
the strictest confidence to the fullest extent permitted under the laws,
rules or regulations of any other applicable governing body.
9. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNIFICATION.
9.1. LIABILITY. UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE
OTHER PARTY FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR EXEMPLARY
DAMAGES (EVEN IF THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES), ARISING FROM BREACH OF THE AGREEMENT, THE SALE OF PRODUCTS, THE USE OR
INABILITY TO USE THE AOL NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED
FLOWERS SITE, OR ARISING FROM ANY OTHER PROVISION OF THIS AGREEMENT, SUCH AS,
BUT NOT LIMITED TO, LOSS OF REVENUE OR ANTICIPATED PROFITS OR LOST BUSINESS
("COLLECTIVELY, "DISCLAIMED DAMAGES"); PROVIDED THAT EACH PARTY WILL REMAIN
LIABLE TO THE OTHER PARTY TO THE EXTENT ANY DISCLAIMED DAMAGES ARE CLAIMED BY A
THIRD PARTY AND ARE SUBJECT TO INDEMNIFICATION PURSUANT TO SECTION 9.3. EXCEPT
AS PROVIDED IN SECTION 9.3, (I) LIABILITY ARISING UNDER THIS AGREEMENT WILL BE
LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND (II) NEITHER PARTY WILL
BE LIABLE TO THE OTHER PARTY FOR MORE THAN THE AGGREGATE AMOUNT OF PAYMENT
OBLIGATIONS TO BE PAID TO AOL BY FLOWERS HEREUNDER IN THE YEAR IN WHICH
LIABILITY ACCRUES; PROVIDED THAT EACH PARTY WILL REMAIN LIABLE FOR THE AGGREGATE
AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO SECTION 4.
9.2. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS
ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE AOL
NETWORK, THE AOL SERVICE, AOL.COM OR THE AFFILIATED FLOWERS SITE, INCLUDING ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND
IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, AOL SPECIFICALLY DISCLAIMS ANY
WARRANTY REGARDING THE PROFITABILITY OF THE AFFILIATED FLOWERS SITE.
9.3. INDEMNITY. Either Party will defend, indemnify, save and hold harmless
the other Party and the officers, directors, agents, affiliates, distributors,
franchisees and employees of the other Party from any and all third party
claims, demands, liabilities, costs or expenses, including reasonable attorneys'
fees ("Liabilities"), resulting from the indemnifying Party's material breach of
any duty, representation, or warranty of this Agreement, except to the extent
Liabilities result from the negligence or misconduct of the other Party or
material breach of any duty, representation or warranty by the other Party.
9.4. CLAIMS. Each Party agrees to (i) promptly notify the other Party in
writing of any indemnifiable claim and give the other Party the opportunity to
defend or negotiate a settlement of any such claim at such other Party's
expense, and (ii) cooperate fully with the other Party, at that other Party's
expense, in defending or settling such claim. Each Party reserves the right, at
its own expense, to assume the exclusive defense and control of any matter
otherwise
<PAGE>
subject to indemnification by the other Partyhereunder, and in such event, such
other Party will have no further obligation to provide indemnification for such
matter hereunder.
9.5. ACKNOWLEDGMENT. AOL and 1-800-Flowers each acknowledges that the
provisions of this Agreement were negotiated to reflect an informed, voluntary
allocation between them of all risks (both known and unknown) associated with
the transactions contemplated hereunder. The limitations and disclaimers related
to warranties and liability contained in this Agreement are intended to limit
the circumstances and extent of liability. The provisions of this Section 9 will
be enforceable independent of and severable from any other enforceable or
unenforceable provision of this Agreement.
10. SOLICITATION OF AOL USERS. During the term of this Agreement, and for
the one-year period following the expiration or termination of this
Agreement, neither 1-800-Flowers nor its agents (acting at 1-800-Flowers
direction) will use the AOL Network to (i) solicit, or participate in the
solicitation of AOL Users when that solicitation is for the benefit of any
AOL Competitor (as defined in the Existing Agreement) or (ii) promote any
services which could reasonably be construed to be in competition with AOL in
its business or providing Internet or online services. In addition,
1-800-Flowers may not send AOL Users e-mail communications promoting Flowers'
Products through the AOL Network without a "Prior Business Relationship." For
purposes of this Agreement, a "Prior Business Relationship" will mean that
the AOL User has either (i) engaged in a transaction with 1-800-Flowers
through the AOL Network or (ii) voluntarily provided information to
1-800-Flowers through a contest, registration, or other communication, which
included notice to the AOL User that the information provided by the AOL User
could result in an e-mail being sent to that AOL User by 1-800-Flowers or its
agents. A Prior Business Relationship does not exist by virtue of an AOL
User's visit to an Affiliated 1-800-Flowers Site (absent the elements above).
More generally, 1-800-Flowers will be subject to any standard policies
regarding e-mail distribution through the AOL Network which AOL may implement.
11. COLLECTION OF USER INFORMATION. 1-800-Flowers is prohibited from
collecting AOL Member screennames or AOL User email addresses from public or
private areas of the AOL Network, except as specifically provided below.
1-800-Flowers will ensure that any survey, questionnaire or other means of
collecting AOL Member screennames or AOL User email addresses, names, addresses
or other identifying information ("User Information"), including, without
limitation, requests directed to specific AOL Member screennames or AOL User
email addresses and automated methods of collecting such information (an
"Information Request") complies with (i) all applicable laws and regulations and
(ii) any privacy policies which have been issued by AOL in writing during the
Term (the "AOL Privacy Policies"). Each Information Request will clearly and
conspicuously specify to the AOL Users at issue the purpose for which User
Information collected through the Information Request will be used (the
"Specified Purpose").
12. USE OF USER INFORMATION. 1-800-Flowers will restrict use of the User
Information collected through an Information Request to the Specified Purpose.
In no event will 1-800-Flowers (i) provide User Information (excluding any such
information (e.g., name) that was received by 1-800-Flowers from an AOL User via
another 1-800-Flowers sales channel and was not overlaid against or otherwise
derived from other information received from such user via the AOL Service or
AOL.com) to any third party (except to the extent specifically (a) permitted
under the AOL Privacy Policies or (b) authorized by the members in question),
(ii) rent, sell or barter User Information, (iii) identify, promote or otherwise
disclose such User Information in a manner that identifies AOL Users as
end-users of the AOL Service, AOL.com or the AOL Network or (iv) otherwise use
any User Information in contravention of Section 10 above. Notwithstanding the
foregoing, in the case of AOL Members who purchase Products from 1-800-Flowers,
1-800-Flowers will be entitled to use User Information from such AOL Members as
part of 1-800-Flowers's aggregate list of Customers; provided that
1-800-Flowers's use does not in any way identify, promote or otherwise disclose
such User Information in a manner that identifies such AOL Members as end-users
of the AOL Service, AOL.com or the AOL Network.
13. EXCUSE. Neither Party will be liable for, or be considered in breach of
or default under this Agreement on account of, any delay or failure to perform
as required by this Agreement as a result of any causes or conditions which are
beyond such Party's reasonable control and which such Party is unable to
overcome by the exercise of reasonable diligence, provided: (i) the delayed
Party gives the other Party written notice of such cause or condition promptly
and (ii) uses its reasonable best efforts to promptly correct such failure or
delay. For purposes of this provision, a delay or non-performance shall not be
deemed beyond the reasonable control of the Party affected if such delay or
non-performance would not have occurred had the affected Party been performing
in accordance with the provisions of the Agreement.
14. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent
contractors. Neither Party is an agent, representative or partner of the other
Party. Neither Party will have any right, power or authority to enter into any
agreement for or on behalf of, or incur any obligation or liability of, or to
otherwise bind, the other Party. This Agreement will not be interpreted or
construed to create an
<PAGE>
association, agency, joint venture or partnership between the Parties or to
impose any liability attributable to such a relationship upon either Party.
15. NOTICE. Any notice, approval, request, authorization, direction or other
communication under this Agreement will be given in writing and will be deemed
to have been delivered and given for all purposes (i) on the delivery date if
delivered by electronic mail on the AOL Network or by facsimile; (ii) on the
delivery date if delivered personally to the Party to whom the same is directed;
(iii) one business day after deposit with a commercial overnight carrier, with
written verification of receipt, or (iv) five business days after the mailing
date, whether or not actually received, if sent by U.S. mail, return receipt
requested, postage and charges prepaid, or any other means of rapid mail
delivery for which a receipt is available, to the person(s) specified below at
the address of the Party set forth in the first paragraph of this Agreement (or
otherwise changed on written notice). In the case of AOL, such notice will be
provided to both the Senior Vice President for Business Affairs and the Deputy
General Counsel.
16. NO WAIVER. The failure of either Party to insist upon or enforce strict
performance by the other Party of any provision of this Agreement or to exercise
any right under this Agreement will not be construed as a waiver or
relinquishment to any extent of such Party's right to assert or rely upon any
such provision or right in that or any other instance; rather, the same will be
and remain in full force and effect.
17. RETURN OF INFORMATION. Upon the expiration or termination of this
Agreement, each Party will, upon the written request of the other Party, return
or destroy (at the option of the Party receiving the request) all confidential
information, documents, manuals and other materials specified the other Party.
18. SURVIVAL. Sections 4.4 and 6 of the body of the Agreement and Sections 8
through 12 of this Exhibit F, will survive the completion, expiration,
termination or cancellation of this Agreement.
19. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and
supersedes any and all prior agreements of the Parties with respect to the
transactions set forth herein. Neither Party will be bound by, and each Party
specifically objects to, any term, condition or other provision which is
different from or in addition to the provisions of this Agreement (whether or
not it would materially alter this Agreement) and which is proffered by the
other Party in any correspondence or other document, unless the Party to be
bound thereby specifically agrees to such provision in writing.
20. AMENDMENT. No change, amendment or modification of any provision of this
Agreement will be valid unless set forth in a written instrument signed by the
Party subject to enforcement of such amendment, and in the case of AOL, by a
senior vice president.
21. FURTHER ASSURANCES. Each Party will take such action (including, but not
limited to, the execution, acknowledgment and delivery of documents) as may
reasonably be requested by any other Party for the implementation or continuing
performance of this Agreement.
22. ASSIGNMENT. Except for assignment, transfer or delegation by either
Party to an affiliate or successor by way of merger, consolidation or sale of
all or substantially all of such Party's outstanding voting securities or
assets, neither Party shall assign (voluntarily, by operation of law or
otherwise) this Agreement or any right, interest or benefit under this Agreement
without the prior written consent of the other Party. Subject to the foregoing,
this Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by the Parties hereto and their respective successors and assigns.
23. CONSTRUCTION; SEVERABILITY. In the event that any provision of this
Agreement conflicts with the law under which this Agreement is to be construed
or if any such provision is held invalid by a court with jurisdiction over the
Parties to this Agreement, (i) such provision will be deemed to be restated to
reflect as nearly as possible the original intentions of the Parties in
accordance with applicable law, and (ii) the remaining terms, provisions,
covenants and restrictions of this Agreement will remain in full force and
effect.
24. REMEDIES. Except where otherwise specified, the rights and remedies
granted to a Party under this Agreement are cumulative and in addition to, and
not in lieu of, any other rights or remedies which the Party may possess at law
or in equity; provided that, in connection with any dispute hereunder, neither
Party will be entitled to offset any amounts that it claims to be due and
payable from the other Party against amounts otherwise payable to such other
Party.
25. APPLICABLE LAW; JURISDICTION. This Agreement will be interpreted,
construed and enforced in all respects in accordance with the laws of the
Commonwealth of Virginia except for its conflicts of laws principles.
26. EXPORT CONTROLS. Both Parties will adhere to all applicable laws,
regulations and rules relating to the export of technical data and will not
export or re-export any technical data, any products received from the other
Party or the direct product of such technical data to any proscribed country
listed in such applicable laws, regulations and rules unless properly
authorized.
<PAGE>
27. HEADINGS. The captions and headings used in this Agreement are inserted
for convenience only and will not affect the meaning or interpretation of this
Agreement.
28. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original and all of which together will constitute one
and the same document
<PAGE>
Exhibit 10.8
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.
CONFIDENTIAL EXECUTION COPY
SPONSORSHIP AGREEMENT
This agreement ("Agreement") is entered into as of the 1st day
of May, 1998 ("Effective Date"), by and between Excite, Inc., a California
corporation, located at 555 Broadway, Redwood City, California 94063 ("Excite"),
and 800-FLOWERS, Inc., a New York corporation, located at 1600 Stewart Avenue,
Westbury, New York, 11590 ("Client").
RECITALS
A. Excite maintains a site on the Internet at http://www.excite.com (the
"Excite Site"), a site at http://www.webcrawler.com (the "WebCrawler Site")
and owns and/or manages related Web sites worldwide (collectively, the
"Excite Network") which, among other things, allow its users to search for
and access content and other sites on the Internet.
B. Within the Excite Site and the WebCrawler Site, Excite currently
organizes certain content into topical channels, including "shopping"
channels (the "Shopping Channels").
C. Client is engaged in the business of selling flowers at its Web site
located at http://www.1800flowers.com (the "Client Site").
D. Client wishes to promote its sale of flowers and related gift items to
Excite's users by sponsoring various portions of the Excite Network and
purchasing banner advertising on the Excite Network.
Therefore, the parties agree as follows:
1. ADVERTISING AND PROMOTIONAL PLACEMENTS
a) The parties recognize that sponsorship, promotional
and advertising opportunities on the Excite Network
will evolve over time and will cooperate in good
faith to determine appropriate opportunities for
Client, subject to Excite's delivery of the
guaranteed impressions as described in Section 2.
b) Commencing on the Launch Date (defined below),
Client will be the exclusive provider of fresh cut
flowers and related gift items in the portions of
the Excite Network described in Exhibit A. For the
purposes of this Agreement "exclusive" means that
Excite will not display on the portions of the
Excite Network described in Exhibit A content
created by Excite promoting Client's "Competitors,"
content created by Client's Competitors [****],
promotional placements from Client's Competitors
or links to Client's Competitors' sites or otherwise
permit Client's Competitors to sell or offer to
sell any fresh cut flowers or related gift items
in said portions of the Excite Network.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
c) Notwithstanding the foregoing, Excite may display
links to [****] in Excite Search and WebCrawler
search results pages in response to user queries,
in any portion of Excite's general directory of
Web sites that appears on the Excite Site or the
WebCrawler Site and in search results displayed in
the "Shopping Service powered by Jango".
2. IMPRESSION GUARANTEES
a) Excite guarantees the display of [****]
impressions of the sponsorship links, promotional
placements and advertising banners for Client in
"Year 1" of the Agreement. For the purposes of
this Agreement, "Year 1" means the period
commencing on July 1, 1998 and ending June 30,
1999.
b) Excite guarantees the display of [****]
impressions of the sponsorship links, promotional
placements and advertising banners for Client in
"Year 2" of the Agreement. For the purposes of
this Agreement, "Year 2" means the period
commencing July 1, 1999 and ending June 30, 2000.
3. LAUNCH DATE, RESPONSIBILITY FOR EXCITE NETWORK AND
REPORTING
a) Client and Excite will use reasonable efforts to
implement the display of the first of Client's
sponsorship links, promotional placements and
advertising by July 1, 1998 (the "Launch Date"). The
parties recognize that the scheduled Launch Date can
be met only if Client provides final versions of all
graphics, text, keywords, banner advertising,
promotional placements, other promotional media and
valid URL links necessary to implement the
promotional placements and advertising described in
the Agreement (collectively, "Impression Material")
to Excite fourteen (14) days prior to scheduled
Launch Date.
b) In the event that Client fails to provide the
Impression Material to Excite fourteen (14) days in
advance of the scheduled Launch Date, Excite may, at
its reasonable discretion (i) reschedule the Launch
Date at the earliest practicable date according to
the availability of Excite's engineering resources
after delivery of the complete Impression Material or
(ii) commence delivery of Impressions based on
Impression Material in Excite's possession at the
time and/or reasonable placeholders created by
Excite.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
2
<PAGE>
c) Excite will have sole responsibility for providing,
hosting and maintaining, at its expense, the Excite
Network. Excite will have sole control over of the
"look and feel" of the Excite Network including, but
not limited to, the display, appearance and placement
of the parties' respective names and/or brands and
the promotional links.
d) Excite will provide Client with monthly reports
substantiating the number of impressions of Client's
sponsorship links, advertising banners and
promotional placements displayed on the Excite
Network. The parties acknowledge that Excite may rely
on ad serving and reporting services provided by its
wholly-owned subsidiary MatchLogic, Inc. to deliver
Client's sponsorship links, advertising banners,
promotional placements and reporting. However, Excite
remains liable to Client for its obligations
hereunder.
e) Excite will maintain accurate records with respect to
impressions due under this Agreement. Once per year,
the parties will-review these records to verify the
accuracy and appropriate accounting of all
impressions delivered made pursuant to the Agreement.
