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<SEC-DOCUMENT>0001084869-05-000057.txt : 20050915
<SEC-HEADER>0001084869-05-000057.hdr.sgml : 20050915
<ACCEPTANCE-DATETIME>20050915170013
ACCESSION NUMBER: 0001084869-05-000057
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 6
CONFORMED PERIOD OF REPORT: 20050703
FILED AS OF DATE: 20050915
DATE AS OF CHANGE: 20050915
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: 113117311
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0627
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-26841
FILM NUMBER: 051087172
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
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<TEXT>
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 July 3, 2005
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 |X| No |_|
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. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
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 December
23, 2004 as reported on the Nasdaq National Market, was approximately
$211,778,000. 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.
28,293,229
(Number of shares of class A common stock outstanding as of September 8, 2005)
36,864,465
(Number of shares of class B common stock outstanding as of September 8, 2005)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Definitive Proxy Statement for the 2005 Annual
Meeting of Stockholders (the Definitive
Proxy Statement) are incorporated by reference into
Part III of this Report.
<PAGE>
1-800-FLOWERS.COM, INC.
FORM 10-K
For the fiscal year ended July 3, 2005
INDEX
PART I
Item 1. Business 1
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities 26
Item 6. Selected Financial Data 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 44
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 45
Item 13. Certain Relationships and Related Transactions 45
Item 14. Principal Accounting Fees and Services 45
Part IV
Item 15. Exhibits and Financial Statement Schedules 46
Signatures 48
<PAGE>
PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS BASED ON THE COMPANY'S CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT 1-800-FLOWERS.COM,
INC. AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'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. THE COMPANY 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
For more than 25 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice(sm)" -
has been providing customers across the nation with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers delivered through its Fresh From Our Growers(sm)
program.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. Gift advisors are available 24/7, and fast
and reliable delivery is offered same day, any day. As always, 100 percent
satisfaction and freshness is guaranteed. The 1-800-FLOWERS.COM collection of
brands also includes home decor and garden merchandise from Plow & Hearth(R)
(1-800-627-1712 or www.plowandhearth.com); premium popcorn and specialty treats
from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com);
exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or
www.cherylandco.com); gourmet foods from GreatFood.com(R) (www.greatfood.com);
children's gifts from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com) and wine gifts from The Winetasting Network(R)
(www.ambrosiawine.com and www.winetasting.com). 1-800-FLOWERS.COM, Inc. stock is
traded on the NASDAQ market under ticker symbol FLWS.
References in this Annual Report on Form 10-K to "1-800-FLOWERS.COM" 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
The Company's operations began in 1976 when James F. McCann, its Chairman and
Chief Executive Officer, acquired a single retail florist in New York City,
which he subsequently expanded to a 14-store chain. Thereafter, the Company
modified its business strategy to take advantage of the rapid emergence of
toll-free calling. The Company acquired the right to use the toll-free telephone
number 1-800-FLOWERS, adopted it as its corporate identity and began to
aggressively build a national brand around it. The Company believes it was one
of the first companies to embrace this new way of conducting business.
To support the growth of its toll-free business and to provide superior customer
service, the Company developed an operating infrastructure that incorporated the
best available technologies. Over time, the Company implemented a sophisticated
1
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transaction processing system that facilitated rapid order entry and
fulfillment, an advanced telecommunications system and multiple customer service
centers to handle increasing call volume.
To enable the Company to deliver products reliably nationwide on a same-day or
next-day basis and to market pre-selected, high-quality floral products, the
Company created BloomNet(R), a nationwide network including independent local
florists selected for their high-quality products, superior customer service and
order fulfillment and delivery capabilities.
In the early 1990s, the Company recognized the emergence of the Internet as a
significant strategic opportunity and moved aggressively to embrace this new
medium. By taking advantage of investments in its infrastructure, the Company
was able to quickly develop and implement an online presence. As a result, the
Company was one of the first companies to market products online through
CompuServe beginning in 1992 and AOL beginning in 1994 (keyword: flowers). In
April 1995, the Company opened its fully functional, e-commerce Web site
(www.1800flowers.com) and subsequently entered into strategic relationships with
AOL, Yahoo! and Microsoft, among others, to build its online brand and customer
base.
The Company's online presence has enabled it to expand the number and types of
products it can effectively offer. As a result, the Company has developed
relationships with customers who purchase products not only for gifting
occasions but also for everyday consumption. Since 1995, the Company has
broadened its product offerings of flowers, gourmet foods and gifts by adding
complementary home and garden merchandise through its April 1998 acquisition of
Plow & Hearth, as well as unique and educational children's toys and games when
it acquired the HearthSong and Magic Cabin product lines in June 2001. In order
to further expand its food, wine and gift baskets category, the Company acquired
GreatFood.com in November 1999, purchased selected assets of The Popcorn Factory
in May 2002, adding premium popcorn and specialty snack foods to the Company's
product offerings, acquired The Winetasting Network in November 2004,
introducing wine gifts to complement it's floral and gourmet offerings, and most
recently, in March 2005, acquired Cheryl & Co., providing our customers with an
exceptional offering of cookies and related baked products.
The Company's Strategy
1-800-FLOWERS.COM's objective is to become the leading authority of thoughtful
gifting, to serve an expanding range of our customers celebratory needs, thereby
helping our customers connect with the important people in their lives. The
Company will continue to build on the trusted relationships with our customers
by providing them with ease of access, tasteful and appropriate gifts, and
superior service. The key elements of its strategy to achieve this objective
are:
Opportunistically Grow the Company's Brands.
The Company believes that 1-800-FLOWERS.COM is one of the most recognized brands
in the floral and gift industry. The strength of its brand has enabled the
Company to extend its product offerings beyond the floral category into
complementary products, which include home and garden merchandise, children's
toys and games, gourmet popcorn, cookies and related baked and snack food
products, as well as wine gifts, many of which can be combined into giftable
baskets. This extension of product offerings through its brands has enabled the
Company to increase the number of purchases by existing customers who have come
to trust the 1-800-FLOWERS.COM brand, as well as continue to attract new
customers.
The Company believes its brands are characterized by:
o Convenience. All of the Company's product offerings can be purchased
2
<PAGE>
either via the web, or via the Company's toll-free telephone numbers,
24 hours a day, seven days a week, for those customers who prefer a
personal gift advisor to assist them. The Company offers a variety of
delivery options, including same-day or next-day service throughout the
world.
o Quality. High-quality products are critical to the Company's continued
brand strength and are integral to the brand loyalty that it has built
over the years. The Company offers its customers a 100% satisfaction
guarantee on all of its products.
o Delivery. The Company has developed a market-proven fulfillment
infrastructure that allows delivery on a same-day, next-day and
any-day basis. Key to the Company's fulfillment capability is an
innovative "hybrid" model which combines BloomNet(R) (comprised of
independent florists operating retail flower shops and Local Fulfillment
Fulfillment or Design Centers ("LFC's"), Company-owned stores and
fulfillment centers, and franchise stores), with its six Company-owned
distribution centers located in California, Illinois, New York, Ohio,
and Virginia, and brand-name vendors who ship directly to the Company's
customers. These fulfillment points are connected by the Company's
proprietary "BloomLink(R)" communication system, a secure internet-
based system through which orders and related information are
transmitted.
o Selection. Over the course of a year, the Company offers over 1,800
varieties of fresh-cut flowers, floral arrangements and plants, over
3,900 SKUs of gifts, gourmet foods and wines, approximately 8,600
different products for the home and garden, including garden accessories
and casual lifestyle furnishings, and over 6,500 unique and educational
toys and games.
o Customer Service. The Company strives to ensure that customer service,
whether online, via the telephone, or in one of its retail stores is of
the highest caliber. The Company operates five customer service
facilities to provide helpful assistance on everything from advice on
product selection to the monitoring of the fulfillment and delivery
process.
The Company's goal is to make its brands synonymous with thoughtful gifting. To
do this, the Company intends to continue to invest in its brands and acquisition
of new customers through the use of selective on and off-line media, direct
marketing, public relations and strategic internet relationships, while
capitalizing on the Company's large and loyal customer base through
cost-effective customer retention programs.
As part of the Company's continuing effort to serve the thoughtful gifting needs
of its customers, and leverage its business platform, where appropriate, the
Company intends to market other high-quality brands in addition to
1-800-FLOWERS.COM. The Company intends to accomplish this through internal
development, co-branding arrangements, strategic relationships and/or
acquisitions of complementary businesses. In keeping with this strategy, in
March 2005, the Company acquired Cheryl&Co., a manufacturer and direct marketer
of premium cookies and related baked gift items, and in November 2004, the
Company acquired The Winetasting Network, a distributor and direct-to-consumer
marketer of wine. These acquisitions, when combined with The Popcorn Factory
product line, acquired in May 2002, have enabled the Company to more fully
develop its food, wine and gift baskets product line. In June 2001 the Company
acquired The Children's Group, including its two brands of unique and
educational children's toys and games, HearthSong and Magic Cabin. In fiscal
2000 the Company acquired GreatFood.com, an online retailer of gourmet foods,
and in 1998, the Company acquired Plow & Hearth, a direct marketer of home decor
and garden merchandise. As a complement to the Company's own brands and product
lines, the Company has formed relationships with Lenox(R), Waterford(R),
Swarovski(R), Godiva(R), Hershey's(R), Gund(R), Crabtree and Evelyn(R), and
Yankee Candle(R), as well as renowned celebrity floral artisans such as Jane
Carroll, Julie McCann Mulligan and Jane Packer, among others, in order to
provide our customers with an even broader selection of products to further its
position as a destination for all of their gifting needs.
3
<PAGE>
Differentiated and Value-Added Product Offerings. The Company's wide selection
of products creates the opportunity to have a relationship with customers who
purchase items not only for gift-giving occasions but also for everyday
consumption. The Company's merchandising team works closely with manufacturers
and suppliers to select and design its floral, gourmet food and wine, home and
garden and children's toys, as well as other gift-related products that
accommodate our customers' needs to celebrate a special occasion, convey a
sentiment or cater to a casual lifestyle. As part of this continuing effort, the
Company intends to continue to develop differentiated products and signature
collections that our customers have embraced and come to expect from us while we
eliminate marginal performers our product offerings.
Enhance its Customer Relationships. The Company intends to deepen its
relationship with its customers and be their trusted resource to fulfill their
need for quality, tasteful gifts. We plan to encourage more frequent and
extensive use of our branded Web sites, by continuing to provide product-related
content and interactive features. The Company will also continue to improve its
customers' shopping experience by personalizing the features of its Web site
and, in compliance with the Company's privacy policy, utilizing customer
information to target product promotions, identify individual and mass market
consumption trends, remind customers of upcoming occasions and convey other
marketing messages. In addition, the Company plans to drive purchase frequency
improvements through the use of loyalty, thank-you and reminder programs. As of
July 3, 2005, the Company's total database of unique customers numbered
approximately 25.0 million (12.8 million of which have transacted business with
the Company within the past 36 months).
Through its Business Gift Services programs, the Company believes it has
significant opportunity to expand its corporate customer base and leverage
existing and/or develop successful gifting programs with corporate customers,
many of which are included in the Fortune 1000, such as AT&T, Bank of America,
General Electric, IBM, JP Morgan Chase, Kraft, and Verizon, to name a few. These
programs focus on developing and/or strengthening strategic partnerships to
develop customized and personalized gifts for their clients and employees, and
are also tailored to meet the needs of small and mid-sized businesses. The
Company helps its corporate partners manage daily sentiment programs, holiday
gifting, rewards and recognition, conferences and events, as well as client
acquisition and customer retention to support their growth strategies.
Increase the Number of Online Customers. Online transactions are more cost
efficient to process. Although the Company expects its customers to choose the
most convenient channel available to them at the time of their purchase, the
Company expects its trend of online growth to continue. In fact, to further
increase the number of customer orders placed through its Web site, the Company
intends to continue to:
o further build brand awareness to drive customers directly to the Company's
URLs;
o actively promote its Web site through internet portals, online networks and
search engines and affiliates;
o aggressively market the Company's Web site in its marketing campaigns;
o facilitate access to the Company's Web site for its corporate customers by
implementing direct links from their internal corporate networks, and
develop customized co-branded micro-sites for larger corporate partners.
Capitalize upon the Company's Technology Infrastructure. The Company believes it
has been and continues to be a leader in implementing new technologies and
systems to give its customers the best possible shopping experience, whether
online or over the telephone.
The Company's online and telephonic orders are fed directly from the Company's
secure Web sites, or with the assistance of a gift advisor, into a transaction
processing system which captures the required customer and recipient
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<PAGE>
information. The system then routes the order to the appropriate Company
warehouse, or for florist fulfilled or drop-shipped items selects a vendor to
fulfill the customer's order and electronically transmits the necessary
information to assure timely delivery. In addition, the Company's gift advisors
have electronic access to this system, enabling them to assist in order
fulfillment and subsequently track other customer and/or order information.
In prior years, the Company has invested heavily in building a scalable
technology platform to support the Company's order volume growth, including
in-sourcing of its Web-hosting and disaster recovery systems. In addition to
leveraging this infrastructure to drive cost savings, in-sourcing has allowed
the Company to focus resources on customer specific projects to ensure an
enjoyable shopping experience while providing improved operational flexibility,
additional capacity and system redundancy. The Company intends to utilize its
informational technology expertise to improve the technology infrastructure of
The Winetasting Network, acquired in November 2004, as well as Cheryl & Co.,
acquired in March 2005, to accomodate anticipated growth.
Continue to Improve the Company's Fulfillment Capabilities. A majority of the
Company's customers' purchases of floral and floral-related gift products are
fulfilled by one of the Company's BloomNet(R) members. This allows the Company
to deliver its floral products on a same-day or next-day basis to ensure
freshness and to meet its customers' need for prompt delivery. In addition, the
Company is better positioned to ensure consistent product quality and
presentation and offer a greater variety of arrangements, which creates a better
experience for its customers and gift recipients. The Company selects
BloomNet(R) members for their high-quality products, superior customer service
and order fulfillment and delivery capabilities. In fiscal 2001, the Company
began entering into Order Fulfillment Agreement(s) with selected BloomNet(R)
members to operate LFC's to facilitate the fulfillment of the Company's floral
and gift orders, improving the economics of florist fulfilled transactions, and
improving the Company's ability to control product quality and branding. In
addition to florist-designed arrangements, fulfilled by the Company's BloomNet
members, for those customers that prefer, the Company offers direct-shipped
product through its Fresh From Our Growers program, all of which come with the
Company's 100% satisfaction freshness guarantee.
The Company fulfills its cookie and baked gifts from its 51,000 square foot
baking and distribution center in Westerville, Ohio, while its premium popcorn
and related snack products are shipped from the Company's 148,000 square foot
manufacturing and distribution center located in Lake Forest, Illinois. Most
wine gift and fulfillment services are provided through the Company's 52,000
square foot fulfillment center in Napa, California. The remainder of the
Company's gift basket, gourmet food and wine items are fulfilled through members
of BloomNet(R) or third-party gift vendors that ship products directly to the
customer by next-day or other delivery options chosen by the customer. The
Company selects its third-party gift vendors based upon the quality of their
products, their reliability and ability to meet volume requirements. The Company
packages and ships its home and garden products primarily from its 300,000
square foot distribution center located in Madison, Virginia, or through the
Company's 200,000 square foot distribution center in Vandalia, Ohio. Shipment of
children's gifts is primarily facilitated through the Vandalia, Ohio
distribution center.
To ensure reliable and efficient communication of online and telephonic orders
to its BloomNet(R) members and third party gift vendors, the Company
internally-developed BloomLink(R), a proprietary and secure internet-based
communications system. All BloomNet(R) members and third-party gift vendors have
adopted BloomLink(R). The Company also has the ability to arrange for
international delivery of floral products through independent wire services and
direct relationships.
The Company intends to improve its fulfillment capabilities to make its
operations more efficient by:
5
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o strengthening relationships and increasing the number of its vendors and
BloomNet(R) member florists, as appropriate, to ensure geographic coverage
and shorten delivery times;
o continuing to improve warehousing operations and reduce fulfillment times
in support of its gift, gourmet food and wine, home and garden and
children's product lines;
o expanding the use of cross-dock logistics and utilizing cross brand
fulfillment capabilities.
The Company's Products
The Company offers a wide range of products, including fresh-cut flowers, floral
arrangements and plants, gifts, popcorn, gourmet foods and wine, home and garden
merchandise and unique toys and games for children. In addition to selecting its
core products, the Company's merchandising team works closely with manufacturers
and suppliers to select and design products that meet the seasonal, holiday and
other special needs of its customers. For the years ended July 3, 2005, June 27,
2004, and June 29, 2003, the sale of floral products represented 52.7%, 52.2%,
and 50.5% of total combined telephonic and online net revenues, respectively.
Over the course of a year, the Company's product selection consists of:
Flowers. The Company offers more than 1,500 varieties of fresh-cut flowers and
floral arrangements for all occasions and holidays, available for same-day
delivery. The Company provides its customers with a choice of florist designed
products, flowers delivered through its "Fresh From Our Growers" program, and
most recently, the Company expanded its successful "celebrity" gift collections,
including the unique floral creations of Jane Carroll, Julie McCann Mulligan and
Jane Packer.
Plants. The Company also offers approximately 300 varieties of popular plants to
brighten the home and/or office, and accent gardens and landscapes.
Gourmet Foods and Wines. The Company offers more than 800 premium popcorn and
specialty snack products from The Popcorn Factory brand, as well as
approximately 800 carefully selected gourmet food and sweet products from the
GreatFood brand, including candies, chocolates, nuts, cookies, fruit, imported
cheeses and giftable surf-and-turf dinners. Most recently, in March 2005, the
Company added over 800 premium cookies and baked gift items from Cheryl & Co.,
which are delivered in beautiful and innovative gift baskets and containers,
providing customers with a variety of assortments to choose from; and, through
the November 2004 acquisition of The Winetasting Network, the Company now offers
its customer more than 400 different wines, primarily from the prestigious wine
regions in California. Currently, restrictions exist in many states regarding
interstate shipment of wine. As such, these items are only available in selected
states. Many of the Company's gourmet products can be packaged in seasonal,
occasion specific or decorative tins, fitting the "giftable" requirement of our
individual customers, while also adding the capability to customize the tins
with corporate logos and other personalized features for the Company's corporate
customer's gifting needs.
