-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ExrnyI5pbYdEGECJy0M4nAygBPuGhyHYepiNzE7QdbfvewvleqD2ooLA4yNdUMgV zfDmS/hY1bepvQC7qY69FQ== 0001047469-99-036782.txt : 19990927 0001047469-99-036782.hdr.sgml : 19990927 ACCESSION NUMBER: 0001047469-99-036782 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1 800 FLOWERS COM INC CENTRAL INDEX KEY: 0001084869 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26841 FILM NUMBER: 99717008 BUSINESS ADDRESS: STREET 1: 1600 STEWART AVE CITY: WESTBURY STATE: NY ZIP: 11590 BUSINESS PHONE: 5162376000 MAIL ADDRESS: STREET 1: 1600 STEWART AVE CITY: WESTBURY STATE: NY ZIP: 11590 10-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 27, 1999 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26841 1-800-FLOWERS.COM, INC. (Exact name of registrant as specified in its charter) DELAWARE 11-3117311 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1600 STEWART AVENUE, WESTBURY, NEW YORK 11590 -------------------------------------------------- (Address of principal executive offices)(Zip code) Registrant's telephone number, including area code: (516) 237-6000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A common stock, $0.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |_| No |X| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| The aggregate market value of voting common stock held by non-affiliates of the Registrant, based on the closing price of the Class A common stock on September 20, 1999 as reported on the Nasdaq National Market, was approximately $181,969,000. Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The Registrant does not have any non-voting common equity outstanding. 21,375,472 (Number of shares of class A common stock outstanding as of September 20, 1999) 40,246,205 (Number of shares of class B common stock outstanding as of September 20, 1999) DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders (the Definitive Proxy Statement), to be filed with the SEC within 120 days of June 27, 1999, are incorporated by reference into Part III of this Report. 1-800-FLOWERS.COM, INC. FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 27, 1999 INDEX PART I ITEM 1. Business 1 ITEM 2. Properties 20 ITEM 3. Legal Proceedings 20 ITEM 4. Submission of Matters to a Vote of Security Holders 20 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 ITEM 6. Selected Financial Data 24 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 35 ITEM 8. Financial Statements and Supplementary Data 36 ITEM 9. Changes in and disagreements with Accountants on Accounting and Financial Disclosure 36 PART III ITEM 10. Directors and Executive Officers of the Registrant 36 ITEM 11. Executive Compensation 36 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 36 ITEM 13. Certain Relationships and Related Transactions 36 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 37 SIGNATURES 39
PART I THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM, INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. 1-800-FLOWERS.COM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED ELSEWHERE IN THIS REPORT. 1-800-FLOWERS.COM UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE. ITEM 1. BUSINESS THE COMPANY 1-800-FLOWERS.COM, Inc. is a leading e-commerce provider of floral products and gifts, gourmet foods and home and garden merchandise, in terms of number of customers and revenue. As of June 27, 1999, we had sold our products to approximately 7.8 million customers, of which 2.8 million had made a purchase from us in the previous twelve months. Our total net revenues for the year ended June 27, 1999 were $295.9 million. 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. The Internet is our fastest growing sales channel. For the year ended June 27, 1999, online revenues were $52.9 million, representing an increase of 97.7% over the prior 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. In May 1999, 1-800-FLOWERS.COM completed a private placement of preferred stock. The private placement yielded us net proceeds of $101.6 million, which we intend to use together with the net proceeds of approximately $115.7 million from the Company's August 1999 initial public offering (IPO), to further our strategy of becoming the leading e-commerce provider of flowers, gifts, gourmet foods and home and garden merchandise. In 1992, Teleway, Inc. was formed under the laws of the State of Delaware and acquired a majority of the outstanding shares of the common stock of 800-FLOWERS, Inc., a Texas corporation; under which entity the telemarketing business was operated. In 1995, Teleway, Inc. changed its name to 1-800-FLOWERS, Inc. and in 1996, 800-FLOWERS, Inc. was merged into 1-800-FLOWERS, Inc. Subsequently, in 1999, 1-800-FLOWERS, Inc. changed its name to 1-800-FLOWERS.COM, Inc. References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM", "we", "our", "us" and the "Company" refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company's principal offices are located at 1600 Stewart Avenue, Westbury, New York, 11590 and its telephone number at that location is (516) 237-6000. THE ORIGINS OF 1-800-FLOWERS.COM Our business began when James F. McCann, our Chairman and Chief Executive Officer, acquired a single retail florist in New York City, which he subsequently expanded to a 14 store chain. Thereafter, we modified 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. 1 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: o a sophisticated transaction processing system that facilitated rapid order entry and fulfillment; o an advanced telecommunications system; and o 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 The Plow & Hearth, Inc. ("Plow & Hearth"). As a result, we have developed relationships with customers who purchase products not only for gifting occasions but also for everyday consumption. 1-800-FLOWERS.COM TODAY 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: 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: o 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. o Quality. High-quality products are critical to our continued brand strength. We offer our customers a 100% satisfaction guarantee on all of our products. o 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. o 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. PRODUCT SELECTION. We continuously expand our product offerings to provide a better shopping experience for 2 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. 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 June 27, 1999, our total database of customers numbered approximately 7.8 million. We also gather information about the recipients of our 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. 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. 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 June 27, 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. 3 We package and ship our home and garden products from our advanced 300,000 square foot fulfillment center located in Madison, Virginia by next-day or other delivery method chosen by the customer. 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 significantly increase our marketing expenditures to: o maintain and develop new strategic relationships with Internet companies; o expand our Internet advertising and promotion; o broaden our television, radio, print and outdoor advertising campaigns; and o 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: o actively promote our Web site through Web portals and online networks; o aggressively expand our online affiliate program, in which independent Web sites link directly to our Web site; o aggressively market our Web site in our advertising campaigns; o promote our Web site to our existing telephonic customers; and o facilitate access to our Web site for our corporate customers by developing direct links from their internal corporate networks. 4 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: o continue to improve the speed and ease of use of our Web site; o improve our transaction processing system to facilitate order tracking and to enhance the interface with our accounting and financial systems; o enhance our ability to analyze our database of customer information and conduct personalized one-to-one marketing; and o 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: o strengthening our relationships with BloomNet member florists and increasing the number of BloomLink installations in their stores; o evaluating and implementing alternative means of fulfillment, including centralized production and logistics partnering; and o 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, June 28, 1998 and June 27, 1999, the flowers and plants products category represented 92.1%, 86.9% and 71.8% of total net revenues, respectively. 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 5 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 6,000 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). As of June 27, 1999, approximately 700,000 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 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. 6 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: o 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 recently entered into an agreement which expanded the term of the relationship until August 31, 2003 and its scope by adding the CompuServe Service, Netscape Netcenter (starting February 2000), the ICQ Service and Digital City to the AOL Service and AOL.com. On the AOL Service and AOL.com we are the exclusive marketer of fresh-cut flowers and plants during the term, and of fresh-cut flowers on CompuServe, Netscape Netcenter, ICQ Service and Digital City for a period of three years. For a one-year period during the term, we are the exclusive marketer of gardening products on all six properties. Under the agreement, the term "exclusive marketer" means that AOL will not promote, market or advertise these products on the aforementioned properties on behalf of any entity other than 1-800-FLOWERS.COM during the respective exclusivity periods. In addition, we are to be prominently promoted through banner and other advertisements across these AOL properties. o 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. o 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. o 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 6,000 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 year ended June 27, 1999, we mailed a total of approximately 36.2 million catalogs, including PLOW & HEARTH and AMERICAN COUNTRY HOME. We believe these catalogs will attract 7 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, none of these relationships have generated a significant amount of revenue. FULFILLMENT OPERATIONS Our customers primarily place orders for our products online or over the telephone. Fulfillment of products is as follows: 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. 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 36 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 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 fiscal 1999, we shipped approximately 800,000 packages from this facility. Construction has recently been completed whereby we expanded this facility from 185,000 square feet to approximately 300,000 square feet. This facility employs 8 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. In recent years we have installed an Oracle-based order processing and database management system, developed BloomLink, and upgraded our telecommunications network, including our call management system. 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. In addition to Fry Multimedia's two hosting facilities, we also intend to co-locate the hosting of our Web site and BloomLink with a third-party vendor to provide additional back-up and system redundancy. Our transaction processing system selects the florist or vendor to fulfill the order and captures customer profile and history in a customized Oracle database. Through the use of customized software applications, we are able to retrieve, sort and analyze customer information to enable us to better serve our customers and target our product offerings. We expect to develop or license additional software applications to expand our ability to analyze and use this information. Our six customer service centers and many of our third party product suppliers are connected electronically to our transaction processing system to permit the rapid transmission of, and access to, critical order and customer information. In addition, BloomLink electronically connects us to approximately one-half of the retail stores in our floral retail fulfillment network. 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: o undertake more extensive marketing campaigns for their brands and services; o adopt more aggressive pricing policies; and o 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: 9 o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o 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: o price reductions, decreased revenues and lower profit margins; o loss of market share; and o 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: o user privacy; o pricing; o content; o connectivity; o intellectual property; o distribution; o taxation; o liabilities; o antitrust; and o 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 10 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. 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 June 27, 1999, we had a total of 2,100 full-time and part-time employees. 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. 11 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES WE FACE. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. 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: o expand the 1-800-FLOWERS.COM brand through marketing and other promotional activities; o enter into strategic relationships with Internet companies; o increase the number of products we offer; and o 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: o seasonality; o the timing and effectiveness of our marketing programs; o the timing and effectiveness of capital expenditures; o our ability to enter into or renew marketing agreements with Internet companies; and o 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. 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, Secretaries' Week and Easter, and the fourth calendar quarter, due to the 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 12 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, or renew existing ones. We may also be required to pay significant fees to maintain and expand existing relationships. 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 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. 13 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: o retail floral shops, some of which maintain toll-free telephone numbers; o online floral retailers; o catalog companies that offer floral products; o floral telemarketers and wire services; and o 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. Competition is intense and we expect it to increase. Increased competition could result in: o price reductions, decreased revenue and lower profit margins; o loss of market share; and o 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 14 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: o import duties and quotas; o agricultural limitations and restrictions to manage pests and disease; o changes in trading status; o economic uncertainties and currency fluctuations; o severe weather; o work stoppages; o foreign government regulations and political unrest; and o trade restrictions, including United States retaliation against foreign trade practices. 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. OUR FRANCHISEES MAY DAMAGE OUR BRAND OR INCREASE OUR COSTS BY FAILING TO COMPLY WITH OUR FRANCHISE AGREEMENTS OR OUR OPERATING STANDARDS. As of June 27, 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 15 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. 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 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. 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: o inadequate network infrastructure; o consumer concerns for Internet privacy and security; o inconsistent quality of service; and o 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. 16 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: o system interruptions; o long response times; and o 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. 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. 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. 17 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 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. 18 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. OUR STOCK PRICE MAY BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY, PARTICULARLY BECAUSE WE HAVE INTERNET OPERATIONS. The price at which our class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced significant price and volume fluctuations that have affected the market prices of securities, particularly securities of companies with Internet operations. As a result, investors may experience a material 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. 19 ITEM 2. 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. In addition, we own an approximately 300,000 square foot fulfillment center in Madison, Virginia, 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 June 27, 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. The Company believes that its current facilities, combined with anticipated additions and improvements currently under construction, are adequate for all present and foreseeable future uses. ITEM 3. LEGAL PROCEEDINGS 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On April 12, 1999, the stockholders of the Company adopted by written consent a resolution changing the name of the Company to "1-800-FLOWERS.COM, Inc." On May 18, 1999, the stockholders of the Company adopted by written consent a resolution approving the Second Amended and Restated Certificate of Incorporation and the Third Amended and Restated Certificate of Incorporation. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION 1-800-FLOWERS.COM's Class A common stock began trading on the Nasdaq National Market under the symbol "FLWS" on August 3, 1999. There is no established public trading market for the Company's Class B common stock. Accordingly, none of the Company's common equity securities were publicly traded during the fiscal year ended June 27, 1999. On September 20, 1999, the last reported sale price of the Class A common stock on the Nasdaq National Market was $16.375. RIGHTS OF COMMON STOCK Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders. Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one 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. HOLDERS As of September 20, 1999, there were approximately 60 shareholders of record of the Company's Class A common stock, although the Company believes that there is a significantly larger number of beneficial owners. As of September 20, 1999, there were approximately 41 shareholders of record of the Company's Class B common stock. DIVIDEND POLICY The Company has never declared or paid any cash dividends on its Class A or Class B common stock, and intends to retain future earnings, if any, to provide funds to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future. USE OF PROCEEDS OF INITIAL PUBLIC OFFERING The effective date of the Company's registration statement (File # 333-78985) filed on Form S-1 under the Securities Act of 1933, as amended, relating to the Company's initial public offering of Class A common stock was August 2, 1999. In its initial public offering, the Company sold 6,000,000 shares of its Class A common stock to an underwriting syndicate led by Goldman, Sachs & Co., Credit Suisse First Boston Corporation and Wit Capital Corporation. The offering commenced on August 3, 1999 and closed on August 6, 1999; resulting in aggregate proceeds of $126 million. The Company's net proceeds from the offering were $115.7 million. Approximately $8.8 million of offering expenses was attributable to underwriting discounts. Upon closing of the Company's IPO, a portion of the proceeds was used as follows: o $18.0 million to repay a term loan with Chase Bank that was used to fund our acquisition of Plow & Hearth; o $3.0 million to repay a draw on our line of credit with Chase Bank that was used for working capital and general corporate purposes; and o $8.4 million to redeem all outstanding common stock of our Plow & Hearth subsidiary not held by us and Plow & Hearth stock options. As of June 27, 1999, we had not made any specific expenditure plans with respect to the remaining proceeds of this offering. While we cannot specify with certainty the particular uses for such proceeds, we currently intend to use the 21 remaining proceeds over time: o to fund our marketing activities; o to enhance our infrastructure; o to enter into strategic relationships with Internet companies; o to expand our product offerings; o for other general corporate purposes, and o to expand our current business through strategic acquisitions. Unused proceeds of the offering are currently invested in money market funds with portfolios of investment grade corporate and U.S. government securities. RECENT SALE OF UNREGISTERED SECURITIES During the fiscal year ended June 27, 1999, the Company issued the following securities: o on May 20, 1999, the Company issued 1,127,546 shares of preferred stock to 11 investors for an aggregate amount of $117.6 million. The preferred stock automatically converted to Class A common stock upon the consummation of the initial public offering. o options to purchase 712,000 shares of class B common stock. 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. 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 Company, to information about the Company. ADDITIONAL ISSUANCES OF SECURITIES Additional securities of the Company may be issued as follows: o 1,237,500 shares of Class B common stock upon the exercise of options outstanding as of September 20, 1999 at a weighted average exercise price of $1.73 per share; o 1,323,000 shares of Class A common stock upon the exercise of options outstanding as of September 20, 1999 at a weighted average exercise price of $19.87, and up to 8,577,000 additional shares of Class A common stock that could be issued under our 1999 stock incentive plan; and o 2,371,040 shares of Class A common stock upon the exercise of an outstanding warrant with a nominal exercise price. RESALES OF SECURITIES 55,621,677 shares of Class A and Class B common stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market from time to time only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act. As of September 20, 1999, 2,307,930 shares of our common stock could be sold in the public market pursuant to Rule 144. 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. 22 We have entered into an investors' rights agreement with certain of our stockholders, including Waelinvest, SOFTBANK, Benchmark, Chase, James F. McCann and Christopher G. McCann. Under this agreement, these parties will have the right to require us to register shares of Class A common stock they own 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 the IPO, a majority in interest of the parties to the agreement other than Messrs. McCann and the Company will have the right to require us on one occasion to register their stock. In addition, one year after the IPO, 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 the IPO 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' commission. 23 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA). The selected consolidated statement of operations data for the years ended June 29, 1997, June 28, 1998 and June 27, 1999 and the consolidated balance sheet data as of June 28, 1998 and June 27, 1999 have been derived from the Company's audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended July 2, 1995 and June 30, 1996 and the selected consolidated balance sheet data as of July 2, 1995, June 30, 1996 and June 29, 1997 are derived from the Company's audited consolidated financial statements which are not included in this Annual Report on Form 10-K. The following tables summarize the Company's consolidated statement of operations and balance sheet data. The Company 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 the Company's consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED ------------------------------------------------------------------------ JULY 2, JUNE 30, JUNE 29, JUNE JUNE 1995 1996 1997 28, 1998 27, 1999 ------------- -------------- -------------- -------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net revenues: Telephonic $100,826 $127,920 $145,295 $161,874 $203,885 Online 4,470 9,936 16,092 26,748 52,886 Retail fulfillment 11,511 15,272 25,043 31,970 39,102 ------------- -------------- -------------- -------------- ------------- Total net revenues 116,807 153,128 186,430 220,592 295,873 Cost of revenues 64,657 92,820 115,078 136,966 179,697 ------------- -------------- -------------- -------------- ------------- Gross profit 52,150 60,308 71,352 83,626 116,176 Operating expenses: Marketing and sales 38,564 42,952 47,464 55,417 92,147 Technology and development 626 851 1,411 1,794 8,067 General and administrative 10,035 11,556 12,338 15,832 15,748 Depreciation and amortization 1,364 2,247 3,287 4,168 8,385 ------------- -------------- -------------- -------------- ------------- Total operating expenses 50,589 57,606 64,500 77,211 124,347 ------------- -------------- -------------- -------------- ------------- Operating income (loss) 1,561 2,702 6,852 6,415 (8,171) Other income (expense), net (131) (209) 674 1,654 (1,183) ------------- -------------- -------------- -------------- ------------- Income (loss) before income taxes and minority interests 1,430 2,493 7,526 8,069 (9,354) Provision (benefit) for income taxes 300 1,255 3,135 3,181 (2,715) ------------- -------------- -------------- -------------- ------------- Income (loss) before minority interests 1,130 1,238 4,391 4,888 (6,639) Minority interests - 59 (4) 186 (207) ------------- -------------- -------------- -------------- ------------- Net income (loss) 1,130 1,297 4,387 5,074 (6,846) Redeemable Class C common stock dividends (293) (1,029) (1,462) (1,608) (5,215) ------------- -------------- -------------- -------------- ------------- Net income (loss) applicable to common stockholders $837 $268 $2,925 $3,466 $(12,061) ============= ============== ============== ============== ============= Net income (loss) per common share applicable to common stockholders: Basic $0.02 $0.01 $0.07 $0.08 $(0.27) ============= ============== ============== ============== ============= Diluted $0.02 $0.01 $0.06 $0.07 $(0.27) ============= ============== ============== ============== ============= Shares used in the calculation of net income (loss) per common share: Basic 48,600 47,050 44,140 44,120 44,035 ============= ============== ============== ============== ============= Diluted 49,780 49,420 46,740 46,610 44,035 ============= ============== ============== ============== =============
24
AS OF ------------ ------------ ------------ ------------ ------------ JULY 2, JUNE 30, JUNE 29, JUNE 28, JUNE 27, 1995 1996 1997 1998 1999 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and equivalents $10,775 $6,639 $11,443 $8,873 $99,183 Working capital (deficit) 2,822 (2,452) 1,975 1,950 85,619 Total assets 35,483 36,884 44,130 81,746 182,355 Long-term liabilities 14,959 17,804 9,456 35,359 37,766 Redeemable class C common stock 10,293 14,622 16,084 17,692 - Total stockholders' equity (deficit) (3,316) (5,615) (2,670) 672 109,003
The following selected unaudited pro forma combined financial data gives effect to the Company's 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 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.