In addition, Client may, upon no less than thirty
(30) days prior written notice to Excite, cause an
independent Certified Public Accountant to inspect
the records of Excite reasonably related to the
calculation of such impressions during Excite's
normal business hours. The fees charged by such
Certified Public Accountant in connection with the
inspection will be paid by Client unless the
impressions delivered by Excite are determined to
have been less than [****] of the impressions
actually owed to Client or as stated by Excite to
have been delivered to Client, in which case
Excite will be responsible for the payment of the
reasonable fees for such inspection.
4. SPONSORSHIP, ADVERTISING AND TRANSACTION FEES
a) Client will pay Excite sponsorship and advertising
fees of [****] for Year 1 of the Agreement. These
fees will be paid in [****] equal monthly
installments of [****]. The first monthly payment
will be due on July 1, 1998 and paid within thirty
(30) days of the execution of this Agreement.
Subsequent installments will be due and paid on
the first of each month thereafter.
b) Provided that Excite delivers the agreed-upon
impressions due in the first year of the term of
the Agreement and the Agreement remains in effect
at the end of the first year of its term, Client
will pay Excite sponsorship and advertising fees
of [****] for Year 2 of the Agreement. These fees
will be paid in [****] equal monthly installments
of [****]. The first of these monthly payments for
Year 2 will be due and paid July 1, 1999.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
3
<PAGE>
Subsequent installments will be due and paid on a
monthly basis thereafter.
c) Separate and apart from the sponsorship and
advertising fees, Client will pay Excite [****] of
all gross revenue in excess of [****] in Year 1
and [****] of all gross revenue in excess of [****]
in Year 2 Client realizes on transactions
conducted by users referred to the Client Site
from the Excite Network during the term of the
Agreement. The [****] commission payment is only
due in those years in which the minimum revenue
threshold is attained. Client will pay Excite its
share of revenues within thirty (30) days after
the close of the financial quarter in which Client
recognizes the revenue derived from these
transactions. "Gross revenue" is defined as the
total transaction amount recognized by Client less
discounts, gift certificates, sales and other
taxes, actual service charges paid to Client by
customers, shipping and handling charges, credits,
refunds, chargebacks, and credit card processing
fees.
d) The sponsorship fees and transaction-related payments
are net of any agency commissions to be paid by
Client.
e) Client will maintain accurate records with respect to
the calculation of all transaction payments due under
this Agreement. Once per year, the parties will
review these records to verify the accuracy and
appropriate accounting of all payments made pursuant
to the Agreement. In addition, Excite may, no more
frequently than every six (6) months and upon no less
than thirty (30) days prior written notice to Client,
cause an independent Certified Public Accountant to
inspect the records of Client reasonably related to
the calculation of such payments during Client's
normal business hours. The fees charged by such
Certified Public Accountant in connection with the
inspection will be paid by Excite unless the
payments made to Excite during the period audited
are determined to have been less than ninety-five
percent (95%) of the payments actually owed to Excite
during the period audited and that such discrepancy
is at least ten thousand dollars ($10,000), in which
case Client will be responsible for the payment of
the reasonable fees for such inspection.
f) Client will have sole ownership and control over the
"look and feel" of the Client Site.
5. PUBLICITY
Unless required by law, neither party will make
any public statement, press release or other
announcement relating to the terms of or existence
of this Agreement without the prior written
approval of the other. Notwithstanding the
foregoing, the parties agree to issue an initial
press release regarding the relationship between
Excite and Client, the timing and wording of which
will be mutually agreed upon.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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6. TERM AND TERMINATION
a) The term of this Agreement will begin on the
Launch Date and will not end until Excite displays
of a total of [****] impressions of Client's
sponsorship links, advertising banners and
promotional placements on the Excite Network.
Regardless of Excite's actual delivery of
impressions, but subject to Section 6(b), the term
of this Agreement will not be shorter than twenty-
four (24) months after the display of the Launch
Date, unless earlier terminated pursuant to the
terms hereof.
b) Notwithstanding Section 6(a), in the event that
Client has not realized [****] in gross revenue
(the "Revenue Goal") on transactions conducted by
users referred to the Client Site from the Excite
Network within [****] months of the Launch Date,
Excite will continue to deliver the impressions of
Client's sponsorship links, advertising banners
and promotional placements on the Excite Network
otherwise required hereunder, but Client will not
be obligated to pay, and Excite hereby waives any
claim to, the monthly sponsorship and advertising
fees for the shorter of the following: (i) [****]
months, (ii) the end of the [****] month after the
Launch Date if by that time Client realizes [****]
in cumulative gross revenue on transactions
conducted by users referred to the Client Site
from the Excite Network or (iii) the end of
[****] month after the Launch Date if by that
time Client realizes [****] in cumulative gross
revenue on transactions conducted by users
referred to the Client Site from the Excite
Network. In the event that Client does not realize
the Revenue Goal within [****] months after the
Launch Date, Client may, at any time, terminate
this Agreement immediately upon written notice to
Excite.
c) Either party may terminate this Agreement if the
other party materially breaches its obligations
hereunder and such breach remains uncured for thirty
(30) days following the notice to the breaching party
of the breach.
d) All undisputed payments that have accrued prior to
the termination or expiration of this Agreement will
be payable in full within thirty (30) days thereof.
e) The provisions of Section 8 (Confidentiality and User
Data), Section 9 (Indemnity), Section 10 (Limitation
of Liability) and Section 11 (Dispute Resolution)
will survive any termination or expiration of this
Agreement.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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7. TRADEMARK OWNERSHIP AND LICENSE
a) Client will retain all right, title and interest in
and to its trademarks, service marks and trade names
worldwide, subject to the limited license granted to
Excite hereunder.
b) Excite will retain all right, title and interest in
and to its trademarks, service marks and trade names
worldwide, subject to the limited license granted to
Client hereunder.
c) Each party hereby grants to the other a
non-exclusive, limited license to use its trademarks,
service marks or trade names only as specifically
described in this Agreement. All such use shall be in
accordance with each party's reasonable policies
regarding advertising and trademark usage as
established from time to time, and, with the
exception of the links, advertising banners and
promotional placements described in this Agreement,
shall be subject to the prior written approval of the
other party, which approval shall not be unreasonably
withheld.
d) Upon the expiration or termination of this Agreement,
each party will cease using the trademarks, service
marks and/or trade names of the other except as the
parties may agree in writing.
8. CONFIDENTIALITY AND USER DATA
a) For the purposes of this Agreement, "Confidential
Information" means information about the disclosing
party's (or its suppliers') business or activities
that is proprietary and confidential, which shall
include all business, financial, technical and other
information of a party marked or designated by such
party as "confidential or "proprietary" or
information which, by the nature of the circumstances
surrounding the disclosure, ought in good faith to be
treated as confidential.
b) Confidential Information will not include information
that (i) is in or enters the public domain without
breach of this Agreement, (ii) the receiving party
lawfully receives from a third party without
restriction on disclosure and without breach of a
nondisclosure obligation, (iii) the receiving party
knew prior to receiving such information from the
disclosing party or (iv) the receiving party develops
independent of any information originating from the
disclosing party.
c) Each party agrees (i) that it will not disclose to
any third party or use any Confidential Information
disclosed to it by the other except as expressly
permitted in this Agreement and (ii) that it will
take all reasonable measures to maintain the
confidentiality of all Confidential Information of
the other party in its possession or control, which
will in no event be less than the measures it uses to
maintain the confidentiality of its own information
of similar importance.
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d) The usage reports provided by Excite to Client
hereunder will be deemed to be the Confidential
Information of Excite.
e) The terms and conditions of this Agreement will be
deemed to be Confidential Information and will not be
disclosed without the written consent of the other
party.
f) For the purposes of this Agreement, "User Data" means
all information submitted by users referred to the
Client Site from the Excite Network during the term
of the Agreement, with the exception of credit card
data. The parties acknowledge that any individual
user of the Internet could be a user of Excite and/or
Client through activities unrelated to this Agreement
and that user data gathered independent of this
Agreement, even from individuals who are users of
both parties' services, will not be deemed to be
"User Data" for the purposes of this Agreement.
g) User Data will be deemed to be the joint property of
the parties and, subject to the limitations contained
herein, both parties will retain all rights to make
use of any User Data obtained through this Agreement.
h) Client will provide to Excite all User Data collected
by Client within thirty (30) days following the end
of each calendar month during the term of the
Agreement in a mutually determined electronic format.
i) Client will not use User Data to directly or
indirectly solicit any Excite users (except as
specifically provided in this Agreement or except to
encourage the continued use of Client's services)
either individually or in the aggregate during the
term of this Agreement and for a period of twelve
(12) months following the expiration or termination
of this Agreement.
j) Neither party may sell, disclose, transfer or rent
any User Data which could reasonably be used to
identify a specific named individual ("Individual
Data") to any third party nor will either party use
Individual Data on behalf of any third party without
the express permission of the individual user. Where
user permission for the dissemination of Individual
Data to third parties has been obtained, each party
will use commercially reasonable efforts to require
the third party recipients of Individual Data to
provide an unsubscribe" feature in any email
communications generated by, or on behalf of, the
third party recipients of Individual Data.
k) Notwithstanding the foregoing, each party may
disclose Confidential Information or User Data (i) to
the extent required by a court of competent
jurisdiction or other governmental authority or
otherwise as required by law or (ii) on a
"need-to-know" basis under an obligation of
confidentiality to its legal counsel, accountants,
banks and other financing sources and their advisors.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
7
<PAGE>
9. INDEMNITY
a) Client will indemnify, defend and hold harmless
Excite, its affiliates, officers, directors,
employees, consultants and agents from any and all
third party claims, liability, damages and/or costs
(including, but not limited to, reasonable attorneys
fees) arising from:
i) The breach of any representation or covenant in
this Agreement; or
ii) Any claim that Client's advertising banners
infringe or violate any third party's copyright, patent, trade secret,
trademark, right of publicity or right of privacy or contain any
defamatory content other than content provided by Excite, if any; or
iii) Any claim arising from content displayed on the
Client Site, other than content provided by Excite.
Excite will promptly notify Client of any and all
such claims and will reasonably cooperate with
Client with the defense and/or settlement thereof;
provided that, if any settlement requires an
affirmative obligation of, results in any ongoing
liability to or prejudices or detrimentally
impacts Excite in any way and such obligation,
liability, prejudice or impact can reasonably be
expected to be material, then such settlement
shall require Excite's written consent (not to be
unreasonably withheld or delayed) and Excite may
have its own counsel in attendance at all
proceedings and substantive negotiations relating
to such claim.
b) Excite will indemnify, defend and hold harmless
Client, its affiliates, officers, directors,
employees, consultants and agents from any and all
third party claims, liability, damages and/or costs
(including, but not limited to, reasonable attorneys
fees) arising from:
i) The breach of any representation or covenant in
this Agreement; or
ii) Any claim arising from or related to the Excite
Network other than content or services provided by Client.
iii) Any claim that Excite's advertising banners
infringe or violate any third party's copyright, patent, trade secret,
trademark, right of publicity or right of privacy or contain any
defamatory content other than content provided by Client, if any.
Client will promptly notify Excite of any and all
such claims and will reasonably cooperate with
Excite with the defense and/or settlement thereof;
provided that, if any settlement requires an
affirmative obligation of, results in any ongoing
liability to or prejudices or detrimentally
impacts Client in any way and such obligation,
liability, prejudice or impact can reasonably be
expected to be material, then such settlement
shall require Client's written consent (not to be
unreasonably withheld or delayed) and Client may
have its own counsel in attendance at all
proceedings and substantive negotiations relating
to such claim.
c) EXCEPT AS SPECIFIED IN THIS AGREEMENT, NEITHER PARTY
MAKES ANY WARRANTY IN CONNECTION WITH THE SUBJECT
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<PAGE>
MATTER OF THIS AGREEMENT AND HEREBY DISCLAIMS ANY AND
ALL IMPLIED WARRANTIES, INCLUDING ALL IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE REGARDING SUCH SUBJECT MATTER.
10. LIMITATION OF LIABILITY
EXCEPT UNDER SECTIONS 9(a) AND 9(b), IN NO EVENT WILL EITHER
PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR
OTHERWISE, WHETHER OR NOT THAT PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGE. THE LIABILITY OF EITHER PARTY FOR DAMAGES OR ALLEGED DAMAGES HEREUNDER,
WHETHER IN CONTRACT, TORT OR ANY OTHER LEGAL THEORY, IS LIMITED TO, AND WILL
NOT EXCEED THREE MILLION DOLLARS ($3,000,000).
11. DISPUTE RESOLUTION
a) The parties agree that any breach of either of the
parties' obligations regarding trademarks, service
marks or trade names and/or confidentiality would
result in irreparable injury for which there is no
adequate remedy at law. Therefore, in the event of
any breach or threatened breach of a party's
obligations regarding trademarks, service marks or
trade names or confidentiality, the aggrieved party
will be entitled to seek equitable relief in addition
to its other available legal remedies in a court of
competent jurisdiction.
b) In the event of disputes between the parties arising
from or concerning in any manner the subject matter
of this Agreement, other than disputes arising from
or concerning trademarks, service marks or trade
names and/or confidentiality, the parties will first
attempt to resolve the dispute(s) through good faith
negotiation. In the event that the dispute(s) cannot
be resolved through good faith negotiation, the
parties will refer the dispute(s) to a mutually
acceptable mediator.
c) In the event that disputes between the parties
arising from or concerning in any manner the subject
matter of this Agreement, other than disputes arising
from or concerning trademarks, service marks or trade
names and/or confidentiality, cannot be resolved
through good faith negotiation and mediation, the
parties will refer the dispute(s) to the American
Arbitration Association for resolution through
binding arbitration by a single arbitrator pursuant
to the American Arbitration Association's rules
applicable to commercial disputes. The Arbitration
will take place at an office of the American
Arbitration Association located in Nassau or New York
County if initiated by Excite and will take place at
an office of the American Arbitration Association
located in the county in which Excite maintains its
principal place of business if initiated by Client..
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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<PAGE>
12. GENERAL
a) ASSIGNMENT. Neither party may assign this Agreement,
in whole or in part, without the other party's
written consent (which will not be unreasonably
withheld), except that no such consent will be
required in connection with (i) a merger,
reorganization or sale of all, or substantially all,
of such party's assets or (ii) either party's
assignment and/or delegation of its rights and
responsibilities hereunder to a majority-owned
subsidiary or joint venture in which the assigning
party holds an interest. Any attempt to assign this
Agreement other than as permitted above will be null
and void.
b) GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of
California, notwithstanding the actual state or
country of residence or incorporation of Excite or
Client.
c) NOTICE. Any notice under this Agreement will be in
writing and delivered by personal delivery, express
courier, confirmed facsimile, confirmed email or
certified or registered mail, return receipt
requested, and will be deemed given upon personal
delivery, one (1) day after deposit with express
courier, upon confirmation of receipt of facsimile or
email or five (5) days after deposit in the mail.