Unique and Specialty Gifts. The Company offers more than 1,100 specially
selected gift items, including plush toys from Gund(R), balloons, bath and spa
items, candles from Yankee Candle(R), wreaths, ornaments, collectibles, home
accessories and giftware.
Home and Garden. Through its Plow & Hearth brand, the Company offers more than
6,800 SKUs for home, hearth and outdoor living, including casual lifestyle
furniture and home accessories, clothing, footwear, candles and lighting, vases,
kitchen items and accents and approximately 1,800 gardening items, including
tools and accessories, pottery, nature-related products, books and related
products.
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Children's Gifts. Through the HearthSong and Magic Cabin brands, the Company
offers over 6,500 products, including environmentally friendly toys, plush
stuffed animals, crafts and books with educational, nature and art themes, as
well as, natural-fiber soft dolls, kits and accessories for children ages 3
through 12.
Greetings. Through its relationships with UPresent.com and 4YourSoul.com, the
Company provides its customers the ability to send personalized electronic and
printed greeting cards with hundreds of fun and creative ways to express
emotions, offer congratulations, or just keep in touch.
The Company's Web Sites
The Company offers floral, plant, gift baskets, gourmet foods, candies, plush
and specialty gift products through its 1-800-FLOWERS.COM Web site
(www.1800flowers.com). Customers can come to the Web site directly or be linked
by one of the Company's portal providers, search engine, or affiliate
relationships. These include AOL (keyword:flowers), Yahoo!, Microsoft, Google
and Overture, as well as thousands of its online affiliate program members. The
Company also offers home and garden products through the Plow & Hearth Web site
(www.plowandhearth.com), gourmet food products through GreatFood.com
(www.greatfood.com), premium popcorn and specialty food products through The
Popcorn Factory (www.thepopcornfactory.com), exceptional baked cookies and baked
gifts from Cheryl&Co. (www.cherylandco.com), children's gifts through its
HearthSong (www.hearthsong.com) and Magic Cabin (www.magiccabin.com), and wine
gifts from The Winetasting Network (www.ambrosiawine.com and
www.winetasting.com) Web sites. Approximately 74% of online revenues are derived
from traffic coming directly to one of the Company's Universal Resource Locators
("URL's").
The Company's Web sites allow customers to easily browse and purchase its
products, promote brand loyalty and encourage repeat purchases by providing an
inviting customer experience. The Company's Web sites offer customers detailed
product information, complete with photographs, personalized shopping services,
contests, sweepstakes, floral care information, gift-giving suggestions, home
decorating and how-to-tips and information about special events and offers. The
Company has designed its Web sites to be fast, secure and easy to use and allows
customers to order products with minimal effort. The Company's Web sites include
the following key features in addition to the variety of delivery and shipping
options (same day/next day) and 24 hour/7 day customer service that are
available to all its customers:
Product Search and Order Tracking. The Company's websites have sophisticated
search capabilities, which enable customers to search for products by occasion,
category/department, price point, flower type, brand or keyword. Many of the
Company's websites also features a "more shopping" section, containing an
easy-to-view drop-down list and quick-links to some of the most popular
categories. The Company's online order tracking capabilities allow customers to
quickly and easily view the delivery status of their purchase, while its
"Delivery Wizard" provides customers with expected delivery dates for each
product selection.
Value-Added Services. The Company utilizes its websites to enhance the direct
relationship with its customers, including greeting customers by name and
personalized web pages tailored to its registered customers. The 1-800-Flowers'
website "Member Benefits" provide customers with an online address book for
names and addresses of their gift recipients, express checkout services and
e-mail notification of special promotions, product previews and events. The
Company developed its Expressions Exchange for the customer searching for the
perfect expression of their sentiment, while registered customers can also
utilize its "Gift Reminder Program," which sends e-mail reminders prior to any
pre-selected occasion and offers suggestions to specific flower and/or gift
products.
Multiple Channel Access to Gift Advisors. The Company's websites offer customers
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the ability to use e-mail, real-time online messaging and "click-to-talk"
capability to reach one of the Company's gift advisors who can answer product
questions, provide gifting suggestions or resolve order issues. The Company also
offers its customers answers to frequently asked questions directly on the Web
site.
Security. The Company provides a safe and secure shopping experience within its
websites through the use of secure server software, which encrypts the
customer's credit card number to protect against interception as the information
is transmitted over the Internet.
Privacy. The Company recognizes the importance of maintaining the privacy of its
customers. The Company uses the information gathered on its websites from time
to time to send promotional materials and to enhance the customer's shopping
experience. The Company periodically makes certain information available to
selected third parties for direct marketing purposes. However, customers may
elect not to receive promotional information and/or instruct the Company not to
make their information available to third parties. The Company's current online
privacy policy, which is updated to continuously reflect current industry
guidelines, is set forth on its websites.
Marketing and Promotion
The Company's marketing and promotion strategy is designed to strengthen the
1-800-FLOWERS.COM brands, increase customer acquisition, build customer loyalty,
encourage repeat purchases and develop additional product revenue opportunities
through organic growth, and where appropriate, through acquisition. The Company
markets and promotes its brands and products as follows:
Direct Mail and Catalogs. The Company uses its direct mail promotions and
catalogs to increase the number of new customers and to increase purchase
frequency of its existing customers. Through the use of the Plow & Hearth,
HearthSong, Magic Cabin, Popcorn Factory and Cheryl & Co. catalogs, the Company
can utilize its extensive customer database to effectively cross-promote its
products. In addition to providing a direct sale mechanism, these catalogs drive
on-line sales and will attract additional customers to the Company's Web sites.
For the year ended July 3, 2005, the Company mailed in excess of 125 million
branded catalogs.
Off-line Media. The Company utilizes off-line media, including television, radio
and print to market its 1-800-Flowers.com brand and products. Off-line media
allows the Company to reach a large number of customers and to target particular
market segments.
The Company's Strategic Online Relationships. The Company promotes its products
through strategic relationships with leading internet portals, search engines
and online networks. The Company's online relationships include, among others,
AOL, Yahoo!, Microsoft, Google and Overture.
Affiliate and Co-Marketing Promotions. In addition to securing alliances with
frequently visited Web sites, the Company developed an affiliate network that
includes thousands of Web sites operated by third parties. Affiliates may join
this program through the Company's Web site and their participation may be
terminated by them or by the Company at any time. These Web sites earn
commissions on purchases made by customers referred from their sites to the
Company's Web site. In order to expand the reach of its marketing programs and
stretch its marketing dollars, the Company has established a number of
co-marketing relationships and promotions to advertise its products. For
example, the Company has established co-marketing arrangements with American,
United and Delta Airlines, as well as Upromise, Capital One, American Express,
VISA and MasterCard, among others.
E-mails. The Company is able to capitalize on its customer database of
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approximately 25.0 million unique customers (12.8 million of which have
transacted business with the Company within the past 36 months), 11.8 million of
which have transacted business with the Company on-line (7.7 million of which
have transacted business with the Company online within the past 36 months), by
utilizing cost-effective, targeted e-mails to notify customers of product
promotions, remind them of upcoming gifting occasions and convey other marketing
messages.
Fulfillment Operations
The Company's customers primarily place their orders either online or over the
telephone. The Company's development of a hybrid fulfillment system which
enables the Company to offer same-day, next-day and any-day delivery, combines
the use of BloomNet(R) (independent florists operating retail flower shops and
LFC's, Company-owned stores and fulfillment centers, and franchise stores), with
the Company-owned distribution centers and brand-name vendors who ship directly
to the Company's customers. While providing a significant competitive advantage
in terms of delivery options, the Company's fulfillment system also has the
added benefit of reducing the Company's capital investments in inventory and
infrastructure. Fulfillment of products is as follows:
Flowers. A majority of the Company's floral orders are fulfilled through
BloomNet(R). The Company selects retail florists for BloomNet(R) based upon the
historical volume of floral deliveries in a particular geographic area, the
number of BloomNet(R) florists currently serving the area and the florist's
design staff, facilities, quality of floral processing, and ability to fulfill
orders in sufficient volume and delivery capabilities. The Company regularly
monitors BloomNet(R) florists' performance and adherence to the Company's
quality standards to ensure proper fulfillment.
By fulfilling floral orders through BloomNet(R), the Company is able to deliver
floral products on a same-day, next-day or any day basis to ensure freshness and
to meet the customers' need for prompt delivery. Because the Company selects
these florists and receives customer feedback on their performance in fulfilling
orders, it is able to ensure consistent product quality and presentation and
offer a greater variety of arrangements, which the Company believes creates a
better experience for its customers and gift recipients.
The Company's relationships with its BloomNet(R) members are non-exclusive. Many
florists, including many BloomNet(R) florists, also are members of other floral
fulfillment organizations. The BloomNet(R) agreements generally are cancelable
by either party with ten days notification and do not guarantee any orders,
dollar amounts or exclusive territories from the Company to the florist. As of
July 3, 2005, the Company had entered into approximately 59 Order Fulfillment
Agreements with selected BloomNet(R) members to operate LFC's, providing
coverage of all significant population centers across the United States.
Generally, these agreements provide for a three-year term, terminable upon 30
days notice upon breach and immediately by the Company in the event of certain
specified defaults by the operator of the LFC. In consideration of the
operator's satisfactory performance, the Company agrees to use reasonable
efforts to forward orders with a specified minimum merchandise value during each
year of the agreement. The Company has not granted an exclusive territory to any
operator.
In certain instances, the Company is required to fulfill orders through
non-BloomNet(R) members, and transmits these orders to the fulfilling florist
using the communication system of an independent wire service or via telephone.
Additionally, the Company offers its customers an alternative to florist
designed products through its "Fresh From Our Growers" program. In this program,
the Company ships overnight via common carrier to its customers.
As of July 3, 2005, the Company operates 21 floral retail stores, located
primarily in the New York and Los Angeles metropolitan areas and 8 fulfillment
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centers. In addition, the Company has 83 franchised stores, located primarily in
California, Colorado and Texas. Company-owned stores serve as local points of
fulfillment and enable the Company to test new products and marketing programs.
Plants, Gift Baskets, Gourmet Food and Wine, Premium Popcorn, and Unique Gifts.
The Company's plants, gift baskets, gourmet food and wines, premium popcorn, and
unique gifts are shipped directly to the customer through its Lake Forest,
Illinois, Westerville, Ohio, Napa, California, Madison, Virginia or Vandalia,
Ohio fulfillment centers, or by members of BloomNet(R) and other third-party
product suppliers using next-day or other delivery option selected by the
customer. The Company's business is not dependent on any single third-party
supplier.
Home and Garden and Children's Toys. The Company fulfills purchases of home and
garden merchandise from its Madison, Virginia and Vandalia, Ohio fulfillment
center or by third-party product suppliers using next-day or other delivery
option selected by the customer.
Technology Infrastructure
The Company believes it has an advanced technology platform. Its technology
infrastructure, primarily consisting of the Company's Web sites, transaction
processing, customer databases and telecommunications systems, is built and
maintained for reliability, security, scalability and flexibility. To minimize
the risk of service interruptions from unexpected component or
telecommunications failure, maintenance and upgrades, the Company has built full
back-up and system redundancies into those components of its systems that have
been identified as critical. In recent years the Company installed an
Oracle-based order processing and database management system; developed
BloomLink(R), upgraded its telecommunications network, including its call
management system and internalized its Web-hosting and development capabilities.
The Company plans to continue to invest in technologies that will improve and
expand its e-commerce and telecommunication capabilities.
The Company's transaction processing system captures customer profile and
history in a customized Oracle database and selects the florist, third-party
vendor, or Company-owned warehouse to fulfill the order. Through the use of
customized software applications, the Company is able to retrieve, sort and
analyze customer information to enable it to better serve its customers and
target its product offerings.
The Company's customer service centers and third-party outsourcers are connected
electronically to its transaction processing system to permit the rapid
transmission of, and access to, critical order and customer information. In
addition, BloomLink(R) electronically connects the Company to its BloomNet(R)
members and non-floral vendors.
The Company's operations center is located in its headquarters in Westbury, New
York. The Company provides comprehensive facility management services, including
human and technical monitoring of all production servers, 24 hours per day,
seven days per week.
Seasonality
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, including the acquisitions of The
Winetasting Network and Cheryl & Co. during fiscal 2005, the Thanksgiving
through Christmas holiday season, which falls within the Company's second fiscal
quarter, generates the highest proportion of the Company's annual revenues.
Additionally, as the result of a number of major floral gifting occasions,
including Mother's Day, Administrative Professionals Week and Easter, revenues
also rise during the Company's fiscal fourth quarter. In addition, results
during the Company's fiscal first quarter will be negatively impacted by the
aforementioned acquisitions due to their seasonal nature and the incremental
overhead incurred during this slow period.
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Competition
The growing popularity and convenience of e-commerce has continued to give rise
to established businesses 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. Additionally, several of these merchants offer an expanding
variety of products and some are attracting an increasing number of customers.
Certain mass 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, distributors and
retailers.
In addition, the Company faces intense competition in each of its individual
product categories. In the floral industry, there are various providers of
floral products, none of which is dominant in the industry. The Company's
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, mass merchants and specialty retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food and wine, unique gifts,
children's toys 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, 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.
The Company believes the strength of its brands, product selection, customer
relationships, technology infrastructure and fulfillment capabilities position
it to compete effectively against its current and potential competitors in each
of its 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 the Company's business
and results of operations.
Government Regulation and Legal Uncertainties
The Internet is rapidly evolving and there are laws and regulations directly
applicable to e-commerce. Legislatures are also considering an increasing number
of laws and regulations pertaining to the Internet, including laws and
regulations addressing:
o user privacy;
o pricing;
o content;
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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 the Company's services and increase
its 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 the
Company's business, financial condition and results of operations.
States or foreign countries might attempt to regulate the Company's business or
levy additional sales or other taxes relating to its activities. Because the
Company's products and services are available over the Internet anywhere in the
world, multiple jurisdictions may claim that the Company is required to do
business as a foreign corporation in one or more of those jurisdictions. Failure
to qualify as a foreign corporation in a jurisdiction where the Company is
required to do so could subject it to taxes and penalties. States or foreign
governments may charge the Company with violations of local laws.
Intellectual Property and Proprietary Rights
The Company regards its service marks, trademarks, trade secrets, domain names
and similar intellectual property as critical to its success. The Company has
applied for or received trademark and/or service mark registration for, among
others,"1-800-FLOWERS.COM", "1-800-FLOWERS", "Plow & Hearth", "GreatFood.com",
"The Popcorn Factory", "TheGift.com", "HearthSong", "Magic Cabin", "Winetasting
Network", and "Cheryl&Co.". The Company also has rights to numerous domain
names, including www.1800flowers.com, www.800flowers.com, www.flowers.com,
www.plowandhearth.com, www.greatfood.com, www.thepopcornfactory.com,
www.hearthsong.com, www.magiccabin.com, www.ambrosiawine.com,
www.winetasting.com, and www.cherylandco.com. In addition, the Company has
developed transaction processing and operating systems as well as marketing
data, and customer and recipient information databases.
The Company relies on trademark, unfair competition and copyright law, trade
secret protection and contracts such as confidentiality and license agreements
with its employees, customers, vendors and others to protect its proprietary
rights. Despite the Company's precautions, it may be possible for competitors to
obtain and/or use the Company's proprietary information without authorization or
to develop technologies similar to the Company's 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. The Company's means of protecting its
proprietary rights in the United States or abroad may not be adequate.
The Company intends to continue to license technology from third parties,
including Oracle, Microsoft, MCI and AT&T, for its communications technology and
the software that underlies its business systems. The market is evolving and the
Company may need to license additional technologies to remain competitive. The
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Company may not be able to license these technologies on commercially reasonable
terms or at all.
Third parties have in the past infringed or misappropriated the Company's
intellectual property or similar proprietary rights. The Company believes
infringements and misappropriations will continue to occur in the future. The
Company intends to police against infringement or misappropriation. However, the
Company cannot guarantee it will be able to enforce its rights and enjoin the
alleged infringers from their use of confusingly similar trademarks, service
marks, telephone numbers and domain names.
In addition, third parties may assert infringement claims against the Company.
The Company cannot be certain that its technologies or its products and services
do not infringe valid patents, trademarks, copyrights or other proprietary
rights held by third parties. The Company may be subject to legal proceedings
and claims from time to time relating to its intellectual property and the
intellectual property of others in the ordinary course of its business.
Intellectual property litigation is expensive and time-consuming and could
divert management resources away from running the Company's business.
Employees
As of July 3, 2005, the Company had a total of approximately 3,000 full and
part-time employees. During peak periods, the Company substantially increases
the number of customer service, manufacturing and retail and fulfillment
personnel. The Company's personnel are not represented under collective
bargaining agreements and the Company considers its relations with its employees
to be good.
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Risk Factors that May Affect Future Results
Cautionary Statements Under the Private Securities Litigation Reform Act of 1995
Our disclosures and analysis in this Form 10-K contain some forward-looking
statements that set forth anticipated results based on management's plans and
assumptions. From time to time, we also provide forward-looking statements in
other statements we release to the public as well as oral forward-looking
statements. Such statements give our current expectations or forecasts of future
events; they do not relate strictly to historical or current facts. We have
tried, wherever possible, to identify such statements by using words such as
"anticipate," "estimate," "expect," "project," "intend," "plan, "believe" and
similar expressions in connection with any discussion of future operating or
financial performance. In particular, these include statements relating to
future actions; the effectiveness of our marketing programs; the performance of
our existing products and services; our ability to attract and retain customers
and expand our customer base; our ability to enter into or renew online
marketing agreements; our ability to respond to competitive pressures; expenses,
including shipping costs and the costs of marketing our current and future
products and services; the outcome of contingencies, including legal proceedings
in the normal course of business; and our ability to integrate acquisitions.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risk, uncertainties and potentially
inaccurate assumptions. Should known or unknown risks or uncertainties
materialize, or should underlying assumptions prove inaccurate, actual results
could differ materially from past results and those anticipated, estimated or
projected. You should bear this in mind as you consider forward looking
statements.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our 10-Q and 8-K reports to the SEC. Also note we provide the following
cautionary discussion of risks, uncertainties and possibly inaccurate
assumptions relevant to our business. These are factors that, individually or in
the aggregate, we think could cause our actual results to differ materially from
expected and historical results. We note these factors for investors as
permitted by the Private Securities Litigation Reform Act of 1995. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider the following to be a complete discussion
of all potential risks and uncertainties.