YEAR ENDED JUNE 28, 1998 -------------- PRO FORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) -------------- COMBINED STATEMENT OF OPERATIONS DATA: Net revenues: Telephonic $197,303 Online 26,748 Retail fulfillment 33,696 -------------- Total net revenues 257,747 Cost of revenues 157,084 -------------- Gross profit 100,663 Operating expenses: Marketing and sales 67,819 Technology and development 2,126 General and administrative 20,369 Depreciation and amortization 5,188 -------------- Total operating expenses 95,502 -------------- Operating income 5,161 Other income, net 521 -------------- Income before income taxes and minority interests 5,682 Provision for income taxes 2,548 -------------- Income before minority interests 3,134 Minority interests 330 -------------- Net income 3,464 Redeemable Class C common stock dividends (1,608) -------------- Net income applicable to common stockholders $1,856 ============== Net income per common share applicable to common stockholders: Basic $0.04 ============== Diluted $0.04 ============== Shares used in the calculation of net income per common share: Basic 44,120 ============== Diluted 46,610 ==============
25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain of the matters and subject areas discussed in this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends and known uncertainties based on the Company's current expectations, assumptions, estimates and projections about its business and the Company's industry. These forward-looking statements involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of several factors, as more fully described under the caption "Risk Factors that May Affect Future Results" and elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. The Company undertakes no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. OVERVIEW The Company is a leading 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 transmit our orders either through BloomLink, our proprietary Internet-based electronic communication system, or the communication system of a third-party. 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 the Company. 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. Our home and garden merchandise and non-floral related gift products and gourmet foods are shipped by the Company, members of BloomNet or third parties directly to the customer. We ship non-floral gift items by Federal Express, United Parcel Service, United States Postal Service or other common carriers. Most of our home and garden products are fulfilled from its Madison, Virginia fulfillment center. The Company's retail fulfillment operations primarily consist of 36 owned stores and 87 franchised stores. Retail fulfillment revenues also include revenues attributable to the Company's wholesale business, fees paid to us by members of the BloomNet network and royalties, fees and sublease payments paid to the us by our franchised stores. Company owned stores serve as local points of fulfillment and enable us to test new products and marketing programs. A majority of the revenues derived from Company owned stores represent fulfillment of our floral orders and are eliminated as intercompany revenues. 26 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 was recently expanded 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. Upon closing of our initial public offering in August 1999, we used a portion of the proceeds to repay amounts then outstanding under its credit facility and to acquire all of the remaining outstanding shares of Plow & Hearth common stock and stock options from the minority stockholders for $8.4 million, thereby satisfying its obligation under the management put liability. In fiscal 1999, the Company determined that its online revenues were likely to become the key revenue and profitability drivers of its business going forward. In fiscal 1999, online revenues had reached $52.9 million, or 17.9% of total net revenues. This represented an increase of 97.7% over online revenues of $26.7 million in fiscal 1998. Online revenues in fiscal 1998 represented an increase of 66.2% over online revenues of $16.1 million in fiscal 1997, which in turn represented an increase of 62.0% over online revenues of $9.9 million in fiscal 1996. Conversely, the rate of increase of revenue originating through the telephonic channel was 26.0% in fiscal 1999, which included a full year contribution of revenue by Plow & Hearth which was acquired in April 1998, compared to a growth rate of 11.4% in fiscal 1998 and 13.6% in fiscal 1997. In addition, because opening new retail stores involved significant capital investments, management attention and operating losses until the new stores reached profitability, the Company determined that its retail stores should be a complement to an Internet-focused distribution strategy. Although the Company has been profitable in the past, the Company expects to incur losses for the foreseeable future as a result of the significant operating and capital expenditures required to achieve its objectives. In order to achieve and maintain profitability, the Company will need to generate revenues significantly above historical levels. The Company's 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. 27 RESULTS OF OPERATIONS The following table provides items from the Company's consolidated statements of operations expressed as a percentage of total net revenues for the periods indicated:
Years ended ------------------------------------ JUNE 29, JUNE 28, JUNE 27, 1997 1998 1999 ----------- ---------- ----------- Net revenues: Telephonic 78.0% 73.4% 68.9% Online 8.6 12.1 17.9 Retail fulfillment 13.4 14.5 13.2 ----------- ---------- ----------- Total net revenues 100.0 100.0 100.0 Cost of revenues 61.7 62.1 60.7 ----------- ---------- ----------- Gross profit 38.3 37.9 39.3 ----------- ---------- ----------- Operating expenses: Marketing and sales 25.4 25.1 31.1 Technology and development 0.8 0.8 2.7 General and administrative 6.6 7.2 5.3 Depreciation and amortization 1.8 1.9 2.8 ----------- ---------- ----------- Total operating expenses 34.6 35.0 41.9 ----------- ---------- ----------- Operating income (loss) 3.7 2.9 (2.6) ----------- ---------- ----------- Other income (expense), net 0.4 0.8 (0.5) Income taxes (benefit) 1.7 1.4 (0.8) ----------- ---------- ----------- Net income (loss) 2.4% 2.3% (2.3%) =========== ========== ===========
YEAR ENDED JUNE 27, 1999 COMPARED TO THE YEAR ENDED JUNE 28, 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 34.1%, from $220.6 million for the year ended June 28, 1998 to $295.9 million for the year ended June 27, 1999. Telephonic revenues increased 26.0%, from $161.9 million for the year ended June 28, 1999 to $203.9 million for the year ended June 27, 1999, primarily as a result of the April 1998 acquisition of Plow & Hearth. Online revenues increased 97.7%, from $26.7 million for the year ended June 28, 1998 to $52.9 million for the year ended June 27, 1999. Retail fulfillment revenues increased 22.3%, from $32.0 million for the year ended June 28, 1998 to $39.1 million for the year ended June 27, 1999, primarily due to the growth in the number of owned retail stores from 23 to 36. The Company does 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 the Company's wholesale operations and facility costs related to properties that are sublet to the Company's franchisees. Cost of revenues increased 31.2%, from $137.0 million for the year ended June 28, 1999 to $179.7 million for the year ended June 27, 1999. For the same period, gross margin increased 1.4 percentage points to 39.3%. The improvement in gross margin was primarily attributable to the April 1998 acquisition of Plow & Hearth, whose product line carries a higher margin than floral products. 28 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 the Company's departments engaged in marketing, selling and merchandising activities. Marketing and sales expenses increased 66.3%, from $55.4 million, or 25.1% of total net revenues, for the year ended June 28, 1998, to $92.1 million, or 31.1% of total net revenues, for the year ended June 27, 1999. The increase was primarily attributable to an additional $15 million of catalog printing and circulation expenditures resulting from the Plow & Hearth acquisition, a $5.8 million increase in the Company's online and traditional media advertising campaigns and a $9.3 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 the Company implements its strategy to expand its 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 its 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 $1.8 million for the year ended June 28, 1998 to $8.1 million for the year ended June 27, 1999. The increase was primarily attributable to a $1.4 million increase in payroll and related expenses for staff additions to the technology team and a $4.9 million increase in development costs incurred to enhance the content and functionality of the Company's Web site and transaction processing system and web hosting fees. We believe that continued investment in technology and development is critical to attaining its strategic objectives and, as a result, we expect technology and development costs to continue 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 the Company's executive, finance & accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses. General and administrative expenses decreased 0.5%, from $15.8 million, or 7.2% of total net revenues, for the year ended June 28, 1998 to $15.7 million, or 5.3% of total net revenues, for the year ended June 27, 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 increased staffing required to support our growth strategy and the incremental costs expected to be incurred as a public company. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from $4.2 million for the year ended June 28, 1998 to $8.4 million for the year ended June 27, 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 created by the Plow & Hearth acquisition. OTHER INCOME (EXPENSE), NET. Other income (expense), net consists primarily of interest expense attributable to the Company's credit facility, promissory notes issued to sellers in acquisitions, and leases, offset by interest income on the Company's cash and short-term investments and dividend income. For the year ended June 27, 1999, the Company recorded a net expense of $1.2 million due primarily to the financing of the Plow & Hearth acquisition. For the year ended June 28, 1998, the Company 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 year ended June 27, 1999, the Company incurred a loss that provided a tax benefit of $2.7 million at an effective rate of 29.0%. The effective tax rate differed from the combined statutory rate primarily as a result of the non-deductibility of certain goodwill amortization and the provision of a valuation allowance on state tax benefits. For the year ended June 28, 1998, the Company provided for taxes of $3.2 million at an effective rate of 39.4%. The Company anticipates incurring significant losses in the foreseeable future. After accounting for recoverable income taxes due to allowable tax carry-back claims, the Company intends to provide a full valuation allowance on the 29 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 the Company's April 1998 acquisition of Plow & Hearth, which contributed $11.4 million in net revenues in the fourth quarter. Online revenues increased 66.2%, from $16.1 million in fiscal 1997 to $26.7 million in fiscal 1998. Retail fulfillment revenues increased 27.7%, from $25.0 million in fiscal 1997 to $32.0 million in fiscal 1998, primarily as a result of the Company's 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. 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 16.8%, from $47.5 million, or 25.5% 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 the Company's online presence through an online marketing agreement with AOL. 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 27.1%, 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, the Company capitalized $5.2 million of software development costs in fiscal 1998 in accordance with SOP 98-1, reflecting increased investments in infrastructure. This compares to $828,000 of capitalized development costs in fiscal 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased 28.3%, 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 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. 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 the 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. 30 QUARTERLY RESULTS OF OPERATIONS The following table provides unaudited quarterly statement of consolidated operations for each quarter of fiscal 1998 and 1999. The Company believes 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 the Company's results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
THREE MONTHS ENDED -------------------------------------------------------------------------------------------- SEPT. DEC. 28, MAR. 29, JUNE 28, SEPT. DEC. 27, MAR. 28, JUNE 28, 1997 1997 1998 1998 27, 1998 1998 1999 27, 1999 (IN THOUSANDS) Net revenues: Telephonic $28,601 $40,041 $38,499 $54,733 $34,370 $67,972 $43,903 $57,640 Online 3,276 5,938 7,095 10,439 6,258 10,771 13,219 22,638 Retail fulfillment 5,638 7,610 9,519 9,203 6,946 10,061 10,168 11,927 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Total net revenues 37,515 53,589 55,113 74,375 47,574 88,804 67,290 92,205 Cost of revenues 23,499 33,361 34,913 45,193 29,793 51,847 42,098 55,959 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Gross profit 14,016 20,228 20,200 29,182 17,781 36,957 25,192 36,246 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Operating expenses: Marketing and sales 9,792 14,689 13,608 17,328 14,455 33,065 19,684 24,943 Technology and development 409 185 534 666 1,127 1,807 2,273 2,860 General and administrative 3,280 3,730 3,305 5,517 2,348 3,273 4,907 5,220 Depreciation and amortization 905 905 958 1,400 1,871 2,015 2,157 2,342 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Total operating expenses 14,386 19,509 18,405 24,911 19,801 40,160 29,021 35,365 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Operating income (loss) (370) 719 1,795 4,271 (2,020) (3,203) (3,829) 881 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Other income (expense), net 1,724 (13) 56 73 (227) (623) (378) (162) Income taxes (benefit) 524 273 718 1,666 (677) (1,071) (1,178) 211 ---------- ---------- ---------- ---------- ---------- ----------- ----------- --------- Net income (loss) $830 $433 $1,133 $2,678 $ (1,570) $(2,755) $(3,029) $508 ========== ========== ========== ========== ========== =========== =========== =========
The Company's 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, Secretaries' Week and Easter. Due to the acquisition of Plow & Hearth, which generates more revenues in the second fiscal quarter due to Christmas and Thanksgiving, the Company's second fiscal quarter revenues in fiscal 1999 increased significantly from historical levels. The Company expects its second fiscal quarter revenues to represent a larger proportion of its total revenues in the future. LIQUIDITY AND CAPITAL RESOURCES At June 27, 1999, our cash and equivalents balance was $99.2 million, compared to $8.9 million at June 28, 1998. On May 20, 1999, we completed a private placement of preferred stock, yielding net proceeds of $101.6 million. Additionally, on August 3, 1999, we completed an initial public offering of 6,000,000 shares of our Class A common stock generating net proceeds of approximately $115.7 million. In addition, to finance prior acquisitions, we issued promissory notes to sellers and entered into a credit agreement with a bank that provides for an $18.0 million term loan 31 and a $5.0 million revolving credit facility, as amended. Additionally, we have a $4.5 million revolving credit line with another bank. At June 27, 1999, in addition to the $18.0 million outstanding under the term loan, approximately $4.0 million was outstanding under the revolving credit facility and other credit lines. We used $5.3 million in cash to fund operations during the year ended June 27, 1999, principally to fund our net loss as well as increases in accounts receivable, inventories and deferred charges related to the America Online, Inc. ("AOL") agreement. This use of cash was offset in part by increases in accounts payable and accrued expenses, due primarily to our revenue growth. We generated $10.7 million and $9.5 million in cash from operations in fiscal 1997 and 1998, respectively. We used $6.4 million in cash for investing activities during the year ended June 27, 1999. We used $4.2 million and $25.5 million in cash for investing activities in fiscal 1997 and 1998, respectively. In each period, cash used for investing activities related primarily to the purchase of property, equipment and investments in systems infrastructure and, in fiscal 1998, the acquisition of Plow & Hearth. For the year ended June 27, 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 $102.0 million in cash from financing activities during the year ended June 27, 1999 and $13.4 million in fiscal 1998. For the year ended June 27, 1999, financing activities included net proceeds of $101.6 million resulting from the May 1999 private placement of preferred stock. Concurrent with this transaction, we also used $4.3 million to redeem our existing class C common stock from our principal shareholder. Financing activities for the year ended June 27, 1999 also included net borrowings of $7.3 million under our credit facility and revolving lines of credit, offset in part by repayments of capital lease obligations. 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. Our material capital commitments consist of: o an aggregate of $21.0 million outstanding at June 27, 1999 under our credit agreement that bears interest at LIBOR plus 2.25% per annum (7.31% at June 27, 1999). This obligation was repaid in August from the proceeds of our initial public offering; o 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; o obligations outstanding under capital and operating leases; and o online marketing agreements with America Online, Inc. ("AOL"). Under an agreement with AOL, we were required to 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 June 27, 1999, we had paid $7,500,000 to AOL under these agreements. Of the remaining $4,000,000, $3,000,000 was paid in July 1999 and $500,000 was to be payable during each of the fiscal years ending June 2000 and 2001. In September 1999, we expanded both the term and scope of our strategic relationship with AOL. Pursuant to the terms of the new agreement, we will pay AOL $37,000,000 over the new four-year term of the agreement which extends through fiscal 2003. 32 Additionally, during the first two years of the new agreement, we are required to share a portion of revenue derived from such online marketing agreements. Such amount is expensed as the related revenue is recognized. Our remaining payment obligations to AOL under the previous agreements were cancelled upon the effectiveness bhof the new agreement. At June 27, 1999, our known commitments for the subsequent twelve months totaled approximately $28.3 million and were comprised of fees related to online marketing agreements (including the new AOL agreement), 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 repaid from the proceeds of the initial public offering. We believe that cash and equivalents at June 27, 1999, together with net proceeds from the August IPO will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. In addition, we may, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies, which might impact our liquidity requirements or cause us to issue additional equity or debt securities. 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 21st century dates from 20th 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. THE COMPANY'S STATE OF READINESS We have made a preliminary assessment of the state of its operating and administrative systems, including its telecommunications systems, its order processing and data collection systems and its Internet-related systems, to assess its state of Year 2000 readiness. Our assessment plan consists of: o evaluating its date dependent code, software and hardware and evaluating external dependencies; o quality assurance testing of its internally developed software and systems; and o 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 its Year 2000 readiness, we identified our material 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 our Web site and BloomLink, are hosted at Fry Multimedia. To date, the Company's 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. 33 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 the our operations are Year 2000 compliant. Our Web site hosting service, Fry Multimedia, has represented to us that our 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 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 other call routing software, which has been represented to us as Year 2000 compliant. We are in the process of contacting our major suppliers of fresh products (flowers and plants) and hard goods for their Year 2000 compliance. We expect to 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 the 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 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. 34 CONTINGENCY PLANS 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 these expectations will be realized. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from its investment of available cash balances in money market funds with portfolios of investment grade corporate and U.S. government securities and, secondarily, its long-term debt arrangements. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. 35 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ANNUAL FINANCIAL STATEMENTS: See Part IV, Item 14 of this Annual Report on Form 10-K. SELECTED QUARTERLY FINANCIAL DATA: See Part II, Item 7 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Incorporated by reference from the portions of the Definitive Proxy Statement entitled "Proposal 1-Election of Directors," "Additional Information" and "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from the portions of the Definitive Proxy Statement entitled "Executive Compensation" and "Additional Information-Compensation of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the portion of the Definitive Proxy Statement entitled "Security Ownership by Management and Principal Stockholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from the portion of the Definitive Proxy Statement entitled "Certain Relationships and Related Transactions." 36 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K. Upon written request, the Company will provide, without charge, a copy of this Annual Report on Form 10-K, including the consolidated financial statements, financial statement schedule and any exhibits for the Company's most recent fiscal year. All requests should be sent to: 1-800-FLOWERS.COM, Inc. Investor Relations 1600 Stewart Avenue Westbury, New York 11590 (516) 237-6000 (a) List of Documents Filed as a Part of this Annual Report on Form 10-K: (1) Index to Consolidated Financial Statements:
Page Report of Independent Auditors F-1 Consolidated Balance Sheets as of June 28, 1998 and June 27, 1999 F-2 Consolidated Statements of Operations for the years ended June 29, 1997, June 28, 1998 and June 27, 1999 F-3 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended June 29, 1997, June 28, 1998 and June 27, 1999 F-4 Consolidated Statements of Cash Flows for the years ended June 27, 1997, June 28, 1998 and June 27, 1999 F-5 Notes to Consolidated Financial Statements F-6
(2) Index to Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts All other information and financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. (3) Index to Exhibits The following exhibits are required to be filed with this Report by Item 14. Other than exhibits 10.22, 21.1, 23.1 and 27.1, which are filed herewith, the following exhibits are incorporated by reference to the exhibits of same number contained in the Company's registration statement on Form S-1 (No. 333-78985), dated August 2, 1999. NUMBER DESCRIPTION ------ ----------- 3.1 Third Amended and Restated Certificate of Incorporation. 3.2 Amendment No. 1 to Third Amended and Restated Certificate of Incorporation. 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. 10.1 Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C and 800-FLOWERS, Inc. 37 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 Reserved 10.6 Reserved 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 # Amended and Restated Interactive Marketing Agreement, made and entered into on September 1, 1999, by and between America Online, Inc. and 800-FLOWERS.COM, Inc. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Powers of Attorney (included in the signature page) 27.1 Financial Data Schedule for the year ended June 27, 1999. - ---------- * Confidential treatment granted for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. # Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 promulgated under the Exchange Act. (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended June 27, 1999 38 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 24, 1999 1-800-FLOWERS.COM, Inc. By: /s/ JAMES F. MCCANN -------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) POWER OF ATTORNEY We, the undersigned directors and/or officers of 1-800-FLOWERS.COM, Inc. (the "Company"), hereby severally constitute and appoint James F. McCann and John W. Smolak, and each of them individually, with full powers of substitution and resubstitution, our true and lawful attorneys, with full powers to them and each of them to sign for us, in our names and in the capacities indicated below, to sign any and all amendments to this Annual Report, and other documents in connection therewith, 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. Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities indicated below: Dated: September 24, 1999 By: /s/ JAMES F. MCCANN -------------------------------- James F. McCann Chief Executive Officer Chairman of the Board of Directors (Principal Executive Officer) Dated: September 24, 1999 By: /s/ JOHN W. SMOLAK -------------------------------- John W. Smolak Senior Vice President Finance and Administration (Principal Financial and Accounting Officer) 39 Dated: September 24, 1999 By: /s/ CHRISTOPHER G. MCCANN -------------------------------- Christopher G. McCann Director, Senior Vice President Dated: September 24, 1999 By: /s/ DAVID BEIRNE -------------------------------- David Beirne Director Dated: September 24, 1999 By: /s/ LAWRENCE CALCANO -------------------------------- Lawrence Calcano Director Dated: September 24, 1999 By: /s/ CHARLES R. LAX -------------------------------- Charles R. Lax Director Dated: September 24, 1999 By: /s/ T. GUY MINETTI -------------------------------- T. Guy Minetti Director Dated: September 24, 1999 By: /s/ KEVIN J. O'CONNOR -------------------------------- Kevin J. O'Connor Director Dated: September 24, 1999 By: /s/ JEFFREY C. WALKER -------------------------------- Jeffrey C. Walker Director 40 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 June 28, 1998 and June 27, 1999, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 27, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 June 28, 1998 and June 27, 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 27, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, 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 August 20, 1999, except for the last paragraph of Note 11, Commitments and Contingencies- Leases, as to which the date is September 1, 1999 F-1 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 28, JUNE 27, 1998 1999 --------- --------- ASSETS Current assets: Cash and equivalents $ 8,873 $ 99,183 Short-term investments 5,034 -- Receivables, net 8,432 9,284 Inventories 4,971 7,496 Prepaid and other 1,026 1,307 Recoverable income taxes -- 2,431 Deferred tax assets 1,637 1,504 --------- --------- Total current assets 29,973 121,205 Property, plant and equipment at cost, net 19,379 27,525 Investments 1,383 984 Capitalized investment in leases 1,837 1,452 Notes receivable, net 902 722 Goodwill, net of accumulated amortization of $534 in 1998 and $1,693 in 1999 22,725 21,362 Investment in licenses, net of accumulated amortization of $1,175 in 1998 and $1,499 in 1999 3,752 3,428 Other 1,795 5,677 --------- --------- Total assets $ 81,746 $ 182,355 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 20,790 $ 23,396 Accrued expenses 3,101 5,543 Current maturities of long-term debt and obligations under capital leases 3,287 6,647 Income taxes payable 845 -- --------- --------- Total current liabilities 28,023 35,586 Long-term debt and obligations under capital leases 22,463 27,457 Deferred tax liabilities 1,332 183 Deferred rent and other liabilities 2,904 3,826 Management put liability 8,660 6,300 --------- --------- Total liabilities 63,382 73,352 Redeemable Class C common stock, $.01 par value, shares issued and outstanding: 348,220 in 1998 and none in 1999, stated at liquidation and redemption value 17,692 -- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued in 1998, 1,127,546 shares issued and outstanding in 1999, stated at liquidation value -- 117,573 Class A common stock, $.01 par value, 200,000,000 shares authorized, 480,870 and 4,100,012 shares issued in 1998 and 1999, respectively 5 41 Class B common stock, $.01 par value, 200,000,000 shares authorized, 48,849,927 and 45,579,005 shares issued in 1998 and 1999, respectively 488 456 Additional paid-in capital 1,739 6,038 Accumulated other comprehensive income 14 -- Retained earnings (deficit) 1,534 (10,527) Deferred compensation -- (1,470) Treasury stock, at cost-52,800 Class A and 5,280,000 Class B shares in 1998 and 1999 (3,108) (3,108) --------- --------- Total stockholders' equity 672 109,003 --------- --------- Total liabilities and stockholders' equity $ 81,746 $ 182,355 ========= =========