Notices will be sent to a party at its address set
forth below or such other address as that party may
specify in writing pursuant to this Section.
d) NO AGENCY. The parties are independent contractors
and will have no power or authority to assume or
create any obligation or responsibility on behalf of
each other. This Agreement will not be construed to
create or imply any partnership, agency or joint
venture.
e) FORCE MAJEURE. Any delay in or failure of performance
by either party under this Agreement will not be
considered a breach of this Agreement and will be
excused to the extent caused by any occurrence beyond
the reasonable control of such party including, but
not limited to, acts of God, power outages and
governmental restrictions, provided the effected
party takes all reasonable steps to resume full
operation.
f) SEVERABILITY. In the event that any of the provisions
of this Agreement are held to be unenforceable by a
court or arbitrator, the remaining portions of the
Agreement will remain in full force and effect.
g) ENTIRE AGREEMENT. This Agreement is the complete and
exclusive agreement between the parties with respect
to the subject matter hereof, superseding any prior
agreements and communications (both written and oral)
regarding such subject matter. This Agreement may
only be modified, or any rights under it waived, by a
written document executed by both parties.
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<PAGE>
h) COUNTERPARTS. This Agreement may be executed in
counterparts, each of which will serve to evidence
the parties' binding agreement.
800-FLOWERS, Inc. Excite, Inc.
By: /s/ Christopher McCann By: /s/ Robert C. Hood
Title: Senior Vice President Title: Executive Vice President/Chief
Financial Officer
Date: 06/26/98 Date: 06/28/98
1600 Stewart Avenue 555 Broadway
Westbury, New York 11590 Redwood City, California 94063
516-237-6000 (voice) 650-568-6000 (voice)
516-237-6060 (fax) 650-568-6030 (fax)
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EXHIBIT A
ANNUAL PLACEMENT SCHEDULE
1. SPONSORSHIP OF THE SHOPPING CHANNELS
a) Client will be prominently promoted in the Excite Shopping
Channel and the WebCrawler Shopping Channel as follows:
i) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the "Such
a Deal" promotional rotation on the home page of the Excite Shopping Channel
in [****] rotations during each year of the term of the Agreement, [****]
every [****].
ii) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the "Shop
Here First" promotional rotation on the home page of the Excite Shopping
Channel in [****] rotations during each year of the term of the Agreement,
[****] every [****].
iii) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed on the home
page of the Excite Shopping Channel under the Flowers & Gifts department
listing for the [****] of the Agreement.
iv) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed on the front
page of the Flowers & Gifts department of the Excite Shopping Channel for the
[****] of the Agreement.
v) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the "Shop
Here First" promotional rotation in the Flowers & Gifts department of the
Excite Shopping Channel in [****] rotations during each year of the term of
the Agreement, [****] every [****].
vi) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the
"Special Web Price!" promotional rotation on the home page of the WebCrawler
Shopping Channel in [****] rotations during each year of the term of the
Agreement, [****] every [****].
vii) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the
"Featured Merchants" promotional rotation on the home page of the WebCrawler
Shopping Channel in [****] rotations during each year of the term of the
Agreement, [****] every [****].
viii) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed on the home
page of the WebCrawler Shopping Channel under the Flowers & Gifts department
listing for the [****] of the Agreement.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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<PAGE>
ix) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed on the front
page of the Flowers & Gifts department of the WebCrawler Shopping Channel for
the [****] of the Agreement.
x) A link to the Client Site (consistent with the
format used on similar links on the same page) will be displayed in the
"Featured Merchants" promotional rotation in the Flowers & Gifts department
of the WebCrawler Shopping Channel in [****] rotations during each year of
the term of the Agreement, [****] every [****].
b) During the [****] of the Agreement, Client will be
included in Excite's promotions of merchants with comparable sponsorship
commitments, such as Excite's Holiday Gift Guide promotion, a possible Gift
Reminder Service, a possible Personalized Gift Finder or other comparable
promotions.
2. "TRY THESE FIRST" AND "SHORTCUTS" LINKS
a) In the event that Client and Excite agree to include
Client in the "Try These First" and/or "Shortcuts" programs, Client will
create a co-branded version of the Client Site (the "Co-Branded Area"). Each
page in the Co-Branded Area will display the name and/or brands of Client and
Excite ("the Excite Co-Branded Area" or "the WebCrawler Co-Branded Area").
Client will create and maintain the Co-Branded Area in a manner consistent
with Excite's then-current guidelines for Co-Branded Areas including, but not
limited to, the display, appearance and placement of the parties' respective
names and/or brands and of advertising displayed on the Co-Branded Area.
b) The Co-Branded Area will be hosted by the Client. Client
will have sole responsibility for providing and maintaining, at its expense, the
Co-Branded Area and any updates thereto.
c) Each page in the Co-Branded Area will include one or more
links to the Excite Network. Excite will supply Client with the URLs for these
links.
d) Client will not sell or barter advertising on the
Co-Branded Area to Excite's competitors including, but not limited to, [****]
, or any other Web site promoting itself as a provider of Internet search and
navigation services. Within five (5) business days of receiving Excite's
written notice, Client will remove any advertising from Excite's competitors
displayed on the Co-Branded Area.
e) Other than updates to the content and to advertising
displayed on the Co-Branded Pages, Client will not change the Co-Branded Area
without Excite's prior consent, which consent will not be unreasonably withheld.
f) Excite may, upon fifteen (15) days prior notice to Client,
request reasonable revisions to the Co-Branded Area as needed to reflect changes
that will not adversely affect Client, such as changes to Excite's name and/or
brand or changes to the URLs for the links to the Excite Network. Client will
use reasonable efforts to accommodate Excite's requested changes within fifteen
(15) days from receipt of such notice.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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<PAGE>
g) A text link to the Excite Co-Branded Area will be
displayed in the "Try These First" section on Excite Search results pages in
response to the following keywords: [****]. The text link will be no more
than twenty-five (25) characters in length, will consist of a "call to
action" based on a special promotion relevant to the holiday (such as [****]
as opposed to a generic solicitation to [****] and will not include [****].
All text links will be prepared by Client and be subject to Excite's sole
approval. The text link will link to a page in the Excite CoBranded Area
which displays content and/or transaction opportunities responsive to the
call to action in the text link. Excite will have sole control over the "look
and feel" of the text links including, but not limited to, the display,
appearance and placement of the text links on the Excite Search results page.
h) A link to the WebCrawler Co-Branded Area will be
displayed as a "Shortcut" on WebCrawler search results pages in response to
the following keywords: [****]. The link will include text of no more than
twenty-two (22) characters in length which consists of a "call to action"
based on a special promotion relevant to the holiday (such as [****] as
opposed to a generic solicitation to [****] and may include the display of
Client's logo. All links will be prepared by Client and be subject to
Excite's sole approval. The link will link to a page in the WebCrawler
Co-Branded Area which displays content and/or transaction opportunities
responsive to the call to action in the text portion of the link. Excite will
have sole control over the "look and feel" of the links including, but not
limited to, the display, appearance and placement of the links on the
WebCrawler search resultspage.
i) At the present time, reports on the number of displayed
"Try These First" or "Shortcut" links are not available. In the event that such
reports are made available to advertisers and sponsors, Excite will provide them
to Client.
j) Excite reserves the right to modify or eliminate the "Try
These First" and/or "Shortcut" functions and to modify its guidelines for
Co-Branded Areas.
3. SPONSORSHIP OF THE EXCITE LIFESTYLE CHANNEL
A link to the Client Site (consistent with the format used on
similar links on the same page) will be displayed in the Family, Holidays, and
Relationships departments of the Excite Lifestyle Channel in a promotional area
in the left sidebar of these pages being developed by Excite (or in an
equivalent promotional area) when launched and for the duration of the term of
the Agreement.
4. SPONSORSHIP OF THE EXCITE SPORTS CHANNEL
A link to the Client Site (consistent with the format used
on similar links on the same page) will be displayed in the "Exciting Stuff'
promotional rotation on the home page of the Excite Sports Channel in [****]
rotations centered on Valentine's Day, Mother's Day and Easter during each
year of the term of the Agreement.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
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<PAGE>
5. SPONSORSHIP OF THE EXCITE SMALL BUSINESS AREA
a) The parties recognize that Excite is currently in the
process of developing personalization functionality for the Excite Small
Business Area which will allow a user to display a set of links to certain
merchants offering services of interest to the user. The user will be able to
select the merchants displayed from a list of participating merchants determined
by Excite. The user will also be able to delete the entire listing from his or
her personalized page. For the purposes of this Agreement, this planned
functionality (or comparable functionality in the Excite Small Business Area)
will be referred to as the "Business Services Module".
b) When Excite implements the Business Services Module, Excite
will display a link to the Client Site in the default configuration of the
Business Services Module (consistent with the format used on similar links in
the module) in periods centered on Valentine's Day, Mother's Day and Easter
during each year of the term of the Agreement. Client will also be included in
the listing of participating merchants from which users may choose to include in
the Business Services Module for the remainder of the term of the Agreement.
Client's participation in the Services Module will be subject to Excite's
guidelines generally applicable to similar participating merchants.
c) Due to the user's control over the listing displayed in the
Business Services Module and whether the Business Services Module will appear at
all in a user's personalized page, the parties acknowledge that Excite cannot
guarantee the number of times Client's link in the Business Services Module will
be displayed.
6. SPONSORSHIP OF THE WEBCRAWLER HOME & FAMILY CHANNEL
A link to the Client Site (consistent with the format used on
similar links on the same page) will be displayed in the WebCrawler Home &
Family Channel in a promotional area being developed by Excite (or in an
equivalent promotional area) when launched and for the duration of the term of
the Agreement.
7. LINK IN PERSONALIZED EXCITE FRONT PAGE "SERVICES" MODULE
a) The parties recognize that Excite is currently in the
process of developing functionality for the front page of the Excite Site which
will allow a user to display a set of links to certain merchants offering
services of interest to the user. The user will be able to select the merchants
displayed from a list of participating merchants determined by Excite. The user
will also be able to delete the entire listing from his or her personalized
front page. For the purposes of this Agreement, this planned functionality (or
comparable functionality in the personalized front page of the Excite Site) will
be referred to as the "Services Modules".
b) When Excite implements the Services Module, Client will be
included in the list of participating merchants from which users may choose to
include in the Services Module. Client's participation in the Service Module
will be subject to Excite's guidelines generally applicable to similar
participating merchants.
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<PAGE>
c) Due to the user's control over the listing displayed in the
Services Module and whether the Services Module will appear at all in a user's
personalized front page, the parties acknowledge that Excite cannot guarantee or
estimate the number of times Client's link in the Services Module will be
displayed.
8. SPONSORSHIP OF THE WEBCRAWLER HOME PAGE
A link to the Client Site (consistent with the format used on
similar links on the same page) will be displayed in the "A Word From Our
Sponsors" promotional area on the home page of the WebCrawler Site during
mutually determined periods during the term of the Agreement. Client will comply
with Excite's then-current guidelines regarding "A Word From Our Sponsors"
promotional placements.
9. ADVERTISING ON THE EXCITE SITE AND THE WEBCRAWLER SITE
a) Excite will display Client's banner advertising on Excite
Search results pages in response to the following keywords: [****].
b) Excite will display Client's banner advertising on
WebCrawler search results pages in response to the following keywords: [****].
c) Excite will display Client's banner advertising in rotation
on the Excite Site and the WebCrawler Site as follows:
i) Excite Lifestyle Channel
ii) Excite Small Business Area
iii) Excite People & Chat Channel
iv) WebCrawler People & Chat Channel
v) WebCrawler Home & Family Channel
vi) WebCrawler "Horoscopes" pages
vii) WebCrawler Relationships Channel
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
16
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION, PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
EXHIBIT 10.9
DEVELOPMENT AND HOSTING AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into as of the
18th day of June, 1999 (the "Effective Date"), by and between Fry Multimedia,
Inc., a Michigan corporation, with offices at 3971 South Research Park Drive,
Ann Arbor, Michigan 48108 ("Fry"), and 800-Gifthouse, Inc. a New York
corporation, with offices at 1600 Stewart Avenue, Westbury, New York 115901
("Client").
Recitals
WHEREAS, Fry is in the business of offering Internet services
relating to, among other things, development, maintenance and hosting of
Internet sites, including those on the World Wide Web portion of the Internet;
WHEREAS, Fry has, and continues to, provide Internet development,
maintenance and hosting services to Client; and
WHEREAS, Client owns various web sites, including without limitation
at the domains www.1800flowers.com, www.plowhearth.com and www.bloomlink.net and
from time to time will develop, own and operate other web sites (collectively,
the "Client Sites");
WHEREAS, Client desires to engage Fry to continue to provide, and
Fry desires to continue to be engaged by Client, to provide such services with
respect to the Client Sites on the terms and subject to the conditions set forth
below.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, Fry and Client (each a "Party," collectively, the "Parties") hereby
agree as follows:
1. Fry Services. Fry agrees to provide to Client the development,
maintenance and hosting services set forth in this Agreement (the
"Services"). Each [****], by on or about [****], Client shall submit to Fry a
written plan with the proposed development, maintenance and hosting
requirements of Client for the [****] period commencing [****] of that year.
Within [****] days of receipt of such plan, Fry shall respond to Client in
writing with respect to its capacity, pricing (on a fixed-price basis unless
otherwise specified) and timetable for each of the development, maintenance
and hosting services for such upcoming year (provided that pricing as to all
hourly rates shall not increase as to any service or item at more than at the
rate of [****] during the most recent [****] month period). Client and Fry
shall then negotiate in good faith to agree upon a final plan for such period
and upon execution by each party of such plan and the Specifications,
Deliverables (each as defined below), terms and conditions thereof shall
become an exhibit to this Agreement and incorporated herein as the "Annual
Plan." In addition to the Annual Plan, Client may request additional services
from Fry and Fry shall provide such additional services as set forth in this
Agreement. With respect to the period from the date hereof until [****] or
such later date as the next Annual Plan shall be
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
A-1
<PAGE>
agreed upon by the parties, the Annual Plan attached as Exhibit A hereto shall
be deemed to be the current Annual Plan hereunder. In the event for any reason
that the Annual Plan for a year is not agreed upon by the parties by [****] of
any year, the Annual Plan then in effect (for the prior period) shall remain in
effect until the new Annual Plan is agreed upon.
2. Development Services.
2.1 Specifications; Deliverables, Pricing and Timetable. Fry
shall perform the development services set forth in the Annual Plan in
accordance with the specifications (the "Specifications"), deliverables (the
"Deliverables"), pricing and timetable therefor contained in the Annual Plan, or
if Client desires to engage Fry for the provision of any other development
services from time to time, in a project brief negotiated in good faith by the
parties containing such information (each a "Project Brief") in the form
attached hereto as Exhibit B as mutually agreed by the parties. Each fully
executed Project Brief shall be incorporated into the then applicable Annual
Plan and shall be subject to the terms and conditions of this Agreement (except
as specifically superseded by the relevant Project Brief).
2.2 Acceptance Testing. Promptly after the delivery of any
Deliverable, Client shall test the Deliverable (the "Acceptance Tests") for
up to [****] business days to determine whether the Deliverable: (i) performs
in accordance with the Specifications and without failure in all material
respects and (ii) operates with internal consistency. In the event that the
Deliverable is accepted by Client, Client shall notify Fry in writing that it
accepts the Deliverable, and the date of such written notification (the
"Acceptance Date ") shall be the date on which Fry shall be entitled to
invoice the payment for the Deliverable. In the event that any Deliverable is
not accepted, Client shall provide written notice to Fry describing the
deficiency in sufficient detail to allow Fry to attempt to correct the
deficiency. After receiving written notice of a deficiency, Fry will exert
its best efforts to correct the deficiency so that the Deliverable: (i)
performs appropriately and repetitively without failure in all material
respects and (ii) operates with internal consistency. The acceptance
procedure in this Section 2.2 will be repeated with respect to the revised
Deliverable to determine whether it is acceptable to Client, unless and until
Client issues a final rejection of the revised Deliverable after rejecting
the Deliverable on at least [****] prior occasions. If Client issues such a
final rejection of the revised Deliverable or notifies Fry in writing that it
chooses to not proceed with development due to failure of Fry to deliver a
Deliverable within [****] days of the due date therefor in the project
schedule, Fry shall promptly refund to Client any fees paid by Client for
such Deliverable. In the event that any Deliverable or revised Deliverable is
not rejected in writing and delivered to Fry within [****] business days
after delivery, the Deliverable or revised Deliverable shall be deemed
accepted by Client and Fry shall be entitled to invoice Client for payment
therefor. In the event that any Deliverable or revised Deliverable is finally
rejected, it shall be returned with all copies to Fry at the time of
rejection.