The Company's operating results may fluctuate, and this fluctuation could cause
financial results to be below expectations. The Company's operating results may
fluctuate from period to period for a number of reasons. In budgeting the
Company's operating expenses for the foreseeable future, the Company assumes
that revenues will continue to grow; however, some of the Company's operating
expenses are fixed in the short term. Sales of the Company's products are
seasonal, concentrated in the fourth calendar quarter, due to the Thanksgiving
and Christmas-time holidays, and the second calendar quarter, due to Mother's
Day and Administrative Professionals' Week. In anticipation of increased sales
activity during these periods, the Company hires a significant number of
temporary employees to supplement its permanent staff and the Company increases
its inventory levels. If revenues during these periods do not meet the Company's
expectations, it may not generate sufficient revenue to offset these increased
costs and its operating results may suffer.
The Company's quarterly operating results may significantly fluctuate and you
should not rely on them as an indication of its future results. The Company's
future revenues and results of operations may significantly fluctuate due to a
combination of factors, many of which are outside of management's control.
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The most important of these factors include:
o seasonality;
o the retail economy;
o the timing and effectiveness of marketing programs;
o the timing of the introduction of new products and services;
o the Company's ability to find and maintain reliable sources for
certain of its products;
o the timing and effectiveness of capital expenditures;
o the Company's ability to enter into or renew online marketing agreements;
and
o competition.
The Company may be unable to reduce operating expenses quickly enough to offset
any unexpected revenue shortfall. If the Company has a shortfall in revenue
without a corresponding reduction to its expenses, operating results may suffer.
The Company's operating results for any particular quarter may not be indicative
of future operating results. You should not rely on quarter-to-quarter
comparisons of results of operations as an indication of the Company's future
performance. It is possible that results of operations may be below the
expectations of public market analysts and investors, which could cause the
trading price of the Company's Class A common stock to fall.
Consumer spending on flowers, gifts and other products sold by the Company may
vary with general economic conditions. If general economic conditions
deteriorate and the Company's customers have less disposable income, consumers
may spend less on its products and its quarterly operating results may suffer.
If the Company's customers do not find its expanded product lines appealing,
revenues may not grow and net income may decrease. The Company's business
historically has focused on offering floral and floral-related gift products.
Although the Company has been successful in its expanded product lines including
plants, gift baskets, popcorn, gourmet food and wine, unique or specialty gifts,
home and garden accessories, and children's gifts, it expects to continue to
incur significant costs in marketing these products. If the Company's customers
do not continue to find its product lines appealing, the Company may not
generate sufficient revenue to offset its related costs and its results of
operations may be negatively impacted.
If the Company fails to develop and maintain its brands, it may not increase or
maintain its customer base or its revenues. The Company must continue to develop
and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its
revenues. In addition, the Company has introduced and acquired other brands in
the past, and may continue to do so in the future. The Company believes that the
importance of brand recognition will increase as it expands its product
offerings. Many of the Company's customers may not be aware of the Company's
non-floral products. If the Company fails to advertise and market its products
effectively, it may not succeed in establishing its brands and may lose
customers leading to a reduction of revenues.
The Company's success in promoting and enhancing the 1-800-FLOWERS.COM brands
will also depend on its success in providing its customers high-quality products
and a high level of customer service. If the Company's customers do not perceive
its products and services to be of high quality, the value of the
1-800-FLOWERS.COM brands would be diminished and the Company may lose customers
and its revenues may decline.
A failure to establish and maintain strategic online relationships that generate
a significant amount of traffic could limit the growth of the Company's
business. Although the Company expects a significant portion of its online
customers will continue to come directly to its Web site, it will also rely on
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third party Web sites, search engines and affililates with which the Company has
strategic relationships for traffic. If these third-parties do not attract a
significant number of visitors, the Company may not receive a significant number
of online customers from these relationships and its revenues from these
relationships may decrease or remain flat. There continues to be strong
competition to establish or maintain relationships with leading Internet
companies, and the Company may not successfully enter into additional
relationships, or renew existing ones beyond their current terms. The Company
may also be required to pay significant fees to maintain and expand existing
relationships. The Company's online revenues may suffer if it does not enter
into new relationships or maintain existing relationships or if these
relationships do not result in traffic sufficient to justify their costs.
If local florists and other third-party vendors do not fulfill orders to the
Company's customers' satisfaction, customers may not shop with the Company
again. In many cases, floral orders placed by the Company's customers are
fulfilled by local independent florists, a majority of which are members of
BloomNet(R). The Company does not directly control any of these florists. In
addition, many of the non-floral products sold by the Company are manufactured
and delivered to its 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 the Company's services when placing future orders
and its revenues may decrease.
If a florist discontinues its relationship with the Company, the Company's
customers may experience delays in service or declines in quality and may not
shop with the Company again. Many of the Company's arrangements with local
florists for order fulfillment may be terminated with 10 days notice. If a
florist discontinues its relationship with the Company, the Company will be
required to obtain a suitable replacement located in the same geographic 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, the
Company will be required to incur substantial costs to issue refunds, credits or
replacement products. The Company offers its customers a 100% satisfaction
guarantee on its products. If customers are not satisfied with the products they
receive, the Company will either replace the product for the customer or issue
the customer a refund or credit. The Company's net income would decrease if a
significant number of customers request replacement products, refunds or credits
and the Company is unable to pass such costs onto the supplier.
Increased shipping costs and labor stoppages may adversely affect sales of the
Company's products. Many of the Company's products are delivered to customers
either directly from the manufacturer or from the Company's fulfillment centers
located in California, Illinois, New York, Ohio and Virginia. The Company has
established relationships with Federal Express, United Parcel Service and other
common carriers for the delivery of these products. If these carriers were to
increase the prices they charge to ship the Company's goods, and the Company
passes these increases on to its customers, its customers might choose to buy
comparable products locally to avoid shipping charges. In addition, these
carriers may experience labor stoppages, which could impact the Company's
ability to deliver products on a timely basis to our customers and adversely
affect its customer relationships.
If the Company fails to continuously improve its Web site, it may not attract or
retain customers. If potential or existing customers do not find the Company's
Web site a convenient place to shop, the Company may not attract or retain
customers and its sales may suffer. To encourage the use of the Company's Web
site, it must continuously improve its accessibility, content and ease of use.
Customer traffic and the Company's business would be adversely affected if
competitors' Web sites are perceived as easier to use or better able to satisfy
customer needs.
Competition in the floral, plant, gift basket, gourmet food and wine, specialty
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gift, children's toys and games 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 these categories. In the floral
category, the Company's 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, mass merchants and specialty gift retailers with floral
departments.
Similarly, the plant, gift basket, gourmet food and wine, specialty gift,
children's toys 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 shops, online retailers and mail-order
catalogs.
Competition is intense and the Company expects 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 the
Company's results of operations.
If the Company does not accurately predict customer demand for its products, it
may lose customers or experience increased costs. In the past, the Company did
not need to maintain a significant inventory of products. However, as the
Company expands the volume of non-floral products offered to its customers, the
Company will be required to increase inventory levels and the number of products
maintained in its warehouses. If the Company overestimates customer demand for
its 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 the Company
underestimates customer demand, it may disappoint customers who may turn to its
competitors. Moreover, the strength of the 1-800-FLOWERS.COM brands could be
diminished due to misjudgments in merchandise selection.
If the supply of flowers for sale becomes limited, the price of flowers could
rise or flowers may be unavailable and the Company's revenues and gross margins
could decline. A variety of factors affect the supply of flowers in the United
States and the price of the Company's floral products. If the supply of flowers
available for sale is limited due to weather conditions or other factors, prices
for flowers could rise and customer demand for the Company's floral products may
be reduced, causing revenues and gross margins to decline. Alternatively, the
Company may not be able to obtain high quality flowers in an amount sufficient
to meet customer demand. Even if available, flowers from alternative sources may
be of lesser quality and/or may be more expensive than those currently offered
by the Company.
Most of the flowers sold in the United States are grown by farmers located
abroad, primarily in Colombia, Ecuador and Holland, and the Company expects 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;
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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.
The Company's franchisees may damage its brands or increase its costs by failing
to comply with its franchise agreements or its operating standards. The
Company's franchise business is governed by its Uniform Franchise Offering
Circulars, franchise agreements and applicable franchise law. If the Company's
franchisees do not comply with its established operating standards or the terms
of the franchise agreements, the 1-800-FLOWERS.COM brands may be damaged. The
Company may incur significant additional costs, including time-consuming and
expensive litigation, to enforce its rights under the franchise agreements.
Additionally, the Company is the primary tenant on certain leases, which the
franchisees sublease from the Company. If a franchisee fails to meet its
obligations as subtenant, the Company could incur significant costs to avoid
default under the primary lease. Furthermore, as a franchiser, the Company has
obligations to its franchisees. Franchisees may challenge the performance of the
Company's obligations under the franchise agreements and subject it 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 the Company loses the right to use its phone numbers, its brands may be
damaged and it may lose sales. The Company's Internet domain names are an
important aspect of its brand recognition. The Company cannot practically
acquire rights to all domain names similar to www.1800flowers.com, or its other
brands, whether under existing top level domains or those issued in the future.
If third parties obtain rights to similar domain names, these third parties may
confuse the Company's customers and cause its customers to inadvertently place
orders with these third parties, which could result in lost sales and could
damage its brands.
Likewise, the phone number that spells 1-800-FLOWERS is important to the
Company's brand and its business. While the Company has obtained the right to
use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as
common toll-free "FLOWERS" misdials, it 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 the Company's customers and
cause lost sales and potential damage to its brands. In addition, under
applicable FCC rules, ownership rights to phone numbers cannot be acquired.
Accordingly, the FCC may rescind the Company's right to use any of its phone
numbers, including 1-800-FLOWERS (1-800-356-9377).
A lack of security over the Internet may cause Internet usage to decline and
cause the Company 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. Additionally, computer "viruses" may cause the
Company's systems to incur delays or experience other service interruptions.
Such interruptions may materially impact the Company's ability to operate its
business. If a computer virus affecting the Internet in general is highly
publicized or particularly damaging, the Company's customers may not use the
Internet or may be prevented from using the Internet, which would have an
adverse effect on its revenues. As a result, the Company may be required to
expend capital and resources to protect against or to alleviate these problems.
18
<PAGE>
Unexpected system interruptions caused by system failures may result in reduced
revenues and harm to the Company's brand. In the past, particularly during peak
holiday periods, the Company has experienced significant increases in traffic on
its Web site and in its toll-free customer service centers. The Company's
operations are dependent on its ability to maintain its computer and
telecommunications systems in effective working order and to protect its systems
against damage from fire, natural disaster, power loss, telecommunications
failure or similar events. The Company's systems have in the past, and may in
the future, experience:
o system interruptions;
o long response times; and
o degradation in service.
The Company's business depends on customers making purchases on its systems, its
revenues may decrease and its reputation could be harmed if it experiences
frequent or long system delays or interruptions or if a disruption occurs during
a peak holiday season.
If AT&T and MCI do not adequately maintain the Company's telephone service, the
Company may experience system failures and its revenues may decrease. The
Company is dependent on AT&T and MCI to provide telephone services to its
customer service centers. Although the Company maintains redundant
telecommunications systems, if AT&T and MCI experience system failures or fail
to adequately maintain the Company's systems, the Company may experience
interruptions and its customers might not continue to utilize its services. If
the Company loses its telephone service, it will be unable to generate revenue.
The Company's future success depends upon these third-party relationships
because it does not have the resources to maintain its telephone service without
these or other third parties. Failure to maintain these relationships or replace
them on financially attractive terms may disrupt the Company's operations or
require it to incur significant unanticipated costs.
Interruptions in FTD's Mercury system or Teleflora's Dove System or a reduction
in the Company's access to these systems may disrupt order fulfillment and
create customer dissatisfaction. A small portion of the Company's customers'
orders are communicated to the fulfilling florist through these third party
systems. These systems are order processing and messaging networks used to
facilitate the transmission of floral orders between florists. These systems
have in the past experienced interruptions in service. If these systems
experience interruptions in the future, the Company could experience
difficulties in fulfilling some of its customers' orders and those customers
might not continue to shop with the Company.
The Company's operating results may suffer due to economic, political and social
unrest or disturbances. Like other American businesses, the Company is unable to
predict what long-term effect, acts of terrorism, war, or similar unforeseen
events, may have on its business. The Company's results of operations and
financial condition could be adversely impacted if such events cause an economic
slowdown in the United States, or other negative effects that cannot now be
anticipated.
If the Company is unable to hire and retain key personnel, its business may
suffer. The Company's success is dependent on its ability to hire, retain and
motivate highly qualified personnel. In particular, the Company's success
depends on the continued efforts of its Chairman and Chief Executive Officer,
James F. McCann, and its President, Christopher G. McCann, as well as its senior
management team which help manage its business. The loss of the services of any
of the Company's executive management or key personnel or its inability to
attract qualified additional personnel could cause its business to suffer and
force it to expend time and resources in locating and training additional
personnel.
19
<PAGE>
Many governmental regulations may impact the Internet, which could affect the
Company's 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 the Company's Web site. The Company expects 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 the
Company's products, increase its costs or otherwise adversely affect its
business.
Regulations imposed by the Federal Trade Commission may adversely affect the
growth of the Company's Internet business or its 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 the Company 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 the Company. 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. The Company may become a party to a similar
investigation, or the Federal Trade Commission's regulatory and enforcement
efforts, or those of other governmental bodies, may adversely affect its ability
to collect demographic and personal information from users, which could
adversely affect its marketing efforts.
Unauthorized use of the Company's intellectual property by third parties may
damage its brands. Unauthorized use of the Company's intellectual property by
third parties may damage its brands and its reputation and may likely result in
a loss of customers. It may be possible for third parties to obtain and use the
Company's intellectual property without authorization. Third parties have in the
past infringed or misappropriated the Company's intellectual property or similar
proprietary rights. The Company believes 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 Company may be unable to register its
intellectual property in some foreign countries and, furthermore, 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 the Company is not successful, could disrupt its ability to conduct
business. The Company cannot be certain that the products it sells, or services
it offers, do not or will not infringe valid patents, trademarks, copyrights or
other intellectual property rights held by third parties. The Company 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 its business. The Company may
incur substantial expense in defending against these third-party infringement
claims, regardless of their merit. Successful infringement claims against the
Company may result in substantial monetary liability or may materially disrupt
its ability to conduct business.
The Company may lose sales or incur significant expenses should states be
successful in imposing broader guidelines to state sales and use taxes. In
addition to the Company's retail store operations, the Company collects sales or
other similar taxes in states where the Company's online and telephonic sales
20
<PAGE>
channels have applicable nexus. Our customer service and fulfillment networks,
and any further expansion of those networks, along with other aspects of our
evolving business, may result in additional sales and use tax obligations. A
successful assertion by one or more states that we should collect sales or other
taxes on the sale of merchandise could result in substantial tax liabilities for
past sales, decrease our ability to compete with traditional retailers, and
otherwise harm our business.
Currently, decisions of the U.S. Supreme Court restrict the imposition of
obligations to collect state and local sales and use taxes with respect to sales
made over the Internet. However, a number of states, as well as the U.S.
Congress, have been considering various initiatives that could limit or
supersede the Supreme Court's position regarding sales and use taxes on Internet
sales. If any of these initiatives addressed the Supreme Court's constitutional
concerns and resulted in a reversal of its current position, we could be
required to collect additional sales and use taxes. The imposition by state and
local governments of various taxes upon Internet commerce could create
administrative burdens for us and could decrease our future sales.
A failure to integrate our acquisitions may cause the results of the acquired
company to suffer as well as the results of the Company. The Company has
opportunistically acquired several companies over the past several years. As
part of the acquisition process, the Company embarks upon a project management
effort to integrate the acquisition onto our information technology systems and
management processes. If we are unsuccessful in integrating our acquisitions,
the results of our acquisitions may suffer, management may have to divert
valuable resources to oversee and manage the acquisitions, the Company may have
to expend additional investments in the acquired company to upgrade personnel
and/or information technology systems and the results of the Company may suffer.
Product liability claims may subject the Company to increased costs. Several of
the products the Company sells, including perishable food and alcoholic beverage
products, home and garden products, or children's toys may expose it to product
liability claims in the event that the use or consumption of these products
results in personal injury. Although the Company has not experienced any
material losses due to product liability claims to date, it 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 the Company's reputation and its brands. Although the Company
maintains insurance against product liability claims, its coverage may be
inadequate to cover any liabilities it may incur.
The wine industry is subject to governmental regulation. The alcoholic beverage
industry is subject to extensive specialized regulation under state and federal
laws and regulations, including the following matters: licensing; the payment of
excise taxes; advertising, trade and pricing practices; product labeling; sales
to minors and intoxicated persons; changes in officers, directors, ownership or
control; and, relationships among product producers, importers, wholesalers and
retailers. While the Company believes that it is in material compliance with all
applicable laws and regulations, in the event that it should be determined that
the Company is not in compliance with any applicable laws or regulations, the
Company could become subject to cease and desist orders, injunctive proceedings,
civil fines, license revocations and other penalties which could have a material
adverse effect on the Company's business and its results of operations.
In addition, the alcoholic beverage industry is subject to potential legislation
and regulation on a continuous basis including in such areas as direct and
Internet sales of alcohol. Certain states still prohibit the sale of alcohol
into their jurisdictions from out of state wineries and/or retailers. There can
be no assurance that new or revised laws or regulations, increased licensing
fees, specialized taxes or other regulatory requirements will not have a
material adverse effect on the Company's business and its results of operations.
While to date the Company has been able to obtain and retain licenses necessary
to sell wine at retail, the failure to obtain renewals or otherwise retain such
licenses in one or more of the states in which
21
<PAGE>
the Company operates would have a material adverse effect on the Company's
business and its results of operations. The Company's growth strategy for its
wine business includes expansion into additional states; however, there can be
no assurance that the Company will be successful in obtaining the required
permits or licenses in any additional states. From time to time, the Company may
introduce new marketing initiatives, which may be expected to undergo regulatory
scrutiny. There can be no assurance that such initiatives will not be stymied by
regulatory criticism.