SEE ACCOMPANYING NOTES. F-2 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED ------------------------------------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 ------------- ------------- ------------- Net revenues $ 186,430 $ 220,592 $ 295,873 Cost of revenues 115,078 136,966 179,697 --------- --------- --------- Gross profit 71,352 83,626 116,176 Operating expenses: Marketing and sales 47,464 55,417 92,147 Technology and development 1,411 1,794 8,067 General and administrative 12,338 15,832 15,748 Depreciation and amortization 3,287 4,168 8,385 --------- --------- --------- Total operating expenses 64,500 77,211 124,347 --------- --------- --------- Operating income (loss) 6,852 6,415 (8,171) Other income (expense): Interest income 1,121 1,290 1,420 Interest expense (912) (1,177) (2,610) Other, net 465 1,541 7 --------- --------- --------- Total other income (expense) 674 1,654 (1,183) --------- --------- --------- Income (loss) before income taxes and minority interests 7,526 8,069 (9,354) Provision (benefit) for income taxes 3,135 3,181 (2,715) --------- --------- --------- Income (loss) before minority interests 4,391 4,888 (6,639) Minority interests in operations of consolidated subsidiaries (4) 186 (207) --------- --------- --------- Net income (loss) 4,387 5,074 (6,846) Redeemable Class C common stock dividends (1,462) (1,608) (5,215) --------- --------- --------- Net income (loss) applicable to common stockholders $ 2,925 $ 3,466 $ (12,061) ========= ========= ========= Net income (loss) per common share applicable to common stockholders: Basic $ 0.07 $ 0.08 $ (0.27) ========= ========= ========= Diluted $ 0.06 $ 0.07 $ (0.27) ========= ========= ========= Shares used in the calculation of net income (loss) per common share: Basic 44,140 44,120 44,035 ========= ========= ========= Diluted 46,740 46,610 44,035 ========= ========= =========
SEE ACCOMPANYING NOTES. F-3 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 29, 1997, JUNE 28, 1998 AND JUNE 27, 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ------------------------------------------- PREFERRED STOCK CLASS A CLASS B -------------------- ------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- -------- ---------- ------ ----------- ------ Balance at June 30, 1996 -- $ -- 480,870 $ 5 48,849,927 $ 488 Accrual of Redeemable Class C common stock dividends -- -- -- -- -- -- Comprehensive income: Net income -- -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- -- Total comprehensive income -- -- -- -- -- -- --------- -------- ---------- ---- ----------- ----- Balance at June 29, 1997 -- -- 480,870 5 48,849,927 488 Accrual of Redeemable Class C common stock dividends -- -- -- -- -- -- Purchase of treasury stock -- -- -- -- -- -- Comprehensive income: Net income -- -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- -- Total comprehensive income -- -- -- -- -- -- --------- -------- ---------- ---- ----------- ----- Balance at June 28, 1998 -- -- 480,870 5 48,849,927 488 Accrual of Redeemable Class C common stock dividends -- -- -- -- -- -- Employee stock options -- -- -- -- -- -- Amortization of deferred compensation -- -- -- -- -- -- Issuance of Series A preferred stock 1,127,546 117,573 -- -- -- -- Issuance of Class A common stock in connection with redemption of Class C common stock -- -- 263,452 3 -- -- Issuance of Class B common stock in connection with redemption of Class C common stock -- -- -- -- 84,768 1 Conversion of Class B common stock into Class A common stock -- -- 3,836,560 38 (3,836,560) (38) Conversion of Class A common stock into Class B common stock -- -- (480,870) (5) 480,870 5 Comprehensive loss: Net loss -- -- -- -- -- -- Unrealized loss on marketable securities -- -- -- -- -- -- Total comprehensive loss -- -- -- -- -- -- --------- -------- ---------- ---- ----------- ----- Balance at June 27, 1999 1,127,546 $117,573 4,100,012 $ 41 45,579,005 $ 456 ========= ======== ========== ==== =========== ===== ACCUMULATED TOTAL ADDITIONAL OTHER RETAINED TREASURY STOCK STOCKHOLDERS' PAID-IN COMPREHENSIVE EARNINGS DEFERRED ------------------- EQUITY CAPITAL INCOME (DEFICIT) COMPENSATION SHARES AMOUNT (DEFICIT) ------- ----------- -------- ------------ --------- ------- --------- Balance at June 30, 1996 $ 1,739 $(15) $ (4,857) $ -- 5,191,400 $(2,975) $ (5,615) Accrual of Redeemable Class C common stock dividends -- -- (1,462) -- -- -- (1,462) Comprehensive income: Net income -- -- 4,387 -- -- -- 4,387 Unrealized gain on marketable securities -- 20 -- -- -- -- 20 --------- Total comprehensive income -- -- -- -- -- -- 4,407 ------- ---- -------- ------- --------- ------- --------- Balance at June 29, 1997 1,739 5 (1,932) -- 5,191,400 (2,975) (2,670) Accrual of Redeemable Class C common stock dividends -- -- (1,608) -- -- -- (1,608) Purchase of treasury stock -- -- -- -- 141,400 (133) (133) Comprehensive income: Net income -- -- 5,074 -- -- -- 5,074 Unrealized gain on marketable securities -- 9 -- -- -- -- 9 --------- Total comprehensive income -- -- -- -- -- -- 5,083 ------- ---- -------- ------- --------- ------- --------- Balance at June 28, 1998 1,739 14 1,534 -- 5,332,800 (3,108) 672 Accrual of Redeemable Class C common stock dividends -- -- (1,584) -- -- -- (1,584) Employee stock options 1,680 -- -- (1,680) -- -- -- Amortization of deferred compensation -- -- -- 210 -- -- 210 Issuance of Series A preferred stock (1,008) -- -- -- -- -- 116,565 Issuance of Class A common stock in connection with redemption of Class C common stock 2,744 -- (2,747) -- -- -- -- Issuance of Class B common stock in connection with redemption of Class C common stock 883 -- (884) -- -- -- -- Conversion of Class B common stock into Class A common stock -- -- -- -- -- -- -- Conversion of Class A common stock into Class B common stock -- -- -- -- -- -- -- Comprehensive loss: Net loss -- -- (6,846) -- -- -- (6,846) Unrealized loss on marketable securities -- (14) -- -- -- -- (14) --------- Total comprehensive loss -- -- -- -- -- -- (6,860) ------- ---- -------- ------- --------- ------- --------- Balance at June 27, 1999 $ 6,038 $-- $(10,527) $(1,470) 5,332,800 $(3,108) $ 109,003 ======= ==== ======== ======= ========= ======= =========
SEE ACCOMPANYING NOTES. F-4 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ------------------------------------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income (loss) $ 4,387 $ 5,074 $ (6,846) Reconciliation of net income (loss) to net cash provided by (used in) operations: Depreciation and amortization 3,287 4,168 8,385 Deferred income taxes (170) 265 (1,016) Management put liability -- 1,631 (1,631) Bad debt expense 553 383 444 Minority interests 4 (186) 207 Amortization of deferred compensation -- -- 210 Loss on disposal of equipment and other -- 313 364 Changes in operating items, excluding the effects of acquisitions: Working capital items 2,547 (284) (2,330) Nonworking capital items 56 (1,864) (3,072) -------- -------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,664 9,500 (5,285) INVESTING ACTIVITIES: Acquisitions, net of cash acquired (1,057) (15,206) -- Proceeds on sale of retail operations 83 -- -- Capital expenditures, net of noncash expenditures-$1,114, $561, and $3,009, for fiscal 1997, 1998 and 1999, respectively (1,814) (10,302) (11,960) Purchases of investments (4,382) (4,050) -- Sales and maturities of available-for-sale investments 3,077 3,754 5,419 Notes receivable, net (97) 341 178 -------- -------- --------- NET CASH USED IN INVESTING ACTIVITIES (4,190) (25,463) (6,363) FINANCING ACTIVITIES: Redemption of Class C common stock -- -- (4,347) Proceeds from issuance of preferred stock, net -- -- 101,636 Payment of deferred offering costs -- -- (1,019) Proceeds from bank borrowings -- 15,500 35,402 Acquisition of treasury stock -- (133) -- Payments of capital lease obligations (1,408) (1,648) (1,639) Repayment of notes payable and bank borrowings (262) (326) (28,075) -------- -------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,670) 13,393 101,958 -------- -------- --------- Net change in cash and equivalents 4,804 (2,570) 90,310 Cash and equivalents: Beginning of year 6,639 11,443 8,873 -------- -------- --------- End of year $ 11,443 $ 8,873 $ 99,183 ======== ======== =========
SEE ACCOMPANYING NOTES. F-5 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 27, 1999 1. DESCRIPTION OF BUSINESS 1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") 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. ("Plow & Hearth") 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. 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. 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. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined using the first-in, first-out method of accounting. F-6 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
YEARS ----- Building 40 Leasehold improvements 15-20 Furniture, fixtures and equipment (including computer equipment, software development costs and telecommunication equipment) 3-5
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. Capitalized computer software developed for internal use approximated $828,000, $5,169,000 and $1,770,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 1999, respectively. NOTES RECEIVABLE Notes receivable are principally the result of (i) an acquired entity's land and building sales; (ii) converting past due franchise receivables into interest bearing promissory notes; (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. Allowances relating to such notes (1998-$593,000 and 1999-$300,000) have been recorded based upon previous experience and management's periodic evaluation of other relevant factors. GOODWILL AND LICENSES 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. 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. F-7 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. 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 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 28, 1998 and June 27, 1999. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject 1-800-FLOWERS.COM to a concentration of credit risk consist primarily of its holdings of cash and equivalents, short-term investments and accounts receivable. Cash and equivalents and short-term investments are deposited with high credit, quality financial institutions. 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 throughout the United States. A substantial portion of receivables are related to balances owed by major credit 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 28, 1998-$784,000 and June 27, 1999-$1,182,000) 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. INCOME TAXES Income taxes are provided using the liability method. Accordingly, deferred tax assets and F-8 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. 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 and $17,606,000 for the years ended June 28, 1998 and June 27, 1999, respectively) was approximately $16,700,000, $16,691,000 and $36,387,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 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. 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. F-9 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, June 28, 1998 and June 27, 1999, the flowers and plants products category represented 92.1%, 86.9% and 71.8% of total net revenues, respectively. 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 27, 1999, 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. 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 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 F-10 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 June 27, 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 years ended June 28, 1998 and June 27, 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). 1-800-FLOWERS.COM's minimum obligation under the put liability increased to $8,400,000 upon the completion of its initial public offering ("IPO") in August 1999 (see Note 12). 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:
YEARS ENDED ------------------------------ JUNE 29, 1997 JUNE 28, 1998 --------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 =============== ==============
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 F-11 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) future operations of the combined companies. 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. 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 June 27, 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 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. 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, June 28, 1998 and June 27, 1999, 1-800-FLOWERS.COM recorded $318,000, $123,000 and $123,000, respectively, of other income representing the accrual of cumulative F-12 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) preferred stock dividends. Accrued preferred stock dividends at June 29, 1997 of $318,000 were paid in July 1997. 4. CAPITAL STOCK TRANSACTIONS In January 1995, 1-800-FLOWERS.COM entered into an investment agreement with Chase Venture Capital Associates ("Chase"), under which Chase purchased 263,452 shares of redeemable Class C common stock and a warrant, expiring in 2005, to purchase 2,371,040 shares of Class A common stock with a nominal exercise price for an investment of $10.0 million. As of June 27, 1999, all such warrants are outstanding. 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. 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. Subsequent to the increase in the authorized shares of preferred stock, 1-800-FLOWERS.COM completed a private placement of 984,493 shares of preferred stock on May 20, 1999, yielding net proceeds of $101.6 million. In connection with this private placement, and pursuant to the terms of the investment agreement with Chase, 1-800-FLOWERS.COM redeemed the Class C common stock for approximately $14.9 million and Chase used such proceeds to purchase 143,053 shares of preferred stock and received 263,452 shares of Class A common stock in connection with the redemption of the Class C common stock. In accordance with the preferred stock purchase agreement, and effective with 1-800-FLOWERS.COM's IPO in August 1999 (see Note 12), each share of preferred stock was converted into ten shares of Class A common stock. Concurrent with the completion of the private placement, 1-800-FLOWERS.COM redeemed 84,768 shares of Class C common stock owned by its Chief Executive Officer for $4.3 million and issued him 84,768 shares of Class B common stock in connection with the redemption. During the year ended June 27, 1999, 1-800-FLOWERS.COM recorded a dividend in the amount of $5.2 million as a result of the issuances of common stock in exchange for the redemption of all of the outstanding Class C common stock, as well as for the accrual of the 10% cumulative dividend on the Class C common stock through the date of redemption. In order to facilitate its IPO, on July 7, 1999, 1-800-FLOWERS.COM amended and restated its certificate of incorporation to provide for the conversion of existing shares of common stock into newly established classes of common stock and 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 (see Note 12). F-13 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. LONG-TERM DEBT 1-800-FLOWERS.COM's long-term debt and obligations under capital leases are as follows:
JUNE 28, 1998 JUNE 27, 1999 -------------- -------------- (IN THOUSANDS) Bank term loan and revolving credit line (1) $ - $21,000 Standby credit note (2) 15,500 - Commercial notes and revolving credit lines (3-6) 2,333 4,675 Seller financed acquisition obligations (7-12) 3,867 3,351 Obligations under capital leases (see Note 11) 4,050 5,078 -------------- -------------- 25,750 34,104 Less current maturities of long-term debt and obligations under capital leases 3,287 6,647 -------------- -------------- $22,463 $27,457 ============== ==============
- ---------- (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 June 27, 1999) payable monthly. 1-800-FLOWERS.COM used the proceeds to repay amounts outstanding under its previous credit agreement (see (2) below). At June 27, 1999, 1-800-FLOWERS.COM had $3,000,000 of outstanding borrowings under the revolving credit line agreement. In conjunction with an amendment to the credit agreement, in April 1999, the bank waived default of certain covenants and amended the agreement whereby the revolving credit line was reduced to $5,000,000 and the term loan will be due and payable on the earlier of 1-800-FLOWERS.COM's successful completion of an IPO or July 3, 2000. Upon closing of its IPO in August 1999, 1-800-FLOWERS.COM used a portion of the proceeds to repay all amounts outstanding under this agreement (see Note 12). (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). 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) $4,500,000 revolving credit line dated September 28, 1998, renewable annually, (none outstanding at June 27, 1999) bearing interest equal to the monthly LIBOR Index plus 1.75% per annum (6.81% at June 27, 1999). (4) $2,400,000 commercial note dated June 13, 1997 ($2,258,000 outstanding at June 27, 1999) F-14 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. (5) $1,460,000 note dated July 1, 1998 ($1,421,000 outstanding at June 27, 1999) bearing interest equal to the monthly Treasury Bill rate plus 2.1% per annum (6.45% at June 27, 1999). The note is payable in 180 equal monthly installments of principal and interest commencing November 1, 1998. (6) $2,980,000 construction line, dated May 12, 1999, convertible, at 1-800-FLOWERS.COM's option, to a 15 year fixed rate term loan in September 1999 ($996,000 outstanding at June 27, 1999) bearing interest at 7.61% per annum. 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: (7) $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. (8) $800,000 promissory note payable assumed October 10, 1994 ($67,000 outstanding at June 27, 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. (9) $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. (10) $275,000 promissory note payable dated November 1, 1994 ($173,000 outstanding at June 27, 1999) bearing interest at 8% per annum. The note is payable in 120 equal monthly installments of principal and interest commencing December 1, 1994. (11) $95,000 note payable assumed November 1, 1994 ($11,000 outstanding at June 27, 1999) bearing interest at 8% per annum. The note is payable in 60 equal monthly installments of principal and interest commencing February 1, 1995. (12) $900,000 promissory note payable dated July 1,1997 ($675,000 outstanding at June 27, 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-15 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 27, 1999, long-term debt maturities, excluding amounts relating to capital leases (see Note 11), are as follows (in thousands):
YEAR DEBT MATURITIES ---- --------------- 2000 $4,792 2001 19,156 2002 1,159 2003 936 2004 940 Thereafter 2,043 ----------- $29,026 ===========
6. INCOME TAXES Significant components of the provision (benefit) for income taxes are as follows (in thousands):
YEARS ENDED -------------- ------------- -------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 -------------- ------------- -------------- Current: Federal $2,600 $2,039 $(1,699) State and local 705 877 - -------------- ------------- -------------- 3,305 2,916 (1,699) Deferred (170) 265 (1,016) -------------- ------------- -------------- $3,135 $3,181 $(2,715) ============== ============= ==============
The reconciliation of income tax computed at the U.S. federal statutory tax rates to income tax expense is as follows:
YEARS ENDED -------------------------------------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 -------------- -------------- ------------- Tax at U.S. statutory rates 34.0% 34.0% (34.0)% State income taxes, net of federal tax benefit 6.0 7.5 - Nondeductible goodwill amortization 1.9 2.1 4.8 Dividends received deduction (1.0) (4.4) (0.2) Other 0.8 0.2 0.4 -------------- -------------- ------------- 41.7% 39.4% (29.0)% ============== ============== =============
F-16 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Significant components of 1-800-FLOWERS.COM's deferred tax assets (liabilities) are as follows:
JUNE 28, 1998 JUNE 27, 1999 ------------- ------------- (IN THOUSANDS) Deferred tax assets: Bad debts $ 481 $ 412 Other accrued expenses and reserves 1,156 1,092 State tax operating losses -- 260 Valuation allowance -- (260) Deferred tax liabilities: Installment sales (157) (147) Tax in excess of book depreciation (1,175) (36) ------- ------- Net deferred taxes $ 305 $ 1,321 ======= =======
1-800-FLOWERS.COM paid income taxes, net of refunds, of approximately $1,700,000, $2,930,000 and $400,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 1999, respectively. 7. SUPPLEMENTARY FINANCIAL INFORMATION PROPERTY, PLANT AND EQUIPMENT
JUNE 28, 1998 JUNE 27, 1999 ------------- ------------- (IN THOUSANDS) Computer equipment $9,648 $15,547 Software development costs 5,997 7,767 Telecommunication equipment 3,854 4,285 Leasehold improvements 3,715 6,363 Building and building improvements 3,463 5,745 Equipment 1,917 2,616 Furniture and fixtures 1,437 2,373 Land 389 389 -------------- -------------- 30,420 45,085 Accumulated depreciation and amortization 11,041 17,560 -------------- -------------- $19,379 $27,525 ============== ==============
F-17 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INVESTMENTS
JUNE 28, 1998 JUNE 27, 1999 ---------------------------- ----------------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE ---------------------------- ----------------------------- (IN THOUSANDS) Investments available-for-sale: Federal and municipal government bonds $5,173 $5,178 $- $ - Equity securities 266 275 - - -------------- ------------- --------------- ------------- $5,439 5,453 $- - ============== ------------- =============== ------------- Other investments: Equity investment in American Floral Services, at cost 918 918 Other 46 66 ------------- ------------- 6,417 984 Less short-term investments 5,034 - ------------- ------------- $1,383 $984 ============= =============
Maturities of investments classified as available-for-sale were as follows (in thousands):
JUNE 28, 1998 JUNE 27, 1999 ---------------------- ----------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------------------- ----------------------- Due in one year or less $5,034 $5,034 $- $- Due after one year 139 144 - - Equity securities not due at a specific date 266 275 - - ---------------------- ----------------------- $5,439 $5,453 $- $- ====================== =======================
There were no gross unrealized holding losses at June 29, 1997, June 28, 1998 and June 27, 1999. Additionally, gross realized gains or losses on the sales of available-for-sale securities were immaterial for all periods presented. OTHER ASSETS
JUNE 28, 1998 JUNE 27, 1999 ------------- ------------- (IN THOUSANDS) Exclusive online marketing contract, net $ - $2,500 Deferred catalog costs, net 669 1,021 Deferred offering costs - 1,019 Other assets, net 1,126 1,137 ------------- ------------- 1,795 5,677 ============= =============
F-18 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CASH FLOWS Changes in operating working capital items, excluding the effects of acquisitions:
YEARS ENDED -------------- -------------- -------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 -------------- -------------- -------------- (IN THOUSANDS) Receivables $ (1,475) $ (1,908) $ (1,296) Inventories 32 (373) (2,525) Prepaid and other 838 732 (281) Recoverable income taxes - - (2,431) Accounts payable 1,742 3,655 2,606 Accrued expenses 278 (2,010) 2,442 Income taxes payable 1,132 (380) (845) -------------- -------------- -------------- $2,547 $ (284) $ (2,330) ============== ============== ==============
Changes in operating non-working capital items, excluding the effects of acquisitions:
YEARS ENDED -------------- -------------- ------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 -------------- -------------- ------------- (IN THOUSANDS) Other assets $ (24) $(1,821) $(3,787) Other liabilities 80 (43) 715 -------------- -------------- ------------- $56 $(1,864) $(3,072) ============== ============== =============
Interest paid amounted to approximately $912,000, $879,000 and $2,723,000 for the years ended June 29, 1997, June 28, 1999 and June 27, 1999, respectively. Cash receipts on notes receivable amounted to $600,000, $723,000 and $786,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 1999, respectively. ACCRUED EXPENSES
JUNE 29, 1998 JUNE 28, 1999 -------------- -------------- (IN THOUSANDS) Payroll and payroll related items $1,877 $2,074 Credits and chargeback reserve 425 846 Sales and use taxes 61 264 Interest 298 185 Other 440 2,174 -------------- -------------- $3,101 $5,543 ============== ==============
F-19 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. PROFIT SHARING PLAN 1-800-FLOWERS.COM has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All full-time employees 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 $101,000, $92,000 and $87,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 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. 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 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 $210,000 was amortized during the year ended June 27, 1999, associated with the option grants in January 1999. F-20 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes activity in stock options:
YEARS ENDED ------------------------------------------------------------------------ JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 ---------------------- ----------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE UNDER EXERCISE UNDER EXERCISE UNDER EXERCISE OPTION PRICE OPTION PRICE OPTION PRICE ----------- ---------- ---------- ----------- ------------ ----------- Balance, beginning of - $- 427,750 $1.30 525,500 $1.36 year 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 year $0.22 $0.73 $0.90
The following table summarizes information about stock options outstanding at June 27, 1999:
WEIGHTED- AVERAGE OPTIONS OPTIONS REMAINING EXERCISE PRICE OUTSTANDING EXERCISABLE CONTRACTUAL LIFE -------------- ----------- ----------- ---------------- $1.30 423,000 253,800 2.5 years 1.61 102,500 25,630 8.5 years 2.00 712,000 393,000 9.1 years ------------- ------------- 1,237,500 672,430 6.8 years ============= =============
In July 1999, 1-800-FLOWERS.COM's board of directors adopted and stockholders approved the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive Plan (see Note 12). At June 27, 1999, 1-800-FLOWERS.COM has reserved approximately 24,784,460 shares of common stock for issuance under common stock options, warrants and convertible preferred 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. As further described in Note 12, 1-800-FLOWERS.COM became a public entity in August 1999. As a F-21 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) result, the determination of fair value of all options granted after such time will include an expected volatility factor in addition to the factors described above, and 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:
YEARS ENDED -------------- -------------- -------------- JUNE 29, 1997 JUNE 28, 1998 JUNE 27, 1999 -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss) applicable to common stockholders: As reported $2,925 $3,466 $(12,061) Pro forma 2,898 3,438 (12,501) Basic earnings (loss) per share applicable to common stockholders: As reported $0.07 $0.08 $(0.27) Pro forma 0.07 0.08 (0.28) Diluted earnings (loss) per share applicable to common stockholders: As reported $0.06 $0.07 $(0.27) Pro forma 0.06 0.07 (0.28)
F-22 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE The following sets forth the data used in the computation of basic and diluted earnings (loss) per common share:
YEARS ENDED ------------------------------------ JUNE 29, JUNE 28, JUNE 27, 1997 1998 1999 -------- -------- -------- (IN THOUSANDS) Numerator: Net income (loss) $ 4,387 $ 5,074 $ (6,846) Redeemable Class C common stock dividends (1,462) (1,608) (5,215) -------- -------- -------- Net income (loss) applicable to common stockholders $ 2,925 $ 3,466 $(12,061) ======== ======== ======== Denominator: Denominator for basic earnings (loss) per share-weighted average common shares outstanding 44,140 44,120 44,035 Effect of dilutive securities: Employee stock options 230 120 -- Warrants 2,370 2,370 -- -------- -------- -------- Dilutive potential common shares 2,600 2,490 -- -------- -------- -------- Denominator for diluted earnings (loss) per share-weighted average common shares outstanding and assumed conversions 46,740 46,610 44,035 ======== ======== ========
During the year ended June 27, 1999, 1,127,546 shares of convertible preferred stock and options and warrants to purchase 3,322,000 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, 348,221 shares of common stock issued upon the conversion of Class C common stock (see Note 4) were excluded from the diluted loss per share computation until their associated conversion/redemption in May 1999, as their inclusion would be antidilutive. Additionally, subsequent to June 27, 1999, 1-800-FLOWERS.COM issued options to purchase 1,023,000 shares of Class A common stock with an exercise price of $21, equal to the price of the shares sold in its IPO and 300,000 shares of Class A common stock with an exercise price of $16. 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 F-23 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) maintenance and operating expenses applicable to the leased properties. 1-800-FLOWERS.COM has also entered into leases that are on a month-to-month basis. 1-800-FLOWERS.COM also leases certain computer, telecommunication and related equipment under capital leases, which are included in property and equipment with a capitalized cost of approximately $7,037,000 and $10,124,000 at June 28, 1998 and June 27, 1999, respectively, and accumulated amortization of $5,031,000 and $6,897,000 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 June 27, 1999, future minimum payments under non-cancelable equipment lease obligations and operating leases with initial terms of one year or more consist of the following:
OBLIGATIONS UNDER EQUIPMENT OPERATING LEASES LEASES ------------- ----------- (IN THOUSANDS) 2000 $1,812 $4,620 2001 1,054 3,936 2002 934 3,712 2003 501 3,214 2004 57 2,447 Thereafter - 3,984 ------------- ----------- Total minimum lease payments 4,358 $21,913 =========== Less amounts representing interest (594) ------------- Present value of net minimum lease payments $3,764 =============