2.3 Limited Warranty. Fry warrants to Client that each
Deliverable shall perform and operate in accordance with the Specifications
therefor for a period of [****] following their acceptance by Client.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
2.4 Ongoing Consultation. Fry agrees to consult, strategize
and coordinate with Client, throughout the provision of Fry's services hereunder
to ensure Client's satisfaction with and approval of each aspect of its
development services and Deliverables.
3. Proprietary Rights and Confidentiality.
3.1 Work for Hire; Assignment. Except for Fry Material, Fry
agrees that all the results and proceeds of Fry's work on or for Client or its
affiliates, including relating to any of the Client Sites, and the content of
the Client Sites itself, shall be owned exclusively by Client (or Client's
designee), including the copyright and other intellectual property rights
thereto (including the look and feel and user interface portions of any work).
Fry agrees that all work performed under this Agreement (and the results
thereof) shall be deemed as "work for hire," of which Client shall be deemed the
author, to the extent such works qualify as such in accordance with applicable
law. In the event, for any reason, any such results or proceeds are not
qualified as work for hire, Fry hereby irrevocably assigns to Client all of its
right, title and interest in such results and proceeds and content to Client.
Fry agrees that Fry (and his affiliates or subcontractors) will sign all papers
and do all acts reasonably necessary or desirable for Client to perfect such
ownership rights, provided that Fry shall not be responsible for the payment of
any filing fees or other out-of-pocket costs associated with perfection of such
ownership rights. Fry hereby irrevocably transfers and assigns to Client any and
all Moral Rights that it may have in any of the services or work. Fry also
hereby forever waives and agrees never to assert against Client, its successors
or licensees, any and all Moral Rights Fry may have in any Services or work
hereunder (except for Fry Material), even after expiration or termination of
this Agreement. "Moral Rights" means any right to claim authorship of a work,
any right to object to any distortion or other modification of the work, and any
similar right, existing under the law of any country in the world or under any
treaty.
3.2 Fry Material. Fry hereby grants to Client and its
sublicensees, successors and assigns a nonexclusive, perpetual and irrevocable
license to use the software or materials owned by Fry which is used to maintain,
update, edit, modify, terminate, redesign and otherwise operate and service the
Client Sites and any version or derivation thereof, without further payment
("Fry Material"), but only to the extent necessary to maintain, update, edit,
modify, terminate, redesign and otherwise operate and service the Client Sites
(wherever hosted) developed as a result of work directly performed and delivered
under this Agreement, including without limitation any back-up, mirrored or
disaster recovery sites or servers.
3.3 Third Party Licensed Material. Attached as Exhibit C is a
complete inventory of the third-party software (including version numbers) used
or needed to maintain, update, edit, modify, terminate, redesign and otherwise
operate and service the Client Sites and a breakdown between software directly
licensed by Client and software licensed by Fry. This exhibit will be updated by
Fry (and to the extent of its knowledge, by Client) from time to time as soon as
practicable after such software inventory changes. In the event Client desires
to be a direct licensee of any software on Exhibit C for which it is not the
direct licensee, Fry shall arrange for Client to be a direct licensee of such
software at Client's expense. Client (or Fry as applicable) shall have perpetual
irrevocable licenses to all software listed on Exhibit C (except as otherwise
indicated on Exhibit C), as the same shall be modified and supplemented from
time to time.
<PAGE>
3.4 Proprietary Rights of Client; Domain Names. As between
Client and Fry, all data, information and other property, tangible and
intangible, provided by or created on behalf of Client or its subcontractors or
information providers, including without limitation software (including
algorithms and source code), firmware and hardware, technical processes and
formulas, source codes, product designs, sales data, store data, product data,
transaction data, customer data, usage data, advertising data, cost and pricing
data, other non-publicly disclosed financial information, product information,
product, marketing and business plans, advertising revenues and relationships,
usage rates, projections and marketing data and all other data received,
transmitted or stored on behalf of Client. or relating to Client and/or Client
Sites or those of its affiliates ("Client Content") shall remain the sole and
exclusive property of Client, including, without limitation, all copyrights,
trademarks, patents, trade secrets and any other proprietary rights therein.
Nothing in this Agreement shall be construed to grant Fry any ownership right
in, or license to, the Client Content. Fry shall assist Client at Fry's standard
charges (plus third party registration fees) in obtaining domain names (and, if
applicable, Internet Protocol addresses) but shall ensure that Client's
designated employee is named as the Administrative Contact for each such
registration on behalf of Client.
3.5 Client's Ownership. Client shall be the exclusive owner of
the Client Sites and all aspects thereof, except as set forth in Sections 3.2
and 3.3 above. Client shall have the right to modify, edit, destroy, license,
exploit or use the Client Sites in any way, without compensation or consultation
with Fry. Fry shall have no obligation to repair, modify or maintain the Client
Sites to the extent that Client's use of such component of the Client Sites is
in violation of law or regulation.
3.6 Confidentiality. Fry acknowledges that Client has provided
Fry to date with extensive confidential information concerning its business,
procedures, plans, and other confidential information and each party agrees that
during the course of this Agreement, that such confidential information and
other information that is confidential or proprietary may be disclosed to the
other party, including, but not limited to all software (including without
limitation source code (including algorithms) written on behalf of Client by
Fry, except as otherwise provided herein), technical processes and formulas,
source codes, product designs, sales data, store data, product data, transaction
data, customer data, usage data, advertising data, cost and pricing data, other
non-publicly disclosed financial information, product information and product
and business plans, , advertising revenues and relationships, usage rates,
projections and marketing data and all other data received, transmitted or
stored on behalf of Client. or relating to Client and/or Client Sites or those
of its affiliates, ("Confidential Information"). Confidential Information shall
not include information that the receiving party can demonstrate (a) is, as of
the time of its disclosure, or thereafter becomes part of the public domain
through a source other than the receiving party, (b) was known to the receiving
party as of the time of its disclosure, (c) is independently developed by the
receiving party w/o use of the Confidential Information, or (d) is subsequently
learned from a third party not under a confidentiality obligation to the
providing party. Except as provided for in this Agreement, each party shall not
make any disclosure of the Confidential Information to anyone other than its
employees who have a need to know in connection with this Agreement. Each party
shall notify its employees of their confidentiality obligations with respect to
the Confidential Information and shall require its employees to comply with
these obligations. In the event that either Party is compelled by law (whether
through court order or subpoena) to disclose Confidential Information, the
disclosing
<PAGE>
Party shall provide the other Party with notice of such compelled disclosure and
a reasonable opportunity to contest it and shall seek a protective order. In the
event that a Party divulges or seeks to divulge or otherwise improperly use any
such Confidential Information, the other Party shall have the right, in addition
to any other remedies available to it, to seek injunctive relief to enjoin such
acts, it being specifically acknowledged by the Parties that any other remedies
are inadequate. The confidentiality obligations of each party and its employees
shall survive the expiration or termination of this Agreement. The particular
terms and conditions of this Agreement are confidential and shall not be
disclosed by either party without the prior written consent of the other party
(except as deemed necessary or appropriate by counsel to Client to comply with
securities and other applicable laws or as required pursuant to judicial or
other government order provided that notice of such order is given to the other
party promptly after its receipt). Except for mutually agreeable press releases
(with each party's prior written consent, which shall not be unreasonably
withheld or delayed), no public announcements relating to this Agreement shall
be issued by either party. Notwithstanding anything stated herein, the parties
agree to allow each other to issue individual press releases announcing the
relationship initiated or continued hereunder and as appropriate to cooperate in
other joint promotional opportunities and announcements.
3.7 Grant of License -- Client. Client hereby grants to Fry a
non-exclusive, worldwide, royalty-free license for the Initial Term and any
Renewal Term (as those terms are hereinafter defined) to edit, modify, adapt,
translate, exhibit, publish, transmit, participate in the transfer of,
reproduce, create derivative works at Client's direction from, distribute,
perform, display and otherwise use Client Content as necessary to render the
Services to Client under this Agreement. In no event will Fry remove or alter
any proprietary notice of Client, or any third party, contained on any of the
Client Sites without the prior written consent of Client.
3.8 Grant of License -- Fry. Fry hereby grants to Client a
limited, non-exclusive, non-transferable perpetual license to make use of Fry
Materials which are incorporated in the Client Sites and which are required for
the operation of the Client Sites solely to operate the Client Sites on the Fry
Server as well as on any back-up, disaster recovery or mirrored servers and web
sites of Client or its affiliates whether hosted by Fry, Client or by a third
party. Fry hereby reserves for itself all rights in and to the Fry Materials not
expressly granted to Client in the immediately foregoing sentence. In no event
shall Client use any trademarks or service marks of Fry without Fry's prior
written consent.
4. Hosting, Communications and Maintenance Services
4.1 Hosting Services. Fry agrees to provide Client with
services for hosting of each of the Client Sites specified in the Annual Plan.
Fry shall provide the hosting services in a professional, workmanlike manner,
and high grade of service, so that the Client Sites are accessible to third
parties via the Internet as specified herein and in the Configuration.
4.2 Availability of the Client Sites. Unless otherwise
indicated on Schedule 1.2 hereto, the Client Sites shall be accessible to third
parties and Client via the Internet and otherwise as specified in the Annual
Plan or the Configuration twenty-four (24) hours a day, seven (7) days a week,
except for scheduled maintenance and required repairs
<PAGE>
during such non-Key Time Periods as Client and Fry mutually agreed in advance
("Scheduled Maintenance").
4.3 Updates. As part of the hosting Services, Fry shall
provide Client with a system and the necessary software to allow Client to
transmit revisions, updates, deletions, Deliverables or modifications (the
"Updates") to a staging server designated and maintained by Fry (the "Staging
Server"). Fry shall update the Fry Server with the Updates according to a
written schedule agreed upon by Client and Fry and contained in the Annual Plan.
4.4 Proprietary Rights of Client. As between Client and Fry,
Client Content shall remain the sole and exclusive property of Client,
including, but not limited to data generated by the Client Sites such as Client,
end user and usage data. Nothing in this Agreement shall be construed to grant
to Fry any ownership right in, license to, or authority to edit, modify or adapt
the Client Content provided by Client to Fry.
4.5 Access and Security. Fry shall maintain a secure room(s)
in which all of Client's equipment and data shall be located and stored (the
"Client Area"). Access to the Client Area shall be limited by Fry solely to (i)
the individuals identified and authorized by Client to have access to the Client
Area in accordance with this Agreement, as identified in the writing to Fry, as
amended from time to time, which is hereby incorporated by this reference (the
"Representatives") and Fry's engineers, senior engineers, system administrators,
equivalent systems personnel and senior management (and as necessary and with
appropriate supervision, other service personnel) authorized by Fry based on
their need to have access to perform the services hereunder. Representatives
shall have access to the Client Area and any other location in where any Client
equipment or data is located twenty-four (24) hours a day, seven (7) days a
week.
4.6 Backup; Redundancy. Fry shall provide Client at all
times with the equipment, software, communications capacity and carriers and
power backup and redundancy set forth in the Configuration attached hereto as
Exhibit D, provided that in any event Fry shall always provide Client with
sufficient local generator backup power capacity to fully operate all of
Client's equipment and each of the Client Sites for at least [****]
consecutive hours. The parties acknowledge that Fry currently has [****]
under construction in [****] and that Fry shall use its best efforts to
provide complete redundancy for each of the Client Sites (and all related
data and Client Content) in at least one such facility as soon as possible
and in accordance with the Annual Plan and Configuration, but not later than
[****].
All Client data and customer data and all transaction and other data
generated by any of the Sites (including all Client Content contained on or
generated by any of the Sites) , directly or indirectly, will be copied and
stored off-site by Fry (or through a subcontractor to be identified by Fry and
approved by Fry) on at least weekly basis with a third-party fireproof storage
facility.
4.7 Communications Services. Fry shall provide the
communications services and capacities set forth in the Annual Plan and
Configuration.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
4.8 Client Equipment. Fry acknowledges that the computer
hardware and other tangible equipment listed on Exhibit E hereto is owned by
Client and shall be returned unencumbered to Client in good working order
(ordinary wear and tear excepted) promptly upon Client's request; provided
however if any such equipment is leased by Client from a third party, Fry shall
cooperate with Client with respect to the return and safekeeping of such
equipment as required by the lessor.
4.9 Maintenance, Error Correction and Support Obligations.
(a) Definitions.
Authorized Caller. "Authorized Caller" means a person or
persons designated by Client as the technical/engineering support interface for
the Work performed hereunder or any of the Client Sites.
Designated Support Engineer. "Designated Support
Engineer" means a person or persons designated by Fry as the
technical/engineering support interface for the Work performed hereunder or any
of the Client Sites.
End User. "End User" means a customer or other user of
any of the Client Sites.
Error. "Error" means a defect in the Services performed
or provided under this Agreement or in the operation of any of the Client Sites
which causes such Services performed hereunder or the performance of any of the
Client Sites not to function substantially in conformance with the
documentation, end user documentation, or other related documentation, including
without limitation any functional documentation or other engineering
documentation for the Services performed hereunder or in any of the Client
Sites, or commonly accepted operating principles as defined by industry
standards. Errors are classified as follows:
Severity 1: System or subsystem failure which results in
a critical impact to business operations. No viable workaround is known to
Client.
Severity 2: Critical System or subsystem service
interruption or degradation creating difficulty in the execution of a material
function. Client acceptable workaround is available.
Severity 3: Significant system or subsystem problems
which prevent some material functions from meeting the Specifications. Some
business operations are impaired, but the system and subsystems continue to
function. Client acceptable workaround is available.
Severity 4: Failure to perform in substantial
accordance with the Documentation, but not a Severity 1-3 Error.
Severity 5: Deliverable requests for hardware, software,
manuals or services.
<PAGE>
Incident. "Incident" means a situation which
necessitates an End User to contact Client for assistance.
Problem. "Problem" means the perceived failure or
functional impairment that causes reduced functionality to the Work performed
hereunder or in any of the Client Sites.
Problem Priorities. "Problem Priorities" classify the
criticality of a problem at a Client site. Problem Priorities are assigned at
the time of Client's initial contact with Fry. Problem Priorities may be changed
based upon new information or Client situation. Problem Priorities refer the
classification of the Incident, not any resulting Error which may be identified
during the resolution of the Incident. Problem Priorities are classified as
follows:
Severity 1: Client is "hot"; there is risk of losing
business.
Severity 2: Client "temperature is rising"; there is
potential risk of losing actual or future business.
Severity 3: The problem is impacting the Client's day to
day business; there is no risk of losing business.
Severity 4: The problem is not currently impacting the
Client's day to day business, but may in the future; there is no risk of losing
business.
Repair. "Repair" means the repair or replacement of a
Work performed hereunder or in any of the Client Sites or part.
Technical Support Levels. "Level" means a certain class
of service provided to authorized resellers and end users. Definitions are as
follows:
Level One: First call support on all Client calls;
technical support staff answers technical inquiries regarding Work performed
hereunder or in any of the Client Sites, performs Work performed hereunder or in
any of the Client Sites installation and configuration support, provides broad
troubleshooting expertise.
Level Two: Specialist level technical support; technical
support/escalation staff performs Problem isolation and replication, lab
simulations and interoperability testing, provides remote diagnostics
capabilities and on-Client Sites troubleshooting, if required, and implements a
solution for a Problem that is not the result of a Work performed hereunder or
in any of the Client Sites Error. In the case of a Work performed hereunder or
in any of the Client Sites Error, the technical staff is able to identify the
source of the Error, create a reproducible test case, and document the details
of the Error for escalation to Fry.
Level Three: Backup engineering and technical support;
staff isolates a Work performed hereunder or in any of the Client Sites error
and implements a solution through a Work performed hereunder or in any of the
Client Sites change.
<PAGE>
Workaround. A "Workaround" is a feasible change in
operating procedures whereby an end user can avoid any deleterious effects of an
Error.