The Company is dependent on common carriers to deliver its wine shipments. The
Company uses FedEx and UPS to deliver its wine shipments. If FedEx or UPS were
to terminate delivery services for alcoholic beverages in certain states, as it
did in 1999 in Florida, Nevada and Connecticut, the Company would likely incur
significantly higher shipping rates that would have a material adverse effect on
the Company's business and its results of operations. If any state prohibits or
limits intrastate shipping of alcoholic beverages by third party couriers, the
Company would likely incur significantly higher shipping rates that would have a
material adverse effect on the Company's business and its results of operations.
There are various health issues regarding wine consumption. Since 1989, federal
law has required health-warning labels on all alcoholic beverages. Although an
increasing number of research studies suggest that health benefits may result
from the moderate consumption of wine, these suggestions have been widely
challenged and a number of groups advocate increased governmental action to
restrict consumption of alcoholic beverages. Restrictions on the sale and
consumption of wine or increases in the taxes imposed on wine in response to
concerns regarding health issues may have a material adverse effect on the
Company's business and operating results. There can be no assurance that there
will not be legal or regulatory challenges to the industry as a whole, and any
such legal or regulatory challenge may have a material adverse effect on the
Company's business and results of operations.
The price at which the Company's Class A common stock will trade may be highly
volatile and may fluctuate substantially. The stock market has from time to time
experienced 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 the
Company's Class A common stock, regardless of the Company's 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. The Company 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, and as such, could have a material
adverse effect on the Company's business and its results of operations.
Additional Information
The Company's internet address is www.1800flowers.com. We make available,
through the investor relations tab located on our website at
www.1800flowers.com, access to our annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934 as soon as reasonably practicable after they are electronically
filed with or furnished to the Securities and Exchange Commission. All such
filings on our investor relations website are available free of charge. A copy
of this annual report on Form 10-K is available without charge upon written
request to: Investor Relations, 1-800-FLOWERS.COM, Inc., 1600 Stewart Avenue,
Westbury, NY 11590.
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<PAGE>
Item 2. PROPERTIES
<TABLE>
<S> <C> <C> <C> <C>
Square
Location Type Principal Use Footage Ownership
---------------------- -------------------- ------------------------------------------------ --------------- ---------------
Westbury, NY Office Headquarters and customer service* 77,000 leased
Alamogordo, NM Office Customer service 23,000 owned
Ardmore, OK Office Customer service 24,000 leased
Madison, VA Office and Distribution, administrative and customer
warehouse service 300,000 owned
Lake Forest, IL Office, plant and Manufacturing, distribution and administrative
warehouse 148,000 leased
Vandalia, OH Warehouse Distribution 200,000 owned
Westerville, OH Office, plant and Manufacturing, distribution and administrative
warehouse 51,000 owned
Westerville, OH Office and
warehouse Distribution and customer service 25,000 leased
Obetz, OH Warehouse Distribution 79,000 leased
Napa, CA Office and Distribution, administrative and customer
warehouse service 68,000 leased
</TABLE>
* The Company is currently in the process of relocating its Corporate
Headquarters to a 90,000 square foot leased facility in Carle Place,
New York.
In addition to the above properties, the Company leases approximately 289,000
square feet for owned or franchised retail stores and local fulfillment centers
with lease terms typically ranging from 5 to 20 years. Some of its leases
provide for a minimum rent plus a percentage rent based upon sales after certain
minimum thresholds are achieved. The leases generally require the Company to pay
insurance, utilities, real estate taxes and repair and maintenance expenses. In
general, our properties are well maintained, adequate and suitable for their
purposes.
Item 3. LEGAL PROCEEDINGS
There are various claims, lawsuits, and pending actions against the Company
incident to the operations of its businesses. It is the opinion of management,
after consultation with counsel, that the ultimate resolution of such claims,
lawsuits and pending actions will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals were serving as executive officers of the Company and
certain of its subsidiaries on September 15, 2005:
<TABLE>
<S> <C> <C>
Name Age Position with the Company
- ------------------------------------------------ -------------------------------------------------
James F. McCann........................... 54 Chairman of the Board and Chief Executive Officer
Christopher G. McCann..................... 44 Director and President
T. Guy Minetti............................ 54 Director and Vice Chairman
Gerard M. Gallagher....................... 52 Senior Vice President, General Counsel, Corporate
Secretary
Thomas G. Hartnett........................ 41 Senior Vice President of Retail and Fulfillment
Tim Hopkins............................... 51 President of Specialty Brands Division
Vincent J. McVeigh........................ 44 Senior Vice President
Enzo J. Micali............................ 46 Senior Vice President of Information Technology and
Chief Information Officer
Peter G. Rice............................. 59 President of The Plow & Hearth, Inc.
William E. Shea........................... 46 Senior Vice President of Finance and Administration,
Treasurer, Chief Financial Officer
Monica Woo................................ 49 Chief Marketing Officer
</TABLE>
James F. McCann has served as the Company's Chairman of the Board and Chief
Executive Officer since inception. Mr. McCann has been in the floral industry
since 1976 when he began a retail chain of flower shops in the New York
metropolitan area. Mr. McCann is a member of the board of directors of Gtech
Corporation, Willis Holdings Group and Boyd's Collection. James F. McCann is the
brother of Christopher G. McCann, a Director and the President of the Company.
Christopher G. McCann has been the Company's President since September 2000 and
prior to that had served as the Company's Senior Vice President. Mr. McCann has
been a Director of the Company since inception. Mr. McCann serves on the board
of directors of Neoware, Inc., Bluefly, Inc. and is a member of the Board of
Trustees of Marist College. Christopher G. McCann is the brother of James F.
McCann, the Company's Chairman of the Board and Chief Executive Officer.
T. Guy Minetti has been a Director of the Company since December 1993 and became
the Company's Vice Chairman in September 2000. Mr. Minetti serves on the board
of directors of Misonix Inc., a medical device and industrial product company.
In March 1989, Mr. Minetti founded Bayberry Advisors, an investment banking
firm, and prior thereto, Mr. Minetti was a Managing Director at Kidder, Peabody
& Company.
Gerard M. Gallagher has been our Senior Vice President, General Counsel and
Corporate Secretary since August 1999 and has been providing legal services to
the Company since its inception. Mr. Gallagher is the founder and a managing
partner in the law firm Gallagher, Walker, Bianco and Plastaras, based in
24
<PAGE>
Mineola, New York, specializing in corporate, litigation and intellectual
property matters since 1993. Mr. Gallagher is duly admitted to practice before
the New York State Courts and the United States District Courts of both the
Eastern District and Southern District of New York.
Thomas G. Hartnett has been our Senior Vice President of Retail and Fulfillment
since September 2000. Before holding this position, Mr. Hartnett held various
positions within the Company since joining the Company in 1991, including
Controller, Director of Store Operations, Vice President of Retail Operations
and most recently as Vice President of Strategic Development.
Tim Hopkins has been our President of the Specialty Brands division since March
2005. Before holding this position, Mr. Hopkins was employed with Sur La Table,
Inc., a multi-channel upscale specialty retailer of gourmet culinary and
serveware products, and served as its Chief Executive Officer and Director since
2001. Prior to joining Sur La Table, Inc., Mr. Hopkins was employed with Le
Gourmet Chef, Inc., a national retailer of gourmet foods and served as its Chief
Executive Officer, President and Director since 2000.
Vincent J. McVeigh has been our Senior Vice President since October 2000. Before
holding this position, Mr. McVeigh held various positions within the Company
since joining the Company in 1991, including Bloomnet Manager, Director of Call
Center Operations and as Vice President of Merchandising.
Enzo J. Micali has been our Senior Vice President of Information Technology and
Chief Information Officer since December 2000. Prior to joining the Company, Mr.
Micali served as Chief Technology Officer for InsLogic. Prior to joining
InsLogic, Mr. Micali spent 12 years in various technology management positions
with J.P. Morgan Chase & Co., formerly Chase Manhattan.
Peter G. Rice, President of The Plow & Hearth, Inc., was co-founder of The Plow
& Hearth, Inc. and served as its President and Chairman of the Board since its
inception in November 1980. Mr. Rice was founder of Blue Ridge Mountain Sports,
a chain of retail backpacking/outdoor stores, and co-founder of Phoenix
Products, a manufacturer of kayaks. He is a member of the Catalog Advisory
Committee of the Direct Marketing Association and a past director of the New
England Mail Order Association and of the U.S. Senate Productivity and Quality
Award Board for Virginia.
William E. Shea has been our Senior Vice President of Finance and Administration
and Chief Financial Officer since September 2000. Before holding his current
position, Mr. Shea was our Vice President of Finance and Corporate Controller
after joining us in April 1996. From 1980 until joining us, Mr. Shea was a
certified public accountant with Ernst & Young LLP.
Monica L.Woo has been our Chief Marketing Officer since January 2004. Prior to
joining the Company, Ms. Woo had founded a successful consulting practice
focusing on growth strategies for such multi-national clients as Deutsche Bank,
Northwest Airlines and Campbell's Soup. Prior to that, Ms. Woo was the President
of Bacardi Global Brands, Inc., of Bacardi Limited. Before holding this
position, Ms. Woo had assumed a number of senior executive positions in the
financial services and consumer packaged goods sectors, including the Global
Marketing Director of Citibank On-line and the Citibank Private Bank, and the
Sr. Vice President, European Marketing Director of Diageo PLC.
25
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
1-800-FLOWERS.COM's Class A common stock trades on The Nasdaq National Stock
Market under the ticker symbol "FLWS." There is no established public trading
market for the Company's Class B common stock. The following table sets forth
the reported high and low sales prices for the Company's Class A common stock
for each of the fiscal quarters during the fiscal years ended July 3, 2005 and
June 27, 2004.
<TABLE>
<S> <C> <C>
High Low
-------------- --------------
Year ended July 3, 2005
June 28, 2004 - September 26, 2004 $ 9.64 $ 7.01
September 27, 2004 - December 26, 2004 $ 8.95 $ 7.44
December 27, 2004 - March 27, 2005 $ 8.75 $ 7.20
March 28, 2005 - July 3, 2005 $ 7.83 $ 6.52
Year ended June 27, 2004
June 30, 2003 - September 28, 2003 $ 10.14 $ 7.55
September 29, 2003 - December 28, 2003 $ 12.14 $ 7.48
December 29, 2003 - March 28, 2004 $ 12.10 $ 8.90
March 29, 2004 - June 27, 2004 $ 11.15 $ 9.08
</TABLE>
Rights of Common Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
Holders
As of September 8, 2005, there were approximately 267 stockholders 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 8, 2005,
there were approximately 16 stockholders of record of the Company's Class B
common stock.
Dividend Policy
Although the Company has never declared or paid any cash dividends on its Class
A or Class B common stock, the Company anticipates that it will generate
increasing free cash flow in excess of its capital investment requirements. As
26
<PAGE>
such, although the Company has no current intent to do so, the Company may
choose, at some future date, to use some portion of its cash for the purpose of
cash dividends.
Resales of Securities
39,937,834 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 8, 2005, all of such shares of
the Company's common stock could be sold in the public market pursuant to and
subject to the limits set forth in Rule 144. Sales of a large number of these
shares could have an adverse effect on the market price of the Company's Class A
common stock by increasing the number of shares available on the public market.
Purchases of Equity Securities by the Issuer
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. As of July 3, 2005, the
Company had repurchased 1,328,050 shares of Class A common stock for $9.8
million, all of which was repurchased during the fiscal year ending July 3,
2005.
The following table sets forth, for the months indicated, the Company's purchase
of Class A common stock during the fiscal year ending July 3, 2005, which
includes the period June 28, 2004 through July 3, 2005.
<TABLE>
<S> <C> <C> <C> <C>
Total Number of Dollar Value of
Shares Purchased Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Plans Under the Plans or
Period Purchased Paid Per Share or Programs Programs
- --------------------------- ------------------ ------------------ --------------------- ----------------------
(in thousands, except average price paid per share)
6/28/04 - 7/25/04 - - - $10,000
7/26/04 - 8/22/04 50.0 $7.43 50.0 $9,626
8/23/04 - 9/26/04 103.7 $7.73 103.7 $8,820
9/27/04 - 10/24/04 86.6 $8.44 86.6 $8,085
10/25/04 - 11/21/04 33.0 $8.22 33.0 $7,812
11/22/04 - 12/26/04 - $- - $7,812
12/27/04 - 1/23/05 - $- - $7,812
1/24/05 - 2/20/05 - $- - $7,812
2/21/05 - 3/27/05 - $- - $7,812
3/28/05 - 4/24/05 - $- - $7,812
4/25/05 - 5/22/05 451.7 $6.98 451.7 $14,641
5/23/05 - 7/3/05 603.1 $7.31 603.1 $10,187
------------------ ------------------ ---------------------
Total 1,328.1 $7.35 1,328.1
================== ================== =====================
</TABLE>
27
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected consolidated statement of income data for the years ended July 3,
2005, June 27, 2004 and June 29, 2003 and the consolidated balance sheet data as
of July 3, 2005 and June 27, 2004, 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 income data for the years
ended June 30, 2002 and July 1, 2001, and the selected consolidated balance
sheet data as of June 29, 2003, June 30, 2002 and July 1, 2001, 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 income
and balance sheet data. The Company acquired Cheryl & Co. in March 2005, The
Winetasting Network in November 2004, The Popcorn Factory in May 2002, and The
Children's Group in June 2001. The following financial data reflects the results
of operations of these subsidiaries since their respective dates of acquisition.
This information should be read together with the discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes to those statements
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<S> <C> <C> <C> <C> <C>
Years ended
----------------------------------------------------------------------
July 3, June 27, June 29, June 30, July 1,
2005 2004 2003 2002 2001
------------ ------------- ------------- ------------ --------------
(in thousands, except per share data)
Consolidated Statement of Income Data:
Net revenues:
Online $ 360,902 $ 307,470 $ 265,278 $ 218,179 $ 182,924
Telephonic 259,929 263,039 271,071 248,931 230,723
Retail/fulfillment 49,848 33,469 29,269 30,095 28,592
------------ ------------- ------------- ------------ --------------
Total net revenues 670,679 603,978 565,618 497,205 442,239
Cost of revenues 395,028 351,111 324,565 293,269 267,779
------------ ------------- ------------- ------------ --------------
Gross profit 275,651 252,867 241,053 203,936 174,460
Operating expenses:
Marketing and sales 198,935 172,251 170,013 150,638 154,321
Technology and development 14,757 13,799 13,937 13,723 16,853
General and administrative 35,572 30,415 29,593 28,179 27,043
Depreciation and amortization 14,489 14,992 15,389 15,061 21,716
------------ ------------- ------------- ------------ --------------
Total operating expenses 263,753 231,457 228,932 207,601 219,933
------------ ------------- ------------- ------------ --------------
Operating income (loss) 11,898 21,410 12,121 (3,665) (45,473)
Other income, net 1,349 320 117 1,448 4,152
------------ ------------- ------------- ------------ --------------
Income (loss) before income taxes 13,247 21,730 12,238 (2,217) (41,321)
Income taxes (benefit) 5,398 (19,174) - (706) -
------------ ------------- ------------- ------------ --------------
Net income (loss) $ 7,849 $40,904 $ 12,238 $ (1,511) $ (41,321)
============ ============= ============= ============ ==============
Net income (loss) per common share:
Basic $0.12 $0.62 $0.19 $(0.02) $(0.64)
============ ============= ============= ============ ==============
Diluted $0.12 $0.60 $0.18 $(0.02) $(0.64)
============ ============= ============= ============ ==============
Shares used in the calculation of net income
(loss) per common share:
Basic 66,038 65,959 65,566 64,703 64,197
============ ============= ============= ============ ==============
Diluted 67,402 68,165 67,670 64,703 64,197
============ ============= ============= ============ ==============
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
As of
-------------- -------------- -------------- --------------- -------------
July 3, 2005 June 27, 2004 June 29, 2003 June 30, 2002 July 1, 2001
-------------- -------------- -------------- --------------- -------------
(in thousands)
Consolidated Balance Sheet Data:
Cash and equivalents and short-term investments $ 46,608 $103,374 $ 61,218 $63,399 $63,896
Working capital 41,692 83,704 26,875 23,301 27,409
Investments-non current - 8,260 19,471 9,591 16,284
Total assets 251,952 261,552 214,796 207,157 195,257
Long-term liabilities 5,900 8,874 12,820 15,939 16,029
Total stockholders' equity 186,334 186,390 137,288 123,908 117,816
</TABLE>
29
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
For more than 25 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice(sm)" -
has been providing customers across the nation with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers delivered through its Fresh From Our Growers(sm)
program.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. Gift advisors are available 24/7, and fast
and reliable delivery is offered same day, any day. As always, 100 percent
satisfaction and freshness is guaranteed. The 1-800-FLOWERS.COM collection of
brands also includes home and garden merchandise from Plow & Hearth(R)
(1-800-627-1712 or www.plowandhearth.com); premium popcorn and specialty treats
from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com);
exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or
www.cherylandco.com); gourmet foods from GreatFood.com(R) (www.greatfood.com);
children's gifts from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com) and wine gifts from The Winetasting Network(R)
(www.ambrosiawine.com and www.winetasting.com). 1-800-FLOWERS.COM, Inc. stock is
traded on the NASDAQ market under ticker symbol FLWS.
Most of the Company's floral orders are fulfilled through BloomNet(R) (comprised
of independent florists operating retail flower shops and Local Fulfillment or
Design Centers ("LFC's"), Company-owned stores and fulfillment centers and
franchise stores). The Company transmits its orders either through BloomLink(R),
its proprietary Internet-based electronic communication system, or the
communication system of a third-party. A portion of the Company's floral and
gift merchandise, as well as its home and garden merchandise, non-floral gift
products and gourmet food merchandise, are shipped by the Company, members of
BloomNet(R), or third parties directly to the customer using common carriers.
Most of the Company's home and garden products are fulfilled from its Madison,
Virginia fulfillment center or its Vandalia, Ohio distribution facility, while
the Company's children's merchandise is fulfilled from its Vandalia facility.