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-24 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following schedule, as of June 27, 1999, reflects the lease receipts due from franchisees (shown as Capitalized Investment in Leases) and capital lease payment obligations:
CAPITALIZED OBLIGATIONS INVESTMENT IN UNDER CAPITAL LEASES LEASES -------------- -------------- (IN THOUSANDS) 2000 $478 $403 2001 433 392 2002 379 339 2003 257 222 2004 173 173 Thereafter 162 162 -------------- -------------- Total minimum lease payments 1,882 1,691 Less interest (430) (377) -------------- -------------- Present value of net minimum lease payments $1,452 $1,314 ============== ==============
At June 27, 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:
SUBLEASE SUBLEASE INCOME EXPENSE -------------- ------------- (IN THOUSANDS) 2000 $3,187 $3,118 2001 2,789 2,742 2002 2,255 2,215 2003 1,881 1,849 2004 1,587 1,555 Thereafter 4,825 4,677 -------------- ------------- $16,524 $16,156 ============== =============
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 June 27, 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 $549,000. Rent expense was approximately $5,800,000, $5,637,000 and $7,692,000 for the years ended June 29, 1997, June 28, 1998 and June 27, 1999. 1-800-FLOWERS.COM has commitments under exclusive online marketing agreements with America Online, Inc. ("AOL") whereby 1-800-FLOWERS.COM was required to 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 F-25 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) total number of contracted impressions, or a straight-line basis over the term of the agreement. Through June 27, 1999, 1-800-FLOWERS.COM paid $7,500,000 pursuant to the AOL agreements. Of the remaining $4,000,000, $3,000,000 was paid in July 1999 and $500,000 was to be payable during each of the fiscal years ending June 2000 and 2001. On September 1, 1999, 1-800-FLOWERS.COM expanded both the term and scope of its strategic relationship with AOL. Pursuant to the terms of the new agreement, 1-800-FLOWERS.COM will pay AOL $37,000,000 over the new four-year term of the agreement which extends through fiscal 2003. Additionally, during the first two years of the new agreement, 1-800-FLOWERS.COM is required to share a portion of revenue derived from certain of the AOL properties included in such agreement. Such amounts will be expensed as the related revenue is recognized. 1-800-FLOWERS.COM's remaining payment obligations to AOL under the previous agreement were cancelled upon the effectiveness of the new agreement. 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. SUBSEQUENT EVENTS CAPITAL TRANSACTIONS On August 3, 1999, 1-800-FLOWERS.COM completed an IPO of 6,000,000 shares of its Class A common stock, par value $0.01 per share, at $21.00 per share, raising net proceeds of approximately $115.7 million. In anticipation of the its IPO, 1-800-FLOWERS.COM amended and restated its certificate of incorporation on July 7, 1999 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. On July 7, 1999, the 1-800-FLOWERS.COM, Inc., 1999 Stock Incentive Plan was adopted by 1-800-FLOWERS.COM's board of directors and approved by its stockholders. Pursuant to the terms of the plan, 9,900,000 shares of Class A common stock have been authorized for issuance. 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. The components of the plan include a discretionary option grant F-26 1-800-FLOWERS.COM, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) program, an automatic option grant program, a stock issuance program, and a salary investment option grant program. In August 1999, 1-800-FLOWERS.COM granted 1,023,000 options at an exercise price of $21 per share and 300,000 options at an exercise price of $16 per share. Such grants were made at the fair market value on their respective grant dates. 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. PREFERRED STOCK CONVERSION Upon completion of 1-800-FLOWERS.COM's IPO, each issued and outstanding share of preferred stock was converted into ten shares of Class A common stock, resulting in the issuance of 11,275,460 shares of Class A common stock. REPAYMENT OF BANK CREDIT FACILITY In connection with the completion of its IPO, 1-800-FLOWERS.COM repaid $21,000,000 of bank borrowings, representing all amounts outstanding under a term loan and revolving credit line (see Note 5 (1)). ACQUISITION OF MINORITY STOCKHOLDERS' INTEREST IN PLOW & HEARTH Pursuant to the terms of the Plow & Hearth stockholders' agreement between 1-800-FLOWERS.COM, Plow & Hearth and Plow & Hearth management shareholders, upon completion of 1-800-FLOWERS.COM's IPO on August 3, 1999, 1-800-FLOWERS.COM acquired all of the remaining outstanding shares of common stock and stock options from the minority stockholders of Plow & Hearth, when, through its Plow & Hearth subsidiary, 1-800-FLOWERS.COM satisfied its obligation under the management put liability (see Note 3) through the purchase, for cash, of all of the outstanding shares of common stock and stock options for $8,400,000. F-27 1-800-FLOWERS.COM, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS ----------------------------------- 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 27,1999: Reserves and allowances deducted from asset accounts: Reserve for estimated doubtful accounts- accounts receivable $784,000 $737,000 $- $(339,000)(a) $1,182,00 Reserve for estimated doubtful accounts- notes receivable 593,000 - - (293,000)(a) 300,000 Reserve for credits and chargebacks 425,000 - 13,858,000(d) (13,437,000)(e) 846,000 Valuation allowance on deferred tax assets - - 260,000(b) - 260,000 --------------- ---------------- ---------------- ----------------- ------------- $1,802,000 $737,000 $14,118,000 $(14,069,000) $2,588,000 =============== ================ ================ ================= ============= 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 =============== ================ ================ ================= =============
- ---------- (a) Reduction in allowance due to write-off of accounts/notes receivable balances. (b) Record a 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-1 EX-10.22 2 EXHIBIT 10.22 EXHIBIT 10.22 CONFIDENTIAL INTERACTIVE MARKETING AGREEMENT This amended and restated Interactive Marketing Agreement (the "Agreement"), made and entered into on September 1, 1999, but for all purposes of this Agreement deemed to be effective as of July 1, 1999 (the "Effective Date"), is between America Online, Inc. ("AOL"), a Delaware corporation, with offices at 22000 AOL Way, Dulles, Virginia 20166, and 800-FLOWERS.COM, Inc. ("1-800-FLOWERS" or "MP"), a New York corporation, with offices at 1600 Stewart Avenue, Westbury, NY 11590. AOL and 1-800-FLOWERS may be referred to individually as a "Party" and collectively as the "Parties." This Agreement is intended to amend and restate in their entirety (i) that certain Interactive Marketing Agreement between the Parties dated May 1, 1997 and (ii) that certain additional Interactive Marketing Agreement dated as of January 1, 1998 between the Parties (collectively, the "Original IMAs"). Upon the Effective Date, the Original IMAs shall be terminated and of no further force and effect. INTRODUCTION Each of AOL and 1-800-FLOWERS desires to enter into an interactive marketing relationship whereby AOL shall promote and distribute interactive sites referred to (and further defined) herein as the Affiliated 1-800-FLOWERS Sites. 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 shall be as defined on Exhibit B attached hereto. TERMS 1. PROMOTION, DISTRIBUTION AND MARKETING. 1.1. AOL PROMOTION OF AFFILIATED 1-800-FLOWERS SITES. AOL shall provide 1-800-FLOWERS with the promotions for the Affiliated 1-800-FLOWERS Sites described on Exhibit A hereto. Subject to 1-800-FLOWERS' approval (which shall not be unreasonably withheld), AOL shall have the right to fulfill its promotional commitments with respect to any of the foregoing promotions by providing 1-800-FLOWERS with comparable promotional placements in appropriate alternative areas of the same AOL Properties; PROVIDED, HOWEVER, that unless otherwise agreed upon by the Parties, any such comparable promotional placements shall be within the same Tier as the promotions for which such comparable promotional placements are being substituted. In addition, if AOL is unable to deliver any particular promotion, AOL shall work with 1-800-FLOWERS to provide 1-800-FLOWERS, as its sole remedy, with a comparable promotional placement (i.e., a placement which is not less valuable, in terms of the applicable CPM, than the promotion being replaced) within the same Tier (as described on Exhibit A to this Agreement). 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 shall work with 1-800-FLOWERS to provide 1-800-FLOWERS, as its sole remedy, a comparable promotional placement in the same Tier as the promotion being replaced. The promotions described on Exhibit A and any comparable promotions provided herein shall be referred to as the "Promotions." On a periodic basis (but in no event less than quarterly), the Parties shall review and modify, as applicable, the promotional plan for the Promotions in a continuing effort to have a current and effective promotional plan. In addition, in order to expand 1-800-FLOWERS' exposure on the AOL Network beyond the AOL-Controlled Areas, (i) AOL shall use commercially reasonable efforts to assist 1-800-FLOWERS in establishing promotional, marketing, advertising and/or distribution relationships with AOL's Content providers to permit 1-800-FLOWERS to be the provider 1 to or through such entities of the Products described on Exhibit D hereto and (ii) 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 the Products set forth on Exhibit D through such entities (the activities in clauses (i) and (ii) above, collectively, the "Promotional Activities"); PROVIDED, HOWEVER, that 1-800-FLOWERS shall have no obligation to enter into any such contractual arrangement. With respect to the Promotional Activities that result in a contractual relationship between 1-800-FLOWERS and any third party, 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 up-front payments (if any) made pursuant to any such arrangement. 1-800-FLOWERS hereby acknowledges and agrees that AOL does not guarantee that (x) any of the entities to be approached under this Section 1.1 will agree to enter into a contractual arrangement with 1-800-FLOWERS and/or (y) the terms and conditions of any such contractual arrangement into which 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). 1.2. IMPRESSIONS COMMITMENT. During the Term, AOL shall deliver *** Impressions to 1-800-FLOWERS through the Promotions (the "Impressions Commitment"). In the event that, by the end of any Year, AOL does not reach the Annual Impressions Target for such Year as set forth on Exhibit A hereto (a "Shortfall"), (i) such Shortfall shall not be deemed a breach of the Agreement by AOL, but instead shall be added to the Annual Impressions Target for the subsequent Year and (ii) the Impressions Commitment shall be increased (subject to the AOL Setoff Right) by *** Impressions (the "Shortfall Penalty") for each Year in which any such Shortfall exists. With respect to the Annual Impressions Targets specified on Exhibit A, AOL shall not be obligated to provide Impressions in excess of any Annual Impressions Target in any Year. In the event AOL provides Impressions in excess of any Annual Impressions Target in any Year during the Initial Term (the "Excess Impressions"), AOL shall have the right to credit any such Excess Impressions (the "AOL Setoff Right") against any future Shortfall solely for purposes of determining the applicability of any Shortfall Penalty (e.g., AOL would have the right to credit *** of Excess Impressions in Year 1 against a Shortfall of *** in Year 3 such that AOL would not be required to pay any Shortfall Penalty due to such Year 3 Shortfall, and the remaining *** Excess Impressions would be available to credit against any Shortfall of up to *** Impressions in Year 4 solely for purposes of determining the applicability of any Shortfall Penalty in Year 4); PROVIDED, HOWEVER, that AOL will use commercially reasonable efforts to deliver the Impressions in accordance with the target amounts set forth on Exhibit A hereto. In the event that 1-800-FLOWERS requests that AOL reduce its promotional commitments hereunder in any Year of the Term, and as a result, AOL fails to satisfy the Annual Impressions Target in such Year, then AOL shall not be responsible for the delivery of such Shortfall, and the Impressions Commitment shall not be increased by the Shortfall Penalty. Within thirty (30) days following any Year of the Initial Term (other than the final Year thereof) in which there is a Shortfall in Impressions, the Parties shall meet to discuss the means by which AOL will attempt to rectify such Shortfall in the subsequent Year. In the event there is a shortfall in Impressions as of the end of the Initial Term (a "Final Shortfall"), AOL shall provide 1-800-FLOWERS (as 1-800-FLOWERS's sole remedy), during the greater of (x) the *** month period immediately following the expiration of the Initial Term or (y) the period in which it would require AOL to deliver the Final Shortfall to 1-800-FLOWERS at a rate not to exceed *** per month (collectively, the "Make-Whole Period") and as 1-800-FLOWERS' sole remedy, with comparable promotional placements for the same number of Impressions (equal to the Final Shortfall) in the same Tiers on the applicable *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 2 AOL Properties (as mutually agreed upon by the Parties); PROVIDED that AOL shall not deliver to 1-800-FLOWERS more than *** Impressions of any such Final Shortfall in any one (1) month of the Make-Whole Period, unless otherwise agreed upon by the Parties. 1.3. CONTENT OF PROMOTIONS. The Promotions for 1-800-FLOWERS shall link only to the Affiliated 1-800-FLOWERS Sites and shall promote only the Exclusive Products and any other Products that 1-800-FLOWERS is permitted to offer on the Affiliated 1-800-FLOWERS Sites pursuant to the terms of this Agreement ***. The specific 1-800-FLOWERS Content to be contained within the Promotions (including, without limitation, advertising banners and contextual promotions) (the "Promo Content") shall 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 and AOL shall work together to develop a quarterly online marketing plan (which 1-800-FLOWERS shall submit to AOL in advance of each quarter during the Term for AOL's final review) with respect to the Affiliated 1-800-FLOWERS Sites. The Parties shall meet in person or by telephone at least monthly to review operations and performance hereunder, including a review of the Promo Content to ensure that it is designed to maximize performance. 1-800-FLOWERS shall consistently update the Promo Content no less than twice per month. Except to the extent expressly described herein (e.g., the Promotions as described on Exhibit A hereto), the specific form, placement, duration and nature of the Promotions shall be as determined by AOL in its reasonable editorial discretion (consistent with the editorial composition of the applicable screens). 2. AFFILIATED 1-800-FLOWERS SITES. 2.1. CUSTOMIZED AFFILIATED 1-800-FLOWERS SITES. 1-800-FLOWERS shall create, at its sole cost and expense, a customized Affiliated 1-800-FLOWERS Site for each of the AOL Properties, through which 1-800-FLOWERS can promote, advertise, market and complete transactions regarding the Products set forth on Exhibit D hereto (which interactive sites collectively shall be referred to herein as the "Affiliated 1-800-FLOWERS Sites"), and warrants that it also shall implement, at its own cost and expense, any appropriate infrastructure additions to the Affiliated 1-800-FLOWERS Sites to support the projected traffic growth on such Affiliated 1-800-FLOWERS Sites. Each Affiliated 1-800-FLOWERS Site shall be customized to comply with the co-branding requirements for the relevant AOL Property, as set forth on Exhibit I hereto. 2.2. CONTENT. 1-800-FLOWERS shall make available through the Affiliated 1-800-FLOWERS Sites the comprehensive offering of Products and related Content (under "Brands" owned by 1-800-FLOWERS that are selected by 1-800-FLOWERS) described on Exhibit D. Except as mutually agreed in writing by the Parties and as otherwise permitted under Section 2.8.2(a)(iii) of this Agreement, the Affiliated 1-800-FLOWERS Sites shall contain only Content that is directly related to the Products listed on Exhibit D and shall not contain any third-party products, services, programming or other Content other than that within the categories set forth on Exhibit D. All sales of Products through the Affiliated 1-800-FLOWERS Sites shall be conducted through a direct sales format; 1-800-FLOWERS shall 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 shall review, delete, edit, create, update and otherwise manage all Content available on or through the Affiliated 1-800-FLOWERS Sites in accordance with the terms of this Agreement. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 3 2.3. PRODUCTION WORK. Except as agreed to in writing by the Parties pursuant to Section 10 of Exhibit F hereto, 1-800-FLOWERS shall be responsible for all production work associated with the Affiliated 1-800-FLOWERS Sites, including all related costs and expenses. 2.4. TECHNOLOGY. 1-800-FLOWERS shall take all reasonable steps necessary to conform its promotion and sale of Products through the Affiliated 1-800-FLOWERS Sites to the then-existing technologies identified by AOL which are optimized for the AOL Service (including, without limitation, any "quick checkout" tool which AOL may implement to facilitate purchase of Products by AOL Users through the Affiliated 1-800-FLOWERS Sites). AOL shall be entitled to require reasonable changes to the Content (including, without limitation, the features or functionality) within any linked pages of any Affiliated 1-800-FLOWERS Site to the extent such Content shall, in AOL's good faith judgment, adversely affect any operational aspect of the AOL Network. AOL reserves the right to review and test any 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. During the Term and subject to Section 2.2 of this Agreement, 1-800-FLOWERS shall use commercially reasonable efforts to ensure that the Affiliated 1-800-FLOWERS Sites include substantially all of the Products and other Content (including, without limitation, any features, offers, contests, functionality or technology) that are then made available by or on behalf of 1-800-FLOWERS through any Additional 1-800-FLOWERS Channel; PROVIDED, HOWEVER, that (i) such inclusion shall 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 such inclusion is prohibited by the terms of (a) this Agreement or (b) another agreement (in full force and effect on the Effective Date) to which 1-800-FLOWERS is a party, (ii) the specific changes in scope, nature and/or offerings required by such inclusion shall be subject to AOL's review and approval, and to the terms of this Agreement, and (iii) in the event that 1-800-FLOWERS makes a special offer on any additional 1-800-FLOWERS Channel, then 1-800-FLOWERS shall use commercially reasonable efforts to offer a comparable Special Offer on the 1-800-FLOWERS Affiliated Sites. 2.6. ***AND TERMS. During the Term and subject to Section 2.5, 1-800-FLOWERS shall ensure that: (i) the *** for the Merchandise Value of the Products in any Affiliated 1-800-FLOWERS Site *** the *** for the Merchandise Value of the Products or substantially similar Products offered by or on behalf of 1-800-FLOWERS through any Additional 1-800-FLOWERS Channel; and (ii) the terms and conditions related to Products offered on or through the Affiliated 1-800-FLOWERS Sites (when taken as a whole) are *** to the terms and conditions for the Products or substantially similar Products offered by or on behalf of 1-800-FLOWERS on or through any Additional 1-800-FLOWERS Channel. 2.7. SPECIAL OFFERS/MEMBER BENEFITS. During the Term, 1-800-FLOWERS shall on a reasonably periodic basis (but in no event less than *** per quarter), promote throughout the Affiliated 1-800-FLOWERS Sites special offers exclusively available to AOL Members and/or AOL Users ("Special Offers"). Each Special Offer made available by 1-800-FLOWERS shall provide a substantial member benefit to AOL Users, either by virtue of a meaningful price discount, product enhancement, unique service benefit or other special feature. 1-800-FLOWERS shall provide AOL with reasonable prior notice of such Special Offers so that AOL can market the availability of such Special Offers in the manner AOL deems appropriate in its editorial discretion. 1-800-FLOWERS shall ensure that such Special Offers are *** when compared with *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 4 any other such offers made 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 on the Affiliated 1-800-FLOWERS Sites; PROVIDED, HOWEVER, that the foregoing obligation shall not apply to a particular Special Offer to the extent that 1-800-FLOWERS cannot make such offer available due to the fact that such offer requires certain support technology from AOL which AOL cannot, or elects not to, provide. 1-800-FLOWERS shall use commercially reasonable efforts to provide an AOL Special Offer (to be mutually agreed upon by the Parties) during each year of the Term to new CompuServe 2000 members. 2.8. OPERATING STANDARDS; NON-COMPLIANT CONTENT. 2.8.1 1-800-FLOWERS TECHNICAL PROBLEM. 1-800-FLOWERS shall ensure that each of the Affiliated 1-800-FLOWERS Sites complies at all times with the standards set forth in Exhibit E hereto. In the event of (i) any 1-800-FLOWERS Technical Problem, AOL shall have the right to block AOL User access to the Affiliated 1-800-FLOWERS Site(s) affected by the 1-800-FLOWERS Technical Problem until such time as 1-800-FLOWERS cures such 1-800-FLOWERS Technical Problem. In the event that 1-800-FLOWERS fails to cure any such 1-800-FLOWERS Technical Problem within five (5) business days, (a) AOL shall have the right (in addition to any other remedies available to AOL hereunder (e.g., any blocking right)) to reduce (on a PRO RATA basis) the Annual Impressions Target for such Year (and for any subsequent Year, in the event that such 1-800-FLOWERS Technical Problem carries over from one Year to the next) until such time as 1-800-FLOWERS cures such 1-800-FLOWERS Technical Problem (and in such event, AOL shall be relieved of the proportionate amount of the Impressions Commitment corresponding to such reduction in Impressions) and (b) any revenue threshold(s) set forth in Section 4 of this Agreement shall each be adjusted proportionately to correspond to such reduction in Impressions during the period of non-compliance (e.g., for each day such 1-800-FLOWERS Technical Problem exists beyond such initial five (5) business day period, the Impressions Commitment shall be reduced by 1/365 of the Impressions to be provided by AOL hereunder, and the relevant revenue threshold(s) also shall be reduced by such percentage). In the event that 1-800-FLOWERS fails to cure such 1-800-FLOWERS Technical Problem within thirty (30) days, AOL shall have the right to terminate this Agreement. Any Dispute regarding the existence of a 1-800-FLOWERS Technical Problem (or any cure thereof) shall be subject to the Dispute resolution provisions of Section 6 of this Agreement. 2.8.2 NON-COMPLIANT CONTENT. (a) RESTRICTIONS ON CONTENT, SERVICES AND PRODUCTS ON THE AFFILIATED 1-800-FLOWERS SITES. 1-800-FLOWERS shall ensure that each Affiliated 1-800-FLOWERS Site does not in any respect: (i) promote, advertise or market the Products, services or Content of (a) any Interactive Service other than AOL or (b) except as not prohibited under Section 2.8.2(a)(iv), any entity reasonably construed to be in competition with any third party with which AOL has an exclusive or premier (i.e., exclusivity granted by AOL to more than one third party in a particular category) relationship; 5 (ii) distribute the Products, services or Content of any Interactive Service other than AOL; (iii) promote, advertise, market, distribute or otherwise offer any Products, services or Content other than the Products, services or Content contained on Exhibits D or J hereto, except (a) in a manner whereby the Transaction Revenues generated by the Products, services and Content other than that contained on Exhibits D or J hereto (the "*** Products") shall not exceed *** (***) of the aggregate Transaction Revenues generated under this Agreement and (b) in accordance with the terms of Exhibit D hereto; or (iv) contain any promotions, advertisements, marketing or links on the home pages of any 1-800-FLOWERS Affiliated Site in any way related to any of the *** Products with respect to which AOL has entered into an exclusive or premier arrangement with a third party prior to the date on which 1-800-FLOWERS begins to offer (on the relevant Affiliated 1-800-FLOWERS Site(s)) the Products, services or Content (as applicable) covered by such exclusive or premier relationship. (b) VIOLATION; AOL BLOCKING RIGHT. In the event that (x) AOL shall notify 1-800-FLOWERS of a violation of either of clauses (i) or (ii) of Section 2.8.2(a), AOL shall have the right to block AOL User access immediately to any relevant portion of the 1-800-FLOWERS Affiliated Site(s) (the "AOL Blocking Right") and 1-800-FLOWERS shall have five (5) business days (following such notice) to remove such non-compliant Products, services or Content (together with the non-compliant Products, services or Content set forth in clauses (iii) and (iv) of Section 2.8.2(a), collectively, the "Non-Compliant Content"). In the event that AOL shall notify 1-800-FLOWERS of a violation of either of clauses (iii) or (iv) of Section 2.8.2(a) above, AOL may exercise its AOL Blocking Right in the event that 1-800-FLOWERS shall not have removed such Non-Compliant Content within five (5) business days following such notice. In connection with the exercise by AOL of its AOL Blocking Right, AOL shall use commercially reasonable efforts to block the minimum portion of any 1-800-FLOWERS Affiliated Site necessary to address the violation by 1-800-FLOWERS of the provisions of this Section 2.8.2. (c) VIOLATION; RIGHT TO REDUCE ANNUAL IMPRESSIONS TARGET AND IMPRESSIONS COMMITMENT. In the event that 1-800-FLOWERS fails to remove any such Non-Compliant Content within five (5) business days, (a) AOL shall have the right (in addition to any blocking right) to reduce the Annual Impressions Target *** for such Year (and for any subsequent Year, in the event that such Non-Compliant Content carries over from one Year to the next) until such Time as 1-800-FLOWERS corrects such Non-Compliant Content (and in such event, AOL shall be relieved of the proportionate amount of the Impressions Commitment corresponding to such decrease in promotion) and (b) any revenue threshold(s) set forth in Section 4 of this Agreement shall each be adjusted proportionately to correspond to such decrease in Impressions and other obligations during the period of non-compliance (e.g., for each day beyond the five (5) business day cure period 1-800-FLOWERS fails to cure such Non-Compliant Content, the Impressions Commitment shall be reduced by *** of the Impressions to be provided by AOL hereunder, and the relevant revenue threshold(s) also shall be reduced by such percentage). (d) VIOLATION; AOL RIGHT TO TERMINATE. In the event that 1-800-FLOWERS fails to cure any such Non-Compliant Content within thirty (30) days, AOL shall have the right to terminate this Agreement. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 6 (e) DISPUTES. Any Dispute regarding the existence of Non-Complaint Content (or any cure thereof) shall be subject to the Dispute resolution provisions of Section 6 of this Agreement. 2.9. ADVERTISING SALES. Neither Party shall sell promotions, advertisements, links, pointers or similar services or rights through the Affiliated 1-800-FLOWERS Sites ("Advertisements") unless and until the Parties have mutually agreed upon a written advertising program whereby the Parties coordinate to establish advertising inventory space and shall share mutually agreed upon revenues generated from such advertising sales. 2.10. TRAFFIC FLOW. 1-800-FLOWERS shall take reasonable efforts to ensure that AOL traffic is either kept within the applicable 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 shall work together on implementing mutually acceptable links from the Affiliated 1-800-FLOWERS Sites back to the AOL Service. 3. AOL EXCLUSIVITY OBLIGATIONS. 3.1 FRESH-CUT FLOWERS EXCLUSIVITY. To the extent provided for in this Section 3.1, 1-800-FLOWERS shall be the exclusive provider of fresh-cut flowers and Plants on the AOL Properties. AOL shall not promote, market or advertise the sale by any third-party of (or permit any third party to promote market or advertise the sale of) fresh-cut flowers on or through the AOL-Controlled Areas during the Fresh-Cut Flowers Exclusivity Period, nor shall AOL promote, market or advertise the sale by any third party of (or permit any third party to promote, market or advertise the sale of) any Plants on AOL.com and the AOL Service during the Fresh Cut Flowers Exclusivity Period. In addition, vis-a-vis the 1-800-FLOWERS Competitors, 1-800-FLOWERS shall be the exclusive provider of fresh-cut flowers and Plants on the AOL Properties. 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. During the Fresh-Cut Flowers Exclusivity Period, AOL shall use commercially reasonable efforts to prevent any third party promoted or marketed by AOL (or to whom AOL sells advertising) on the AOL Properties, as may be permitted hereunder, from promoting, marketing or advertising fresh-cut flowers or Plants on the home pages of such third parties' affiliated Interactive Sites (if any). 