(b) Error Correction. Client and Fry shall promptly
agree in good faith to any information and/or documentation which may be
required to permit Fry to identify and resolve Errors (meaning to correct the
Error to restore compliance with specifications and Documentation) in any of the
Services performed hereunder or in any of the Client Sites. The Error correction
period begins after Fry (a) has enough information to profile the Error and (b)
can recreate the Error or has access to a facility where the Error can be
recreated. Fry agrees to respond to identified Errors based on the following
time-table:
Severity 1 Errors. Fry shall use best efforts to
resolve or reduce the severity via Workaround and/or patch within [****]
(during any Key Time Period and [****] during any non-Key Time Period) of
receipt of notice of such Error and use best efforts to resolve the Error
within [****] days of receipt of notice of such Error. Fry shall provide its
action plan within [****] days of such notice, and shall provide regular
status updates. A final engineering resolution shall be identified in the
action plan. Client and Fry problem managers shall review the incident after
such [****] day period.
Severity 2 Errors. Fry shall use best efforts to
resolve or reduce the severity via Workaround and/or patch within [****]
(during any Key Time Period and [****] during any non-Key Time Period) of
receipt of notice of such Error and use best efforts to resolve the Error
within [****] days of receipt of notice of such Error. Fry shall provide an
action plan within [****] days of such notice, and provide regular status
updates. Client and Fry problem managers shall review incident after [****]
days. A final engineering resolution shall be identified in the action plan.
A final engineering resolution shall be identified in the action plan. Client
and Fry problem managers shall review the incident after such [****]day
period.
Severity 3 Errors. Fry shall use reasonable
commercial efforts to resolve or reduce the severity via Workaround and/or
patch within [****] ([****] during any non-Key Time Period) of receipt of
notice and use best efforts to resolve within [****] days of receipt of
notice. Fry shall provide an action plan within [****] days of such notice,
and provide regular status updates. Client and Fry problem managers shall
review incident after [****] days. A final engineering resolution shall be
identified in the action plan. A final engineering resolution shall be
identified in the action plan. Client and Fry problem managers shall review
the incident after such [****]day period.
Severity 4 Errors. Fry shall use reasonable
commercial efforts to resolve or reduce the severity via Workaround and/or
patch within [****] ([****] during any non-Key Time Period) of receipt of
notice and use best efforts to resolve within [****] days of receipt of
notice. Fry shall provide an action plan within [****] days of such notice,
and provide regular status updates. Client and Fry problem managers shall
review incident after [****] days. A final engineering resolution shall be
identified in the action plan. A final engineering resolution shall be
identified in the action plan. Client and Fry problem managers shall review
the incident after such [****] day period.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
Severity 5 Errors. Fry shall use its reasonable
commercial efforts to acknowledge the Error within [****] days of receipt
of notice of such Error. A final engineering resolution will be determined
and scheduled through mutual agreement.
(c) Technical Support
(i) Support Issues. Client is responsible for
providing Level One support services to its end users. Fry shall provide
Levels One, Two and Three back-up technical support to Client, and shall make
support available to Client via telephone to Client's Authorized Caller(s).
Client agrees to use reasonable commercial efforts to ensure that no more
than [****] Client's Authorized Callers will be requesting support from Fry at
any given time. Fry will provide such support 24 hours a day seven days a
week every day of the year. .
The Authorized Callers and Designated Support Engineers will be the
primary contacts between Client's and Fry's technical support and/or escalation
centers. Client will provide a list of Authorized Callers including names,
address, phone numbers, and internet e-mail address. Fry will provide a list of
Designated Support Engineers.
(ii) Resolution of Support Issues. In the event
that Client cannot successfully resolve any Problem, Client may request
assistance from Fry. Fry will not contact or provide direct support to Client's
end users with respect to the Work performed hereunder or in any of the Client
Sites pursuant to this Agreement. Fry will provide an initial response
acknowledging receipt of the support request to all Client support inquiries
within four hours of receipt and Client and Fry will agree, in good faith, what
additional information and/or documentation will be required for resolution.
Technical support managers and engineers for each party will work in good faith
to devise and carry out an action plan that will provide a timely and
satisfactory resolution. Fry shall work with Client in attempting to reproduce
any such problem.
5. Client Content.
5.1 Accuracy and Review of Client Content. Client assumes sole
responsibility for: (a) acquiring any authorization(s) necessary for hypertext
links to third-party Web sites; and (b) the accuracy of materials provided to
Fry, including, without limitation, Client Content, descriptive claims,
warranties, guarantees, nature of business, and address where business is
conducted; and (c) ensuring that the Client Content does not infringe or violate
any right of any third party.
5.2 Limitations on Client Content. Client shall use reasonable
commercial efforts to provide Client Content that does not contain any content
or materials which are obscene, malicious, which infringe on or violate any
applicable law or regulation or any proprietary, contract, moral, privacy or
other third-party right, or which otherwise expose Fry to civil or criminal
liability.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
6. Fees and Taxes.
6.1 Maintenance Fees. To the extent that Fry is to provide
Maintenance under Exhibit A hereto, Client shall pay for all Maintenance-related
tasks as provided in Exhibit A hereto.
6.2 Out-of-Pocket Expenses. Client shall pay, or reimburse
Fry, upon receipt of appropriate receipts and documentation, for any reasonable
out-of-pocket expenses, including, without limitation, travel and travel-related
expenses, incurred by Fry in connection with the performance of the Services;
provided, however, that any single expense in excess of [****] shall require the
prior written approval of Client.
6.3 Additional Service Fees. Unless otherwise agreed to by the
Parties in a Project Brief or Annual Plan, Client shall pay to Fry all fees for
Additional Services on a time and materials basis as invoiced by Fry.
6.4 Late Payment. Client shall pay to Fry all fees not
specifically itemized on Exhibit A within [****] days of receipt of the
applicable Fry invoice. If Client fails to pay any fees within [****] days of
any written late payment notice from Fry, late charges of the lesser of [****]
per month or the maximum allowable under applicable law shall also become
payable by Client to Fry.
6.5 Taxes. Client shall pay or reimburse Fry for all sales,
use, transfer, privilege, excise and all other taxes and all duties, whether
international, national, state or local, however designated, which are levied or
imposed by reason of the performance by Fry under this Agreement; excluding,
however, income taxes which may be levied against Fry.
6.6 Most Favored Terms. If after the effective date of the
Agreement, Fry enters into a hosting, development or similar agreement with a
third party of substantially the same scope as herein provided but under more
favorable financial, or other material, terms than those given to Client
under this Agreement, Fry shall promptly notify Client of said more favorable
terms, and this Agreement shall automatically be amended effective with the
date of such other agreement to reflect the more favorable terms. Fry will
provide Client with any information necessary to evidence compliance with
this Section.
7. Exclusivity. Except with the prior written consent of Client,
Fry agrees that during the term of this Agreement and for two (2) years
thereafter Fry shall not provide any development, maintenance, hosting or
related services to any person or entity providing floral products or engaged
in the floral and/or gardening industries except for Client and Client's
affiliates.
8. Insurance. Fry agrees to maintain at its expense the following
insurance policies during the term of this Agreement and for two years
thereafter: commercial general liability coverage of at least [****] million
and Internet professional liability coverage of at least [****] million (and
shall name Client as an additional insured thereunder); provided, however,
that upon the signing hereof, such coverage amounts may be [****] million,
but shall be increased to the [****] million level by [****]. In addition,
Fry shall maintain appropriate workman's compensation and all other policies
required by law. Upon the signing hereof and
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
any increase in coverage amount referred to above, Fry shall provide Client with
certificates of insurance evidencing the foregoing.
9. Fry Warranties.
(a) General Warranties. Fry represents and warrants
that: (i) Fry has the power and authority to enter into and perform its
obligations under this Agreement, (ii) Fry's Services under this Agreement shall
be performed in a professional workmanlike manner with the degree of skill and
care that is required by current, good and sound professional procedures and
practices and in conformance with generally accepted professional standards for
the completion of such work prevailing at the time, (iii) that it owns all
rights of any nature in the Fry Material without encumbrance and has the right
to grant to Client the rights and licenses granted herein and that neither any
design nor programming, nor any other material or facet added to the Client
Sites by Fry (provided that Fry makes no representations with respect to
material provided by Client) infringes any person or entity's copyright,
trademark, patent or other proprietary right, is libelous, an invasion of
privacy, obscene or otherwise violates any law or right of any person or entity,
or contains any recipe, formula or instruction harmful to any person or
property; (iv) that all Services and property as delivered by Fry is and shall,
during the Initial Term and any Renewal Term, and for a period of [****]
thereafter, remain free of any (a) back door, time bomb, drop dead device, or
other software routine designed to disable a computer program automatically with
the passage of time or under the positive control of the warranting party or (b)
any virus, Trojan horse, worm, or other software routine or hardware component
designed to permit unauthorized access, to disable, erase, modify or otherwise
harm any software, hardware or data or to perform any other such actions and (v)
that all software, firmware and hardware delivered to Client or used by Fry in
connection with any of the Client Sites will, except to the extent covered by a
third party manufacturer's year 2000 compliance warranty disclosed in advance to
Client in writing and accepted by Client, (1) correctly handle date information
before, during, and after January 1, 2000 including accepting date input,
providing date output and performing calculation on dates or portions of dates;
(2) function accurately and without interruption before, during, after and
including January 1, 2000 without changes in operation associated with the
advent of the new century assuming correct configuration; (3) respond to two
digit date input in a way that resolves the ambiguity as to century in a
disclosed, defined and pre-determined manner; (4) store and provide Output of
date information in ways that-are unambiguous as to century; (5) correctly
manage the leap years occurring in the year 2000 and subsequently; and (6) use
fields providing at least four decimal digits for the year portion of all stored
dates.
(b) Service Level Warranty. In the event Client
experiences any of the following which is not as a result of any actions or
inactions of Client or any third parties not under control of Fry (including
Client Equipment and third party equipment), Fry will credit Client's account as
described below:
(i) Inability to Access the Internet
(Downtime). If Client is unable to transmit or receive information from Fry's
Internet Data Center (i.e., Fry's LAN and WAN) to other portions of the
Internet because Fry failed to provide the Internet Data Center Services for
more than [****] ("Internet Access Failure"), Fry will
credit Client's account an amount equal to [****] of the [****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
then paid by Client under this Agreement ([****] (meaning the [****] days
prior to and the day of the following days each year in the United States:
Thanksgiving, Christmas, Valentines Day, Easter, Secretary's Day, and Mothers
Day)) for each such [****] (but such credits in any given [****] shall not
exceed the [****] due for such [****]). Fry's Scheduled Maintenance of shall
not be deemed to be a failure of Fry to provide the hosting Services
hereunder. For purposes of the foregoing, "unable to transmit or receive"
shall mean sustained packet loss in excess of [****] based on Fry's
reasonable measurements.
Fry shall continue to provide Client with real-time reporting
information concerning server performance and other relevant performance,
transactional and processing data in the same manner as it currently provides to
Client plus such additional information and reporting as the parties shall agree
or as shall be contained in the Annual Plan.
(ii) Response Time and Equipment Availability. Fry
shall respond as follows within the following minimum response times:
(1) Time to Discover; Inability to Access
the Internet; Notification of Client. As soon as practicable, but within
[****](during Key Time Periods and [****] during other times) of discovering
the existence of an Internet Access Failure, Fry will determine whether the
source of the an Internet Access Failure is limited to the Client Equipment
and the Fry equipment connecting the Client Equipment to Fry's LAN ("Client
Specific Failure"). If an Internet Access Failure is not a Client Specific
Failure, Fry will determine the source of the Internet Access Failure as soon
as practicable, but within [****] (during Key Time Periods, and [****] during
other times) after determining that it is not a Client Specific Failure. In
any event, Fry will notify Client of the source of an Internet Access Failure
within [****] after identifying the source.
(2) Remedy of Inability to Access the
Internet. If an Internet Access Failure remedy is within the sole control of
Fry, Fry will remedy an Internet Access Failure as soon as practicable, but
within [****] (during Key Time Periods, and [****] during other times) of
determining the source of an Internet Access Failure . If an Internet Access
Failure is caused from outside of the Fry LAN or WAN, Fry will notify Client
and will use commercially reasonable efforts to promptly notify the
party(ies) responsible for the source and cooperate with it(them) to resolve
the problem as soon as possible.
(3) Failure to Determine Source and/or
Resolve Problem. In the event that Fry is unable to determine the source of
and remedy the Internet Access Failure within the time periods described
above, Fry will credit Client's account the pro-rata connectivity charges for
[****] of service for every failure to satisfy the above response time
commitments ([****] days during Key Time Periods) and an extra day of credit
for every [****] ([****] for non-Key Time Periods) in excess of the above time
periods that it takes Fry to resolve the problem (but such credits in any
given [****] shall not exceed the [****] due for such [****]).
(iii) Termination Option for Chronic Problems: If,
in any thirty day period , Client would be able to receive credits totaling
[****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
resulting from [****] or more events, or if any single event entitling
Client to credits under this Section exists for a period of [****]
consecutive hours, then, Client may terminate this Agreement for cause and
without penalty by notifying Fry no later than [****] business days following
the end of such calendar month. Such termination will be effective on the
date set by Client.
10. Client Warranties. Client represents and warrants that (a)
Client has the power and authority to enter into and perform its obligations
under this Agreement, (b) commencing as of the date of this Agreement Client
Content does not and shall not contain any content, materials, advertising or
services that are materially inaccurate or that infringe on or violate any
applicable law, regulation or right of a third party, including, without
limitation, export laws, or any proprietary, contract, or any other third-party
right, (c) that Client owns the Client Content or otherwise has the right to
place the Client Content on the Client Sites on which it is placed, (d) that its
services, products, materials, data, information and Client Equipment used by
Client in connection with this Agreement as well as Client's Equipment does not
operate in any manner that would violate any applicable law or regulation in any
material respect and (e) Client has obtained any authorization(s) necessary
under law for hypertext links from the any Client Sites to other third-party Web
sites.
11. Disclaimers of Warranty. EXCEPT FOR THE LIMITED WARRANTIES SET
FORTH IN SECTIONS 9 AND 10 ABOVE, THE PARTIES MAKE NO WARRANTIES HEREUNDER, AND
THE PARTIES EXPRESSLY DISCLAIM ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING, WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
FRY DOES NOT AND CANNOT CONTROL THE FLOW OF DATA TO OR FROM FRY'S
FACILITIES AND OTHER PORTIONS OF THE INTERNET. SUCH FLOW DEPENDS IN LARGE PART
ON THE PERFORMANCE OF INTERNET SERVICES PROVIDED OR CONTROLLED BY THIRD PARTIES.
AT TIMES, ACTIONS OR INACTIONS CAUSED BY THESE THIRD PARTIES CAN PRODUCE
SITUATIONS IN WHICH CLIENTS' CONNECTIONS TO THE INTERNET (OR PORTIONS THEREOF)
MAY BE IMPAIRED OR DISRUPTED. ALTHOUGH FRY WILL USE COMMERCIALLY REASONABLE
EFFORTS TO TAKE ACTIONS IT DEEMS APPROPRIATE TO REMEDY AND AVOID SUCH EVENTS,
FRY CANNOT GUARANTEE THAT THEY WILL NOT OCCUR. ACCORDINGLY, FRY DISCLAIMS ANY
AND ALL LIABILITY TO THE EXTENT RESULTING FROM OR RELATED TO SUCH EVENTS.
EACH REPRESENTATIVE OF CLIENT AND ANY OTHER PERSONS VISITING THE
INTERNET DATA CENTERS DOES SO AT ITS OWN RISK AND FRY ASSUMES NO LIABILITY
WHATSOEVER FOR ANY HARM TO SUCH PERSONS RESULTING FROM ANY CAUSE OTHER THAN
FRY'S NEGLIGENCE OR WILLFUL MISCONDUCT RESULTING IN PERSONAL INJURY TO SUCH
PERSONS DURING SUCH A VISIT.