The Company's gourmet popcorn and related merchandise is produced and fulfilled
primarily from its Lake Forest, Illinois manufacturing facility. Cookies and
related gifts are baked and fulfilled from the Company's Westerville, Ohio
facility, while winery services and wine gifts are shipped from its distribution
facility in Napa, California or through third-parties.
As of July 3, 2005, the Company-owned retail fulfillment operations consisted of
34 retail stores and 8 fulfillment centers. Retail fulfillment revenues also
includes fees paid to the Company by, and the sale of wholesale products by the
Company to, members of its BloomNet(R) network as well as distribution service
fees for its winery fulfillment operations, wholesale bakery product revenue,
and royalties, fees and sublease rent paid to the Company by its 83 franchise
stores. Company-owned stores serve as local points of fulfillment and enable the
Company to test new products and marketing programs. As such, a significant
percentage of the revenues derived from Company-owned stores and fulfillment
centers represent fulfillment of its telephonic and online sales channel floral
orders and are eliminated as inter-company revenues.
30
<PAGE>
Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal year 2005, which ended on July 3, 2005, consisted of
53 weeks, while fiscal years 2004 and 2003, which ended on June 27, 2004 and
June 29, 2003, respectively, consisted of 52 weeks.
Net Revenues
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
Online $360,902 17.4% $307,470 15.9% $265,278
Telephonic 259,929 (1.2%) 263,039 (3.0%) 271,071
Retail/fulfillment 49,848 48.9% 33,469 14.3% 29,269
------ ------ ------
$670,679 11.0% $603,978 6.8% $565,618
======== ======== ========
</TABLE>
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined telephonic and online revenue growth of 8.8% and 6.4% during the fiscal
years ended July 3, 2005 and June 27, 2004, respectively, was due to an increase
in order volume resulting from: (i) the Company's strong brand name recognition,
(ii) continued leveraging of its existing customer base, (iii) increased
spending on its marketing and selling programs, designed to improve customer
acquisition and accelerate top-line growth, and (iv) the turnaround of the home
and garden gift category, which implemented a revised marketing plan to enhance
its product offerings, and improve the creative look and feel of its catalogs
after experiencing a decline in sales during fiscal 2004. In addition, revenues
were favorably impacted by the incremental revenue from Cheryl & Co., a
manufacturer of cookies and baked gifts, which was acquired in March 2005, and
the inclusion of an additional week of sales, as fiscal year 2005 consisted of
53 weeks. During the fiscal year ended June 27, 2004, the Company's combined
telephonic and online sales channels experienced strong growth in the floral and
complementary gift categories of gourmet food gifts, such as the Popcorn Factory
line of products, gift baskets and children's gifts, but this growth was
partially offset by slower sales in the home and garden gift category as a
result of internal marketing and merchandising issues, as well as increasingly
competitive market conditions.
The Company fulfilled approximately 10,213,000, 9,322,000, and 8,681,000 orders
through its combined telephonic and online sales channels during the fiscal
years ended July 3, 2005, June 27, 2004, and June 29, 2003, respectively,
representing increases of 9.6% and 7.4% over the respective prior fiscal years.
Order volume through the Company's online sales channel increased 17.5% and
15.6%, during the years ended July 3, 2005 and June 27, 2004, respectively, as a
result of improved conversion of qualified traffic through the Company's
Websites, and increased marketing efforts through search engines and affiliates.
The continued migration of customers from the Company's telephonic sales channel
also contributed to the growth within the online sales channel, resulting in the
order volume decreases of 1.1% and 1.9% experienced by the telephonic sales
channel during the fiscal years ending July 3, 2005 and June 27, 2004. The
Company's combined telephonic and online sales channel average order value has
declined slightly as a result of product mix, and was $60.79 during fiscal 2005,
compared with $61.20 in fiscal 2004 and $61.79 during fiscal 2003.
The Company's online sales channel contributed 58.1%, 53.9% and 49.5% of the
total combined telephonic and online revenues during the fiscal years ended July
3, 2005, June 27, 2004 and June 29, 2003, respectively. The Company intends to
31
<PAGE>
continue to drive revenue growth through its online sales channel and continue
the migration of its customers from the telephone to the Web for several
important reasons: (i) online orders are less expensive to process than
telephonic orders, (ii) online customers can view the Company's full range of
gift offerings, including non-floral gifts, which in many cases yield higher
gross margin opportunities, (iii) online customers can utilize all of the
Company's services, such as the various gift search functions, order status
check and reminder service, thereby deepening the relationship with its
customers and leading to increased order rates, and (iv) when customers visit
the Company online, it provides an opportunity to interact with them in an
electronic dialog via cost efficient marketing programs.
Retail/fulfillment revenues for the fiscal years ended July 3, 2005 and June 27,
2004 increased in comparison to the prior years, primarily as a result of
increased membership and sales of products to the Company's BloomNet(R) members.
Additionally, during fiscal 2005 the Company generated winery services revenue
via its November 2004 acquisition of The Winetasting Network and retail and
wholesale bakery product revenue via its March 2005 acquisition of Cheryl & Co.
At the start of the second half of fiscal 2005, the Company initiated a strategy
designed to extend the Company's leadership position in the floral and
thoughtful gift marketplace, and implemented plans to increase its marketing
spending to drive increased customer acquisition particularly in the core floral
gift category. As a result, during the fiscal year ended July 3, 2005,
non-floral gift products accounted for 47.3% of total combined telephonic and
online net revenues, compared to 47.8% and 49.5% during the years ended June 27,
2004 and June 29, 2003, respectively. The Company intends to continue to execute
against this plan, and in addition to increasing its media presence, the Company
will expand its BloomNet business-to-business floral operations, build out its
technology platform, and increase the depth of its marketing programs and
personnel within its recently acquired wine gift business and cookies and baked
goods product line which support the Company's growing gourmet gift and gift
basket product line. While the Company believes that these investments will
impact the Company's earnings growth over the short term, over the longer term,
the Company believes that this strategy will enable it to achieve sustainable
double digit revenue growth and provide further leverage within its business
model and therefore improved profitability.
Gross Profit
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Gross profit $275,651 9.0% $252,867 4.9% $241,053
Gross margin % 41.1% 41.9% 42.6%
</TABLE>
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (primarily fees paid directly to
florists), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and associated costs including inbound and outbound
shipping charges. Additionally, cost of revenues include labor and facility
costs related to direct-to-consumer merchandise operations, as well as facility
costs on properties that are sublet to the Company's franchisees. Gross profit
increased during the fiscal years ended July 3, 2005 and June 27, 2004, as a
result of increased order volume from the Company's online and retail
fulfillment sales channels, and the incremental gross profit associated with the
acquisitions of Cheryl & Co. in March 2005 and The Winetasting Network in
November 2004. During the fiscal years ended July 3, 2005 and June 27, 2004
32
<PAGE>
gross margin percentage declined by 80 and 70 basis points, respectively, over
the prior fiscal years, due to a combination of product mix, increased
promotional pricing, and increased carrier fuel surcharges and shipping costs
associated with the Monday placement of the Valentine's Day Holiday.
During fiscal 2006, although varying by quarter due to seasonal changes in
product mix, the Company expects that its gross margin percentage will improve
primarily through the continued growth of its higher margin specialty brand gift
categories, including the recent acquisition of Cheryl & Co., and through
improved sourcing, pricing initiatives and customer service and fulfillment
enhancements which are expected to mitigate continued pressure on shipping
costs.
Marketing and Sales Expense
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Marketing and sales $198,935 15.5% $172,251 1.3% $170,013
Percentage of sales 29.7% 28.5% 30.1%
</TABLE>
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. Marketing and sales expense increased during the year ended July 3,
2005 as a result of the Company's efforts to increase new customer acquisition
and accelerate top-line growth through increased spending on media, as well as
adding personnel to expand its BloomNet business-to-business floral operations.
Partially funding the increased spending were volume related operating
efficiencies, and a continued reduction of order processing costs. As a result
of the Company's cost-efficient customer retention programs, of the 6,182,000
customers who placed orders during the year ended July 3, 2005, approximately
46.4% represented repeat customers compared to 45.0% in fiscal 2004 and 42.4% in
fiscal 2003. In addition, as a result of the Company's strategic initiative to
increase its marketing and selling efforts, specifically, in its core floral
gift business, the Company added 3,311,000 new customers in fiscal 2005 compared
with 3,141,000 and 3,106,000 in fiscal 2004 and fiscal 2003, respectively.
Marketing and sales expense decreased as a percentage of net revenue during the
year ended June 27, 2004 in comparison to the prior fiscal year as a result of
volume related efficiencies and reduced order processing costs, as well as a net
reduction in advertising cost per order, resulting from a shift in product mix
to floral products, which enabled it to proportionately reduce the circulation
of higher cost per order catalogs in favor of lower cost media and online
advertising.
The Company expects to increase its marketing and sales spending in order to
accelerate its rate of new customer acquisition, while also leveraging its
already significant customer base through cost effective, customer retention
initiatives. Such spending will include an increasing presence in online search
and affiliate relationships, as well as in direct marketing and broadcast
advertising programs. In addition, the Company plans to continue to add
personnel to grow its BloomNet membership and support the anticipated growth of
its recently acquired wine business. As a result, over the short term the
Company expects that marketing and sales expense, as a percentage of revenue,
will be consistent with the prior year.
33
<PAGE>
Technology and Development Expense
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Technology and development $14,757 6.9% $13,799 (1.0)% $13,937
Percentage of sales 2.2% 2.3% 2.5%
</TABLE>
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Technology and development expense increased
during the year ended July 3, 2005, primarily as a result of the incremental
expenses associated with the acquisition of The Winetasting Network in November
2004 and Cheryl & Co. in March 2005, as well as for increases in the cost of
maintenance and license agreements required to support the Company's technology
platform. During the fiscal year ended June 27, 2004 technology and development
expense decreased as a percentage of net revenue and in absolute spending due to
the Company's ability to internalize its development functions, thereby cost
effectively enhancing the content and functionality of the Company's Web sites
and improving the performance of the fulfillment and database systems, while
adding improved operational flexibility and supplemental back-up and system
redundancy. During the fiscal years ended July 3, 2005, June 27, 2004, and June
29, 2003, the Company expended $24.0 million, $22.8 million, and $22.2 million
on technology and development, of which $9.2 million, $9.0 million, and $8.3
million, respectively, has been capitalized.
Although over the longer term, the Company believes that it will continue to
demonstrate its ability to leverage its IT platforms, during fiscal 2006, the
Company intends to improve the technology infrastructure of its wine gift
business, as well as the recently acquired Cheryl & Co. cookies and baked gifts
business, and therefore expects that technology and development spending as a
percentage of net revenues will be consistent with the prior year.
General and Administrative Expenses
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
General and administrative $35,572 17.0% $30,415 2.8% $29,593
Percentage of sales 5.3% 5.0% 5.2%
</TABLE>
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. General and administrative expense increased
during the fiscal year ended July 3, 2005, due to: (i) incremental expenses
associated with the Company's wine gift product line and additional overhead
added during a seasonally slow period for Cheryl & Co., which was acquired in
March 2005, (ii) an increase in professional fees associated with Sarbanes-Oxley
compliance, and (iii) increased travel and entertainment related to the
Company's BloomNet business-to-business expansion. Although declining as a
percentage of net revenues, general and administrative expenses increased during
the fiscal year ended June 27, 2004, in comparison to the prior year, primarily
as a result of increased health and business insurance costs, partially offset
by various cost reduction initiatives.
34
<PAGE>
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements, as a result of
the incremental expenses associated with the acquisitions of The Winetasting
Network and Cheryl & Co., the Company expects that its general and
administrative expenses as a percentage of net revenue during fiscal 2006 will
be consistent to increase slightly in comparison to fiscal 2005.
Depreciation and Amortization
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Depreciation and amortization $14,489 (3.4)% $14,992 (2.6)% $15,389
Percentage of sales 2.2% 2.5% 2.7%
</TABLE>
Depreciation and amortization expense during the fiscal years ended July 3, 2005
and June 27, 2004 decreased slightly in comparison to the respective prior
fiscal years, reflecting the impact of the Company's declining rate of capital
additions, and the leverage of the Company's existing infrastructure.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, including the improvement
of the technology platform of its wine gift business and anticipated expansion
of Cheryl & Co.'s operations, is critical to attaining its strategic objectives,
the Company expects that depreciation and amortization in fiscal 2006 will
continue to decrease as a percentage of net revenues in comparison to prior
years.
Other Income (Expense)
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended
----------------------------------------------------------------------
July 3, June 27, June 29,
2005 % Change 2004 % Change 2003
------------ --------------- ------------- ------------- -------------
(in thousands)
Interest income $1,690 27.6% $1,324 14.4% $1,157
Interest expense (481) 27.5% (663) 32.5% (982)
Other, net 140 141.1% (341) 487.9% (58)
------------ ------------- -------------
$1,349 321.6% $320 173.5% $117
============ ============= =============
</TABLE>
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt.
The increase in other income (expense) during the fiscal years ended July 3,
2005, in comparison to the fiscal 2004 was primarily attributable to higher
interest income resulting from an increase in interest rate returns, as well as
lower interest expense due to maturing debt and capital lease obligations. The
increase in other income (expense) during the fiscal year ended June 27, 2004,
in comparison to the prior fiscal year, resulted primarily from an increase in
interest income resulting from higher invested cash balances generated from
operations, and a reduction in interest expense associated with the refinancing
of a series of fixed and variable rate mortgage and equipment notes in June
2003, partially offset by losses incurred upon closure/conversion of certain
retail stores.
35
<PAGE>
Income Taxes
During the fiscal year ended July 3, 2005, the Company recorded income tax
expense of approximately $5.4 million. The Company's effective tax rate for the
fiscal year ended July 3, 2005 was approximately 40.7%, which differed from the
U.S. federal statutory rate of 35% primarily due to state income taxes,
partially offset by various tax credits. During fiscal 2006, the Company
anticipates an effective tax rate between 41%-42%.
During the fiscal year ended June 27, 2004, the Company recorded an income tax
benefit of approximately $19.2 million (net) due to the removal of the Company's
valuation allowance on its deferred tax assets which consisted primarily of net
operating loss carryforwards (see below), offset in part by income tax expense
for federal alternative minimum tax and various state taxes resulting from state
tax law changes that deferred the use of available net operating losses for
state purposes.
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it is more likely than not that the deferred tax assets would be
realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises. The favorable impact of the income tax benefit
has distorted the trends in our net income and will impact the comparability of
our net income with other periods.
At July 3, 2005, the Company's federal and state net operating loss
carryforwards were approximately $60.5 million, which, if not utilized, will
begin to expire in fiscal year 2020.
36
<PAGE>
Quarterly Results of Operations
The following table provides unaudited quarterly consolidated results of
operations for each quarter of fiscal years 2005 and 2004. The Company believes
this unaudited information has been prepared substantially on the same basis as
the annual audited consolidated financial statements and all necessary
adjustments, consisting of only normal recurring adjustments, have been included
in the amounts stated below to present fairly the Company's results of
operations. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
-------------------------------------------------------------------------------------
Jul. 3, Mar. 27, Dec. 26, Sep. 26, Jun. 27, Mar. 28, Dec. 28, Sep. 28,
2005 2005 2004 2004 2004 2004 2003 2003
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
(in thousands, except per share data)
Net revenues:
Online $108,492 $91,638 $107,686 $53,086 $93,135 $74,521 $90,878 $48,936
Telephonic 60,349 52,424 109,570 37,586 58,443 50,851 113,374 40,371
Retail/fulfillment 17,277 12,971 12,758 6,842 9,989 8,697 8,930 5,853
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total net revenues 186,118 157,033 230,014 97,514 161,567 134,069 213,182 95,160
Cost of revenues 111,737 97,947 127,402 57,942 98,039 79,429 117,550 56,093
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Gross profit 74,381 59,086 102,612 39,572 63,528 54,640 95,632 39,067
Operating expenses:
Marketing and sales 50,389 45,813 72,841 29,892 38,950 37,693 66,762 28,846
Technology and development 4,201 4,160 3,292 3,104 3,289 3,576 3,503 3,431
General and administrative 10,152 9,864 7,954 7,602 7,187 7,872 7,577 7,779
Depreciation and amortization 3,473 3,350 3,770 3,896 3,660 3,572 3,843 3,917
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Total operating expenses 68,215 63,187 87,857 44,494 53,086 52,713 81,685 43,973
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Operating income (loss) 6,166 (4,101) 14,755 (4,922) 10,442 1,927 13,947 (4,906)
Other income (expense), net 423 509 172 245 455 82 23 (240)
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Income (loss) before income taxes 6,589 (3,592) 14,927 (4,677) 10,897 2,009 13,970 (5,146)
Income taxes (benefit) 2,688 (1,546) 6,223 (1,967) (19,532) 66 292 -
--------- --------- ---------- ----------- --------- ---------- ---------- ----------
Net income (loss) $3,901 $(2,046) $8,704 $(2,710) $30,429 $1,943 $13,678 $(5,146)
========= ========= ========== =========== ========= ========== ========== ==========
Net income (loss) per share:
Basic $0.06 $(0.03) $0.13 $(0.04) $0.46 $0.03 $0.21 $(0.08)
========= ========= ========== =========== ========= ========== ========== ==========
Diluted $0.06 $(0.03) $0.13 $(0.04) $0.45 $0.03 $0.20 $(0.08)
========= ========= ========== =========== ========= ========== ========== ==========
</TABLE>
The Company's quarterly results may experience seasonal fluctuations. Due to the
Company's expansion into non-floral products, including the acquisitions of The
Winetasting Network and Cheryl & Co. during fiscal 2005, the Thanksgiving
through Christmas holiday season, which falls within the Company's second fiscal
quarter, generates the highest proportion of the Company's annual revenues.
Additionally, as the result of a number of major floral gifting occasions,
including Mother's Day, Administrative Professionals Week and Easter, revenues
also rise during the Company's fiscal fourth quarter. In addition, results
during the Company's fiscal first quarter will be negatively impacted by the
aforementioned acquisitions due to their seasonal nature and the incremental
overhead incurred during this slow period.