3.2 GARDENING EXCLUSIVITY. During the Gardening Exclusivity Period, AOL shall not (i) promote, market or advertise the sale by any third party (other than 1-800-FLOWERS) of the Gardening Products on or through the AOL Properties, nor (ii) permit any such third party to promote, market or advertise the sale of Gardening Products on or through the AOL Properties. In addition, prior to the expiration of the Gardening Exclusivity Period, AOL shall not enter into any agreement with any Gardening Competitor that contains, as a component thereof, the promotion, marketing or advertising by AOL of the sale of Gardening Products by any such Gardening Competitor (on the AOL Properties) during the Gardening Exclusivity Period. Prior to (and during) the Gardening Exclusivity Period, the Parties shall meet on a quarterly basis (or more frequent basis, as mutually agreed upon by the Parties) to discuss, among other things, the development of the 1-800-FLOWERS Online Gardening Channel. At such meetings prior to the Gardening Exclusivity Period, the Parties shall discuss the Gardening Products to be offered on the 1-800-FLOWERS Online Gardening Channel during such period, in an effort to optimize the range of Gardening Product categories to be offered on such channel as set forth on Exhibit J hereto. However, 1-800-FLOWERS shall make the final determination as to the 7 Gardening Products it will offer on its Gardening Channel. When AOL shall have removed from the AOL Properties all promotions, marketing and advertising related to the sale of Gardening Products, AOL shall notify 1-800-FLOWERS in writing (e.g., by e-mail) of such removal and the Gardening Exclusivity Period shall commence on October 31, 1999. In the event that AOL shall not have provided 1-800-FLOWERS with such notice by October 31, 1999, then the Gardening Exclusivity Period shall be extended by one day for each day after October 31, 1999 in which AOL fails to provide 1-800-FLOWERS with such notice. 1-800-FLOWERS shall cause the 1-800-FLOWERS Online Gardening Channel (including, without limitation, substantially all of the Products and Content set forth on Exhibit J hereto) to be launched by October 31, 1999; PROVIDED, that for each day following October 31, 1999 in which 1-800-FLOWERS shall not have launched the 1-800-FLOWERS Online Gardening Channel, the Gardening Exclusivity Period shall be reduced by one (1) day. Any Dispute regarding the Gardening Exclusivity shall be subject to the Dispute resolution provisions of Section 6 of this Agreement. During the Gardening Exclusivity Period, AOL shall use commercially reasonable efforts to prevent any third party promoted or marketed by AOL (or to whom AOL sells advertising) on the AOL Properties, as may be permitted herein, from promoting, marketing or advertising the sale of Gardening Products on the home pages of such third parties' affiliated Interactive Sites (if any). 3.3 EXCEPTIONS. Notwithstanding anything to the contrary in this Section 3 (and without limiting any actions which may be taken by AOL without violation of 1-800-FLOWERS' rights hereunder), no provision of this Agreement shall limit AOL's ability (on or off the AOL Network) to: (i) undertake activities or perform duties pursuant to existing arrangements with third parties that include (as a component thereof) the promotion, marketing or advertising of any Gardening Products, PROVIDED, HOWEVER, that AOL shall not (to the extent not contractually prohibited and to the extent within AOL's control) renew or otherwise extend any portion of any such agreement that relates to the sale, promotion, advertising or marketing of Gardening Products during the Gardening Exclusivity Period; PROVIDED, FURTHER, that AOL hereby represents that to the best of AOL's knowledge and the knowledge of each of the AOL Properties (as the case may be) (a) as of the Effective Date, there are no existing arrangements to which AOL is a party that would have a material adverse effect on the Gardening Products exclusivity granted to 1-800-FLOWERS during the Gardening Exclusivity Period under this Agreement and (b) there are no agreements with any third party whose primary product line is gardening products that will not expire on or before October 31, 1999; (ii) undertake or perform duties pursuant to any agreements to which AOL becomes a party subsequent to the Effective Date as a result of Change of Control, merger (where AOL is the surviving entity) or acquisition, PROVIDED, HOWEVER, that in the context of any agreements to which AOL becomes a party following the Effective Date, AOL (a) shall use commercially reasonable efforts to provide 1-800-FLOWERS with an opportunity during the applicable Exclusivity Period to bid for the right to sell the Exclusive Products on any new AOL property acquired by AOL and distributed through any AOL Property in connection with any such Change or Control, merger or acquisition and (b) shall not promote, market or advertise the Exclusive Products (or the sale of the Exclusive Products by any third party acquired pursuant to any such Change of Control, merger or acquisition) on the AOL Properties nor permit any third party to promote, market or advertise the Exclusive Products on the AOL-Controlled Areas; (iii) promote, market or sell advertising to any third- party (other than a 1-800-FLOWERS 8 Competitor (except as permitted by Section 3.3(viii) below)), PROVIDED that (a) AOL does not promote, market or advertise the Exclusive Products of any such third party on any of the AOL Properties nor permit any third party to promote, market or advertise the Exclusive Products on the AOL-Controlled Areas and (b) AOL shall use commercially reasonable efforts to ensure that such third parties do not promote, market or advertise the Exclusive Products on the home pages of such third parties' affiliated Interactive Sites; (iv) enter into an arrangement with any third party for the primary purpose of acquiring incremental AOL Users whereby such party is allowed to promote or market products or services (other than on the AOL Properties) solely to the incremental AOL Users that are acquired as a result of such agreement; (v) enter into any arrangement with any Full Service Home Improvement Partner, PROVIDED, that any such Full Service Home Improvement Partner shall only be permitted to sell, promote, market or advertise its Gardening Products on the Gardening Area (or any successor area) of the Shopping Channel (on each AOL Property) and in any gardening Content areas within any AOL Property so long as such third party promotes, markets or advertises its Gardening Products in combination with at least two (2) other lines of products; (vi) create contextual links or editorial commentary (provided that any third parties referenced in such contextual links or editorial commentary shall not have paid for any such references for the purpose of selling their Exclusive Products) relating to content describing the Exclusive Products or any third party marketer of the Exclusive Products; (vii) promote, market or advertise the gardening content of any third party (including, without limitation, any Gardening Competitor but excluding any 1-800-FLOWERS Competitor) on the AOL Properties; PROVIDED, HOWEVER that (a) during the Gardening Exclusivity Period, such promotions, marketing or advertisements (1) promote gardening content, (2) do not promote the sale, directly or indirectly, of Gardening Products and (3) do not link to a commerce area of any such third party and (b) AOL shall not promote, market or advertise the Gardening Competitors in the Shopping Channel during the Gardening Exclusivity Period; or (viii) enter into any agreement with any local merchant of fresh-cut flowers or Gardening Products on Digital City, PROVIDED that AOL shall not (a) promote, market or advertise any such fresh-cut flowers or Gardening Products on any of the other AOL Properties nor (b) promote, market or advertise any such local merchants within the national areas of Digital City; PROVIDED, FURTHER, that AOL shall use commercially reasonable efforts to ensure that such local merchants do not promote, market or advertise or sell fresh-cut flowers or Gardening Products on the national areas of Digital Cities(other than the local areas of Digital City) during the Exclusivity Period; PROVIDED, HOWEVER, that 1-800-FLOWERS acknowledges that an occasional, unintentional failure to comply with the foregoing obligation shall not be deemed a breach of this Agreement. 4. PAYMENTS. 4.1. GUARANTEED PAYMENTS. During the Initial Term and while this Agreement is in full force and effect, 1-800-FLOWERS shall pay AOL a non-refundable guaranteed payment of Forty Two Million Dollars ($42,000,000) as follows: (i) Five Million Dollars (US$5,000,000) paid to AOL by 1-800-FLOWERS prior to the Effective Date; 9 (ii) Five Million Dollars (US$5,000,000) to be paid to AOL no later than September 1, 1999; (iii) One Million Five Hundred Thousand Dollars (US$1,500,000), to be paid to AOL no later than September 30, 1999; (iv) One Million Dollars (US$1,000,000) to be paid to AOL no later than March 1, 2000; (v) Seven Million Three Hundred Seventy Five Thousand Dollars (US$7,375,000), to be paid on May 30, 2000; (vi) Seven Million Three Hundred Seventy Five Thousand Dollars (US$7,375,000), to be paid on May 30, 2001; (vii) Seven Million Three Hundred Seventy Five Thousand Dollars (US$7,375,000), to be paid on May 30, 2002; and (vii) Seven Million Three Hundred Seventy Five Thousand Dollars (US$7,375,000), to be paid on December 30, 2002. 4.2. SHARING OF TRANSACTION REVENUES. (i) BASE REVENUE SHARE. If at any time during the Initial Term, the aggregate amount of Transaction Revenues generated (excluding the amounts set fort hin clauses (ii) and (iii) of this Section 4.2) exceeds *** (the "Revenue Threshold"), then 1-800-FLOWERS shall pay AOL *** percent *** of the Transaction Revenues (the "Base Revenue Share") generated during the remainder of the Term. 1-800-FLOWERS shall pay all of the foregoing amounts on a quarterly basis within thirty (30) days following the end of the any such quarter in which the applicable Transaction Revenues above the Revenue Threshold were generated. (ii) INCREMENTAL YEAR 1 REVENUE SHARE. In addition to the Base Revenue Share, within thirty (30) days following the end of Year 1, 1-800-FLOWERS shall pay AOL an amount equal to (a) *** percent (***%) of all Transaction Revenues up to and including *** generated on the AOL Service and AOL.com during Year 1 PLUS (b) *** of all Transaction Revenues generated in excess of *** on the AOL Service and AOL.com during Year 1 (collectively, the Incremental Year 1 Revenue Share"). (iii) INCREMENTAL YEAR 2 REVENUE SHARE. In addition to the Base Revenue Share, within thirty (30) days following the end of Year 2, 1-800-FLOWERS shall pay AOL an amount equal to (a) *** percent (***%) of all Transaction Revenues up to and including *** generated on the AOL Service and AOL.com during Year 2 PLUS (b) *** of all Transaction Revenues generated in excess of *** on the AOL Service and AOL.com during Year 2 (collectively, the Incremental Year 2 Revenue Share"). 4.3. LATE PAYMENTS; WIRED PAYMENTS. All amounts owed hereunder not paid when due and payable shall bear interest from the date such amounts are due and payable *** in effect at such time. Unless otherwise agreed upon by the Parties, all payments *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 10 required hereunder shall be paid in immediately available, non-refundable U.S. funds wired to the "America Online" account, Account Number *** at The Chase Manhattan Bank, 1 Chase Manhattan Plaza, New York, NY 10081 (ABA: 021000021). 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 (or its representative) shall have the right to conduct a reasonable and necessary inspection of portions of the books and records of 1-800-FLOWERS which are relevant to the amounts payable by 1-800-FLOWERS pursuant to this Agreement. Any such audit may be conducted after twenty (20) business days' prior written notice to 1-800-FLOWERS; PROVIDED, HOWEVER, that no such audit shall occur during the months of July or August in any Year, and AOL shall be limited to one (1) such audit per any Year of the Term, unless otherwise agreed upon by the Parties. AOL shall bear the expense of any audit conducted pursuant to this Section 4.4 unless such audit shows an error in AOL's favor amounting to a deficiency to AOL in excess of the greater of (i) *** of the actual amounts due and payable to AOL hereunder or (ii) ***, in which event 1-800-FLOWERS shall bear the reasonable expenses of the audit (not to exceed ***). 1-800-FLOWERS shall pay AOL the amount of any deficiency discovered by AOL within thirty (30) days after receipt of notice thereof from AOL, unless such amount is contested in good faith by 1-800-FLOWERS, in which case such Dispute shall be subject to the terms of Section 6 of this Agreement. In the event that 1-800-FLOWERS has good-faith grounds to question AOL's tracking and reporting of Impressions, 1-800-FLOWERS shall be entitled to a report issued by a qualified independent auditor describing AOL's methodologies regarding the tracking and reporting of Impressions and certifying AOL's compliance with such methodologies and with AOL's obligations hereunder. 4.5. TAXES. 1-800-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 attorneys' fees. 4.6. REPORTS. Each Party shall provide the other Party with certain reports (the form and substance of which may be amended from time to time upon the mutual agreement of the Parties) evidencing the reporting Party's compliance with its obligations under this Agreement and detailing certain information, all as set forth below. 4.6.1. SALES REPORTS. Consistent with the reports currently supplied by 1-800-FLOWERS to AOL, 1-800-FLOWERS shall provide AOL with periodic reports, detailing the following activity in each such period (and any other information mutually agreed upon by the Parties or reasonably required for measuring revenue activity by 1-800-FLOWERS through the Affiliated 1-800-FLOWERS Sites): Transaction Revenues, 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 relevant credit card associations or issuing institutions (collectively, the "Sales Reports"). AOL shall be entitled to use the Sales Reports in its internal business operations, subject to the terms of this Agreement. 4.6.2. USAGE REPORTS. AOL shall provide 1-800-FLOWERS with standard monthly usage information related to the Promotions (e.g. a schedule of the Impressions delivered by AOL at such time) which are similar in substance and form to the *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 11 reports provided by AOL to other interactive marketing partners similar to 1-800-FLOWERS. 4.6.3. PROMOTIONAL REPORTS. Each Party shall provide the other Party with a quarterly report documenting its compliance with any promotional commitments that it has undertaken under this Agreement. In reporting any promotion, the Party should describe the nature of the promotion, its duration and any other relevant information regarding such promotion (including, without limitation, any required information set forth in the description of any such promotion). 4.6.4. FRAUDULENT TRANSACTIONS. To the extent permitted by applicable laws, 1-800-FLOWERS shall provide AOL with a prompt report of any fraudulent order, including the date, screen name or email address and amount associated with such order, promptly following 1-800-FLOWERS obtaining knowledge that the order is, in fact, fraudulent. 5. TERM; RENEWAL; TERMINATION. 5.1. TERM. Unless earlier terminated as set forth herein, the initial term of this Agreement shall begin on the Effective Date and end on August 31, 2003 (the "Initial Term"). 5.2. CONTINUED LINKS. Upon expiration of the Initial Term, AOL may, at its discretion (for a period not to exceed two (2) years), (i) continue to promote one or more "pointers" or links from the AOL Network to (a) an agreed-upon 1-800-FLOWERS Affiliated Site or (b) a 1-800-FLOWERS Interactive Site to be selected by 1-800-FLOWERS, and (ii) continue to use 1-800-FLOWERS' trade names, trade marks and service marks (approved for AOL use by 1-800-FLOWERS during the Initial Term) solely in connection therewith (collectively, a "Continued Link"). At the end of such two (2) year period (and at the end of each subsequent year thereafter), the Continued Link period shall automatically be extended by one (1) additional year unless either Party elects to terminate such Continued Link period prior to the end of any such year (any such Continued Link period, together with the Initial Term, collectively referred to herein as the "Term"). So long as AOL maintains a Continued Link, (i) 1-800-FLOWERS shall pay AOL *** of the Transaction Revenues generated during such period and (ii) the obligations of the Parties under Sections 1, 2, 3, 4.1, 4.2, 4.6.2, 8 and Exhibits A, C, D, E, F, G, H, I and J shall no longer apply. 5.3. 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, HOWEVER, 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 of receipt of written notice regarding such payment. 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 thirty (30) days, either Party may terminate this Agreement if the breach remains uncured after written notice thereof to the other Party. 5.4. 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. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 12 5.5. 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. 5.6. EFFECT OF TERMINATION BY 1-800-FLOWERS FOR AOL MATERIAL BREACH. In the event of termination of this Agreement by 1-800-FLOWERS due to any material breach of this Agreement by AOL during any Year of this Agreement, 1-800-FLOWERS shall not be required to pay AOL any amounts otherwise due to AOL (after any such material breach) during the remainder of any such Year or the remainder of the Term. Furthermore, in such event, 1-800-FLOWERS reserves all legal and equitable remedies it may have related to any such material breach by AOL. 6. MANAGEMENT COMMITTEE/ARBITRATION. 6.1. MANAGEMENT COMMITTEE. The Parties shall act in good faith and use commercially reasonable efforts to promptly resolve (and in any event, within ten (10) business days) any claim, dispute, claim, controversy or disagreement between the Parties or any of their respective subsidiaries, affiliates, successors and assigns under or related to this Agreement or any document executed pursuant to this Agreement or any of the transactions contemplated hereby (each, a "Dispute"). If the Parties cannot resolve any such Dispute within such time frame, the Dispute shall be submitted to the Management Committee for resolution. For ten (10) days following submission of the Dispute to the Management Committee, the Management Committee shall have the exclusive right to resolve such Dispute. If the Management Committee is unable to amicably resolve the Dispute during such ten (10) day period, then the Dispute shall be subject to the resolution mechanisms described below. "Management Committee" shall mean a committee of two (2) people, made up of a senior executive from each of the Parties for the purpose of resolving Disputes under this Section 6 and generally overseeing the relationship between the Parties contemplated by this Agreement. Neither Party shall seek, nor shall be entitled to seek, binding outside resolution of the Dispute unless and until the Parties have been unable amicably to resolve the Dispute as set forth in this Section 6.1 and then, only in compliance with the procedures set forth in this Section 6. 6.2. ARBITRATION. Except for Disputes relating to issues of proprietary rights, including but not limited to intellectual property and confidentiality, any Dispute not resolved by amicable resolution as set forth in Section 6.1 shall be governed exclusively and finally by arbitration. Such arbitration shall be conducted by the American Arbitration Association ("AAA") in New York, New York, and shall be initiated and conducted in accordance with the Commercial Arbitration Rules ("Commercial Rules") of the AAA, including the AAA Supplementary Procedures for Large Complex Commercial Disputes ("Complex Procedures"), as such rules shall be in effect on the date of delivery of a demand for arbitration ("Demand"), except to the extent that such rules are inconsistent with the provisions set forth herein. Notwithstanding the foregoing, the Parties may agree in good faith that the Complex Procedures shall not apply in order to promote the efficient arbitration of Disputes where the nature of the Dispute, including without limitation the amount in controversy, does not justify the application of such procedures. 6.3. SELECTION OF ARBITRATORS. The arbitration panel shall consist of three (3) arbitrators. Each Party shall name one (1) arbitrator within ten (10) days after the delivery of the Demand, and the third arbitrator shall be selected by the first two arbitrators. If the two arbitrators are unable to select a third arbitrator within ten (10) days, a third neutral arbitrator shall be appointed by the AAA from the panel of commercial arbitrators of any of the AAA Large 13 and Complex Resolution Programs. If a vacancy in the arbitration panel occurs after the hearings have commenced, the remaining arbitrator or arbitrators may not continue with the hearing and determination of the controversy, unless the Parties agree otherwise. 6.4. GOVERNING LAW. The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, and not state law, shall govern the arbitrability of all Disputes. The arbitrators shall allow such discovery as is appropriate to the purposes of arbitration in accomplishing a fair, speedy and cost-effective resolution of the Disputes. The arbitrators shall reference the Federal Rules of Civil Procedure then in effect in setting the scope and timing of discovery. The Federal Rules of Evidence shall apply IN TOTO. The arbitrators may enter a default decision against any Party who fails to participate in the arbitration proceedings. 6.5. ARBITRATION AWARDS. The arbitrators shall have the authority to award compensatory damages only or other equitable relief. Any award by the arbitrators shall be accompanied by a written opinion setting forth the findings of fact and conclusions of law relied upon in reaching the decision. The award rendered by the arbitrators shall be final, binding and non-appealable, and judgment upon such award may be entered by any court of competent jurisdiction. The Parties agree that the existence, conduct and content of any arbitration shall be kept confidential and no Party shall disclose to any person any information about such arbitration, except as may be required by law or by any governmental authority or for financial reporting purposes in each Party's financial statements. 6.6. FEES. Each Party shall pay the fees of its own attorneys, expenses of witnesses and all other expenses and costs in connection with the presentation of such Party's case (collectively, "Attorneys' Fees"). The remaining costs of the arbitration, including without limitation, fees of the arbitrators, costs of records or transcripts and administrative fees (collectively, "Arbitration Costs") shall be borne equally by the Parties. Notwithstanding the foregoing, the arbitrators may modify the allocation of Arbitration Costs and award Attorneys' Fees in those cases where fairness dictates a different allocation of Arbitration Costs between the Parties and an award of Attorneys' Fees to the prevailing Party as determined by the arbitrators. 6.7 NON ARBITRATABLE DISPUTES. Any Dispute that is not subject to final resolution by the Management Committee or to arbitration under this Section 6 or by law (collectively, "Non-Arbitration Claims") shall be brought in a court of competent jurisdiction in the State of New York. Each Party irrevocably consents to the exclusive jurisdiction of the courts of the State of New York and the federal courts situated in New York City in the State of New York, over any and all Non-Arbitration Claims and any and all actions to enforce such claims or to recover damages or other relief in connection with such claims. 7. PRESS RELEASES. Each Party shall submit to the other Party, for its prior written approval, which shall not be unreasonably withheld or delayed, any press release or any other public statement ("Press Release") regarding the transactions contemplated hereunder. Notwithstanding the foregoing, either Party may issue any disclosures as required by law without the consent of the other Party and in such event, the disclosing Party shall provide at least five (5) business days prior written notice of such disclosure. 8. STANDARD TERMS. The Standard Online Commerce Terms & Conditions set forth on Exhibit F attached hereto and Standard Legal Terms & Conditions set forth on Exhibit G attached hereto are each hereby made a part of this Agreement. 14 [REMAINDER OF PAGE INTENTIONALLY BLANK] IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the Effective Date. AMERICA ONLINE, INC. 800-FLOWERS.COM, INC. By: _______________________________ By: _______________________________ Name: David Colburn Name: Christopher G. McCann Title: Senior Vice President, Title: Senior Vice President Business Affairs EXHIBIT A PLACEMENT/PROMOTION A. CARRIAGE PERIOD, FRESH-CUT FLOWERS EXCLUSIVITY PERIOD AND GARDENING EXCLUSIVITY PERIOD
- --------------------------- ----------------------- --------------------------------------------------------- AOL PROPERTY CARRIAGE AND CARRIAGE AND FRESH-CUT FLOWERS EXCLUSIVITY EXCLUSIVITY BEGINS PERIOD ENDS - --------------------------- ----------------------- --------------------------------------------------------- AOL.com July 1, 1999 August 31, 2003 (end of Initial Term) - --------------------------- ----------------------- --------------------------------------------------------- AOL Service July 1, 1999 August 31, 2003 (end of Initial Term) - --------------------------- ----------------------- --------------------------------------------------------- CompuServe September 1, 1999 October 31, 2002 - --------------------------- ----------------------- --------------------------------------------------------- DCI September 1, 1999 October 31, 2002 - --------------------------- ----------------------- --------------------------------------------------------- ICQ September 1, 1999 April 30, 2003 (or earlier, in the event of an Affirmative Election pursuant to Exhibit A) - --------------------------- ----------------------- --------------------------------------------------------- Netcenter February 5, 2000 February 28, 2003* (with possibility of extension through March 30, 2003**) *if carriage begins by 11:59p.m., February 7, 1999 **if carriage begins following 12:00 a.m., February 8, 1999 - --------------------------- ----------------------- --------------------------------------------------------- - --------------------------- ----------------------- --------------------------------------------------------- GARDENING EXCLUSIVITY CARRIAGE AND CARRIAGE AND GARDENING EXCLUSIVITY PERIOD ENDS EXCLUSIVITY BEGINS - --------------------------- ----------------------- --------------------------------------------------------- The AOL Properties November 1, 1999 October 31, 2000 (with possibility of extension, pursuant to and subject to Section 3.2 of this Agreement). - --------------------------- ----------------------- ---------------------------------------------------------
17 B. CARRIAGE PLAN 1. CARRIAGE PLAN SUMMARY BY AOL PROPERTY AND TIER
YEAR 1 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** CPM BY BRAND: BRAND IMPS AS % OF TOTAL: *** *** *** YEAR 2 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** YEAR 3 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** YEAR 4 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** ***
*** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 18
YEAR 1 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** CPM BY BRAND: BRAND IMPS AS % OF TOTAL: *** *** *** YEAR 2 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** YEAR 3 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** *** YEAR 4 AOL SERVICE NETSCAPE NETCENTER DCI ------------------------ ------------------------ ------------------------ IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS IMPRESSIONS % TIER IMPS ----------- ----------- ----------- ----------- ----------- ----------- ENDEMIC *** *** *** *** *** *** DEMO TARGETED *** *** *** *** *** *** BROAD REACH *** *** *** *** *** *** ---------------------------------------------------------------------------- *** *** *** ***
*** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 19 2. CARRIAGE SUMMARY WITH DETAIL BY TIER E=ENDEMIC D=DEMOGRAPHIC B=BROAD REACH
AOL SERVICE YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/Y4 IMPS - ------------------------------------------------------------------------------------------------------------------------------- HOLIDAY AREA CO-SPONSORSHIP E V-Day, Easter, Mother's Day, Fathers Day, Hween, Winter Holidays *** *** *** *** *** E Families ROS Banners *** *** *** *** *** E Women's ROS Banners *** *** *** *** *** E Home & Garden ROS Banners *** *** *** *** *** E Lifestyles ROS Banners *** *** *** *** *** E Interests ROS Banners *** *** *** *** *** E Love @ AOL-Insta ROSE Banners Sponsorship (Nov-Feb) *** *** *** *** *** E Member Perks *** *** *** *** *** E Quarterly Contest Promotion (Women 18+) *** *** *** *** *** D AOL ROS Banners Women 18+ *** *** *** *** *** D AOL ROS Banners Women 18+, Own Home *** *** *** *** *** D Channel Newsletters (Families, Women's, Interests, Lifestyles) *** *** *** *** *** D What's New Banners *** *** *** *** *** B Email In-Box Banner *** *** *** *** *** B AOL Network ROS Banners *** *** *** *** *** B Welcome Screen-No Graphic *** *** *** *** *** B Welcome Screen-Graphic *** *** *** *** *** B Sign-Off Screen *** *** *** *** *** - ------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------ *** *** *** *** ***
AOL.COM YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/Y4 IMPS - ------------------------------------------------------------------------------------------------------------------------------ E Net Find (Targeted Search Terms-Flowers, Gifts) *** *** *** *** *** E Targeted Industry Packages *** *** *** *** *** E Yellow Pages Shopping and Services Gifts and Flowers *** *** *** *** *** E Yellow Pages Home and Garden *** *** *** *** *** E Run of Love@AOL Web *** *** *** *** *** E Valentine's Day and Mother's Day-Special Promotions *** *** *** *** *** E Run of Home & Garden *** *** *** *** *** E Home & Garden Webcenter Home Department *** *** *** *** *** E Home & Garden Webcenter-Home & Family Timesaver *** *** *** *** *** D Entertainment ROS Banners *** *** *** *** *** D Hometown AOL-Home & Garden Member Pages *** *** *** *** *** D My News ROS-Entertainment, Sports, Top News *** *** *** *** *** B AOL.com Home Page *** *** *** *** *** B Net Find Home Page *** *** *** *** *** B NetFind General Rotation *** *** *** *** *** B AOL Instant Messenger *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** ***
*** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended.
DCI YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/4 IMPS - ----------------------------------------------------------------------------------------------------------------------------------- E Personals Sponsorship (65 Cities) *** *** *** *** *** B Personals Promotional Contest Screen *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** ***
NETSCAPE NETCENTER YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/4 IMPS - ----------------------------------------------------------------------------------------------------------------------------------- E Family Channel Main Page Banner *** *** *** *** *** E Family Channel Main Page Text Link *** *** *** *** *** E Calendar Holiday/Special Occasion Reminder Button *** *** *** *** *** E Holiday Specials (Mother's Day, Valentine's Day, Christmas) *** *** *** *** *** E Netscape Search (Flowers, Gifts) *** *** *** *** *** D Family Channel ROS Banner *** *** *** *** *** D Family Channel ROS Text Link *** *** *** *** *** B NSCP ROS Text Link *** *** *** *** *** B NSCP Home Page Banner *** *** *** *** *** B NSCP ROS Banner *** *** *** *** *** B Calendar ROS Banners *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** ***
*** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 20
ICQ YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/Y4 IMPS - ----------------------------------------------------------------------------------------------------------------------------------- EIQO/Reminder Service-Integrated *** *** *** *** *** Contract List-Integrated *** *** *** *** *** ICQ Plug Ins-Integrated *** *** *** *** *** Portal Channels (Channels TBD) Banners & Promotions-Women *** *** *** *** *** Portal Channels (Channels TBD) Banners & Promotions-Family *** *** *** *** *** Portal Channels (Channels TBD) Banners & Promotions-Greetings *** *** *** *** *** Portal Channels (Channels TBD) Banners & Promotions-Romance *** *** *** *** *** Portal Channels (Channels TBD) Banners & Promotions-Teens *** *** *** *** *** ICQ Portal: Promotions on Women *** *** *** *** *** ICQ Portal: Promotions on Family *** *** *** *** *** ICQ Portal: Promotions on Greetings *** *** *** *** *** ICQ Portal: Promotions on Romance *** *** *** *** *** ICQ Portal: Promotions on Teens *** *** *** *** *** Web Directory Banners (Target TBD) *** *** *** *** *** Search (Terms TBD) Results Banner *** *** *** *** *** Co-Browsing Banners (Target URLs TBD) *** *** *** *** *** Portal Channel "What's Related" Links *** *** *** *** *** Portal Channel Community Links *** *** *** *** *** Broad Reach *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** *** COMPUSERVE SERVICE YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/Y4 IMPS - ----------------------------------------------------------------------------------------------------------------------------------- Today's Deals-Rotated Placements (4/month) *** *** *** *** *** WebCenter Placements *** *** *** *** *** Headline Placements (1/month) *** *** *** *** *** Promotions (as agreed upon) *** *** *** *** *** COMPUSERVE SERVICE - - - Home & Family Mindset Package Banners *** *** *** *** *** Quarterly Service-Wide announcements *** *** *** *** *** Featured Link in What's New *** *** *** *** *** Featured Link in Today's Features *** *** *** *** *** Content/Editorial placement in all channels as deemed appropriate *** *** *** *** *** Rotational Placement in Member Perks *** *** *** *** *** Rotational Placement in Channel Oriented Insider Newsletters *** *** *** *** *** High Reach Menus (Banners Rotated through various channel menus) *** *** *** *** *** Compuserve Instant Messenger Banners *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** *** SHOPPING YEAR 1 YEAR 2 YEAR 3 YEAR 4 TOTALS IMPS/Y1 IMPS/Y2 IMPS/Y3 IMPS/Y4 IMPS - ----------------------------------------------------------------------------------------------------------------------------------- ANCHOR TENANT IN FLOWERS, CARDS, GIFTS *** *** *** *** *** ANCHOR TENANT IN HOME IMPROVEMENT *** *** *** *** *** ANCHOR TENANT IN GIFT SUGGESTION *** *** *** *** *** GOLD TENANT IN GIFTS *** *** *** *** *** ANCHOR TENANT IN GIFTS *** *** *** *** *** ANCHOR TENANT IN GOURMET GIFTS *** *** *** *** *** DCI SHOPPING MAIN PERMANENT PLACEMENT (1 OF 5) *** *** *** *** *** DCI DEPARTMENT PLACEMENT W/HOLIDAY PACKAGE (4 HOLIDAYS W/R) *** *** *** *** *** DCI PROMO PLACEMENT W/HOLIDAY PACKAGE (4 HOLIDAYS W/ROS BA) *** *** *** *** *** - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- *** *** *** *** ***
NOTES TO CARRIAGE PLAN: *The Promotions designated for placement on the AOL Service and AOL.com shall be placed thereon throughout the Initial Term. **The Promotions designated for placement on (i) the CompuServe Service and Digital City shall be placed in each such service during the thirty-eight (38) month period immediately following September 1, 1999 and (ii) the Promotions designated for placement on the ICQ Service shall be placed therein during the forty-four (44) month period immediately following September 1, 1999; PROVIDED, HOWEVER, that during the period from June 30, 2001 to July 31, 2001 (the "Affirmative Election Period"), 1-800-FLOWERS may elect to cease receiving Promotions on ICQ (the "Affirmative Election") and reallocate (a) any unutilized non-integrated Promotions designated for placement on ICQ and (b) the PRO RATA share of the remaining integrated Promotions (collectively, up to an aggregate maximum amount of *** Impressions) within the same respective Tier(s) selected by 1-800-FLOWERS on other AOL Properties during the remainder of the Initial Term (and the Make-Whole Period), subject to availability. As described in this Exhibit, some Promotions for 1-800-FLOWERS on ICQ shall be integrated with the ICQ Client (PROVIDED that the manner of such integration shall be in the sole reasonable discretion of ICQ, after consultation with 1-800-FLOWERS). For the purposes of meeting AOL's obligations under Section 1.2 of this Agreement, the Parties agree that the Integrated ICQ Promotions described in this Exhibit are worth the equivalent of *** Impressions spread out evenly over the forty-four (44) month period immediately following September 1, 1999. Following the exercise by 1-800-FLOWERS of the Affirmative Election, any right of exclusivity granted to 1-800-FLOWERS on the ICQ Service pursuant to the terms of this Agreement shall terminate. ***The Promotions designated for placement on Netscape Netcenter shall begin on February 5, 2000 (or as promptly *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. thereafter as commercially reasonable) and shall extend for three (3) years thereafter; PROVIDED, HOWEVER, that any failure of AOL to implement such Promotions (due to any technological or other operational reason) by February 5, 2000 shall not be a breach of this Agreement. If AOL fails to place the aforementioned Promotions on Netscape Netcenter by 11:59 p.m. on February 7, 2000, then (as 1-800-FLOWERS's sole and exclusive remedy) the three (3) year term for placement of such Promotions shall be extended through March 30, 2003. ****AOL shall provide 1-800-FLOWERS with the Shopping Channel anchor tenancies (the "Anchor Tenancies") set forth on the above Carriage Plan. Such Anchor Tenancies shall entitle 1-800-FLOWERS to placement that is no less prominent and favorable in size and position on such screen than any other promotion on such screen. In addition, AOL will ensure that (a) the term "Flowers" (or a term similar thereto, as mutually agreed upon by the Parties) will be a part of the top-level department category description for a Shopping Channel department in which 1-800-FLOWERS has a Shopping Channel placement and offers fresh-cut flowers and Plants for sale and (b) the term "Garden" (or a term similar thereto, as mutually agreed upon by the Parties) will be a part of the top level-department category description of a Shopping Channel department in which 1-800-FLOWERS has a Shopping Channel placement and offers Gardening Products for sale. The Anchor Tenancy in Gifts shall commence April 1, 2000. The Anchor Tenancy in Gourmet Gifts shall commence on the date of execution of this Agreement. ***** Excluding Shopping Channel placements, all placements described in the above carriage plan are examples of placements within the respective Tiers and are meant as guidelines. The Parties understand that the actual plan may vary from the above. ****** Upon agreement in writing by Netscape UK, for a period of one (1) year from the later of (i) the launch of the Netscape UK Online platform or (ii) delivery to 1-800-FLOWERS of any Netscape UK Promotions (as defined below), 1-800-FLOWERS shall receive the following placements in Netscape UK (collectively, the "Netscape UK Promotions"): (a) an anchor tenancy on the front screen of the Netscape UK Online shopping channel; (b) an anchor tenancy on the flowers/gifts (or similar) area on the Netscape UK Online shopping channel; (c) opportunities to promote 1-800-FLOWERS special offers, etc., within the relevant portions of the Netscape UK Online editorial area (subject to editorial approval); and (d) a minimum guarantee of *** Impressions on Netscape UK Online over the one-year term (PROVIDED that such Impressions shall not constitute part of the Impressions Commitment for purposes of this Agreement). In the event that Netscape UK does not agree in writing to provide the Netscape UK Promotions, AOL will provide 1-800-FLOWERS with One Million Dollars (US$1,000,000) of comparable promotional placements within the AOL Properties to be mutually agreed upon by the Parties in good faith. C. KEYWORD SEARCH TERMS AND GO WORD SEARCH TERMS During the Term, subject to the terms and conditions hereof, 1-800-FLOWERS shall have the right to use (i) the following Keyword Search Terms and (ii) the following Go Word Search Terms: Keyword Search Terms: *** *** Go Word Search Terms: *** *** *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 22 EXHIBIT B DEFINITIONS The following definitions shall apply to this Agreement: AAA. "AAA" shall have the meaning set forth in Section 6.2 of this Agreement. ACTION. "Action" shall have the meaning set forth in Section 9(d) of Exhibit G to this Agreement. ADDITIONAL 1-800-FLOWERS CHANNEL. Any other on-line 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 any Affiliated 1-800-FLOWERS Site. ADVERTISEMENTS. "Advertisements" shall have the meaning set forth in Section 2.9 of this Agreement. AFFILIATED 1-800-FLOWERS SITES. "Affiliated 1-800-FLOWERS Sites" shall have the meaning set forth in Section 2.1 of this Agreement. ANCHOR TENANCIES. "Anchor Tenancies" shall have the meaning set forth in Exhibit A to this Agreement. ANCILLARY GARDENING ITEMS. Hand-held gardening tools, trowels, soil scoops, shears, pruners, spades, watering cans, hand rakes and hand-held forks; provided, HOWEVER, that such term shall not include any gardening-related machinery (e.g., roto-tillers, weed-whackers, lawn mowers, etc.) or home improvement products (e.g., power tools, building materials, paint, etc.). ANNUAL IMPRESSIONS TARGET. Each of the annual Impressions target amounts set forth in Section B of Exhibit A to this Agreement. AOL BLOCKING RIGHT. "AOL Blocking Right" shall have the meaning set forth in Section 2.8.2(b) of this Agreement. AOL-CONTROLLED AREAS. All areas of the AOL Properties which are owned, maintained or controlled by AOL. AOL INTERACTIVE SITE. Any Interactive Site that is managed, maintained, owned or controlled by AOL or its agents or its affiliates. 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 Properties, including any sub-accounts thereof under an authorized master account. AOL NETWORK. (i) The AOL Properties and (ii) any other product or service owned, operated, distributed or authorized to be distributed by or through AOL or its affiliates worldwide (and including those properties excluded from the definitions of the AOL Service or AOL.com). It is understood and agreed that the rights of 1-800-FLOWERS relate only to the AOL Properties and not generally to the AOL Network. AOL PROPERTIES. The AOL Service, AOL.com, the CompuServe Service, Netscape Netcenter (after February 5, 2000), the ICQ Service and Digital City. 23 AOL PURCHASER. Any person or entity who enters any 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 or entrance to any such Affiliated 1-800-FLOWERS Site which includes a domain other than an "AOL.com" domain). AOL SERVICE. The standard U.S. version of the America Online-Registered Trademark- brand service (including, the "Shop@AOL" area thereon), specifically excluding (a) AOL.com or any other AOL Interactive Site, (b) the international versions of the AOL Service (E.G., AOL Japan), (c) the CompuServe-Registered Trademark- brand service and any other CompuServe products or services (d) "Driveway," "ICQ-TM-," "AOL NetFind-TM-," "AOL Instant Messenger-TM-," "Digital City," "NetMail-TM-," "Electra", "Thrive", "Real Fans", "Love@AOL", "Entertainment Asylum," "AOL Hometown," "My News" or any similar product, service or property which may be offered by, through or with the U.S. version of the America Online-Registered Trademark- brand service, (e) Netscape Netcenter-TM- and any additional Netscape products or services, (f) any programming or Content area offered by or through the U.S. version of the America Online-Registered Trademark- brand service over which AOL does not exercise complete or substantially complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (g) 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-Registered Trademark- brand service, (h) any property, feature, product or service which AOL or its affiliates may acquire subsequent to the Effective Date and (i) any other version of an America Online service which is materially different from the standard U.S. version of the America Online brand service, by virtue of its branding, distribution, functionality, Content or services, including, without limitation, any co-branded and/or customized version of the service and any version distributed primarily through any broadband distribution platform or through any platform or device other than a desktop personal computer. AOL SETOFF RIGHT. "AOL Setoff Right" shall have the meaning set forth in Section 1.2 of this Agreement. AOL USER. Any user of the AOL Service, AOL.com, CompuServe, Digital City, ICQ, Netcenter or the AOL Network. AOL.COM. AOL's primary Internet-based Interactive Site marketed under the "AOL.COM-TM-" brand (or any successor or substitute brand for the "AOL.COM-TM-" brand), including the "Shop@AOL.com" area thereon, but specifically excluding (a) the AOL Service, (b) any international versions of AOL.com, (c) "ICQ-TM-," "AOL NetFind-TM-," "AOL Instant Messenger-TM-," "NetMail-TM-," "AOL Hometown," "My News" 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 over which AOL does not exercise complete or substantially complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (e) Netscape Netcenter-TM- and any additional Netscape products or services, (f) any programming or Content area offered by or through the U.S. version of the America Online-Registered Trademark- brand service which was operated, maintained or controlled by the former AOL Studios division (e.g., Electra), (g) 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, (h) any property, feature, product or service which AOL or its affiliates may acquire subsequent to the Effective Date and (i) any other version of an America Online Interactive Site which is materially different from AOL's primary Internet-based Interactive Site marketed under the "AOL.COM-TM-" brand, by virtue of its branding, distribution, functionality, Content or services, including, without limitation, any customized and/or co-branded versions and any version distributed primarily through any broadband distribution platform or through any platform or device other than a desktop personal computer. ARBITRATION COSTS. "Arbitration Costs" shall have the meaning set forth in Section 6.6 of this Agreement. ATTORNEYS' FEES. "Attorneys' Fees" shall have the meaning set forth in Section 6.6 of this Agreement. 24 BASE REVENUE SHARE. The revenue sharing arrangement set forth in Section 4.2(i) of this Agreement. CHANGE OF CONTROL. 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 1934, as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under such Act) of more than 50% of the combined voting power of the then outstanding voting securities of such party entitled to vote generally in the election of directors. COMMERCIAL RULES. "Commercial Rules" shall have the meaning set forth in Section 6.2 of this Agreement. COMPLEX PROCEDURES. "Complex Procedures" shall have the meaning set forth in Section 6.2 of this Agreement. COMPUSERVE SERVICE. The standard U.S. version of the CompuServe brand service (including the "Shop@CompuServe" area thereon), specifically excluding (a) any international versions of such service, (b) Content areas owned, maintained or controlled by CompuServe affiliates or any similar "sub-service," (c) any programming or Content area offered by or through the U.S. version of the CompuServe brand service over which CompuServe does not exercise complete or substantially complete operational control (e.g., third-party Content areas), (d) Netscape Netcenter-TM- and any additional Netscape products or services, (e) any yellow pages, white pages, classifieds or other search, directory or review services or Content, (f) any co-branded or private label branded version of the U.S. version of the CompuServe brand service, (g) any version of the U.S. version of the CompuServe brand service which offers Content, distribution, services and/or functionality materially different from the Content, distribution, services and/or functionality associated with the standard U.S. version of the CompuServe brand service, including, without limitation, any version of such service distributed primarily 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 CompuServe or its affiliates may acquire subsequent to the Effective Date. 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" 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. CONTENT. Text, images, video, audio (including, without limitation, music used in synchronism or timed relation with visual displays) and other data, Products, advertisements, promotions, links, pointers and software, including any modifications, upgrades, updates, enhancements and related documentation. CONTEST. "Contest" shall have the meaning set forth in Section 3 of Exhibit F to this Agreement. CONTINUED LINK. "Continued Link" shall have the meaning set forth in Section 5.2 of this Agreement. CUSTOMERS. "Customers" shall have the meaning set forth in Section 9(a) of Exhibit F to this Agreement. CUT-OFF TIME. "Cut-Off Time" shall have the meaning set forth in Section 9(b) of Exhibit F to this Agreement. 25 DEMAND. "Demand" shall have the meaning set forth in Section 6.2 of this Agreement. DIGITAL CITY. The standard U.S. version of Digital City's local content offerings marketed under the Digital City-Registered Trademark- brand name (including the "Shop@Digital City" area thereon), specifically excluding (a) the AOL Service, AOL.com or any other AOL Interactive Site, (b) any international versions of such local content offerings, (c) the CompuServe-Registered Trademark- brand service and any other CompuServe products or services, (d) "Driveway," "ICQ-TM-," "AOL NetFind-TM-," "AOL Instant Messenger-TM-," "Digital City," "NetMail-TM-," "Electra", "Thrive", "Real Fans", "Love@AOL", "Entertainment Asylum," "AOL Hometown," "My News" or any similar product, service or property which may be offered by, through or with the standard version of Digital City's local content offerings, (e) Netscape Netcenter-TM-and any additional Netscape products or services, (f) any programming or Content area offered by or through such local content offerings over which AOL does not exercise complete or substantially complete operational control (including, without limitation, Content areas controlled by other parties and member-created Content areas), (g) any yellow pages, white pages, classifieds or other search, directory or review services or Content offered by or through such local content offerings, (h) any property, feature, product or service which AOL or its affiliates may acquire subsequent to the Effective Date, (i) any other version of a Digital City local content offering which is materially different from the U.S. version of Digital City's local content offerings marketed under the Digital City-Registered Trademark- brand name, by virtue of its branding, distribution, functionality, Content or services, including, without limitation, any co-branded and/or customized version of the offerings and any version distributed primarily through any broadband distribution platform or through any platform or device other than a desktop personal computer, and (j) Digital City-branded offerings in any local area where such offerings are not owned or operationally controlled by AOL, Inc. or DCI (e.g., Chicago, Orlando, South Florida, and Hampton Roads). DISCLAIMED DAMAGES. "Disclaimed Damages" shall have the meaning set forth in Section 9(a) of Exhibit G to this Agreement. DISPUTE. "Dispute" shall have the meaning set forth in Section 6.1 of this Agreement. EXCESS IMPRESSIONS. "Excess Impressions" shall have the meaning set forth in Section 1.2 of this Agreement. EXCLUSIVE PRODUCTS. (i) Fresh-cut flowers and Plants and (ii) Gardening Products, solely during the Fresh-Cut Flowers Exclusivity Period and the Gardening Exclusivity Period, respectively. EXCLUSIVITY PERIOD. The Fresh-Cut Flowers Exclusivity Period and the Gardening Exclusivity Period (as applicable). FINAL SHORTFALL. "Final Shortfall" shall have the meaning set forth in Section 1.2 of this Agreement. FULL SERVICE HOME IMPROVEMENT PARTNER. Any online provider of home improvement products and services (e.g., lawn mowers, paint supplies, power tools, or other home appliances), provided that such Full Service Home Improvement Partner also may sell gardening tools and supplies, fertilizer, seeds, plants, etc. FRESH-CUT FLOWERS EXCLUSIVITY PERIOD. With respect to fresh-cut flowers and Plants to be offered on or through the Affiliated 1-800-FLOWERS Sites, the dates set forth on Exhibit A (Section A) hereto, solely to the extent as such dates apply to each respective AOL Property. GARDENING AREA. The area on the Shopping Channel (or any successor area thereto) of the AOL Service that is primarily dedicated to the promotion and sale of gardening-related Products. GARDENING COMPETITORS. Those entities listed on Exhibit L to this Agreement. 26 GARDENING EXCLUSIVITY PERIOD. November 1, 1999 until October 31, 2000, subject to the terms of Section 3.2 of this Agreement. GARDENING PLANT. Any bulbs, live plants, bare-root materials, seeds, trees, herbs, topiaries and any other living horticultural or gardening-related plants or shrubs explicitly for use in a garden. GARDENING PRODUCTS. Any Gardening Plants or Ancillary Gardening Items. GIFT BASKET. A collection of Products packaged together with a theme in mind and sold as a single unit. GO WORD SEARCH TERMS. The Go Word online search terms made available on the CompuServe Service for use by CompuServe Service members, combining the CompuServe Service's Go word online search modifier (i.e., "Go:") with a term or phrase specifically related to 1-800-FLOWERS (and determined in accordance with the terms of this Agreement). ICQ CLIENT. (i) The persistent, desktop-based instant messaging, chat and "buddy list" client software developed by or for ICQ and distributed by or for ICQ that enables ICQ Users to send messages, chat, track the online status of other users and use the ICQ Service, and (ii) any Updates thereto. The ICQ Client shall not include (a) any discrete applications providing substantially different services, regardless of any shared use of the ICQ Service backend (e.g., presence engine, directory server, etc.), (b) any desktop search application, ICQ desktop information "ticker," ICQ mail client or ICQ co-browser, (c) any version of the ICQ Client that is co-branded with an unaffiliated third party, or (d) plug-ins to other clients (e.g., browser plug-ins). ICQ SERVICE. The standard English language version of the ICQ brand communications and messaging service available in the U.S. and internationally (e.g., to U.S.- and internationally-based ICQ Members), including the "Shop@ICQ" area thereon, but specifically excluding (a) "ICQ It!" or any similar product, service or property which may be offered by, through or with the English language version of the ICQ brand service, (b) any programming or Content area offered by or through the English language version of the ICQ brand service over which ICQ does not exercise complete or substantially complete operational control (including, without limitation, Content areas controlled by other parties, whether or not co-branded with ICQ, and ICQ user-created Content areas), (c) any yellow pages, white pages, classifieds or other search, directory or review services or Content offered by or through the English language version of the ICQ brand service, (d) any property, feature, product or service which ICQ or its affiliates may acquire subsequent to the effective date hereof and (e) any other version of an ICQ service which is materially different from the standard English language version of the ICQ brand service, by virtue of its branding, language (e.g., the Japanese-language version), distribution, functionality, Content or services, including, without limitation, any co-branded and/or customized version of the service or any version distributed primarily through any broadband distribution platform or through any platform or device other than a desktop personal computer. IMPRESSION. User exposure to the applicable Promotion, as such exposure may be reasonably determined and measured by AOL in accordance with its standard methodologies and protocols. IMPRESSIONS COMMITMENT. "Impressions Commitment" shall have the meaning set forth in Section 1.2 of this Agreement. INCREMENTAL YEAR 1 REVENUE SHARE. "Incremental Year 1 Revenue Share" shall have the meaning set forth in Section 4.2(ii) of this Agreement. INCREMENTAL YEAR 2 REVENUE SHARE. "Incremental Year 2 Revenue Share" shall have the meaning set forth in Section 4.2(iii) of this Agreement. 27 INDEMNIFIED PARTY. "Indemnified Party" shall have the meaning set forth in Section 9(d) of Exhibit G to this Agreement. INDEMNIFYING PARTY. "Indemnifying Party" shall have the meaning set forth in Section 9(d) of Exhibit G to this Agreement. INITIAL TERM. "Initial Term" shall have the meaning set forth in Section 5.1 of this Agreement. INTERACTIVE SERVICE. An entity offering one or more of the following: (i) online or Internet connectivity services (e.g., an Internet service provider); (ii) an interactive site or service featuring a broad selection of aggregated third party interactive content (or navigation thereto) (e.g., an online service or search and directory service) and/or marketing a broad selection of products and/or services across numerous interactive commerce categories (e.g., an online mall or other leading online commerce site); (iii) a persistent desktop client; and (iv) communications software capable of serving as the principal means through which a user creates, sends and receives electronic mail or real time online messages (whether by telephone, computer or other means), including, without limitation, greeting cards but excluding virtual bouquets or similar items. INTERACTIVE SITE. Any interactive site or area, including, by way of example and without limitation, (i) an 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 *** or interactive environment such as *** KEYWORD SEARCH TERMS. (i) The Keyword-TM- online search terms made available on the AOL Service for use by AOL Members, combining AOL's Keyword-TM- online search modifier with a term or phrase specifically related to 1-800-FLOWERS (and determined in accordance with the terms of this Agreement), and (ii) the Go Word Search Terms. LIABILITIES. "Liabilities" shall have the meaning set forth in Section 9(c) of Exhibit G to this Agreement. LICENSED CONTENT. All Content offered through the Affiliated 1-800-FLOWERS Sites pursuant to this Agreement or otherwise provided to AOL by 1-800-FLOWERS or its agents in connection herewith (e.g., offline or online promotional Content, Promotions, AOL "slideshows", etc.), including in each case, any modifications, upgrades, updates, enhancements, and related documentation. MAKE-WHOLE PERIOD. "Make-Whole Period" shall have the meaning set forth in Section 1.2 of this Agreement. MANAGEMENT COMMITTEE. "Management Committee" shall have the meaning set forth in Section 6.1 of this Agreement. MARKS. "Marks" shall have the meaning set forth in Section 3 of Exhibit G to this Agreement. MERCHANDISE VALUE. The gross sales price of a Product, less taxes, service charges, shipping and handling charges, discounts, gift certificates, refunds, chargebacks, rebates and credit card processing fees. NETSCAPE NETCENTER. The U.S. version of the Netscape Netcenter internet based interactive site marketed under the "Netcenter" brand (including the "Shop@Netcenter" area thereon), specifically excluding (a) any other Netscape or Netscape Affiliate owned or operated internet based interactive sites, (b) the international versions of Netcenter or any similar Netscape or Affiliate service or interactive site; (c) "Netscape AOL Instant Messenger-TM-," "Netscape Custom Netcenter," Netscape WebMail, or any *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 28 similar independent product, service or property which may be offered by, through or by Netscape; (d) any programming or content area offered by or through the U.S. version of the Netcenter brand service over which Netscape does not exercise complete or substantially complete operational control (including, without limitation, Content areas controlled by other parties), (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 Netcenter brand service, (f) any property, feature, product or service which Netscape or its Affiliates may acquire subsequent to the Effective Date and (g) any other version of a Netscape service which is materially different from Netcenter by virtue of its branding, distribution, functionality, Content or services, including, without limitation, any co-branded and/or customized version of the service or any version distributed primarily through any broadband distribution platform or through any platform or device other than a desktop personal computer. NEW FUNCTIONALITY. "New Functionality" shall have the meaning set forth in Section 8.v of Exhibit E to this Agreement. NON-ARBITRATION CLAIMS. "Non-Arbitration Claims" shall have the meaning set forth in Section 6.7 of this Agreement. NON-COMPLIANT CONTENT. "Non-Compliant Content" shall have the meaning set forth in Section 2.8.2(b) of this Agreement. 