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
12. Indemnification.
12.1 Client. Client will indemnify, defend and hold Fry, its
affiliates and Clients harmless from and against any and all Losses resulting
from or arising out of any Action brought by or against Fry, its affiliates or
Clients alleging: (a) with respect to the Client's Business: (i) infringement or
misappropriation of any intellectual property rights; (ii) defamation, libel,
slander, obscenity, pornography, or violation of the rights of privacy or
publicity; or (iii) spamming, or any other offensive, harassing or illegal
conduct; or (b) any damage or destruction to Fry's facility or the equipment of
Fry or any other client of Fry by Client or its Representatives (except for
ordinary wear and tear).
12.2 Fry. Fry will indemnify, defend and hold Client harmless
from and against any and all costs, liabilities, losses, and expenses
(including, but not limited to, reasonable attorneys' fees) (collectively,
"Losses") resulting from any claim, suit, action, or proceeding (each, an
"Action") brought against Client alleging (i) if true, a breach of any of Fry's
representations, warranties or agreements hereunder; (ii) the infringement of
any third party copyright, patent, trademark or other intellectual property
right resulting from the provision of the Services or (iii) personal injury to
Client's Representatives from Fry's negligence or willful misconduct.
12.3 Notice. In claiming any indemnification hereunder, the
indemnified party shall promptly provide the indemnifying party with written
notice of any claim which the indemnified party believes falls within the scope
of the foregoing paragraphs. The indemnified party may, at its own expense,
assist in the defense if it so chooses, provided that the indemnifying party
shall control such defense and all negotiations relative to the settlement of
any such claim and further provided that any settlement intended to bind the
indemnified party shall not be final without the indemnified party's written
consent, which shall not be unreasonably withheld.
12.4 Limitation of Liability. NEITHER PARTY SHALL HAVE
LIABILITY WITH RESPECT TO OBLIGATIONS UNDER THIS AGREEMENT OR OTHERWISE FOR
CONSEQUENTIAL, EXEMPLARY, SPECIAL, INCIDENTAL OR PUNITIVE DAMAGES, EVEN IF THE
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
EXCEPT FOR CLIENT'S INDEMNIFICATION OBLIGATIONS UNDER SECTION
12.1(a), CLIENT'S AGGREGATE LIABILITY FOR ANY REASON AND UPON ANY CAUSE OF
ACTION IN CONNECTION WITH THIS AGREEMENT SHALL BE LIMITED TO THE TOTAL
AGGREGATE CONSIDERATION PAID TO FRY BY CLIENT UNDER THIS AGREEMENT DURING THE
THEN MOST RECENT 12 MONTH PERIOD. THIS LIMITATION APPLIES TO ALL CAUSES OF
ACTION IN THE AGGREGATE, INCLUDING WITHOUT LIMITATION, BREACH OF CONTRACT,
BREACH OF WARRANTY, NEGLIGENCE, STRICT LIABILITY, MISREPRESENTATIONS AND
OTHER TORTS.
EXCEPT FOR FRY'S INDEMNIFICATION OBLIGATIONS UNDER SECTION 12.2
AND BREACHES OF SECTION 3.6 OR ANY OTHER INTELLECTUAL
<PAGE>
PROPERTY PROVISIONS OF THIS AGREEMENT, FRY'S AGGREGATE LIABILITY FOR ANY
REASON AND UPON ANY CAUSE OF ACTION IN CONNECTION WITH THIS AGREEMENT SHALL
BE LIMITED TO TWO TIMES (2) THE TOTAL AGGREGATE CONSIDERATION PAID TO FRY BY
CLIENT UNDER THIS AGREEMENT DURING THE THEN MOST RECENT 12 MONTH PERIOD. THIS
LIMITATION APPLIES TO ALL CAUSES OF ACTION IN THE AGGREGATE, INCLUDING
WITHOUT LIMITATION, BREACH OF CONTRACT, BREACH OF WARRANTY, NEGLIGENCE,
STRICT LIABILITY, MISREPRESENTATIONS AND OTHER TORTS.
The parties agree that all of the limitations and exclusions of
liability and disclaimers specified in this Agreement will survive and apply
even if found to have failed of their essential purpose.
13. Termination and Renewal.
13.1 Term. This Agreement shall be effective when signed by
the Parties and thereafter shall remain in effect for two (2) years, unless
earlier terminated as otherwise provided in this Agreement (the "Initial
Term"). This Agreement shall automatically be renewed beyond the Initial Term
for additional two (2) year terms (each, a "Renewal Term") unless Client
provides Fry with a written notice of termination at least sixty (60) days
prior to the expiration of the Initial Term or the then-current Renewal Term.
13.2 Should a Party breach this Agreement, the
non-breaching Party shall provide the breaching Party with prompt written
notice of such breach. Upon receipt of such notice, the breaching Party shall
have thirty (30) days to cure such breach, unless the breach is of the
confidentiality, license or ownership provisions of this Agreement, in which
case the non-breaching Party may terminate this Agreement immediately upon
written notice to the other party. If a breach of other than the
confidentiality, license or ownership provisions of this Agreement is not
cured within such cure period, the non-breaching Party may terminate this
Agreement upon written notice to the breaching Party. Fry shall, at the
Client's discretion, complete any work assigned or scheduled during the
notice period in accordance with the terms and conditions of this Agreement.
Subject to making the payments (except for the hold-back specified below) ,
Client shall own all the results and proceeds of Fry's Services rendered to
the date of termination as "work for hire" in accordance with the terms
hereof, and Fry shall promptly deliver all materials, information, documents,
drafts and any other property secured, produced and/or developed by Fry
pursuant to this Agreement, in full satisfaction of the Parties' obligations
to each other under this Agreement. Regardless of termination under this or
any other provision of this Agreement, Client shall be entitled, in its
discretion, to continue, discontinue, modify, or change its plans regarding
the Client Sites project.
13.3 All rights and licenses granted under or pursuant to this
Agreement by Fry to Client are, and shall be deemed to be, for purposes of
Section 365(n) of the United States Bankruptcy Code, 11 U.S.C. Section 101, et.
seq. (the "Bankruptcy Code"), licenses of rights to "intellectual property" as
defined under Section 101(56) of the Bankruptcy Code. The Parties agree that
Client, as a licensee of such rights and licenses, shall retain and may fully
exercise all of its rights and elections under the Bankruptcy Code, provided it
abides by the terms of this Agreement including without limitation, payment of
all sums due hereunder. The Parties
<PAGE>
further agree that, in the event that any proceedings shall be instituted by or
against Fry seeking to adjudicate it bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking an entry of an
order for relief for the appointment of a receiver, trustee or other similar
official for it or any substantial part of its property, or Fry shall take any
action to authorize any of the foregoing actions (each a "Proceeding"), Client
shall have the right to retain and enforce its rights under this Agreement
including, but not limited to, the following rights, provided it abides by the
terms of this Agreement: (i) the right to continue to use the Fry Material and
all source and object code developed under this Agreement and all versions and
derivatives thereof, and all documentation and other supporting material related
thereto, in accordance with the terms and conditions of this Agreement; and (ii)
the right to complete access to, as appropriate, all Fry Material and all source
and object code and all embodiments of such to be provided under this Agreement,
including documentation therefore to the extent provided for hereunder, and the
same, if not already in Client's possession, shall promptly be delivered to
Client: (a) upon any such commencement of a Proceeding upon written request
therefor by Client, unless Fry elects to continue to perform all of its
obligations under this Agreement; or (b) if not delivered under (a) above, upon
the rejection of this Agreement by or on behalf of Fry upon written request
therefor by Client.
13.4 Termination and Payment. Upon any termination or
expiration of this Agreement (except for an amount of up to $100,000 which
Client may hold-back until the return to Client of all of Client's Content and
other property by Fry), Client shall pay all unpaid and outstanding fees through
the effective date of termination or expiration of this Agreement and Fry shall
deliver to Client all work completed prior to the effective date of termination.
13.5 Designated Contact. Each party shall designate one person
who will act as the primary liaison for all communications regarding the
Services to be rendered by Fry hereunder.
14. Miscellaneous.
14.1 Entire Agreement. This Agreement and attached Exhibits
(including the then applicable Annual Plan) constitute the entire agreement
between Client and Fry with respect to the subject matter hereof and there are
no representations, understandings or agreements which are not fully expressed
in this Agreement.
14.2 Cooperation. The Parties acknowledge and agree that
successful completion of the Services shall require the full and mutual good
faith cooperation of each of the Parties.
14.3 Independent Contractors. Fry and its personnel, in
performance of this Agreement, are acting as independent contractors and not
employees or agents of Client.
14.4 No Joint Ventures. Nothing in this Agreement shall be
construed to establish a joint venture, agency, employment or partnership
relationship between the Parties.
<PAGE>
14.5 Amendments. No amendment, change, waiver, or discharge
hereof shall be valid unless in writing and signed by the party against which
such amendment, change, waiver or discharge is sought to be enforced.
14.6 Force Majeure. Except for the obligation to pay money,
neither party will be liable for any failure or delay in its performance under
this Agreement due to any cause beyond its reasonable control, including act of
war, acts of God, earthquake, fire, flood, embargo, riot, sabotage, labor
shortage or dispute, governmental act or failure of the Internet, provided that
the delayed party: (a) gives the other party prompt notice of such cause, and
(b) uses its reasonable commercial efforts to correct promptly such failure or
delay in performance and Client may terminate if service is down for more than
[****] consecutive hours.
If the performance of any part of this Agreement by either party is
prevented, hindered, delayed or otherwise made impracticable by reason of any
flood, riot, fire, judicial or governmental action, labor disputes, act of God
or any other causes beyond the control of either party, that party shall be
excused from such to the extent that it is prevented, hindered or delayed by
such causes provided, however, that if such delay or default by Fry exceeds
[****] consecutive business days, then Client may terminate this Agreement
effective upon written notice to the other party.
14.7 Arbitration. Any claim, dispute or controversy with
respect to, in connection with or arising out of this Agreement shall be
subject to and decided by arbitration in Nassau County, New York, by a panel
of three arbitrators. Each Party shall designate one disinterested arbitrator
and the two arbitrators so designated shall select a third arbitrator. The
persons selected as arbitrators need not be professional arbitrators, and
persons such as lawyers, accountants, brokers and bankers shall be
acceptable, but each shall have substantial experience with respect to
information technology and development. The arbitration proceeding shall be
conducted in accordance with the commercial arbitration rules of the American
Arbitration Association then and there pertaining. Any party may initiate
arbitration proceedings hereunder by providing written notice ("Demand for
Arbitration") to the other party to such claim, dispute or controversy. A
Demand for Arbitration shall be made within a reasonable time after the
claim, dispute or controversy has arisen; provided, however, that no Demand
for Arbitration may be made after the date when institution of such claim,
dispute or controversy would be barred by the applicable statutes of
limitations. Arbitration proceedings shall be commenced within thirty (30)
days of such notice or as soon thereafter as practicable, and the arbitrators
shall be required to render a written determination within thirty (30) days
after the commencement of such arbitration proceedings. The written award of
a majority of the arbitrators shall be final and binding upon the parties and
judgement may be entered upon it in accordance with applicable law in any
court having jurisdiction thereof, including the federal district courts
located in Nassau County, New York. All costs of any such arbitration shall
be borne equally by the parties.
This Section shall not be construed to prohibit either party from
seeking preliminary or permanent injunctive relief in any court of competent
jurisdiction, however, the arbitrator hearing the dispute to which the
injunction pertains will have the power to modify or dissolve any such
injunction, or to order additional injunctive relief, in connection with the
final arbitration award. The parties, their representatives, other participants,
and the mediator and
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
arbitrator shall hold the existence, content, and result of any mediation and
arbitration in confidence except to the extent necessary to enforce a final
settlement agreement or to obtain and secure enforcement of or a judgment on an
arbitration decision and award.
14.8 Choice of Law and Venue. This Agreement shall be governed
in all respects by the laws of the State of New York without regard to its
conflict of laws provisions.
Subject to Section 14.7, each of the parties hereto irrevocably
and voluntarily submits to personal jurisdiction of the New York Supreme
Court located in Nassau County, New York and the Federal and state courts
located in the Eastern District of New York in any action or proceeding
arising out of or relating to this Agreement and agrees that all claims in
respect of such action or proceeding may be heard and determined in any such
court. Each of the parties hereto further consents and agrees that such party
may be served with process in the same manner as a notice may be given under
Section 14.10. Each of the parties hereto agrees that any action or
proceeding instituted by any of them against any 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 parties hereto 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.
14.9 Assignment. Neither party shall assign, without the prior
written consent of the other Party, its rights, duties or obligations under this
Agreement to any person or entity, in whole or in part, whether by assignment,
merger, transfer of assets, sale of stock, operation of law or otherwise, and
any attempt to do so shall be deemed a material breach of this Agreement, except
to affiliate.
14.10 Notice. Any notice pursuant to this Agreement, if
specified to be in writing, shall be in writing and shall be deemed given (i) if
by hand delivery, upon receipt thereof, (ii) if by mail, three (3) days after
deposit in the United States mails, postage prepaid, certified mail, return
receipt requested, (iii) if by facsimile transmission, upon electronic
confirmation thereof, or (iv) if by next day delivery service, upon such
delivery. All notices shall be addressed as follows (or such other address as
either party may in the future specify in writing to the other):
In the case of Fry: Fry Multimedia, Inc.
3971 South Research Park Drive
Ann Arbor, Michigan 48108
Fax: (734) 741-0640
Attention: David Fry, President
<PAGE>
In the case of Client: 800-Gifthouse, Inc.
1600 Stewart Avenue
Westbury, New York 115901
Fax: (516) 237-6060
Attention: Donna Iucolano
With a copy to: Gallagher Walker & Bianco
98 Willis Avenue
Mineola, New York 11501
Telecopier: (516) 248-2394
Attention: Gerard M. Gallagher, Esq.
14.11 Waiver. The waiver of failure of either party to
exercise any right in any respect provided for herein shall not be deemed a
waiver of any further right hereunder.
14.12 Severability. If any provision of this Agreement is
determined to be invalid under any applicable statute or rule of law, it is to
that extent to be deemed omitted, and the balance of the Agreement shall remain
enforceable.
14.13 Counterparts. This Agreement may be executed in several
counterparts, all of which taken together shall constitute the entire agreement
between the Parties hereto.
14.14 Headings. The section headings used herein are for
reference and convenience only and shall not enter into the interpretation
hereof.
14.15 Approvals and Similar Actions. Where agreement,
approval, acceptance, consent or similar action by either party hereto is
required by any provision of this Agreement, such action shall not be
unreasonably delayed or withheld.
14.16 Survival. The provisions of Sections 3, 4.8, 7, 8, 9(a),
12, 13.2, 13.3 and 14 of this Agreement shall survive the termination or
expiration of this Agreement.
14.17 Government Regulations. Client will not export,
re-export, transfer, or make available, whether directly or indirectly, any
regulated item or information to anyone outside the U.S. in connection with this
Agreement without first complying with all applicable export control laws and
regulations of the U.S. Government and any country or organization of nations
within whose jurisdiction Client operates or does business.
14.18 Non-Solicitation. During the period beginning on the
date hereof and ending on the first anniversary of the termination or expiration
of this Agreement in accordance with its terms, Fry and Client agrees that they
will not, and will ensure that their affiliates do not, directly or indirectly,
solicit or attempt to solicit for employment or other work persons employed by
the other Party during such period.
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
CLIENT FRY
800-GIFTHOUSE, INC. FRY MULTIMEDIA, INC.
By: /s/ Christopher G. McCann By: /s/ David Fry
-------------------------- -----------------------
(Signature) (Signature
Name: Christopher G. McCann Name: David Fry
Title: Vice President Title: President
<PAGE>
EXHIBIT A
ANNUAL PLAN
<PAGE>
====================
[LOGO] INTERACTIVE SERVICES
PROJECT BRIEF
====================
PROJECT TITLE: Annual Plan--Fiscal Year 2000 BRIEF NUMBER: 0199-1003
PROJECT SPONSOR: Donna Iucolano BRIEF DATE: Jan-13-1999
BACKGROUND:
1-800-FLOWERS(R) currently maintains a business to consumer based
transactional Web Site at www.1800flowers.com. The Site, which is developed,
managed, and maintained by Fry Multimedia in Ann Arbor, Michigan was recently
redesigned and launched on November 16, 1998. Given several new opportunities
which have presented themselves, the Company's e-commerce strategy has been
changed to support the housing of the totality of the 1-800-FLOWERS, Inc.
product and service offerings as available through its various subsidiaries
including 800-FLOWERS, 800-BASKETS, 800-GROWERS, 800-GOODIES, Plow & Hearth,
Fresh Home & Garden, and American Country Home under one "master"
Network-concept Web Site. The theme of the Network [new Web Site] is to
revolve around "living and giving" with 1-800-FLOWERS as it is bringing
customers the "best of" floral, home and gardening products. The goal is to
convey that the Network offers products and ideas for self-consumption as
well as gifting.