Liquidity and Capital Resources
At July 3, 2005, the Company had working capital of $41.7 million, including
37
<PAGE>
cash and equivalents and short-term investments of $46.6 million, compared to
working capital of $83.7 million, including cash and equivalents and short-term
investments of $103.4 million, at June 27, 2004. In addition to cash and
short-term investments, at June 27, 2004, the Company maintained approximately
$8.3 million of long-term investments, consisting primarily of investment grade
corporate and U.S. government securities.
Net cash provided by operating activities of $10.4 million for the fiscal year
ended July 3, 2005 was primarily attributable to earnings, adjusted for
depreciation and amortization, deferred income taxes and other non-cash charges,
which in total amounted to $27.5 million, offset in part by increases in
inventory related to foreign sourced products and the post-acquisition inventory
build of The Winetasting Network and Cheryl & Co. and decreases in accounts
payable and accrued expenses primarily related to additional vendor payments due
to the timing of the fiscal 2005 year end.
Net cash used in investing activities of $39.9 million for the fiscal year ended
July 3, 2005 was primarily attributable to funding acquisitions ($51.0 million),
including The Winetasting Network and Cheryl & Co., which amounted to
approximately $9.5 million and $41.1 million, respectively, as well as capital
expenditures primarily related to the Company's technology infrastructure,
offset in part by net proceeds from the sale of the Company's long-term
investments.
Net cash used in financing activities of $11.3 million for the fiscal year ended
July 3, 2005, resulted primarily from cash used to repurchase 1,328,050 shares
of the Company's Class A common stock, which were placed in treasury, for
approximately $9.8 million, as well as the repayment of amounts outstanding
under the Company's credit facilities and long-term capital lease obligations,
offset in part by the net proceeds received upon the exercise of employee stock
options and employee stock purchase plan. The Company has a $5.0 million
revolving line of credit, renewable November 30, 2005 (none outstanding at any
point during the fiscal year ending July 3, 2005), available for working capital
purposes.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. During fiscal 2005, the Company utilized available cash balances to
fund its acquisitions of The Winetasting Network and Cheryl & Co., as well as
its share repurchase program, which in the aggregate amounted to approximately
$60.8 million. As a result, the Company may utilize, and or increase, its
existing $5.0 million line of credit during its fiscal first and second quarter
to fund working capital requirements, which have increased during this time
period, due to the Company's continued expansion into non-floral products,
including the aforementioned acquisitions of The Winetasting Network and Cheryl
& Co.
At July 3, 2005, the Company's contractual obligations consist of:
<TABLE>
<S> <C> <C> <C> <C> <C>
Payments due by period
----------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
----------- -------------- ---------- ------------ -------------
Long-term debt $4,598 $1,414 $3,058 $ 126 $ -
Capital lease obligations 1,838 1,440 379 19 -
Operating lease obligations 57,258 7,465 12,466 9,016 28,311
Sublease obligations 8,790 2,448 3,548 1,815 979
Other cash obligations (*) 93 93 - - -
Purchase commitments (**) 29,989 29,989 - - -
----------- -------------- ---------- ------------ -------------
Total $102,566 $42,849 $19,451 $10,976 $29,290
=========== ============== ========== ============ =============
</TABLE>
38
<PAGE>
(*) Other cash obligations include $0.1 million of franchise lease guarantees.
(**)Purchase commitments consist primarily of inventory and equipment purchase
orders made in the ordinary course of business.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. As of July 3, 2005, the
Company had repurchased 1,328,050 shares of common stock for $9.8 million, all
of which was repurchased during the fiscal year ending July 3, 2005.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates its estimates, including those related to revenue recognition,
inventory and long-lived assets, including goodwill and other intangible assets
related to acquisitions. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers or franchisees to make required
payments. If the financial condition of the Company's customers or franchisees
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
39
<PAGE>
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses is
impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement
revises SFAS No.123 by eliminating the option to account for employee stock
options under APB No. 25 and generally requires companies to recognize the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (the "fair-value-based" method).
The Company is adopting SFAS 123(R) effective July 4, 2005 using the modified
prospective method. The impact of adopting SFAS 123(R) cannot be predicted at
this time because it will depend on the levels of share-based compensation
granted in the future; however, had the Company adopted SFAS 123(R) in prior
periods, the impact of that standard would have approximated the proforma
disclosure, excluding the impact of the option acceleration described in Note 1
to the Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds and investment grade corporate and U.S. government
securities. Under its current policies, the Company does not use interest rate
derivative instruments to manage exposure to interest rate changes.
40
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Annual Financial Statements: See Part IV, Item 15 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.
Item 9A. CONTROLS AND PROCEDURES.
The Company's management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
of the Securities Exchange Act of 1934 (the "Exchange Act") as of the
end of the period covered by this report. Based on such evaluation,
the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of such period, the Company's
disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in the reports
that it files or submits under the Exchange Act is recorded,
processed, summarized and reported on a timely basis, and is
accumulated and communicated to the Company's management, including
including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure.
41
<PAGE>
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rules
13-a-15(f) and 15d-15(f) under the Exchange Act as a process
designed by, or under the supervision of, the Company's principal
executive and principal financial officers and effected by the
Company's board of directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles and includes those policies and procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorization of management and
directors of the Company; and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management assessed the effectiveness of the Company's internal
control over financial reporting as of July 3, 2005. In making this
assessment, management used the criteria established in "Internal
Control-Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on this assessment, management believes that, as of July 3,
2005 the Company's internal control over financial reporting is
effective.
The Company acquired The Winetasting Network on November 15, 2004
and Cheryl & Co. on March 28, 2005, and has excluded the acquired
companies from its assessment of and conclusion on the effectiveness
of internal control over financial reporting. For the year ended July
3, 2005, The Winetasting Network and Cheryl & Co., accounted for 1.5%
of the Company's total net revenue. As of July 3, 2005, The
Winetasting Network and Cheryl & Co. accounted for 8.3% of the
Company's total assets, excluding $40.9 million of goodwill and other
intangible asset amounts that were recorded in connection with the
acquisitions of The Winetasting Network and Cheryl & Co.
Ernst & Young LLP, the Company's independent registered public
accounting firm, has issued a report on management's assessment and
the effectiveness of the Company's internal control over financial
reporting, as of July 3, 2005; their report is included in Item 9A.
42
<PAGE>
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of 1-800-FLOWERS.COM, Inc.
and Subsidiaries
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting,
that 1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company")
maintained effective internal control over financial reporting
as of July 3, 2005, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
1-800-FLOWERS.COM, Inc.'s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of
the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
As indicated in the accompanying Management's Report on Internal
Control Over Financial Reporting in Item 9A, management's assessment
of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of Cheryl &
Co. and The Winetasting Network, which are included in the Fiscal
2005 consolidated financial statements of 1-800-FLOWERS.COM, INC. and
Subsidiaries and constituted 8.3% of total assets as of July 3, 2005,
43
<PAGE>
excluding $40.9 million of goodwill and other intangible asset
amounts recorded in connection with these acquisitions, and 1.5% of
revenues for the fiscal year then ended. Our audit of internal
control over financial reporting of 1-800-FLOWERS.COM, INC. and
Subsidiaries also did not include an evaluation of the internal
control over financial reporting of Cheryl & Co. and The Winetasting
Network.
In our opinion, management's assessment that 1-800-FLOWERS.COM, INC.
and Subsidiaries maintained effective internal control over financial
reporting as of July 3, 2005, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, 1-800-
FLOWERS.COM, INC. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
July 3, 2005, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance
sheets of 1-800-FLOWERS.COM, INC. and Subsidiaries (the "Company") as
of July 3, 2005, and June 27, 2004, and the related consolidated
statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended July 3, 2005 and our report
dated September 9, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
September 9, 2005
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the quarter ended July
3, 2005 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
Item 9B. OTHER INFORMATION.
None.
44
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth in the Proxy Statement for the 2005
annual meeting of stockholders is incorporated herein by reference.
The Company maintains a Code of Ethics, which is applicable to all
directors, officers and employees on the Investor Relations-Corporate
Governance tab of the Company's website at 1800flowers.com. Any
amendment or waiver to the Code of Ethics that applies to our
directors or executive officers will be posted on our website or in a
report filed with the SEC on Form 8-K. A copy of the Code of Ethics
is available without charge upon written request to: Investor
Relations, 1-800-FLOWERS.COM, Inc., 1600 Stewart Avenue, Westbury,
New York 11590.
Item 11. EXECUTIVE COMPENSATION.
The information set forth in the Proxy Statement for the 2005
annual meeting of stockholders is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information set forth in the Proxy Statement for the 2005
annual meeting of stockholders is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in the Proxy Statement for the 2005
annual meeting of stockholders is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information set forth in the Proxy Statement for the 2005
annual meeting of stockholders is incorporated herein by reference.
45
<PAGE>
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Index to Consolidated Financial Statements:
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of July 3, 2005 and June 27, 2004 F-2
Consolidated Statements of Income for the years ended July 3, 2005,
June 27, 2004 and June 29, 2003 F-3
Consolidated Statements of Stockholders' Equity for the years ended
July 3, 2005, June 27, 2004 and June 29, 2003 F-4
Consolidated Statements of Cash Flows for the years ended July 3, 2005,
June 27, 2004 and June 29, 2003 F-5
Notes to Consolidated Financial Statements F-6
(a) (2) Index to Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts S-1
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 consolidated financial statements or notes
thereto.
46
<PAGE>
(a)(3) Index to Exhibits
The following exhibits are required to be filed with this Report by Item
15(a)(3). Other than exhibits 10.26, 21.1, 23.1, 24.1, 31.1 and 32.1 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, except for
exhibit 10.23, which is incorporated by reference to the exhibit of the
same number contained in the Company's registration statement on Form S-8
(No. 333-54590), dated January 30, 2001, and exhibits 10.24 and 10.25,
which are incorporated by reference to Registrant's Definitive Proxy
Statement filed on October 27, 2003 (No. 000-26841). Exhibits 10.10, 10.19,
10.20, 10.23, 10.24 and 10.25 are management contracts or compensatory
plans or arrangements.
Exhibit 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.
10.1 Lease, commencing on May 15, 1998, between 1600 Stewart Avenue, L.L.C.
and 800-FLOWERS, Inc.
10.2 Investment Agreement, dated as of January 16, 1995, among Chemical
Venture Capital Associates, Teleway, Inc. and James F. McCann.
10.3 Consent and Amendment No. 1 to Investment Agreement, dated as of May
20, 1999, among Chase Capital Partners, 1-800-FLOWERS.COM, Inc. and
James F. McCann.
10.10 1997 Stock Option Plan, as amended.
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.
10.22 #Amended and Restated Interactive Marketing Agreement, made and
entered into on September 1, 2000, by and between America Online, Inc.
and 1-800-FLOWERS.COM, Inc.
10.23 Employee Stock Purchase Plan
10.24 2003 Long Term Incentive and Share Award Plan
10.25 Section 16 Executive Officers Bonus Plan
10.26 Lease, dated May 20, 2005, between Treeline Mineola, LLC and
1-800-FLOWERS.COM, Inc. (filed herewith)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Powers of Attorney (included in the signature page).
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
--------------------
# Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 24b-2 promulgated under the Exchange Act.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
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 15, 2005 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 William
E. Shea, 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 report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated below:
Dated: September 15, 2005 By: /s/ James F. McCann
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Dated: September 15, 2005 By: /s/ William E. Shea
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
48
<PAGE>
Dated: September 15, 2005 By: /s/ Christopher G. McCann
Christopher G. McCann
Director, President
Dated: September 15, 2005 By: /s/ T. Guy Minetti
T. Guy Minetti
Director, Vice Chairman
Dated: September 15, 2005 By: /s/ John J. Conefry, Jr.
John J. Conefry, Jr.
Director
Dated: September 15, 2005 By: /s/ Leonard J. Elmore
Leonard J. Elmore
Director
Dated: September 15, 2005 By: /s/ Kevin J. O'Connor
Kevin J. O'Connor
Director
Dated: September 15, 2005 By: /s/ Mary Lou Quinlan
Mary Lou Quinlan
Director
Dated: September 15, 2005 By: /s/ Deven Sharma
Deven Sharma
Director
Dated: September 15, 2005 By: /s/ Jeffrey C. Walker
Jeffrey C. Walker
Director
49
<PAGE>
F-3
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
1-800-FLOWERS.COM, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
1-800-FLOWERS.COM, Inc. and Subsidiaries (the "Company") as of July 3, 2005 and
June 27, 2004, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended July 3,
2005. Our audits also included the financial statement schedule listed in the
index at Item 15(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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
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 July 3, 2005 and June 27, 2004, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended July 3, 2005, in conformity with U.S. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of
1-800-FLOWERS.COM, Inc.'s internal control over financial reporting as of July
3, 2005, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated September 9, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Melville, New York
September 9, 2005
F-1
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<S> <C> <C>
July 3, June 27,
2005 2004
------------- ------------
Assets
Current assets:
Cash and equivalents $ 39,961 $80,824
Short-term investments 6,647 22,550
Receivables, net 10,619 9,013
Inventories 28,675 19,625
Deferred income taxes 10,219 16,463
Prepaid and other 5,289 1,517
------------- ------------
Total current assets 101,410 149,992
Property, plant and equipment, net 50,474 42,460
Investments - 8,260
Goodwill 63,219 34,529
Other intangibles, net 14,215 2,598
Deferred income taxes 17,161 13,548
Other assets 5,473 10,165
------------- ------------
Total assets $251,952 $261,552
============= ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 57,121 $63,266
Current maturities of long-term debt and obligations under capital leases 2,597 3,022
------------- ------------
Total current liabilities 59,718 66,288
Long-term debt and obligations under capital leases 3,347 6,062
Other liabilities 2,553 2,812
------------- ------------
Total liabilities 65,618 75,162
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000 shares authorized,29,888,603
and 29,428,143 shares issued in 2005 and 2004, respectively 300 295
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
shares issued in 2005 and 2004 421 421
Additional paid-in capital 258,848 255,829
Retained deficit (59,198) (67,047)
Deferred compensation (1,116) -
Treasury stock, at cost-1,380,850 and 52,800 Class A shares in 2005 and 2004,
respectively, and 5,280,000 Class B shares (12,921) (3,108)
------------- ------------
Total stockholders' equity 186,334 186,390
------------- ------------
Total liabilities and stockholders' equity $251,952 $261,552
============= ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<S> <C> <C> <C>
Years ended
--------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
-------------- -------------- -------------
Net revenues $670,679 $603,978 $565,618
Cost of revenues 395,028 351,111 324,565
-------------- -------------- -------------
Gross profit 275,651 252,867 241,053
Operating expenses:
Marketing and sales 198,935 172,251 170,013
Technology and development 14,757 13,799 13,937
General and administrative 35,572 30,415 29,593
Depreciation and amortization 14,489 14,992 15,389
-------------- -------------- -------------
Total operating expenses 263,753 231,457 228,932
-------------- -------------- -------------
Operating income 11,898 21,410 12,121
Other income (expense):
Interest income 1,690 1,324 1,157
Interest expense (481) (663) (982)
Other, net 140 (341) (58)
-------------- -------------- -------------
Total other income, net 1,349 320 117
-------------- -------------- -------------
Income before income taxes 13,247 21,730 12,238
Income taxes (benefit) 5,398 (19,174) -
-------------- -------------- -------------
Net income $7,849 $40,904 $12,238
============== ============== =============
Net income per common share:
Basic $0.12 $0.62 $0.19
============== ============== =============
Diluted $0.12 $0.60 $0.18
============== ============== =============
Weighted average shares used in the calculation of net income
per common share:
Basic 66,038 65,959 65,566
============== ============== =============
Diluted 67,402 68,165 67,670
============== ============== =============
</TABLE>
See accompanying notes.
F-3
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 3, 2005, June 27, 2004 and June 29, 2003
(in thousands, except share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock
--------------------------------------
Class A Class B Additional Unearned Treasury Stock
------------------- ------------------- Paid-in Retained Stock-Based ------------------ Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Shares Amount Equity
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
June 30, 2002 28,319,677 $283 42,480,925 $425 $246,497 $(120,189) $- 5,332,800 $(3,108) $123,908
Exercise of
stock options 228,666 2 - - 842 - - - - 844
Employee stock
purchase plan 50,495 1 - - 297 - - - - 298
Conversion of
Class B common
stock into
Class A common
stock 81,010 1 (81,010) (1) - - - - - -
Net income - - - - - 12,238 - - - 12,238
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
June 29, 2003 28,679,848 287 42,399,915 424 247,636 (107,951) - 5,332,800 (3,108) 137,288
Exercise of
stock options 440,741 4 - - 1,730 - - - - 1,734
Employee stock
purchase plan 52,104 1 - - 391 - - - - 392
Reversal of
valuation
allowance related
to income tax
benefits from
employee stock
option exercises - - - - 6,072 - - - - 6,072
Conversion of
Class B common
stock into Class
A common
stock 255,450 3 (255,450) (3) - - - - - -
Net income - - - - - 40,904 - - - -
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
June 27, 2004 29,428,143 295 42,144,465 421 255,829 (67,047) - 5,332,800 (3,108) 186,390
Exercise of
stock options 228,695 2 - - 1,064 - - - - 1,066
Employee stock
purchase plan 75,846 1 - - 466 - - - - 467
Income tax benefit
from employee
stock option
exercises - - - - 183 - - - - 183
Issuance of
restricted stock 161,795 2 - - 1,355 - (1,357) - - -
Amortization of
unearned stock-
based compensation,
net - - - - - - 192 - - 192
Forfeiture of
unvested restricted
stock (5,876) - - - (49) - 49 - - -
Treasury Stock - - - - - - - 1,328,050 (9,813) (9,813)
Conversion of Class
B common
stock into Class
A common stock - - - - - - - - - -
Net income - - - - - 7,849 - - - 7,849
---------- -------- ----------- -------- ---------- ----------- ------------ --------- --------- ------------
Balance at
July 3, 2005 29,888,603 $300 42,144,465 $421 $258,848 $(59,198) $(1,116) 6,660,850 $(12,921) $186,334
========== ======== =========== ======== ========== =========== ============ ========= ========= ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<S> <C> <C> <C>
Years ended
------------------------------------------------
July 3, 2005 June 27, 2004 June 29, 2003
--------------- --------------- ---------------
Operating activities:
Net income $7,849 $40,904 $12,238
Reconciliation of net income to net cash provided by
operations:
Depreciation and amortization 14,489 14,992 15,389
Deferred income taxes 4,702 (20,776) -
Stock compensation expense 192 - -
Bad debt expense 270 437 426
Other non-cash items - 250 72
Changes in operating items, excluding the effects
of acquisitions:
Receivables (655) (1,683) 1,152
Inventories (6,345) 745 (4,723)
Prepaid and other (3,445) 691 12
Accounts payable and accrued expenses (10,953) 1,624 (2,493)
Other assets 4,584 5,829 (2,555)
Other liabilities (259) (884) 1
--------------- --------------- ---------------
Net cash provided by operating activities 10,429 42,129 19,519
Investing activities:
Acquisitions, net of cash acquired (50,965) - -
Capital expenditures (13,334) (10,576) (10,269)
Purchases of investments (93,946) (62,584) (56,412)
Proceeds from sales of investments 118,109 63,384 57,191
Other 192 217 390
--------------- --------------- ---------------
Net cash used in investing activities (39,944) (9,559) (9,100)
Financing activities:
Acquisition of treasury stock (9,813) - -
Proceeds from employee stock options/stock purchase plan 1,533 2,126 1,142
Repayment of notes payable and bank borrowings (1,391) (1,176) (1,492)
Repayment of capital lease obligations (1,677) (1,775) (1,591)
--------------- --------------- ---------------
Net cash used in financing activities (11,348) (825) (1,941)
--------------- --------------- ---------------
Net change in cash and equivalents (40,863) 31,745 8,478
Cash and equivalents:
Beginning of year 80,824 49,079 40,601
--------------- --------------- ---------------
End of year $ 39,961 $ 80,824 $ 49,079
=============== =============== ===============
</TABLE>
Supplemental Cash Flow Information:
__________________________________
- - Interest paid amounted to $481, $663, and $982 for the years ended July 3,
2005, June 27, 2004 and June 29, 2003, respectively.