1-800-FLOWERS COMPETITORS. "1-800-FLOWERS Competitors" shall have the meaning set forth on Exhibit K hereto. 1-800-FLOWERS INTERACTIVE SITE. Any Interactive Site (other than the Affiliated 1-800-FLOWERS Sites) which is managed, maintained, owned or controlled primarily by 1-800-FLOWERS or its agents. 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 1-800-FLOWERS Interactive Sites. 1-800-FLOWERS ONLINE GARDENING CHANNEL. The specific area or web site to be launched by 1-800-FLOWERS in 1999, through which 1-800-FLOWERS shall market and complete transactions regarding Gardening Products. 1-800-FLOWERS TECHNICAL PROBLEM. "1-800-FLOWERS Technical Problem" shall have the meaning set forth in Section 4 of Exhibit E to this Agreement. ORIGINAL IMAS. "Original IMAs" shall have the meaning set forth in the first paragraph of this Agreement. PLANT. A live, flowering plant (e.g., azalea plant, gardenia plant, juniper bonsai, lavender plant, hibiscus (in a cache pot), chrysanthemum plant, kalanchoe in a window box and "dish gardens") (but expressly excluding Gardening Plants, wreaths, bulbs, bare-root materials, dried flowers, seeds, trees, herbs, shrubs, topiaries and other horticultural or gardening-related plants). Nothing herein is intended to prevent 1-800-FLOWERS from selling any plant through the Affiliated 1-800-FLOWERS Sites. PRESS RELEASE. "Press Release" shall have the meaning set forth in Section 7 of this Agreement. 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) any 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 Sites requiring 29 purchasers to reference a specific promotional identifier or tracking code, including, without limitation, products sold through surcharged downloads (to the extent expressly permitted hereunder). PRODUCTION PLAN. "Production Plan" shall have the meaning set forth in Section 10 of Exhibit F to this Agreement. PROMO CONTENT. "Promo Content" shall have the meaning set forth in Section 1.3 of this Agreement. PROMOTIONS. "Promotions shall have the meaning set forth in Section 1.1 of this Agreement. PROMOTIONAL ACTIVITIES. "Promotional Activities" shall have the meaning set forth in Section 1.1 of this Agreement. PROMOTIONAL MATERIALS. "Promotional Materials" shall have the meaning set forth in Section 1 of Exhibit G to this Agreement. QUALIFIED INTERACTIVE SERVICE. An entity offering one or more of the following: (i) online or Internet connectivity services (e.g., an Internet service provider); (ii) an interactive site or service featuring a broad selection of aggregated third party interactive content (or navigation thereto) (e.g., an online service or search and directory service) and/or marketing a broad selection of products and/or services across numerous interactive commerce categories (e.g., an online mall or other leading online commerce site); (iii) a persistent desktop client; and (iv) communications software capable of serving as the principal means through which a user creates, sends and receives electronic mail or real time online messages (whether by telephone, computer or other means). REVENUE THRESHOLD. "Revenue Threshold" shall have the meaning set forth in Section 4.2(i) of this Agreement. SALES REPORTS. "Sales Reports" shall have the meaning set forth in Section 4.6.1 of this Agreement. SHOPPING CHANNEL. "Shopping Channel" shall mean the areas within the "Shop@AOL," Shop@AOL.com," Shop@CompuServe," "Shop@Digital City," "Shop@Netcenter" and "Shop@ICQ" that are owned, maintained or controlled by the respective AOL Properties. SHORTFALL. "Shortfall" shall have the meaning set forth in Section 1.2 of this Agreement. SHORTFALL PENALTY. "Shortfall Penalty" shall have the meaning set forth in Section 1.2 of this Agreement. SPECIAL OFFERS. "Special Offers" shall have the meaning set forth in Section 2.7 of this Agreement. TIER. "Tier" shall have the meaning set forth in Exhibit A hereto. TERM. "Term" shall have the meaning set forth in Section 5.2 of this Agreement. TRANSACTION REVENUES. Aggregate amounts paid by AOL Purchasers in connection with the sale, licensing, distribution or provision of any Products which 1-800-FLOWERS sells to AOL Purchasers on or through any 1-800-FLOWERS Affiliated 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 canceled goods or services, but not excluding cost of goods sold or any similar cost. *** PRODUCTS. "*** Products" shall have the meaning set forth in Section 2.8.2(a)(iii) of this Agreement. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 30 YEAR. The time period between each of (i) the Effective Date and the first anniversary thereof; (ii) the first anniversary of the Effective Date and the second anniversary thereof; (iii) the second anniversary of the Effective Date and the third anniversary thereof; and (iv) the third anniversary of the Effective Date and the fourth anniversary thereof. YEAR 1. The first Year of this Agreement. YEAR 2. The second Year of this Agreement. 31 EXHIBIT C 1-800-FLOWERS CROSS-PROMOTION A. 1-800-FLOWERS shall prominently and regularly promote the Affiliated 1-800-FLOWERS Sites (making specific mention of their availability through the AOL Properties) in (i) approximately *** of 1-800-FLOWERS-controlled television, radio or print advertisements that are produced after the Effective Date and that specifically mention any of 1-800-FLOWERS' online or Internet-based shopping functionality and (ii) approximately *** of any publications, programs, features or other forms of media under 1-800-FLOWERS' control (excluding the advertisements subject to clause (i)). In this regard, in *** instances when 1-800-FLOWERS makes promotional reference in *** print advertisements to *** 1-800-FLOWERS Interactive Site (each such reference, a "Web Reference"), 1-800-FLOWERS shall include a specific reference to the availability of the Affiliated 1-800-FLOWERS Sites through AOL and its affiliated interactive properties of at least equal prominence to the Web Reference by the use of the Keyword Search Term for the AOL Service or otherwise); any listings of the applicable "URL(s)" for such Affiliated 1-800-FLOWERS Site(s) shall include a listing of the Keyword for the AOL Service 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 this Agreement. B. 1-800-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) 1-800-FLOWERS, which 1-800-FLOWERS desires to conduct with any Interactive Service subsequent to execution hereof (so long as AOL informs 1-800-FLOWERS of its desire to participate in any such activity within five (5) business days following receipt of written notice from 1-800-FLOWERS detailing the opportunity) and (b) AOL receives substantially more promotion and marketing (in value, duration, prominence, etc.) from 1-800-FLOWERS than any such other Interactive Service receives from FLOWERS. C. 1-800-FLOWERS shall include each of the following promotions for the Online Area and AOL within each 1-800-FLOWERS Interactive Site during the term of the Agreement: (i) a prominent "Try AOL" feature in the area where 1-800-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-Registered Trademark- brand service and (ii) a link from the 1-800-FLOWERS Interactive Site to AOL's primary site on the World Wide Web. D. During the Initial Term, 1-800-FLOWERS shall not promote any Qualified Interactive Service (other than AOL) as its preferred Interactive Service. E. In exchange for *** of cooperative advertising to be provided by AOL to 1-800-FLOWERS during the 1999 holiday season, 1-800-FLOWERS will provide AOL with *** of bookable in-kind advertising (to be mutually agreed upon by the Parties) during the Initial Term. Such in-kind advertising shall conform to requirements to be mutually agreed upon by the Parties, it being understood that it is the Parties' intention (i) to structure the in-kind advertising to allow for the recognition by AOL of *** of revenue therefrom, based on a valuation by an independent third-party valuation agency and (ii) unless otherwise agreed upon by the Parties, to have such in-kind advertising provided to AOL as evenly as possible over the course of the Term. The Parties acknowledge and agree that (i) AOL shall have the right to use a qualified third party to make such valuations and that (ii) such third party will value the in-kind advertising provided to AOL by 1-800-FLOWERS based upon the portion of such advertising (e.g., in terms of space, seconds, etc., as applicable) that features AOL. For the avoidance of doubt, subject to the requirements of this Section *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 32 E, 1-800-FLOWERS shall have the right to credit in-kind advertising set forth in Section A of this Exhibit C towards the aforementioned *** commitment. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 33 EXHIBIT D DESCRIPTION OF PRODUCTS AND OTHER CONTENT The Products to be offered by 1-800-FLOWERS on the Affiliated 1-800-FLOWERS Sites shall include: 1. Fresh-cut flowers, Gardening Products and Plants 2. Balloons 3. Gift Baskets (which may include books related to the Products listed on this Exhibit D and Exhibit J) 4. Gourmet foods and candy 5. Home decor 6. Books and videos related to fresh-cut flowers, Gardening Products and Plants; PROVIDED that such books and videos (excluding those books and videos promoted as part of a Gift Basket or promoted as part of a theme package (i.e., "Books and Blooms")) shall not be promoted, marketed or advertised by or on behalf of 1-800-FLOWERS on any home page of any Affiliated 1-800-FLOWERS Site; PROVIDED, FURTHER, that books shall not constitute more than *** of the annual gross revenues generated by the 1-800-FLOWERS Sites in any Year of the Initial Term. 7. Sentiment expression products and specialty gifts 8. Products listed on Exhibit J For the avoidance of doubt, during the Initial Term, 1-800-FLOWERS also shall be permitted to continue to offer on the Affiliated 1-800-FLOWERS Sites any Products or services offered by 1-800-FLOWERS on the AOL Service and AOL.com pursuant to the terms of the Original IMAs prior to the Effective Date hereof. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 34 EXHIBIT E OPERATIONS 1. AFFILIATED 1-800-FLOWERS SITES INFRASTRUCTURE. 1-800-FLOWERS shall be responsible for all communications, hosting and connectivity costs and expenses associated with the Affiliated 1-800-FLOWERS Sites. 1-800-FLOWERS shall provide all hardware, software, telecommunications lines and other infrastructure necessary to meet traffic demands on the Affiliated 1-800-FLOWERS Sites from the AOL Network. 1-800-FLOWERS shall design and implement the network between the AOL Service and Affiliated 1-800-FLOWERS Sites such that (i) no single component failure shall have a materially adverse impact on AOL Members seeking to reach the Affiliated 1-800-FLOWERS Sites from the AOL Network and (ii) no single line under material control by 1-800-FLOWERS shall run at more than 70% average utilization for a 5-minute peak in a daily period. In this regard, 1-800-FLOWERS shall provide AOL, upon request, with a detailed network diagram regarding the architecture and network infrastructure supporting the Affiliated 1-800-FLOWERS Sites. In the event that 1-800-FLOWERS elects to create a custom version of any Affiliated 1-800-FLOWERS Site in order to comply with the terms of this Agreement, 1-800-FLOWERS shall bear responsibility for all aspects of the implementation, management and cost of such customized site. 2. OPTIMIZATION; SPEED. 1-800-FLOWERS shall use commercially reasonable efforts to ensure that: (a) the functionality and features within the Affiliated 1-800-FLOWERS Sites are optimized for the client software then in use by AOL Members; and (b) each of the Affiliated 1-800-FLOWERS Sites is designed and populated in a manner that minimizes delays when AOL Members attempt to access such site. At a minimum, 1-800-FLOWERS shall ensure that each Affiliated 1-800-FLOWERS Site's data transfers initiate within fewer than fifteen (15) seconds on average. Prior to commercial launch of any material promotions described herein, 1-800-FLOWERS shall permit AOL to conduct performance and load testing of the Affiliated 1-800-FLOWERS Sites (in person or through remote communications), with such commercial launch not to commence until such time as AOL is reasonably satisfied with the results of any such testing. 3. USER INTERFACE. 1-800-FLOWERS shall maintain a graphical user interface within each 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 review the user interface and site design prior to launch of the Promotions and to conduct focus group testing to assess compliance with respect to such consultation and with respect to 1-800-FLOWERS' compliance with the preceding sentence. 4. TECHNICAL PROBLEMS. 1-800-FLOWERS agrees to use commercially reasonable efforts to address material technical problems (over which 1-800-FLOWERS exercises control) affecting use by AOL Members of the Affiliated 1-800-FLOWERS Sites (a "1-800-FLOWERS Technical Problem") promptly following notice thereof. In the event that 1-800-FLOWERS is unable to promptly resolve a 1-800-FLOWERS Technical Problem following notice thereof from AOL (including, without limitation, infrastructure deficiencies producing user delays), AOL shall have the right to regulate the promotions it provides to 1-800-FLOWERS hereunder until such time as 1-800-FLOWERS corrects the 1-800-FLOWERS Technical Problem at issue. 5. MONITORING. 1-800-FLOWERS shall use commercially reasonable efforts to ensure that the performance and availability of each Affiliated 1-800-FLOWERS Site is monitored on a reasonably continuous basis. 1-800-FLOWERS shall provide AOL with contact information (including e-mail, phone, pager and fax information, as applicable, for both during and after business hours) for 1-800-FLOWERS' principal business and technical representatives, for use in cases when issues or problems arise with respect to any Affiliated 1-800-FLOWERS Site. 6. TELECOMMUNICATIONS. Where applicable 1-800-FLOWERS shall utilize encryption methodology to secure data communications between the Parties' data centers. The network between the Parties shall be configured such that no single component failure shall significantly impact AOL Users. The network shall be sized such that no single line over which the 1-800-FLOWERS has material control runs at more than 70% average utilization for a 5-minute peak in a daily period. 7. SECURITY. 1-800-FLOWERS shall utilize Internet standard encryption technologies (e.g., Secure Socket Layer - SSL) to provide a secure environment for conducting transactions and/or transferring private member information (e.g. credit card numbers, banking/financial information, and member address information) to and from any Affiliated 1-800-FLOWERS Site. 1-800-FLOWERS shall facilitate periodic reviews of the Affiliated 1-800-FLOWERS Sites by AOL in order to evaluate the security risks of such site. 1-800-FLOWERS shall promptly remedy any 35 security risks or breaches of security as may be identified by AOL's Operations Security team. 8. TECHNICAL PERFORMANCE. i. 1-800-FLOWERS shall design the Affiliated 1-800-FLOWERS Sites to support the AOL-client embedded versions of the Microsoft Internet Explorer 3.XX and 4.XX browsers (Windows and Macintosh)and the Netscape Browser 4.XX and make commercially reasonable efforts to support all other AOL browsers listed at: "http://webmaster.info.aol.com." ii. To the extent 1-800-FLOWERS creates customized pages on any Affiliated 1-800-FLOWERS Site for AOL Members, 1-800-FLOWERS shall develop and employ a methodology to detect AOL Members (e.g. examine the HTTP User-Agent field in order to identify the "AOL Member-Agents" listed at: "http://webmaster.info.aol.com)." iii. 1-800-FLOWERS shall periodically review the technical information made available by AOL at http://webmaster.info.aol.com. iv. 1-800-FLOWERS shall design its site to support HTTP 1.0 or later protocol as defined in RFC 1945 and to adhere to AOL's parameters for refreshing or preventing the caching of information in AOL's proxy system as outlined in the document provided at the following URL: http://webmaster.info.aol.com. 1-800-FLOWERS is responsible for the manipulation of these parameters in web-based objects so as to allow them to be cached or not cached as outlined in RFC 1945. v. Prior to releasing material, new functionality or features through any Affiliated 1-800-FLOWERS Site ("New Functionality"), 1-800-FLOWERS shall use commercially reasonable efforts to (i) test the New Functionality to confirm its compatibility with AOL Service client software and (ii) provide AOL with written notice of the New Functionality so that AOL can perform tests of the New Functionality to confirm its compatibility with the AOL Service client software. Should any new material, new functionality or features through any Affiliated 1-800-FLOWERS Site be released without notification to AOL, AOL shall not be responsible for any adverse member experience until such time that compatibility tests can be performed and the new material, functionality or features qualified for the AOL Service 9. AOL INTERNET SERVICES 1-800-FLOWERS SUPPORT. AOL shall provide 1-800-FLOWERS with access to the standard online resources, standards and guidelines documentation, technical phone support, monitoring and after-hours assistance that AOL makes generally available to similarly situated web-based partners. AOL support shall not, in any case, be involved with content creation on behalf of 1-800-FLOWERS or support for any technologies, databases, software or other applications which are not supported by AOL or are related to any 1-800-FLOWERS area other than the Affiliated 1-800-FLOWERS Sites. Support to be provided by AOL is contingent on 1-800-FLOWERS providing to AOL demo account information (where applicable), a detailed description of the respective Affiliated 1-800-FLOWERS Site's software, hardware and network architecture and access to the respective Affiliated 1-800-FLOWERS Site for purposes of such performance and load testing as AOL elects to conduct. 36 EXHIBIT F STANDARD ONLINE COMMERCE TERMS & CONDITIONS 1. AOL NETWORK DISTRIBUTION. 1-800-FLOWERS shall not authorize or knowingly permit any third party to distribute or promote the Products or any 1-800-FLOWERS Interactive Site through the AOL Network absent AOL's prior written approval. The Promotions and any other promotions or advertisements purchased from or provided by AOL shall link only to the Affiliated 1-800-FLOWERS Sites, shall be used by 1-800-FLOWERS solely for its own benefit and shall not be resold, traded, exchanged, bartered, brokered or otherwise offered to any third party. 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 Sites violates AOL's then-standard Terms of Service (as set forth on the America Online-Registered Trademark- brand service at Keyword term "TOS"), 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 Sites (other than any specific items of Content which may be expressly identified in this Agreement), then 1-800-FLOWERS shall take commercially reasonable steps to block access by AOL Users to such Content using 1-800-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 shall 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 shall cooperate with AOL's reasonable requests to the extent AOL elects to implement any such access restrictions. 3. CONTESTS. 1-800-FLOWERS shall take all steps necessary to ensure that any contest, sweepstakes or similar promotion conducted or promoted through the Affiliated 1-800-FLOWERS Sites (a "Contest") complies with all applicable federal, state and local laws and regulations. 1-800-FLOWERS shall use commercially reasonable efforts to provide AOL of at least thirty (30) days prior written notice of any such Contest. 4. NAVIGATION. Subject to the prior consent of 1-800-FLOWERS, which consent shall not be unreasonably withheld, AOL shall be entitled to establish navigational icons, links and pointers connecting the Affiliated 1-800-FLOWERS Sites (or portions thereof) with other content areas on or outside of the AOL Network. Additionally, in cases where an AOL User performs a search for 1-800-FLOWERS through any search or navigational tool or mechanism that is accessible or available through the AOL Network (e.g., Promotions, Keyword Search Terms, or any other promotions or navigational tools), AOL shall have the right to direct such AOL User to the applicable Affiliated 1-800-FLOWERS Site, or any other 1-800-FLOWERS Interactive Site determined by AOL in its reasonable discretion. 5. DISCLAIMERS. Upon AOL's request, 1-800-FLOWERS agrees to include in a prominent area to be agreed upon by the Parties of each Affiliated 1-800-FLOWERS Site, a product disclaimer to be mutually agreed upon by the Parties and 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 shall own all right, title and interest in and to 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 contained within the AOL Network, subject to 1-800-FLOWERS' ownership rights in any 1-800-FLOWERS trademarks or copyrighted material within the Affiliated 1-800-FLOWERS Sites and the 1-800-FLOWERS Look and Feel. AOL acknowledges and agrees that 1-800-FLOWERS shall own all right, title and interest in and to the 1-800-FLOWERS Look and Feel and the Affiliated 1-800-FLOWERS Site, subject to the AOL Look and FEEL. 7. MANAGEMENT OF THE AFFILIATED 1-800-FLOWERS SITES. 1-800-FLOWERS shall manage, review, delete, edit, create, update and otherwise manage all Content available on or through the Affiliated 1-800-FLOWERS Sites, in a timely and professional manner and in accordance with the terms of this Agreement. 1-800-FLOWERS shall 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 Licensed Content: (i) shall 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) shall not violate AOL's then-applicable Terms of Service or any other standard, written AOL policy available online or otherwise provided to 1-800-FLOWERS; and (iii) shall 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 Sites. 1-800-FLOWERS shall not in any manner, including, without limitation in any Promotion, the Licensed Content or the Materials state or 37 imply that AOL recommends or endorses 1-800-FLOWERS or 1-800-FLOWERS' Products (e.g., no statements that 1-800-FLOWERS is an "official" or "preferred" provider of products or services for AOL); PROVIDED, HOWEVER, that 1-800-FLOWERS shall have the right (provided that 1-800-FLOWERS is in compliance with the terms and conditions of this Agreement) upon the prior approval of AOL to state that it is the exclusive marketer of the Exclusive Products on the AOL Properties (as defined herein). AOL shall have no obligations with respect to the Products available on or through the Affiliated 1-800-FLOWERS Sites, including, but not limited to, any duty to review or monitor any such Products. 8. DUTY TO INFORM. 1-800-FLOWERS shall promptly inform AOL of any information related to the Affiliated 1-800-FLOWERS Sites 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. (a) GENERAL. It is the sole responsibility of 1-800-FLOWERS to provide customer service to persons or entities purchasing Products through the AOL Network ("Customers"), as further described in Exhibit H to this Agreement. 1-800-FLOWERS shall bear full responsibility for all customer service, including without limitation, order processing, billing, fulfillment, shipment, collection and other customer service associated with any Products offered, sold or licensed through the Affiliated 1-800-FLOWERS Sites, and AOL shall have no obligations whatsoever with respect thereto. 1-800-FLOWERS shall receive all emails from Customers via a computer available to 1-800-FLOWERS' customer service staff and generally respond to such emails within one business day of receipt. 1-800-FLOWERS shall 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 shall ensure that all orders of Products are received, processed, fulfilled and delivered on a timely and professional basis. 1-800-FLOWERS shall offer AOL Users who purchase Products through such Affiliated 1-800-FLOWERS Sites its customary satisfaction guarantee. 1-800-FLOWERS shall 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 shall also comply with the requirements of any federal, state or local consumer protection or disclosure law. Payment for Products shall be collected by 1-800-FLOWERS directly from customers. 1-800-FLOWERS' order fulfillment operation shall be subject to AOL's reasonable review. (b) CUT-OFF TIME. In addition to the customer service requirements set forth in Section 9(a) above (as the same may be reasonably amended by AOL from time to time), 1-800-FLOWERS shall ensure same-day delivery for orders received before 12:30 p.m. (the "Cut-Off Time") in the time zone in which the order is to be delivered; PROVIDED, HOWEVER, that the Cut-Off Time may be expanded or contracted by 1-800-FLOWERS during holiday periods due to significant changes in market demand; PROVIDED, FURTHER, that 1-800-FLOWERS shall use all reasonable efforts to notify AOL before the Cut-Off Time is changed. Notwithstanding the foregoing, 1-800-FLOWERS hereby acknowledges and agrees that the Cut-Off Time with respect to AOL Purchasers shall be no earlier than the cut-off time for any other 1-800-FLOWERS partner (except due to specific performance failures of the AOL Network (e.g., downtime of e-mail, etc.). If same-day service will not be feasible for a particular order, 1-800-FLOWERS hereby agrees to use its best efforts (by e-mail, phone, etc.) to notify the customer that the order will be delivered the next day. Next-day delivery shall always be attempted, even during busy holiday seasons. 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 Sites, (ii) a redesign of or addition to the Affiliated 1-800-FLOWERS Sites (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 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 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 the agreed-upon Production Plan, such agreement shall 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 standards & practices (as provided on the America Online brand service at Keyword term "styleguide"). The specific production resources which AOL allocates to any production work to be performed on behalf of 1-800-FLOWERS shall be as determined by AOL in its sole discretion. With respect to any routine production, maintenance or related services which AOL reasonably determines are necessary for AOL to perform in order to support the proper functioning and integration of the Affiliated 1-800-FLOWERS Sites ("Routine Services"), 1-800-FLOWERS shall pay the then-standard fees charged by AOL for such Routine Services. 11. OVERHEAD ACCOUNTS. To the extent AOL has granted 1-800-FLOWERS any overhead accounts on the AOL Properties, 1-800-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 1-800-FLOWERS, but 1-800-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. 38 12. NAVIGATION TOOLS. In addition to the Keyword Search Terms granted to 1-800-FLOWERS under the Original IMAs and set forth on Exhibit A hereto, any further Keyword Search Terms to be directed to any Affiliated 1-800-FLOWERS Site shall be (i) subject to availability for use by 1-800-FLOWERS and (ii) limited to the combination of the Keyword-TM- search modifier (i.e., "Keyword:") combined with a registered trademark of 1-800-FLOWERS. AOL reserves the right to revoke at any time 1-800-FLOWERS' use of any Keyword Search Terms which do not incorporate registered trademarks of 1-800-FLOWERS. 1-800-FLOWERS acknowledges that its utilization of a Keyword Search Term shall not create in it, nor shall it represent it has, any right, title or interest in or to such Keyword Search Term, other than the right, title and interest 1-800-FLOWERS holds in 1-800-FLOWERS' registered trademark independent of the Keyword Search Term. Without limiting the generality of the foregoing, 1-800-FLOWERS shall not: (a) attempt to register or otherwise obtain trademark or copyright protection in the Keyword Search Term; or (b) use the Keyword Search Term, except for the purposes expressly required or permitted under this Agreement. To the extent AOL allows AOL Users to "bookmark" the URL or other locator for any Affiliated 1-800-FLOWERS Site, such bookmarks shall be subject to AOL's control at all times. Upon the termination of this Agreement, 1-800-FLOWERS' rights to any Keyword Search Terms and bookmarking shall terminate. 