Due to increased competition within the floral and related gardening and gifting
categories - both online and off-line, the window of opportunity to develop and
successfully launch the Network is narrow with it being imperative to achieve a
live date of early spring.
IT IS IMPORTANT TO NOTE THAT THE STRATEGY IS BEING EVOLVED AS A RESULT OF NEW
OPPORTUNITIES AND NOT BECAUSE THE CURRENT SITE IS FLAWED IN ANY WAY. IT IS OUR
INTENT TO BUILD UPON ALL OF THE FUNCTIONALITY AVAILABLE IN THE CURRENT SITE AND
THAT IS BEING PURSUED IN PHASE II IN THE NETWORK.
While 1-800-FLOWERS has emerged as the online market leader in the fresh floral
category, it has a tremendous opportunity to expand beyond this product category
to others, which are related. Four general or umbrella categories are being
pursued including:
1. FRESH PRODUCTS - Flowers, Plants, Fruit, Vegetables, Gourmet,
Etc.
2. BASKETS & RELATED PRODUCTS - Gourmet Baskets, Novelty Gift
Baskets, Balloons, Etc.
3. GARDEN PRODUCTS - Seeds, Plants, Bulbs, Garden Tools, Garden
Ornaments, Clothing and Accessories, Etc.
4. HOME / HOME DECORATING - Indoor & Outdoor Furniture, Decorative
Containers, Accessories, Dried Floral Products, Clothing, etc.
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<PAGE>
ASSIGNMENT:
1-800-FLOWERS(R) is interested in having Fry Multimedia develop a Web Site so
that it reflects the new [Fresh] Floral, Home & Garden Network strategy. This
Network Site should leverage as much of the recent development for Version 5
[introduced on Nov-16-98] and Plow & Hearth [introduced on Dec-08-98] as
possible so as to be completed in a cost efficient manner, and one that
recognizes the time constraints under which the Network is expected to
launch. The Network strategy is being designed to position 1-800-FLOWERS as
one of the emerging online commerce hubs and is intended to aggregate all of
the products of the 1-800-FLOWERS organization under one umbrella and master
Web Site so as to gain economies of scale and not need to develop
individually branded efforts for [****] subsidiary company. Products to be
featured on the site include those of the brands 800-FLOWERS, 800-BASKETS,
800-GROWERS, 800-GOODIES, Plow & Hearth, Fresh Home & Garden, and American
Country Home as well as others if appropriate. This Network Web Site should
be robust enough to accommodate [****] of products [and attributes] as well
as provide for a [****] defined further down in this document.
OBJECTIVE[S]:
1-800-FLOWERS(R) has aggressive sales growth expectations from its Web Site in
Fiscal 2000 and views the ability to offer the totality of the 1-800-FLOWERS'
product line under one umbrella and master Web Site as critical in order to
achieve the growth. As such, 1-800-FLOWERS expects to satisfy the following
objectives with the Network concept:
1. ENABLING THE OFFERING OF GREATER VARIETY, DEPTH AND BREADTH OF
SELECTION. One of the most attractive things about online retailing for
both the retailer and the consumer is the fact that there is an endless
supply of [virtual] shelf space. Without the physical restrictions of
brick and mortar, a retailer has the ability to present millions of
products for sale to prospective shoppers. While successful in its
efforts, 1-800-FLOWERS actually offers one of the [****] inventories
of products available for sale online typically averaging approximately
[****] products. By aggregating our [****] product offerings under the
Network, 1-800-FLOWERS can make the leap from [****] to several [****]
products.
2. INCREASING SALES REVENUE. By adding products designed for [****] to
complement the [****], and adding [****] merchandise, 1-800-FLOWERS
will be able to grow sales revenue faster.
3. LEVERAGING ONLINE RETAILING & MERCHANDISING EXPERTISE. Over the years,
1-800-FLOWERS has built a reputation for its expertise in online
retailing and merchandising. This expertise should be leveraged so as to
be able to generate hundreds of orders for new product categories
introduced almost overnight. This will only work by deploying a Network
strategy.
4. MINIMIZING DEVELOPMENT & MAINTENANCE COSTS. Building and maintaining
multiple Web Sites that are on par with the 1-800-FLOWERS Web Site
will be expensive and challenging. With the initial cost of subsidiary
sites ranging from $100,000 to $250,000, plus maintenance, the return
on investment might not be realized with each individual effort. The
Plow & Hearth Web Site went live on December 9th. It now needs to be
maintained on a day-to-day basis and a marketing strategy and budget
needs to be developed to drive traffic to it. This will be both
time-consuming and expensive. And, the Web Site development for other
1-800-FLOWERS subsidiary efforts including Fresh Home & Garden,
American Country Home, and GardenWorks has also been discussed.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
5. PIGGY-BACKING ON MARKETING & DISTRIBUTION DEALS. As we are finding,
driving traffic to the Web Site is getting more expensive every day.
Portal and distribution deals [****]. Negotiating each of these
relationships is time-consuming, as is the implementation once the
agreement is signed. By focusing on a Network strategy, the
relationships and marketing programs in place to support the fresh
floral product line can be leveraged to support additional product
offers. [****] This Network strategy is the exact one being
successfully deployed by [****]. 1-800-FLOWERS can do the exact same
thing, and own valuable online real estate for not only flowers, but
also gardening and home.
6. LEVERAGING OPERATIONS & CUSTOMER SERVICE EXPERIENCE. Over the past
5 years, 1-800-FLOWERS has learned many valuable lessons as a
result of its online retailing and interactive marketing efforts -
none of the mistakes made which led to lessons learned should be
repeated, if possible. While the Plow & Hearth Web Site is up and
running, its features and capabilities are [****] to where
1-800-FLOWERS is today. For example: [****]. 1-800-FLOWERS has not
processed online orders manually since April of [****]. There is
[****] and there is [****]. Given our leadership position online, we
cannot "afford" to role out related or subsidiary efforts this way
without the potential for negatively impacting our reputation.
7. PERSONALIZED CONTENT. While we have researched the integration of
personalized capabilities as offers by Net Perceptions and others, these
applications are expensive and not really designed to support gifting
sites. By aggregating all efforts under one site, we can create an
intelligent, interactive environment that targets the appropriate
audience(s) with the appropriate product(s), value-added service(s), and
information while supporting and motivating the visitor toward trial,
repeat purchase, brand adoption, and long-term loyalty by offering
products and information for self consumption as well as gifting.
8. MULTIPLE SELLING OPPORTUNITIES. With the introduction of additional
products and product categories, many more merchandising and
cross-selling opportunities become available on the Home Page and
throughout the Web Site, which can increase the conversion of browsers
to shoppers. This might include multiple featured products, buttons,
banners, and text links on the home page; the creation of a gift center
which provides for profiling of the recipient; integration of general
gifting, floral, home decorating, and light gardening information
[or editorial] which integrates products for sale.
9. CO-BRANDING. Given the new "look & feel," there will be the need to
create a "standard" presentation for co-branded content to be
implemented primarily by the expansion of the affiliate network and
general distribution relationships. The co-branding in place today
might be able to be leveraged.
10. RECOGNITION OF REFERRING URL. We recognize the tremendous marketing
potential presented by printed catalogs and general brand recognition of
1-800-FLOWERS subsidiary companies. The Network Site should be created
in a manner enabling the many domain names currently owned by
1-800-FLOWERS such as WWW.PLOWHEARTH.COM to remain live and to take
customers to the Network while acknowledging where they came from. For
example: "Plow & Hearth products found here!"
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
FUNCTIONAL REQUIREMENTS:
A. [****]:
1. The Network Site will become the central online point of contact
for customers interested in shopping with 1-800-FLOWERS and its
subsidiary companies. [****]
2. The "look and feel" of the Site will need to convey the
availability of fresh floral, home and garden products as
presented within a living and giving context in the most
efficient manner. A streamlined and tight masthead or primary
navigation element is desired along with high performance at a
28.8 dial-up modem speed. [****]
3. [****]
4. Web Sites to review to their efficiency and compactness include
the following: [****].
B. SHOPPING FUNCTIONALITY:
1. The Network Site should support shopping by [****] - i.e.
800-FLOWERS or Plow & Hearth as well as by [****] or [****] -
i.e. flowers, plants, outdoor furniture, etc. It should also
allow for searching by keywords.
2. The Network Site should also feature a [****] which offers
suggested products based on [****] - i.e. [****]; based on
relationship to the [****] - i.e. [****]; based on [****] -
i.e. gifts under [****]; and, based on [****] - i.e. same
day, within [****] hours, within [****] hours. A special
holiday [****] should also be available at Christmas,
Valentine's Day, Mother's Day, etc.
3. The Network Site will need to support a product database
consisting of [****] of products with attributes or features,
and be able to guide people through the searching process so
as not to be overwhelmed by the potential number of products
returned. The current of the WWW.1-800-FLOWERS.COM and
WWW.PLOWHEARTH.COM sites should be integrated.
4. The Network Site should offer [****]. All orders taken on the
Site will be processed by 1-800-FLOWERS in Westbury, New York
automatically.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
5. The Network Site will integrate special features as created for
the 1-800-FLOWERS.com Site namely the [****] including [****].
These can all be enhanced through the additional of software as
provided by Net Perceptions or others.
6. The Network Site should allow [****] between companies
and departments featured on the Site.
7. The Network Site needs to support [****] including
select local florist, Federal Express, United Parcel Service,
and the US Postal Service.
8. The Network Site MUST support intelligence in the [****]
with the ability to pro-active present the [****] date and/or
[****] date to consumers.
9. Departmentalized Web shopping sites to review include:
[****].
C. CUSTOMER SERVICE FUNCTIONALITY:
1. Given the potential number of product offerings and the fact
that many more of the offerings require being inventoried and
available for purchase, the Network Site will need to
communicate in real time or close to it with company-wide
inventory management systems. This will prevent the purchasing
of products, which are out of stock and/or inform customers of
any back orders.
2. Given that a majority of the products to be purchased will be
fulfilled [****] from vendors using Federal Express,
United Parcel Service, or some other service, the ability of a
customer to [****] would offer a value added customer service
benefit to shoppers. The Site should allow customers to generate
[****] messages or [****] online.
3. Real time customer service [****] - as provided by [****] -
would need to be supported on the Network.
4. Customer service inquiries via email would also need to be
supported on the Network.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
D. MERCHANDISING FUNCTIONALITY:
1. Given the potential number of product offerings, the Network
Site offers tremendous opportunity for [****] and [****]
as well as the presentation of great variety. Products will
need to be presented with [****]. The [****] should
allow for several products to be returned quickly.
2. As with the 1-800-FLOWERS.com Web Site, there will be the need
to communicate important information to customers at certain
points. This might include holiday "cut-offs," products being
out of stock, new products, etc. This information will be might
be vendor, product or Network specific.
3. The Network Site should further enable merchandising within
[****] and on the [****].
4. The Network Site should support [****] as well as [****]
to support merchandising and the presentation of special offers,
holiday reminders, etc.
5. The Network Site needs to support [****] delivery and
shipping for certain vendors and/or products.
6. The Network Site needs to support a [****] of product selection
in the case of a product [*****].
E. CONTENT FUNCTIONALITY:
1. All editorial information related to fresh flowers, gardening
and home should reside in [****] predominant place - i.e. the
[****] area. Content should however be [****] throughout the
Site - especially within the shopping section so as to
support merchandising within an editorial context. Editorial
should also support impulse buying and the integration of
merchandise.
2. Content should support selling including [****] with [****]
embedded within the content and not only available as [****]
on the [****] of pages.
3. The Network should support truly [****] content, which will
enable a customer to [****] of the service as related to
their [****]. For example: a [****] area where customers would
provide us details about [****].
4. The Network should enable integration of other content - i.e. we
might want to partner with [****] to support [****] area.
5. [****] content areas should allow for [****], as some of
the content will be written by 1-800-FLOWERS, some [****],
some [****], etc.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
F. ADVERTISING AND PROMOTIONAL FUNCTIONALITY:
1. Given the potential number of product offerings and multiple
brands that will be available on the Network, there should be
some [****] functionality built in which enables [****] to run
promoting products, services, brands or concepts available
within the Network.
2. [****] should be available on the Site's [****] for possible
use by the Network or for sale to [****] such as a [****]
company.
3. Integrate an [****] such as provided by [****] or [****] to
serve and track [****] within the Network Site.
4. Support for standard linking with tracking capability as it
exists today. Links to: 1-800-FLOWERS.com [****], individual
product pages, product collections, [****] content areas,
promotional pages, [****], etc.
5. Support for special partner programs such as [****] of [****]
information for [****], pre-population of order form for
[****], and 1-800-FLOWERS.com "keyword search" feature.
6. Promotional areas should enable 1-800-FLOWERS to use in-house
resources to create, update and maintain holiday or seasonal
theme areas.
G. RELATIONSHIP MARKETING FUNCTIONALITY:
1. Registration should be easy and encouraged often. Getting people
to register is high priority. There should be many real benefits
including the ability to customize the Network - i.e. the My
Flower Shop concept which will need to be renamed. Registration
should enable customers to receive information in general
about the Network or specific to an area of interest
[i.e. gardening].
2. Interaction with the Network should enable learning about the
customer in order to serve them better. This "learning" might
need to be facilitated by the software of a company such as is
offered by Net Perceptions.
3. Registration layout and information gathered will need to be
revised to accommodate customer preferences for self-consumption
as well as gifting. Personalization software should enable this
[i.e. Amazon's book recommendation service).
4. Information being captured during the registration process
should allow for profiling as well as prospecting. A much more
[****] role in [****] is being requested.
5. [****] tools should be state-of-the-art and usable at
1-800-FLOWERS as well as at Fry Multimedia.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
6. The following [****] for programs and general communication
need to be in place and a determination of the communication
source (1-800-FLOWERS, Fry Multimedia, Plow & Hearth) will need
to be made in each case. All communication sent to each customer
would need to be [****] as part of the [****] in the
[****].
[****]
7. The Network Site will need to incorporate [****] so to be
able to speak to customers individually and uniquely. This
can take on many forms. Keep it simple in the beginning
through [****] at [****] without buying, [****], etc.).
Eventually enhance to dynamically generate content or views
based on customer learning. (i.e. [****])
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
H. BRANDING FUNCTIONALITY:
1. While the Network Site should be branded in a manner that
conveys "Fresh Floral, Home & Gardening" as well as "Living &
Giving," the equity in the brand building efforts of
1-800-FLOWERS should not be abandoned. They should instead be
leveraged. While the company has not [****] on the [****], it
is receptive to suggestions from Fry Multimedia. Discussions
to date have lead to:
a. The concept that given the Company's reputation as an
online retailing leader [and pioneer] there is a big
benefit to branding the Network as being offered "by
1-800-FLOWERS" or "from 1-800-FLOWERS."
b. The fact that domain names including WWW.800FLOWERS.COM,
WWW.1800FLOWERS.COM, WWW.FLOWERS.COM as well as the
various other combinations owned should all take one to
the Network.
c. The fact that we might be able to create a brand for the
Network through another domain name such as the
[****] or [****].
d. The fact that given the catalog efforts of Plow & Hearth
and Fresh Home & Garden, they should be able to promote
branded or vanity URLs which take customers to the
Network while allowing customers to "know" want the
referring company / domain name was. For example: a
positioning that would allow for "Plow & Hearth products
featured here!" Branding and co-branding for the
subsidiary companies needs to be further investigated.
e. A well-branded site with flanking brands for review
includes that of [****]. While [****] is the primary
site, customers have access to [****], which is
branded as [****] and an educational support site
branded as the [****] at [****].