- - The Company paid income taxes of approximately $762, net of tax refunds
received for the year ended July 3, 2005. The Company received tax
refunds, net of income taxes paid of approximately $1,476, and $0 for
the years ended June 27, 2004 and June 29, 2003, respectively.
See accompanying notes.
F-5
<PAGE>
Note 1. Description of Business
1-800-FLOWERS.COM, Inc. ("1-800-FLOWERS.COM") is a leading gift retailer,
providing a broad range of thoughtful gift products including flowers, plants,
gourmet foods, cookies, cakes, candies, wine, gift baskets, and other unique
gifts to our customers around the world. The 1-800-FLOWERS.COM family of brands
also includes Plow & Hearth, a direct marketer of home and garden merchandise,
GreatFood.com, a source for gourmet products, The Popcorn Factory, a
manufacturer and direct marketer of premium popcorn and specialty food gifts,
HearthSong and Magic Cabin, direct marketers of unique children's toys and
games, The Winetasting Network, a distributor and direct-to-consumer wine
marketer, and Cheryl&Co., a manufacturer and direct marketer of premium cookies
and baked gift items. The Company operates in one business segment, providing
its customers with convenient, multi-channel access via the Internet, telephone,
catalogs and retail stores.
Note 2. Significant Accounting Policies
Fiscal Year
The Company's fiscal year is a 52- or 53-week period ending on the Sunday
nearest to June 30. Fiscal year 2005, which ended on July 3, 2005, consisted of
53 weeks, while fiscal years 2004 and 2003, which ended on June 27, 2004 and
June 29, 2003, respectively, consisted of 52 weeks.
Basis of Presentation
The consolidated financial statements include the accounts of 1-800-FLOWERS.COM
and its wholly-owned subsidiaries (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
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, United States government securities, overnight repurchase
agreements and commercial paper with maturities of three months or less when
purchased.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out method of accounting.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost reduced by accumulated
depreciation. Depreciation expense is recognized over the assets' estimated
useful lives using the straight-line method. Amortization of leasehold
improvements and capital leases are calculated using the straight-line method
over the shorter of the lease terms, including renewal options expected to be
exercised, or estimated useful lives of the improvements. Estimated useful lives
are periodically reviewed, and where appropriate, changes are made
prospectively. The Company's property plant and equipment is depreciated using
the following estimated lives:
F-6
<PAGE>
Buildings 40 years
Leasehold Improvements 3-10 years
Furniture, Fixtures and Equipment 3-10 years
Software 3-5 years
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangibles are not amortized, but are evaluated
annually in the Company's fiscal fourth quarter for impairment. To date, there
has been no impairment of these assets.
The cost of intangible assets with determinable lives is amortized to reflect
the pattern of economic benefits consumed, on a straight-line basis, over the
estimated periods benefited, ranging from 3 to 16 years.
Deferred Catalog Costs
The Company capitalizes the costs of producing and distributing its catalogs.
These costs are amortized in direct proportion with actual sales from the
corresponding catalog over a period not to exceed 26-weeks. Included within
other assets was $3.7 million and $3.8 million at July 3, 2005 and June 27,
2004, respectively, relating to prepaid catalog costs.
Investments
The Company considers all of its debt and equity securities, for which there is
a determinable fair market value and no restrictions on the Company's ability to
sell within the next 12 months, as available-for-sale. Available-for-sale
securities are carried at fair value, with unrealized gains and losses reported
as a separate component of stockholders' equity. For the years ended July 3,
2005, June 27, 2004 and June 29, 2003, there were no significant unrealized
gains or losses. Realized gains and losses are included in other income. The
cost basis for realized gains and losses on available-for-sale securities is
determined on a specific identification basis.
Fair Values of Financial Instruments
The recorded amounts of the Company's cash and equivalents, short-term
investments, receivables, accounts payable, and accrued liabilities approximate
their fair values principally because of the short-term nature of these items.
The fair value of investments, including available-for-sale securities, is based
on quoted market prices where available. The fair value of the Company's
long-term obligations are estimated based on the current rates offered to the
Company for obligations of similar terms and maturities. Under this method, the
Company's fair value of long-term obligations was not significantly different
than the carrying values at July 3, 2005 and June 27, 2004.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and equivalents,
investments and accounts receivable. The Company maintains cash and equivalents
and investments with high credit, quality financial institutions. Concentration
of credit risk with respect to accounts receivable are limited due to the
Company's large number of customers and their dispersion throughout the United
States, and the fact that a substantial portion of receivables are related to
balances owed by major credit card companies. Allowances relating to consumer,
corporate and franchise accounts receivable ($1.5 million and $1.4 million at
July 3, 2005 and June 27, 2004, respectively) have been recorded based upon
previous experience and management's evaluation.
F-7
<PAGE>
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Cost of Revenues
Cost of revenues consists primarily of florist fulfillment costs (fees paid
directly to florists and fees paid to wire service entities that serve as
clearinghouses for floral orders, net of wire service rebates), the cost of
floral and non-floral merchandise sold from inventory or through third parties,
and associated costs including inbound and outbound shipping charges.
Additionally, cost of revenues includes labor and facility costs related to
direct-to-consumer merchandise production operations, as well as facility costs
on properties that are sublet to the Company's franchisees.
Marketing and Sales
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, interactive marketing agreements, retail store and
fulfillment operations (other than costs included in cost of revenues), and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities.
The Company expenses all advertising costs, with the exception of catalog costs
(see Deferred Catalog Costs above) at the time the advertisement is first shown.
Advertising expense was $107.8 million, $91.1 million, and $88.9 million for the
years ended July 3, 2005, June 27, 2004 and June 29, 2003, respectively.
Technology and Development
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. Costs associated with the acquisition or
development of software for internal use are capitalized if the software is
expected to have a useful life beyond one year and amortized over the software's
useful life, typically three years. Costs associated with repair, maintenance or
the development of Web site content are expensed as incurred as the useful lives
of such software modifications are less than one year.
Stock-Based Compensation
The Company's employee stock based compensation plans are described more fully
in Note 9. Employee stock option plans are accounted for under the intrinsic
value recognition and measurement provisions of Accounting Principles Board
Opinion ("APB") No. 25, Accounting for Stock Issued to Employees. As all options
issued had an exercise price equal to or greater than the market value of the
underlying common stock on the date of grant and the related number of shares
granted is fixed at that point in time, no compensation expense was recognized.
Had compensation expense for the plans been determined based on the fair value
of the options on the grant date, consistent with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," the Company's net income and earnings per common share would have
been as follows:
F-8
<PAGE>
<TABLE>
<S> <C> <C> <C>
Years ended
-------------- -------------- -------------
July 3, June 27, June 29,
2005 2004 2003
-------------- -------------- -------------
(in thousands, except per share data)
Net income, as reported $7,849 $40,904 $12,238
Less: FAS 123 stock based compensation 10,499 (1) 1,339 (2) 7,803
-------------- -------------- -------------
Pro forma net income (loss) $(2,650) $39,565 $4,435
============== ============== =============
Net income (loss) per share:
Basic - As reported $0.12 $0.62 $0.19
Basic - Pro forma ($0.04) $0.60 $0.07
Diluted - As reported $0.12 $0.60 $0.18
Diluted - Pro forma ($0.04) $0.58 $0.07
</TABLE>
(1) During fiscal 2005, the Company accelerated the vesting of all
unvested stock options awarded to employees and officers which had
an exercise price greater than $10.00 per share. Options to
purchase approximately 0.8 million shares became exercisable
immediately as a result of the vesting acceleration. The Company
sought to balance the benefit of eliminating the requirement to
recognize compensation expense in future periods with the need to
continue to motivate employee performance through previously
issued, but currently unvested, stock option grants. With those
factors being considered, management determined it to be
appropriate to accelerate only those unvested stock options where
the strike price was reasonably in excess of the Company's then
current stock price.
The effect of the acceleration was an increase in pro-forma stock
based employee compensation expense for the year ended July 3,
2005 of $3.0 million ($0.05 per basic and diluted share). As the
Company will be adopting SFAS 123R, "Share-Based Payment," in the
first quarter of fiscal 2006, the decision to accelerate the
vesting of the identified stock options will reduce the Company's
share-based compensation expense of approximately $2.1 million in
fiscal 2006 and $0.9 million in fiscal 2007.
(2) During fiscal 2004, FAS 123 stock based compensation is net of the
income tax benefit of $6.1 million, associated with the removal of
the valuation allowance on deferred tax assets arising from
employee stock option exercises.
Comprehensive Income
For the years ended July 3, 2005, June 27, 2004 and June 29, 2003, the Company's
comprehensive income was equal to the respective net income for each of the
periods presented.
Net Income Per Share
Basic net income per common share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares (consisting primarily of employee stock options) outstanding
during the period.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123(R)). This Statement
revises SFAS No.123 by eliminating the option to account for employee stock
F-9
<PAGE>
options under APB No. 25 and generally requires companies to recognize the cost
of employee services received in exchange for awards of equity instruments based
on the grant-date fair value of those awards (the "fair-value-based" method).
The Company is adopting SFAS 123(R) effective July 4, 2005 using the modified
prospective method. The impact of adopting SFAS 123(R) will be consistent with
the impact in the proforma disclosure, excluding the effect of the option
acceleration presented above.
Reclassifications
Certain balances in the prior fiscal years have been reclassified to conform
with the presentation in the current fiscal year.
Note 3. Acquisitions
The Company accounts for its business combinations in accordance with SFAS No.
141, "Business Combinations," which addresses financial accounting and reporting
for business combinations and requires that all such transactions be accounted
for using the purchase method. Under the purchase method of accounting for
business combinations, the aggregate purchase price for the acquired business is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date.
Acquisition of Cheryl & Co.
On March 28, 2005, the Company acquired all of the outstanding common stock of
Cheryl & Co., a Westerville, Ohio-based manufacturer and direct marketer of
premium cookies and related baked gift items, with annual revenues of
approximately $33 million during its most recent year ended January 29, 2005.
The purchase price of approximately $41.1 million, including acquisition costs,
was funded utilizing the Company's available cash and investment balance, and
included $6.3 million used to retire Cheryl & Co.'s outstanding debt.
Acquisition of The Winetasting Network
On November 15, 2004, the Company acquired all of the outstanding common stock
of The Winetasting Network, a Napa, California based distributor and
direct-to-consumer wine marketer. The purchase price of approximately $9.5
million, including acquisition costs was funded utilizing the Company's
available cash and investment balance and included $2.4 million used to retire
The Winetasting Network's long-term debt.
F-10
<PAGE>
The following table summarizes the estimated fair values of assets acquired and
liabilities assumed at the date of acquisition.
<TABLE>
<S> <C> <C>
Cheryl & Co. The Winetasting
Purchase Network
Price Purchase Price
Allocation Allocation
------------------ --------------------
(in thousands)
Current assets $2,908 $1,017
Property, plant and equipment 8,045 209
Deferred income tax asset (liability) (26) 1,914
Intangible assets 12,421 -
Goodwill 20,245 8,202
Other 356 126
------------------ --------------------
Total assets acquired 43,949 11,468
------------------ --------------------
Current liabilities 2,821 1,983
------------------ --------------------
Net assets acquired $41,128 $9,485
================== ====================
</TABLE>
Of the $12.4 million of acquired intangible assets related to the Cheryl & Co.
acquisition, $8.3 million was assigned to trademarks that are not subject to
amortization, while the remaining acquired intangibles of $4.1 million were
allocated primarily to customer lists which are being amortized over the assets'
determinable useful life of 5 to 6 years.
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Cheryl & Co. and The Winetasting Network had
taken place at the beginning of fiscal year 2003. The following unaudited pro
forma information is not necessarily indicative of the results of operations in
future periods or results that would have been achieved had the acquisitions
taken place at the beginning of the periods presented.
<TABLE>
<S> <C> <C> <C>
Years Ended
---------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
-------------- -------------- --------------
(in thousands, except per share data)
Net revenues $703,749 $645,206 $600,672
Net income $ 8,808 $ 40,989 $ 11,628
Net income per common share
Basic $0.13 $ 0.62 $ 0.18
Diluted $0.13 $ 0.60 $ 0.17
</TABLE>
F-11
<PAGE>
Note 4. Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
<TABLE>
<S> <C> <C>
July 3, June 27,
2005 2004
-------------- -------------
(in thousands)
Goodwill - beginning of year $34,529 $37,692
Removal of deferred tax asset valuation allowance related to net
operating losses acquired from GreatFood.com, Inc. - (3,163)
Acquisition of The Winetasting Network 8,202 -
Acquisition of Cheryl&Co. 20,245 -
Other 243 -
-------------- -------------
Goodwill - end of year $63,219 $34,529
============== =============
</TABLE>
The Company's intangible assets consist of the following:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
July 3, 2005 June 27, 2004
-----------------------------------------------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ----------- ---------------- ---------- ------------ -------------- ---------
(in thousands)
Intangible assets with
determinable lives:
Investment in licenses 14 - 16 years $4,927 $3,438 $1,489 $4,927 $3,115 $1,812
Customer lists 3 - 6 years 4,640 1,145 3,495 910 657 253
Other 5 - 8 years 555 170 385 194 137 57
----------- ---------------- ---------- ------------ -------------- ---------
10,122 4,753 5,369 6,031 3,909 2,122
Trademarks with
indefinite lives - 8,846 - 8,846 476 - 476
----------- ---------------- ---------- ------------ -------------- ---------
Total intangible
assets $18,968 $4,753 $14,215 $6,507 $3,909 $2,598
=========== ================ ========== ============ ============== =========
</TABLE>
The amortization of intangible assets for the years ended July 3, 2005, June 27,
2004 and June 29, 2003 was $0.8 million, $0.6 million, and $0.9 million,
respectively. Future estimated amortization expense is as follows: 2006 - $1.0
million, 2007 - $1.0 million, 2008 - $1.0 million, 2009 - $1.0 million, and 2010
- - $1.0 million, and thereafter - $0.4 million.
F-12
<PAGE>
Note 5. Property, Plant and Equipment
<TABLE>
<S> <C> <C>
July 3, June 27,
2005 2004
------------- -------------
(in thousands)
Land $2,516 $666
Building and building improvements 16,255 12,038
Leasehold improvements 16,891 11,767
Furniture and fixtures 3,971 3,755
Equipment 14,979 8,016
Computer equipment 44,796 41,173
Telecommunication equipment 7,008 6,842
Software 43,872 36,321
-------------- -------------
150,288 120,578
Accumulated depreciation and amortization 99,814 78,118
-------------- -------------
$50,474 $ 42,460
============== =============
Note 6. Long-Term Debt
July 3, June 27,
2005 2004
------------- -------------
(in thousands)
Commercial notes and revolving credit line (1-2) $4,152 $5,504
Seller financed acquisition obligations (3) 46 85
Obligations under capital leases (see Note 12) 1,746 3,495
-------------- --------------
5,944 9,084
Less current maturities of long-term debt and obligations under
capital leases 2,597 3,022
-------------- --------------
$3,347 $6,062
============== ==============
</TABLE>
The following notes and credit lines relate to obligations arising from, and
collateralized by, the underlying assets of the Company's Plow & Hearth facility
in Madison, Virginia.
(1) $5,000,000 revolving credit line, renewable on November 30, 2005 (none
outstanding at July 3, 2005), bearing interest equal to the monthly
LIBOR Index (3.34%) plus 1.50% per annum (4.84% at July 3, 2005).
(2) $6,612,000 note dated June 27, 2003, ($4,152,000 outstanding at July 3,
2005), bearing interest at 5.44% per annum. The note, which resulted
from the consolidation and refinancing of a series of fixed and
variable rate mortgage and equipment notes in June 2003, is payable in
60 equal monthly installments of principal and interest commencing
August 1, 2003.
The following note relates to a seller-financed acquisition obligation,
collateralized by either the stock or assets of various subsidiaries of the
Company:
(3) $160,000 non-interest bearing promissory note dated September 30, 1999
($46,000 outstanding at July 3, 2005). The note is payable in 8 annual
installments commencing August 2000.