13. MERCHANT CERTIFICATION PROGRAM. 1-800-FLOWERS shall 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 shall 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. 14. PROHIBITION OF PROMOTIONAL PROGRAMS. On the Affiliated 1-800-FLOWERS Sites, 1-800-FLOWERS shall not offer, provide, implement or otherwise make available any promotional programs or plans that are intended to provide customers with rewards or benefits in exchange for, or on account of, their past or continued loyalty to, or patronage or purchase of, the products or services of 1-800-FLOWERS or any third party (e.g., a promotional program similar to a "frequent flier" program) other than travel-related or 1-800-FLOWERS' proprietary flowers-related frequent purchasing programs, unless such promotional program or plan is provided exclusively through AOL's "AOL Rewards" program, accessible on the AOL Service at Keyword: "AOL Rewards" (unless otherwise consented to by AOL, which consent shall not be unreasonably withheld). 39 EXHIBIT G STANDARD LEGAL TERMS & CONDITIONS 1. PROMOTIONAL MATERIALS/PRESS RELEASES. Each Party shall submit to the other Party, for its prior written approval, which shall not be unreasonably withheld or delayed, any marketing, advertising, or other promotional materials, related to the Affiliated 1-800-FLOWERS Sites and/or referencing the other Party and/or its trade names, trademarks, and service marks (the "Promotional Materials"); PROVIDED, HOWEVER, that either Party's use of screen shots of the Affiliated 1-800-FLOWERS Sites for promotional purposes shall not require the approval of the other Party so long as America Online-Registered Trademark- is clearly identified as the source of such screen shots; PROVIDED, FURTHER, that following the initial public announcement of the business relationship between the Parties in accordance with the approval and other requirements contained herein, either Party's subsequent factual reference to the existence of a business relationship between the Parties in Promotional Materials, shall not require the approval of the other Party. Each Party shall solicit and reasonably consider the views of the other Party in designing and implementing such Promotional Materials. Once approved, the Promotional Materials may be used by a Party and its affiliates for the purpose of promoting the Affiliated 1-800-FLOWERS Sites 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 Promotional Materials may be depleted. 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 the execution of this Agreement, and in no event, more than ten (10) business days thereafter (unless otherwise required by applicable law). 2. LICENSE. During the Term, 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 as AOL deems appropriate 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 displays prepared by 1-800-FLOWERS or AOL on behalf of 1-800-FLOWERS at 1-800-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 shall have the right to access and use the Affiliated 1-800-FLOWERS Sites. 3. TRADEMARK LICENSE. In designing and implementing the Materials and subject to the other provisions contained herein, 1-800-FLOWERS shall be entitled to use the following trade names, trademarks, and service marks of AOL and CompuServe (respectively): the "America Online-Registered Trademark-" brand service, "AOL-TM-" service/software, AOL's triangle logo and the "CompuServe" trademark; and AOL and its affiliates shall be entitled to use the trade names, trademarks, and service marks of 1-800-FLOWERS for which 1-800-FLOWERS holds all rights necessary for use in connection with this Agreement (e.g., 1-800-Flowers, Gift Concierge Service, World's Favorite Florist, Freshness Care System, Fresh Thoughts, 1-800-FLOWERS.com, Gardenworks, etc.) (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; 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 right of the other Party in the Marks of the other Party and agrees that all use of the other Party's 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 Marks shall not create in it, nor shall 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 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. 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 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. 7. REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the other Party that: (i) such Party has the full corporate 40 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 shall 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 shall 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. 1-800-FLOWERS hereby represents and warrants that it possesses all authorizations, approvals, consents, licenses, permits, certificates or other rights and permissions necessary to sell the Products. 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 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 two (2) 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 who must have access to such Confidential Information to perform such Party's obligations hereunder, who shall 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 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 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. (a) 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 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 1-800-FLOWERS SITES, 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 SHALL 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(c). EXCEPT AS PROVIDED IN SECTION 9(c), (I) LIABILITY ARISING UNDER THIS AGREEMENT SHALL BE LIMITED TO DIRECT, OBJECTIVELY MEASURABLE DAMAGES, AND (II) THE MAXIMUM LIABILITY OF ONE PARTY TO THE OTHER PARTY FOR ANY CLAIMS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE THE AGGREGATE AMOUNT OF PAYMENT OBLIGATIONS TO BE PAID TO AOL BY 1-800-FLOWERS HEREUNDER IN THE YEAR IN WHICH THE EVENT GIVING RISE TO THE LIABILITY OCCURS; PROVIDED THAT EACH PARTY SHALL REMAIN LIABLE FOR THE AGGREGATE AMOUNT OF ANY PAYMENT OBLIGATIONS OWED TO THE OTHER PARTY PURSUANT TO THE AGREEMENT. (B) 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 1-800-FLOWERS SITES, 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 1-800-FLOWERS SITES. (c) INDEMNITY. Either Party shall 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. (d) CLAIMS. If a Party entitled to indemnification hereunder (the "Indemnified Party") becomes aware of any matter it believes is indemnifiable hereunder involving any claim, action, suit, investigation, arbitration or other proceeding against the Indemnified Party by any third party (each an "Action"), the Indemnified Party shall give the other Party (the "Indemnifying Party") prompt written notice of such Action. Such notice shall (i) provide the basis on which indemnification is being asserted and (ii) be accompanied by copies of all relevant pleadings, demands, and other papers related to the Action and in the possession of the Indemnified Party. The Indemnifying Party shall have a period of ten (10) days after delivery of such notice to respond. If the Indemnifying Party elects to defend the Action or does not respond within the requisite ten (10) day 41 period, the Indemnifying Party shall be obligated to defend the Action, at its own expense, and by counsel reasonably satisfactory to the Indemnified Party. The Indemnified Party shall cooperate, at the expense of the Indemnifying Party, with the Indemnifying Party and its counsel in the defense and the Indemnified Party shall have the right to participate fully, at its own expense, in the defense of such Action. If the Indemnifying Party responds within the required ten (10) day period and elects not to defend such Action, the Indemnified Party shall be free, without prejudice to any of the Indemnified Party's rights hereunder, to compromise or defend (and control the defense of) such Action. In such case, the Indemnifying Party shall cooperate, at its own expense, with the Indemnified Party and its counsel in the defense against such Action and the Indemnifying Party shall have the right to participate fully, at its own expense, in the defense of such Action. Any compromise or settlement of an Action shall require the prior written consent of both Parties hereunder, such consent not to be unreasonably withheld or delayed. 10. 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 10 shall be enforceable independent of and severable from any other enforceable or unenforceable provision of this Agreement. 11. SOLICITATION OF AOL USERS. During the term of the Agreement and for a one (1) year period following the expiration or termination of this Agreement, 1-800-FLOWERS shall not use the AOL Network (including, without limitation, the e-mail network contained therein) to solicit AOL Users on behalf of another Interactive Service. More generally, 1-800-FLOWERS shall not send unsolicited, commercial e-mail (i.e., "spam") or other online communications through or into AOL's products or services, absent a Prior Business Relationship. For purposes of this Agreement, a "Prior Business Relationship" shall mean that the AOL User to whom commercial e-mail or other online communication is being sent has voluntarily either (i) engaged in a transaction with 1-800-FLOWERS or (ii) provided information to 1-800-FLOWERS through a contest, registration, or other communication, which included reasonably clear notice to the AOL User that the information provided could result in commercial e-mail or other online communication being sent to that AOL User by 1-800-FLOWERS or its agents. Any commercial e-mail or other online communications to AOL Users which are otherwise permitted hereunder, shall (a) include a prominent and reasonably easy means to "opt-out" of receiving any future commercial communications from 1-800-FLOWERS, and (b) shall also be subject to AOL's then-standard restrictions on distribution of bulk e-mail (e.g., related to the time and manner in which such e-mail can be distributed through or into the AOL product or service in question). 12. AOL USER COMMUNICATIONS. During the Term of this Agreement and for a period of one (1) year thereafter, to the extent that 1-800-FLOWERS is permitted to communicate with AOL Users under Section 11 of this Exhibit G, in any such communications to AOL Users on or (specifically targeting AOL Users) off the Affiliated 1-800-FLOWERS Sites (including, without limitation, e-mail solicitations), 1-800-FLOWERS shall not encourage AOL Users to use an Interactive Site other than the Affiliated 1-800-FLOWERS Sites for the purchase of Products, (ii) using Content other than the Licensed Content; (iii) bookmarking of Interactive Sites; or (iv) changing the default home page on the AOL browser. Additionally, with respect to such AOL User communications, in the event that 1-800-FLOWERS encourages an AOL User to purchase products through such communications, 1-800-FLOWERS shall ensure that (a) the AOL Network is promoted as the primary means through which the AOL User can access the Affiliated 1-800-FLOWERS Sites and (b) any link to any Affiliated 1-800-FLOWERS Site shall link to a page which indicates to the AOL User that such user is in a site which is affiliated with the AOL Network. 13. COLLECTION AND USE OF USER INFORMATION. 1-800-FLOWERS shall ensure that its collection, use and disclosure of information obtained from AOL Users under this Agreement and through any Affiliated 1-800-FLOWERS Site ("User Information") complies with (i) all applicable laws and regulations and (ii) AOL's standard privacy policies, available on the AOL Service at the keyword term "Privacy" (or, in the case of the Affiliated 1-800-FLOWERS Sites, 1-800-FLOWERS' standard privacy policies so long as such policies are prominently published on the site and provide adequate notice, disclosure and choice to users regarding 1-800-FLOWERS' collection, use and disclosure of user information). 1-800-FLOWERS shall not disclose User Information collected hereunder to any third party in a manner that identifies AOL Users as end users of an AOL product or service or during the Term (and thereafter, to the extent expressly provided for herein) use Member Information collected under this Agreement to market another Interactive Service 14. 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 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. 15. INDEPENDENT CONTRACTORS. The Parties to this Agreement are independent contractors. Neither Party is an agent, representative or employee 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. 42 16. 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 (to screenname "AOLNotice@AOL.com" in the case of AOL) or by confirmed 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. In the case of AOL, such notice shall be provided to both the Senior Vice President for Business Affairs (fax no. 703-265-1206) and the Deputy General Counsel (fax no. 703-265-1105), each at the address of AOL set forth in the first paragraph of this Agreement. In the case of 1-800-FLOWERS, except as otherwise specified herein, the notice address shall be the address for 1-800-FLOWERS set forth in the first paragraph of this Agreement (to the attention of Chris McCann and with a copy to Jerry Gallagher, Esq.), with the other relevant notice information, including the recipient's fax number or AOL e-mail address, to be as reasonably identified by AOL. 17. 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 provision or right in that or any other instance; rather, the same shall be and remain in full force and effect. 18. RETURN OF INFORMATION. Upon the expiration or termination of this Agreement, each Party shall, 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. 19. SURVIVAL. Section 4 (to the extent any such amounts are due and payable pursuant to the terms of this Agreement) and Section 6 of the body of the Agreement, and Sections 8, 9, 11, 12, 13, 16, 19, 24, 25 and 26 of this Exhibit G, (and any other Sections shall survive the completion, expiration, termination or cancellation of this Agreement. 20. 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. 21. AMENDMENT. No change, amendment or modification of any provision of this Agreement shall be valid unless set forth in a written instrument signed by the Party subject to enforcement of such amendment, and in the case of either Party, by an executive with a title of at least Senior Vice President. 22. 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. 23. ASSIGNMENT. Except for the assignment transfer or delegation by either Party to an affiliate 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 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. 24. 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 shall 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 shall remain in full force and effect. 25. 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 shall be entitled to offset any amounts that it claims to be due and payable from the other Party against amounts otherwise payable by the other Party to such Party. 26. APPLICABLE LAW. Except as otherwise expressly provided herein, this Agreement shall be interpreted, construed and enforced in all respects in accordance with the laws of the State of New York except for its conflicts of laws principles. 27. EXPORT CONTROLS. Both Parties shall adhere to all applicable laws, regulations and rules relating to the export of technical data and shall 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. 43 28. HEADINGS. The captions and headings used in this Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement. 29. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document 44 EXHIBIT H CUSTOMER SERVICE REQUIREMENTS 1. Commercially reasonable best efforts to process orders electronically within one (1) hour from receipt (if between 7A.M. and 7P.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/Chanukkah, Valentine's Day, Easter, Mother's Day, New Years and Secretaries' Week, to answer questions in an "online conference room" set up specifically for the relevant 1-800-FLOWERS store. Online customers shall 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 AOL Members regarding the Products, including, at a minimum, best efforts to receive and respond to e-mails within twenty-four (24) hours of receipt via a computer available to the customer service staff. 5. Provide the customer with an order confirmation within twenty-four (24) hours of receipt. Order confirmation should include any information such order status (temporary back order or out of stock situations), and expected delivery times. 6. Have the ability to handle volumes in excess of twenty-five percent (25%) to fifty percent (50%) of 1-800-FLOWERS' 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 any Affiliated 1-800-FLOWERS Site without substituting. 9. Offer all AOL Purchasers a 100% satisfaction guarantee, pursuant to which, 1-800-FLOWERS agrees to replace or refund orders upon such AOL Purchaser's or AOL's request, in accordance with 1-800-FLOWERS' standard customer service policy. 10. Comply with all applicable disclosure laws. 45 EXHIBIT I CO-BRANDING REQUIREMENTS ON THE 1-800-FLOWERS AFFILIATED SITES I. AOL SERVICE. The AOL Service will maintain the current co-branding as in effect under the Original IMA (including, without limitation, the use of the "Rainman" screens). II. AOL.COM. Commencing on a mutually agreed upon date(s) after the Effective Date. 1-800-FLOWERS shall create a version of the principal 1-800-FLOWERS Interactive Site customized for distribution through AOL.com (the "1-800-FLOWERS/AOL.com Site") by (w) developing the 1-800-FLOWERS/AOL.com Site as a "cul de sac" site containing no links outside of the 1-800-FLOWERS/AOL.com Site other than to AOL.com, other AOL or third party Content determined by AOL, or advertisements permitted under this Agreement, (x) displaying on each page of the 1-800-FLOWERS/AOL.com Site headers and footers of size and type determined by AOL and which contain both AOL.com and 1-800-FLOWERS branding, links to AOL.com, a Netfind search box and two (2) promotional spaces to be programmed by AOL, (y) programming each page of the 1-800-FLOWERS/AOL.com Site with a co-branded domain name (e.g., 1800Flowers.aol.com) and (z) matching the look and feel of AOL.com on the 1-800-FLOWERS/AOL.com Site. All registration and community-related utilities and functionality (including, without limitation, chat, message boards, and web page community services such as AOL Hometown) shall be managed by AOL. The 1-800-FLOWERS/AOL.com Site shall contain Content of substantially the same quality, scope, functionality, terms and conditions as the Content on any other 1-800-FLOWERS Interactive Site. 1-800-FLOWERS will, in accordance with the Programming Plan, and subject to the terms of this Agreement, (1) provide AOL with Content for the areas and screens of AOL.com described in the Programming Plan, and (2) program and manage the Content on the 1-800-FLOWERS/AOL.com Site for distribution through AOL.com. All terms and conditions of this Agreement applicable to any 1-800-FLOWERS Interactive Site shall apply to the 1-800-FLOWERS/AOL.com Site except as expressly otherwise stated. III. COMPUSERVE SERVICE. Commencing on a mutually agreed upon date(s) after the Effective Date. 1-800-FLOWERS shall create a version of the principal 1-800-FLOWERS Interactive Site customized for distribution through the CompuServe Service (the "1-800-FLOWERS/CIS Site") by (w) developing the 1-800-FLOWERS/CIS Site as a "cul de sac" site containing no links outside of the 1-800-FLOWERS/CIS Site other than to the CompuServe Service, other AOL or third party Content determined by AOL, or advertisements permitted under this Agreement, (x) displaying on each page of the 1-800-FLOWERS/CIS Site headers and footers of size and type determined by AOL or CompuServe and which contain both CIS and 1-800-FLOWERS branding, links to the CompuServe Service and two (2) promotional spaces to be programmed by AOL or CompuServe, (y) programming each page of the 1-800-FLOWERS/CIS Site with a co-branded domain name (e.g., 1800Flowers.compuserve.com) and (z) matching the look and feel of the CompuServe Service on the 1-800-FLOWERS/CIS Site. All registration and community-related utilities and functionality (including, without limitation, chat, message boards, and web page community services) shall be managed by AOL or CompuServe. The 1-800-FLOWERS/CIS Site shall contain Content of substantially the same quality, scope, functionality, terms and conditions as the Content on any other 1-800-FLOWERS Interactive Site. 1-800-FLOWERS will, in accordance with the Programming Plan, and subject to the terms of this Agreement, (1) provide AOL with Content for the areas and screens of the CompuServe Service described in the Programming Plan, and (2) program and manage the Content on the 1-800-FLOWERS/CIS Site for distribution through the CompuServe Service. All terms and conditions of this Agreement applicable to any 1-800-FLOWERS Interactive Site shall apply to the 1-800-FLOWERS/CIS Site except as expressly otherwise stated. IV. NETSCAPE NETCENTER. The Service Pages will be co-branded by Netscape and 1-800-FLOWERS. The co-branding will be subject to Netscape's Guidelines and will include 1-800-FLOWERS' company name and logo. Furthermore, 1-800-FLOWERS shall take reasonable efforts to ensure that Netscape traffic is generally either 46 kept within the Service Pages or channeled back into Netcenter. To the extent that Netscape notifies Participant in writing that, in Netscape's reasonable judgment, links from the Service Pages cause an excessive amount of user traffic to be diverted outside of such site and Netscape Netcenter in a manner that has a detrimental effect on the traffic flow of the user audience, then 1-800-FLOWERS shall immediately reduce the number of links out of such site(s). In the event that 1-800-FLOWERS cannot or does not so limit diverted traffic from such site, Netscape (or AOL, as the case may be) reserves the right to take control of the relevant Service Pages. For purposes of these co-branding requirements, "Service Pages" shall mean all pages of the specific area within the Netscape Network which shall be developed, managed or marketed by 1-800-FLOWERS pursuant to this Agreement, including but not limited to the Licensed Content, any functionality or services, message boards, chat and other Netscape Member-supplied content areas contained therein (but excluding any site or area outside of Netscape Netcenter that is linked to Netscape Netcenter (through a "pointer" or similar link) in accordance with the terms and conditions of this Agreement). V. ICQ SERVICE. Commencing on a mutually agreed upon date(s) after the Effective Date. 1-800-FLOWERS shall create a version of the principal 1-800-FLOWERS Interactive Site customized for distribution through the ICQ Service (the "1-800-FLOWERS/ICQ Site") by (w) developing the 1-800-FLOWERS/ICQ Site as a "cul de sac" site containing no links outside of the 1-800-FLOWERS/ICQ Site other than to the ICQ Service, other AOL or third party Content determined by AOL, or advertisements permitted under this Agreement, (x) displaying on each page of the 1-800-FLOWERS/ICQ Site headers and footers of size and type determined by AOL and which contain both ICQ and 1-800-FLOWERS branding, links to the ICQ Service and two (2) promotional spaces to be programmed by AOL, (y) programming each page of the 1-800-FLOWERS/ICQ Site with a co-branded domain name (e.g., 1800Flowers.icq.com) and (z) matching the look and feel of the ICQ Service on the 1-800-FLOWERS/ICQ Site. All registration and community-related utilities and functionality (including, without limitation, chat, message boards, and web page community services) shall be managed by AOL or ICQ. The 1-800-FLOWERS/ICQ Site shall contain Content of substantially the same quality, scope, functionality, terms and conditions as the Content on any other 1-800-FLOWERS Interactive Site. 1-800-FLOWERS will, in accordance with the Programming Plan, and subject to the terms of this Agreement, (1) provide AOL with Content for the areas and screens of the ICQ Service described in the Programming Plan, and (2) program and manage the Content on the 1-800-FLOWERS/ICQ Site for distribution through the ICQ Service. All terms and conditions of this Agreement applicable to any 1-800-FLOWERS Interactive Site shall apply to the 1-800-FLOWERS/ICQ Site except as expressly otherwise stated. VI. DIGITAL CITY. Commencing on a mutually agreed upon date(s) after the Effective Date. 1-800-FLOWERS shall create a version of the principal 1-800-FLOWERS Interactive Site customized for distribution through the CompuServe Service (the "1-800-FLOWERS/DCI Site") by (w) developing the 1-800-FLOWERS/DCI Site as a "cul de sac" site containing no links outside of the 1-800-FLOWERS/DCI Site other than to Digital City, other AOL or third party Content determined by AOL, or advertisements permitted under this Agreement, (x) displaying on each page of the 1-800-FLOWERS/DCI Site headers and footers of size and type determined by AOL and which contain both DCI and 1-800-FLOWERS branding, links to Digital City and two (2) promotional spaces to be programmed by AOL, (y) programming each page of the 1-800-FLOWERS/DCI Site with a co-branded domain name (e.g., 1800Flowers.digitalcity.com) and (z) matching the look and feel of Digital City on the 1-800-FLOWERS/DCI Site. All registration and community-related utilities and functionality (including, without limitation, chat, message boards, and web page community services) shall be managed by AOL. The 1-800-FLOWERS/DCI Site shall contain Content of substantially the same quality, scope, functionality, terms and conditions as the Content on any other 1-800-FLOWERS Interactive Site. 1-800-FLOWERS will, in accordance with the Programming Plan, and subject to the terms of this Agreement, (1) provide AOL with Content for the areas and screens of Digital City described in the Programming Plan, and (2) program and manage the Content on the 1-800-FLOWERS/DCI Site for distribution through Digital City. All terms and conditions of this Agreement applicable to any 1-800-FLOWERS Interactive Site shall apply to the 1-800-FLOWERS/DCI Site except as expressly otherwise stated. 47 EXHIBIT J CATEGORIES OF GARDENING-RELATED ITEMS TO BE OFFERED ON THE 1-800-FLOWERS AFFILIATED SITES GARDEN Annuals Books/Videos related to gardening Bulbs Seeds Composting Fencing Edging Apparel related to gardening Footwear related to gardening Lawn Care Perennials Vines Pest Control Indoor Plants Roses Tools Supplies related to gardening Trees Shrubs Trellises Arbors Pottery related to gardening Vases Tropical Plants Water Gardening OUT DOOR LIVING Birds/Nature Doormats/Rugs Fireplace Furniture Lighting 48 EXHIBIT K 1-800-FLOWERS COMPETITORS - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** - - *** The above entities also include any of their affiliates whose primary business is the sale of fresh-cut flowers and Plants. During the Fresh-Cut Flowers Exclusivity Period, 1-800-FLOWERS can replace any of the above entities with another entity whose primary business is the sale of fresh-cut flowers and Plants. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 49 EXHIBIT L GARDENING COMPETITORS - - *** - - *** - - *** - - *** - - *** - - *** - - *** The above entities also include any of their affiliates whose primary business is the sale of Gardening Products. During the Gardening Exclusivity Period, 1-800-FLOWERS can replace any of the above entities with another entity whose primary business is the sale of Gardening Products. *** Confidential treatment has been requested for this portion pursuant to Rule 24b-2 promulgated under the Securities Exchange Act of 1934, as amended. 50 EX-21.1 3 EXHIBIT 21.1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT 1-800 FLOWERS Team Services, Inc. (Delaware) 1-800 FLOWERS Acquisition Corp. (Delaware) 1-800 FLOWERS RETAIL, Inc. (Delaware) 800-FLOWERS, Inc. (New York) 800-FLOWERS.COM, Inc. (New York) Amalgamated Consolidated Enterprises, Inc. (Nevada) Bloomlink Systems, Inc. (New York) C.M. Conroy Company, Inc. (California) Conroy's Acquisition Corporation (California) Conroy's Inc. (California) Floral Works, Inc. (Delaware) Flores De Exito, Inc. (California) Florists Capital Corporation, Inc. (California) Fresh Intellectual Properties, Inc. (Delaware) Gerber Gardens/1-800-Flowers, L.L.C. (New York) P&H, L.P. (Virginia) The Plow & Hearth, Inc. (Virginia) St. Claire Floral Co., Inc. (New York) Teleway, Inc. (New York) Westbury Investing Corp. (Delaware) EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-84281) pertaining to the 1-800-FLOWERS.COM, Inc. 1999 Stock Incentive Plan and the 1997 Stock Option Plan of our report dated August 20, 1999, except for the last paragraph of Note 11, Commitments and Contingencies-Leases as to which the date is September 1, 1999, with respect to the consolidated financial statements of 1-800-FLOWERS.COM, Inc. included in the Annual Report (Form 10-K) for the year ended June 27, 1999. /s/ Ernst & Young LLP Melville, New York September 24, 1999 EX-27 5 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1-800-FLOWERS.COM, INC'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JUN-27-1999 JUN-29-1998 JUN-27-1999 99,183 0 11,488 (1,482) 7,496 121,205 45,085 (17,560) 182,355 35,586 0 0 117,573 497 (9,067) 182,355 295,873 295,873 179,697 179,697 124,347 105 2,610 (9,354) (2,715) (6,846) 0 0 0 (6,846) (0.27) (0.27)
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