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1-800-FLOWERS, Inc. Page 9 of 18 Confidential
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
I. EDITORIAL FUNCTIONALITY:
1. The Network Site should feature [****] that is [****] to [****]
of the editorial or magazine like content, and might also be
branded as the [****]. This editorial area will need to
support a varied about of information as outlined below:
a. Floral Information - care and handling, how-to
information, meanings of flowers, floral design trends,
etc.
b. Gardening Information - what to plant, when to plant,
regional gardening tips and information, descriptions of
plants/bulbs/seeds, etc.
c. Home Decorating - trends, ideas, suggestions, etc.
d. Gifting - trends, hot products, etc.
J. REPORTING / TRACKING FUNCTIONALITY:
NOTE: THIS SECTION WILL REQUIRE FURTHER DISCUSSION AS IT PERTAINS TO
HOW WE ISSUE [****] TO PEOPLE ON THE SITE TODAY AS WELL AS [****] AND
[****] PROCEDURES SO AS TO INTERACT WITH A CUSTOMER CENTERED DATABASE
PRODUCT.
1. [****] / Customer Performance [****]
The Site will need to [****] identify and report on customers
(purchasers) / Shoppers (browsers). - All reports should be
able to be run based on the following criteria: [****]
selection By [****] range, [****] ([****] and [****]), [****]
([****]). Ability to compare over [****] period a [****] ago.
a. Number of new [****] and number of new
[****].
b. Number of [****] and [****].
c. Registered vs. Non Registered [****]
d. [****] rate of shoppers to customers (first
time)
e. [****] rates of [****] customers
f. [****] rates of [****] visitors.
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**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
2. [****] Analysis
We need the ability to count visits to the Site by each
[****] identified visitor and then determine their purchase
[****]. What we hope to do is to identify the [****] on
average and for particular customer segments. - [****]
shopper, [****] customer, [****] customer, [****] customer
[****], [****] customer [****], [****] customer by [****] of
[****], [****] customer by [****] of [****], [****] shoppers
[****], etc. This report would include the ability to set a
[****] (i.e. [****] customers for [****] all, registered,
etc.) This should also include the ability to define the
[****] for particular segments and by the customers [****].
The information on this report should be available [****]
as well as in a [****] format that can be easily copied
into [****].
3. Establish a linkage between [****], 1-800-FLOWERS [****], and
[****]
The [****] of customers from each source should be included
in the file layouts of each of these sources. The [****] should
be passed to 1-800-FLOWERS and to [****] and retained. [****]
should correspond to 1-800-FLOWERS [****] and where multiple
customer numbers exist those records should be consolidated
or linked to obtain complete customer [****]. Based on [****]
at this level [****] or [****] can be set so that the next time
the customer comes to the web site or calls they could be [****]
for a specific [****]. Customers' will fall into specific
defined groups and be appropriately targeted.
4. Customer Purchase History
Purchase history of all customers that we can speak to via
[****]. History to include [****] dates, [****], zip code
[****] zip code [****], [****] type. We have discussed
offering this [****] to registered users and then to all
1-800-FLOWERS customers.
On the Fry side determine what [****] information can be
retained and tied to the [****] so that we can use the
[****] as a trigger for [****] that treat customers
[****]. The ultimate goal is to be able to have Fry maintain
a usable database of information that will enable us to
remember and act upon customer [****] and [****]. The [****]
portion of this equation will be incorporated into the new
registration area.
5. Metrics Numbers
Should be [****] reporting or scheduled and automated for
[****] delivery daily. Includes [****] all compared to
[****] ago numbers as defined by 1-800-FLOWERS.
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the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
6. Basic Marketing Questions to be answered:
a. Who are my customers?
Name, Address, City, State, Zip
[****]
b. Ability to define customer [****]?
[****] visitors and buyers, [****], Buyers by
[****], [****] buyers by [****], [****], [****],
Geographically. By [****] relationship, by [****]
location (ADI, ZIP) By customer to [****] location.
c. What are my customers [****]?
Break up floral purchases to cut flowers, arrangements,
etc. and gift products. Floral vs. Fed Ex, add new items
by category
d. How much are my customers [****]?
[****]?, Last [****] Months, [****].
e. Source of Acquisition? Affiliates, search engines,
[****], etc.
f. [****]
With [****], shopping to buying seasonally issues:
[****] reports by Quarter, Month by Month, Holiday vs.
Same Holiday year ago.
7. Web Analysis
[****] Analysis - [****] the consumer through the Site to
determine [****] areas on the site [****] before leaving
site.
8. Reporting Tools
Fry to review additional Web [****] tools such as [****]
for support on the Site.
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the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
9. Site Speed
Stimulus / response data - target [****] offers to segments
with [****] to measure [****] over standard to determine best
incentives by audience. Ability to offer dynamic [****]
messages.
Ability to identify [****] Customers / Visitors [****] and for
any date range selected numerically and graphically. Need to
know how many customers are [****] on a [****] basis.
10. [Redefine] Affiliate Reporting
By [****] ([****] effort code, [****] code or combination of
[****] code and [****] code - TBD)
By [****] to determine which products were purchased as a
result (promotional products vs. other products). (By [****]
Code).
Reports would show [****] numbers, graphs of results and updated
results.
ELEMENTS TO BE INCLUDED:
[****]
K. WEB SITE ADMINISTRATION:
1. The Network Site should allow for updating and maintenance by
1-800-FLOWERS remotely. Current administration area would need
to be enhanced to support the Network.
L. WEB SITE REMOTE MONITORING:
1. 1-800-FLOWERS is interested in being able to [****] traffic,
usage, etc. [****] from Westbury, New York.
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the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
M. HOSTING / REDUNDANCY:
1. 1-800-FLOWERS is asking Fry Multimedia to re-evaluate hosting
needs and projected server capacity with respects to increased
traffic and sales volume. Determine feasibility of [****] in
[****] or other location as a [****] measure.
MESSAGE[S]:
The messages to convey to users of the Network Site include:
1. That 1-800-FLOWERS means more than just flowers.
2. That 1-800-FLOWERS is leveraging its size and online retailing
expertise to bring Web customers the "best of" flowers,
gardening, and home decorating products.
3. That 1-800-FLOWERS means "Solutions/Products for Living &
Giving!"
4. That 1-800-FLOWERS is an electronic commerce / Internet
retailing leader that is an emerging online commerce hub.
5. That 1-800-FLOWERS has the expertise in "living and giving" as
evidenced through the editorial and general content available on
the Network Site.
TARGET AUDIENCE:
The Web site should speak to the follow target audiences:
1. PRIME: Given the nature of our product, the primary audience is
pretty [****]. It includes men and women ages [****]
and living primarily in [****].
2. SECOND: We have the opportunities to attract both [****]
and [****] men and women as well. We also have
the opportunities to attract Americans living and
working [****] of the [****] as well as [****]
interested in shopping with [****] companies.
3. THIRD: A growing number of [****], which maintain [****]
are [****] to our site in support of [****]. These
companies have [****] programs for their [****]
and/or [****] for [****] gift giving needs.
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 14 of 18 Confidential
536615.1-MATHUS-6/17/99 12:35:15 PM
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
NETWORK CONTENTS:
As suggested, the Network should offer a broader array of products, which are
brought to consumers by 1-800-FLOWERS. While there should be editorial
information to support the merchandising and selling process as well as to
establish credibility and expertise, the products available for sales are
critical. Here is a suggested approach to our merchandising efforts:
<TABLE>
<CAPTION>
- ---------------------------------------- -------------------------------------- --------------------------------------
FRESH [FLOWERS & RELATED] GARDENING HOME
- ---------------------------------------- -------------------------------------- --------------------------------------
<S> <C> <C>
FLOWERS [****]: BULBS & SEEDS [****]: DECORATING [****]:
- --------------- --------------------- ------------------
- - Floral Arrangements - Assorted bulbs - Wreaths
- - Roses - Assorted seeds - Candles
- - Plants - Starter kits / supplies - Vases
- - Wreaths / Topiaries - Pots & Containers
- - Balloons TOOLS [****]: - Dried Floral
--------------------- - Table Settings
- Tools - Garden-Inspired Art
FLOWERS [****]: - Boots, clogs & gloves - Books
- --------------- - Apparel
- - Plants - Greenhouses
- - Floral bouquets - Irrigation
- - Roses KITCHEN GARDENING [****]:
- - Plants -------------------------
- - Continuity Products - Cooking Herbs
PLANTS, TREES & SHRUBS [****] - Vegetables
----------------------------- - Fruiting Trees
- Perennials
GIFT BASKETS [****] - Herbs OUTDOOR FURNITURE [****]:
- - Gourmet Baskets - Fruit trees & plants -------------------------
- - Novelty Baskets - Roses, orchids, etc. - Wood/Iron/Wicker Furniture
- - Branded Baskets - Fencing
- - Floral/Aromatherapy Baskets WATER GARDENING [****] - Bird Feeders & Houses
---------------------- - Garden Ornaments
- Water garden plants - Storage Containers
FRUIT, CANDIES, & COOKIES [****] - Supplies & accessories
- --------------------------------
- - Fruit Baskets ORGANIC [****]:
- - Citrus Baskets/Boxes/Crates -------------- INDOOR FURNITURE [****]:
- - Candied & Dried Fruit Containers - [****] -----------------------
- - Nuts in Containers - Bedroom Furniture
- - Jellies, Jams, & Marmalades OUTDOOR FURNITURE [****]: - Other Indoor Furniture
- - Chocolate Products ------------------------- - Indoor Accessories
- - Cookie Products - Wood/Iron Furniture - Blankets
- Fencing
- Bird feeders & houses
- Garden ornaments FIREPLACE / HEARTH [****]:
--------------------------
- Fireplace Screens/Glass
PEST TRAPS [****]: - Firewood Containers/Carriers
----------------- - Wood Splitting Tools
VEGETABLES [****] - Traps - Accessories
- -----------------
- - Assorted in Crates APPAREL & ACCESSORIES [****]:
LANDSCAPE GARDENING [****]: -----------------------------
[****] --------------------------- [****]
- --------------------- - Other
- - Flowers
- - Floral Arranging [****]
- - Other - TBD --------------------- [****]
- Gardening/Gardens of the World -------------------
- [****] - Home Decorating
OTHERS - Other - TBD - Other--TBD
- ------
- - To Be Determined OTHERS OTHERS
------- ------
- To Be Determined - To Be Determined
- ---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 15 of 18 Confidential
536615.1-MATHUS-6/17/99 12:35:15 PM
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
COMPETITIVE SET:
While 1-800-FLOWERS has a growing number of competitors online, there is
[****] is the [****] being pursued by the Network - namely floral, home and
gardening products [****]. The following sites are however important for
their competition potential and individual efforts.
1. EMERGING COMMERCE HUBS:
[****]
2. FLORAL RELATED SITES:
[****]
3. GARDENING:
[****]
4. RETAIL AGGREGATORS:
[****]
1-800-FLOWERS FURTHER EXPECTS FRY MULTIMEDIA TO REVIEW/RESEARCH OTHER
TRANSACTIONAL AND/OR CONTENT SITES FOR [****] ELEMENTS AND SUGGESTIONS.
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 16 of 18 Confidential
536615.1-MATHUS-6/17/99 12:35:15 PM
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
TONE & MANNER:
We want our customers to perceive us as online retailer first and foremost -
not a warehouse or telemarketing organization. We want to convey that we have
a passion for the products we sell and know "everything" there is to know
about them. We have the broadest selection, access to the best grower farms
around the world, the best care and handling procedures, the best vendors,
and the best customer service.
MANDATORIES:
1. FAST PERFORMANCE: The Site should be optimized for best possible
performance most notably by the fast loading of its pages and searches in
its database. Given that we are broadening the product line beyond flowers,
the Network site does not have to be [****] or [****].
2. [****] FRIENDLY: Given the strategy, 1-800-FLOWERS would be interested in
[****] its native [****] on [****]. As such, our [****] marketing and
merchandising efforts would point and link to the [****]. Given the [****],
the Site would need to be maximized for performance via the [****]
browser. [See the information at the following location for optimizing
Web Site for performance via [****].
3. REDUNDANCY: With the size and scope of the effort, the Network needs to be
developed and maintained as a "mission critical" effort requiring [****]
for all of the possible points of failure and redundancy to successfully
accommodate the high volume of traffic and sales activity.
BUDGET:
Given the investment in the 1-800-FLOWERS.com Version 5.0 site and the
Plow & Hearth Version 1.0 made over the past 6 months, and the Company's
intent to leverage as much of the development as possible, it will rely
on Fry Multimedia to submit an estimate for the Network's development.
An estimate is expected as early as possible during the month of
January 1999.
TIMING:
The new site needs to be completed and live in the spring of 1999 so as to
maximize its appeal and launch. The launch will be supported with a [****],
which includes [****] and [****].
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 17 of 18 Confidential
536615.1-MATHUS-6/17/99 12:35:15 PM
**** Represents material which has been redacted and filed separately with
the Commission pursuant to a request for confidential treatment under Rule
406 of the Securities Act of 1933, as amended.
<PAGE>
================================================================================
PROJECT BRIEF SUBMISSION APPROVAL:
This Project Brief is being submitted on the part of 1-800-FLOWERS as approved
by:
DONNA M. IUCOLANO
-------------------------------
[Print Name]
_______________________________ Date: __________________
[Signature]
RETURN COST ESTIMATE & AGGRESSIVE TIME SCHEDULE BY FEBRUARY 01, 1999 TO:
DONNA IUCOLANO, VICE PRESIDENT
1-800-FLOWERS, INC.
1600 STEWART AVENUE
WESTBURY, NEW YORK 11590
FAX NUMBER: [516] 237-6009
E-MAIL: [email protected]
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 18 of 18 Confidential
536615.1-MATHUS-6/17/99 12:35:15 PM
<PAGE>
EXHIBIT B
PROJECT BRIEF FORM
B-1
<PAGE>
========================
[GRAPHIC OMITTED] INTERACTIVE SERVICES
1-800-FLOWERS(R) PROJECT BRIEF TEMPLATE
========================
PROJECT TITLE: BRIEF NUMBER:
PROJECT SPONSOR: BRIEF DATE:
BACKGROUND:
ASSIGNMENT:
OBJECTIVE[S]:
FUNCTIONAL REQUIREMENTS:
MESSAGE[S]:
TARGET AUDIENCE:
COMPETITIVE SET:
TONE & MANNER:
MANDATORIES:
BUDGET:
TIMING:
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 1 of 2 Confidential
<PAGE>
PROJECT BRIEF SUBMISSION APPROVAL:
This Project Brief is being submitted on the part of 1-800-FLOWERS as approved
by:
-------------------------------
[Print Name]
Date:
------------------------------- ----------------
[Signature]
RETURN COST ESTIMATE & TIME SCHEDULE BY [DATE GOES HERE] TO:
Contact Information Goes Here
- --------------------------------------------------------------------------------
1-800-FLOWERS, Inc. Page 2 of 2 Confidential
<PAGE>
EXHIBIT C
THIRD PARTY LICENSES
C-1
<PAGE>
EXHIBIT C
Software licensed directly by Client
[****]
Software licensed by Fry but made available for the Client's sites
[****]
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT D
CONFIGURATION
1-800-FLOWERS.COM
Voice and Data Networks
[****] [one chart omitted]
1-800-FLOWERS
Final Configuration
w/o Disaster Recovery
[****] [one chart omitted]
D-1
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<PAGE>
EXHIBIT E
CLIENT-OWNED EQUIPMENT
[****]
E-1
**** Represents material which has been redacted and filed separately with the
Commission pursuant to a request for confidential treatment under Rule 406 of
the Securities Act of 1933, as amended.
<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 July 28, 1999, in
Amendment No. 6 to the Registration Statement (Form S-1 No. 333-78985) and
related Prospectus of 1-800-FLOWERS.COM, Inc. dated August 2, 1999.
Ernst & Young LLP
Melville, New York
August 2, 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 30, 1999