F-13
<PAGE>
As of July 3, 2005, long-term debt maturities, excluding amounts relating to
capital leases, are as follows:
<TABLE>
<S> <C>
Debt
Year Maturities
- ---- --------------
(in thousands)
2006 $1,231
2007 1,413
2008 1,468
2009 86
--------------
$4,198
==============
</TABLE>
Note 7. Income Taxes
Significant components of the income tax provision (benefit) are as follows:
<TABLE>
<S> <C> <C> <C>
Years ended
------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
------------- -------------- ------------
(in thousands)
Current provision:
Federal $308 $677 $ -
State 388 923 -
------------- -------------- ------------
696 1,600 -
Deferred provision (benefit):
Federal 3,313 (15,796) -
State 1,389 (4,980) -
------------- -------------- ------------
4,702 (20,776) -
------------- -------------- ------------
Income tax provision (benefit) $5,398 $(19,174) $ -
============= ============== ============
</TABLE>
A reconciliation of the U.S. federal statutory tax rate to the Company's
effective tax rate is as follows:
<TABLE>
<S> <C> <C> <C>
Years ended
------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
------------- -------------- ------------
Tax at U.S. statutory rates 35.0% 35.0% 34.0%
State income taxes, net of federal tax benefit 8.7 2.8 5.9
Goodwill amortization 1.5 .5 1.0
Tax settlements - 2.7 -
Change in tax rates - 4.2 -
Change in valuation allowance - (140.1) (39.7)
Other (4.5) 6.7 (1.2)
------------- -------------- --------------
40.7% (88.2)% 0.0%
============= ============== ==============
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-14
<PAGE>
The significant components of the Company's deferred income tax assets
(liabilities) are as follows:
<TABLE>
<S> <C> <C> <C>
Years ended
------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
------------- -------------- ------------
(in thousands)
Deferred income tax assets:
Net operating loss carryforwards $23,742 $27,878 $ 34,247
Accrued expenses and reserves 3,965 3,463 3,624
Valuation allowance - - (36,523)
Deferred income tax liabilities:
Installment sales (34) (39) (53)
Tax in excess of book depreciation (293) (1,291) (1,295)
-------------- --------------- --------------
Net deferred income tax assets $27,380 $30,011 $ -
============== =============== ==============
</TABLE>
At June 27, 2004, management of the Company reassessed the valuation allowance
previously established against its net deferred income tax assets. Based on the
Company's earnings history and projected future taxable income, management
determined that it is more likely than not that the deferred income tax assets
would be realized. Accordingly, the Company removed the valuation allowance of
approximately $30.0 million from its deferred income tax assets resulting in the
recognition of an income tax benefit of approximately $20.8 million, a reduction
of goodwill of approximately $3.1 million, related to the acquired net operating
losses of GreatFood.com, and an increase in additional paid-in-capital of
approximately $6.1 million related to income tax benefits associated with
employee stock option exercises.
At July 3, 2005, the Company's federal and state net operating loss
carryforwards were approximately $60.5 million, which, if not utilized, will
begin to expire in fiscal year 2020.
Note 8. Capital Stock
Holders of Class A common stock generally have the same rights as the holders of
Class B common stock, except that holders of Class A common stock have one vote
per share and holders of Class B common stock have 10 votes per share on all
matters submitted to the vote of stockholders. Holders of Class A common stock
and Class B common stock generally vote together as a single class on all
matters presented to the stockholders for their vote or approval, except as may
be required by Delaware law. Class B common stock may be converted into Class A
common stock at any time on a one-for-one share basis. Each share of Class B
common stock will automatically convert into one share of Class A common stock
upon its transfer, with limited exceptions.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. As of July 3, 2005, the
Company had repurchased 1,328,050 shares of common stock for $9.8 million, all
of which was repurchased during the fiscal year ending July 3, 2005.
Note 9. Stock Based Compensation
In December 2003, the Company's Board of Directors and shareholders approved the
1-800-FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (the "Plan").
The Plan is a broad-based, long-term incentive program that is intended to
attract, retain and motivate employees, consultants and directors to achieve the
Company's long-term growth and profitability objectives, and therefore align
F-15
<PAGE>
stockholder and employee interests. The Plan provides for the grant to eligible
employees, consultants and directors of stock options, share appreciation rights
("SARs"), restricted shares, restricted share units, performance shares,
performance units, dividend equivalents, and other share-based awards
(collectively "Awards"). The Plan reserves 7,500,000 shares of Common Stock,
which is approximately the amount of shares which had been previously available
for issuance under the Company's 1999 Stock Incentive Plan. No further awards
will be issued under the 1999 Stock Incentive Plan. During a calendar year i)
the maximum number of shares with respect to which options and SARs may be
granted to an eligible participant under the Plan will be 1,000,000 shares, and
ii) the maximum number of shares with respect to which Awards intended to
qualify as performance-based compensation other than options and SARs may be
granted to an eligible participant under the Plan will be 500,000 shares.
The Plan is administered by the Compensation Committee or such other Board
committee (or the entire Board) as may be designated by the Board (the
"Committee"). Unless otherwise determined by the Board, the Committee will
consist of two or more members of the Board who are nonemployee directors within
the meaning of Rule 16b-3 of the Securities Exchange Act of 1934 and "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended. The Committee will determine which eligible employees,
consultants and directors receive awards, the types of awards to be received and
the terms and conditions thereof. The Chief Executive Officer shall have the
power and authority to make Awards under the Plan to employees and consultants
not subject to Section 16 of the Exchange Act, subject to limitations imposed by
the Committee.
At July 3, 2005, the Company has reserved approximately 16,117,883 shares of
common stock for issuance, including options previously authorized for issuance
under the 1999 Stock Incentive Plan.
Stock Options Plans
The following table summarizes activity in stock options:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Years ended
------------------------------------------------------------------------
July 3, 2005 June 27, 2004 June 29, 2003
----------------------- ------------------------- ----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
Under Exercise Under Exercise Under Exercise
Price Price Option Price Option Price
------------ ---------- ------------ ----------- ------------ ---------
Balance, beginning of year 9,108,985 $8.45 10,001,345 $8.28 8,113,144 $8.95
Grants 1,195,630 $8.12 154,800 $10.15 3,036,705 $6.55
Exercises (228,575) $4.66 (440,741) $3.93 (228,666) $3.69
Forfeitures (598,579) $10.82 (606,419) $9.38 (919,838) $9.43
------------ ------------ ------------
Balance, end of year 9,477,461 $8.35 9,108,985 $8.45 10,001,345 $8.28
============ ============ ============
</TABLE>
F-16
<PAGE>
The following table summarizes information about stock options outstanding at
July 3, 2005:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Remaining Exercise Options Exercise
Exercise Price Outstanding Contractual Life Price Exercisable Price
- ------------------- -------------- ------------------ --------------- --------------- ---------------
$1.61 - 2.00 277,325 3.0 years $1.98 277,325 $1.98
$3.31 - 3.65 1,378,542 5.4 years $3.65 1,138,827 $3.65
$4.02 - 4.50 1,154,045 4.8 years $4.50 1,153,085 $4.50
$5.06 - 6.42 1,744,560 7.2 years $6.41 271,234 $6.39
$6.45 - 7.81 1,101,040 8.5 years $7.05 308,438 $6.76
$7.82 - 11.58 1,545,173 7.7 years $9.95 870,839 $11.11
$11.64 - 12.74 455,336 4.6 years $12.41 455,336 $12.41
$12.87 - 12.87 1,119,744 6.5 years $12.87 1,119,744 $12.87
$12.95 - 15.77 111,900 6.1 years $13.98 111,900 $13.98
$21.00 - 21.00 589,796 4.1 years $21.00 589,796 $21.00
-------------- ---------------
9,477,461 6.4 years $8.35 6,296,524 $9.12
============== ===============
</TABLE>
Fair Value Disclosures
The exercise price of employee stock option grants is set at the closing price
of the Company's common stock on the date of grant and the related number of
shares granted is fixed at that point in time. Therefore, under the principles
of APB No. 25, the Company does not recognize compensation expense associated
with the grant of employee stock options. SFAS No. 123 requires the use of
option valuation models to provide supplemental information regarding options
granted after 1994.
The weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model, were as follows:
<TABLE>
<S> <C> <C> <C>
Years ended
------------------------------------------
July 3, June 27, June 29,
2005 2004 2003
------------- -------------- ------------
Weighted average fair value of options granted $4.44 $5.99 $3.95
Risk-free interest rate 3.75% 3.61% 3.95%
Expected life (in years) 5.0 5.0 5.0
Expected volatility 60.5% 67.8% 70.0%
Expected dividend yield 0.0% 0.0% 0.0%
</TABLE>
Restricted Stock Grants
From time to time, the Company grants restricted stock to key employees under
its 2003 Plan. The number of shares granted to employees during the years ended
July 3, 2005, June 27, 2004 and June 29, 2003 were 161,795, 0 and 0,
respectively. The value of all the granted shares was established by the market
price on the date of grant. The unearned compensation is shown as a reduction of
stockholders' equity and is being amortized ratably over the vesting period.
During the years ended July 3, 2005, June 27, 2004 and June 29, 2003, the
Company recognized $192,000, $0 and $0, respectively in general and
administrative expense related to the grants, net of forfeitures.
F-17
<PAGE>
Note 10. Employee Stock Purchase Plan
In December 2000, the Company's Board of Director's approved the
1-800-FLOWERS.COM, Inc. 2001 Employee Stock Purchase Plan (ESPP), a
non-compensatory employee stock purchase plan under Section 423 of the Internal
Revenue Code, to provide substantially all employees who have completed six
months of service, an opportunity to purchase shares of the Company's Class A
common stock. Employees may contribute a maximum of 15% of eligible
compensation, but in no event can an employee purchase more than 500 shares on
any purchase date. Offering periods have a duration of six months, and the
purchase price per share will be the lower of: (i) 85% of the fair market value
of a share of Class A common stock on the last trading day of the applicable
offering period, or (ii) 85% of the fair market value of a share of Class A
common stock on the last trading day before the commencement of the offering
period. The ESPP was terminated on June 30, 2005.
Note 11. Profit Sharing Plan
The Company 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 the Company, as determined by
its board of directors, may make certain discretionary contributions. Employees
are vested in the Company's contributions based upon years of service. The
Company made contributions of $0.3 million, $0.3 million and $0.4 million, for
the years ended July 3, 2005, June 27, 2004 and June 29, 2003, respectively.
Note 12. Commitments and Contingencies
Leases
The Company currently leases office, store facilities, and equipment under
various operating leases through fiscal 2019. As these leases expire, it can be
expected that in the normal course of business they will be renewed or replaced.
Most lease agreements contain renewal options and rent escalation clauses and
require the Company to pay real estate taxes, insurance, common area maintenance
and operating expenses applicable to the leased properties. The Company has also
entered into leases that are on a month-to-month basis. All leases and subleases
with an initial term of greater than one year are accounted for under SFAS No.
13, Accounting for Leases. These leases are classified as either capital leases,
operating leases or subleases, as appropriate.
The Company leases certain computer, telecommunication and related equipment
under capital leases, which are included in property and equipment with a
capitalized cost of approximately $17.9 million and $18.4 million at July 3,
2005 and June 27, 2004, respectively, and accumulated amortization of $17.1
million and $15.6 million, respectively. In addition, the Company subleases land
and buildings (which are leased from third parties) to certain of its
franchisees. Certain of the leases, other than land leases which have been
classified as operating leases, are classified as capital leases and have
initial lease terms of approximately 20 years (including option periods in some
cases).
The Company has a $5.0 million equipment lease line of credit with a bank.
Interest under this line, which is renewable annually, is determined on the date
of each commitment to borrow and is based on the bank's base rate on such date.
At July 3, 2005, approximately $1.7 million is outstanding. The borrowings,
which bear interest at rates ranging from 5.39% to 6.36% annually, are payable
in 60 monthly installments of principal and interest commencing in February
2001. Borrowings under the line are collateralized by the underlying equipment
purchased and an equal amount of pledged investments.
F-18
<PAGE>
As of July 3, 2005, future minimum payments under non-cancelable capital lease
obligations and operating leases with initial terms of one year or more consist
of the following:
<TABLE>
<S> <C> <C>
Obligations
Under
Capital Operating
Leases Leases
------------ ------------
(in thousands)
2006 $1,440 $7,465
2007 367 6,560
2008 12 5,906
2009 12 4,959
2010 7 4,057
Thereafter - 28,311
------------ ------------
Total minimum lease payments $1,838 $57,258
============
Less amounts representing interest (92)
------------
Present value of net minimum lease payments $1,746
============
</TABLE>
At July 3, 2005, the aggregate future sublease rental income under long-term
operating sub-leases for land and buildings and corresponding rental expense
under long-term operating leases were as follows:
<TABLE>
<S> <C> <C>
Sublease Sublease
Income Expense
-------------- --------------
(in thousands)
2006 $2,462 $2,448
2007 2,002 1,989
2008 1,572 1,559
2009 1,182 1,171
2010 647 644
Thereafter 988 979
-------------- --------------
$8,853 $8,790
============== ==============
</TABLE>
In addition to the above, the Company has agreed to provide rent guarantees for
leases entered into by certain franchisees with third party landlords. At July
3, 2005, the aggregate minimum rent payable by franchisees guaranteed by the
Company was approximately $0.1 million. Rent expense was approximately $9.7
million, $8.9 million, and $9.0 million for the years ended July 3, 2005, June
27, 2004 and June 29, 2003, respectively.
Litigation
There are various claims, lawsuits, and pending actions against the Company and
its subsidiaries incident to the operations of its businesses. It is the opinion
of management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
<PAGE>
1-800-FLOWERS.COM, INC.
Schedule II - Valuation and Qualifying Accounts
<TABLE>
<S> <C> <C> <C> <C> <C>
Additions
--------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs Other Accounts- Deductions- End of
Description of Period and Expenses Describe Describe (a) Period
- --------------------------------------------- ------------------ ------------- ----------------- ----------------- -------------
Reserves and allowances deducted from asset
accounts:
Reserve for estimated doubtful
accounts-accounts/notes receivable
Year Ended July 3, 2005 $1,449,000 $270,000 $ - $(182,000) $1,537,000
Year Ended June 27, 2004 $1,277,000 $437,000 $ - $(265,000) $1,449,000
Year Ended June 29, 2003 $1,016,000 $426,000 $ - $(165,000) $1,277,000
</TABLE>
- -----------------------------------
(a) Reduction in reserve due to write-off of accounts/notes receivable balances.
S-1
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>2
<FILENAME>sub.txt
<TEXT>
_Exhibit 21.1
Subsidiaries of the Registrant
(as of July 3, 2005)
1-800-FLOWERS Team Services, Inc. (Delaware)
1-800-FLOWERS Seasonal Team, Inc. (Delaware)
1-800-FLOWERS Acquisition Corp. (Delaware)
1-800-FLOWERS RETAIL, Inc. (Delaware)
1-800-FLOWERS.COM Franchise Co., 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 Inc. (California)
Fresh Intellectual Properties, Inc. (Delaware)
P&H, L.P. (Virginia)
The Plow & Hearth, Inc. (Virginia)
Plow & Hearth Team Services, Inc. (Delaware)
St. Claire Floral Co., Inc. (New York)
Teleway, Inc. (New York)
Westbury Investing Corp. (Delaware)
TheGift.com, Inc. (Delaware)
GT&C.com, Inc. (formerly 1-800-TheRose.Com, Inc) (Delaware)
The Children's Group, Inc. (Delaware)
The Children's Group Realty, Co. (Delaware)
The Popcorn Factory, Inc. (Delaware)
Guarded Realty Holdings, LLC. (Delaware)
BloomNet Exchange, Inc. (Delaware)
Flower Country, Inc. (Delaware)
The Winetasting Network (California)
WTN Services, LLC (California)
Cheryl & Co. (Ohio)
Floranet Iberia (Spain)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31
<SEQUENCE>3
<FILENAME>thirtyone.txt
<TEXT>
Exhibit 31.1
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(RULE 13a-14(a))
I, James McCann, certify that:
(1) I have reviewed this annual report on Form 10-K of 1-800-FLOWERS.COM,
Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2005 /s/ James F. McCann
- --------------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
<PAGE>
I, William Shea, certify that:
(1) I have reviewed this annual report on Form 10-K of 1-800-FLOWERS.COM, Inc.;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
(4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
(5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: September 15, 2005 /s/ William E. Shea
--------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>4
<FILENAME>thirtytwo.txt
<TEXT>
Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of 1-800-FLOWERS.COM, Inc.
(the "Company") hereby certifies, to such officer's knowledge, that:
(1) the accompanying annual report on Form 10-K of the Company for the
fiscal year ended July 3, 2005 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934; as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: September 15, 2005 /s/ James F. McCann
------------------------
James F. McCann
Chairman and Chief Executive
Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, the undersigned officer of 1-800-FLOWERS.COM, Inc.
(the "Company") hereby certifies, to such officer's knowledge, that:
(1) the accompanying annual report on Form 10-K of the Company for the
fiscal year ended July 3, 2005 (the "Report") fully complies with the
requirements of Section 13(a) or Section 15(d), as applicable, of the Securities
Exchange Act of 1934; as amended; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: September 15, 2005 /s/ William E. Shea
------------------------
William E. Shea
Senior Vice President and
Chief Financial Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>finalconsent.txt
<TEXT>
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference of our reports dated September 9,
2005, with respect to the consolidated financial statements and schedule of
1-800-FLOWERS.COM, Inc. and Subsidiaries, 1-800-FLOWERS.COM, Inc. management's
assessment of the effectiveness of internal control over financial reporting,
and the effectiveness of internal control over financial reporting of
1-800-FLOWERS.COM, Inc. and Subsidiaries, included in this Annual Report (Form
10-K) for the year ended July 3, 2005 in the following:
o 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; and
o the Registration Statement (Form S-8 No. 333-119999) pertaining
to the 1-800-FLOWERS.COM, Inc. 2003 Long Term Incentive and Share
Award Plan
/s/ Ernst & Young LLP
Melville, New York
September 13, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>6
<FILENAME>lease.txt
<TEXT>
AGREEMENT OF LEASE
Between
TREELINE MINEOLA LLC,
Landlord,
and
1-800-FLOWERS.COM, INC.,
Tenant.
Dated: May 20, 2005
PREMISES
1 Old Country Road
Carle Place, New York
Suite LL08, 500, 110, 112, 120, 122, 300 and the Storage
Space (as herein defined)
<PAGE>
AGREEMENT OF LEASE, made as of this __ day of May, 2005, by and between
Treeline Mineola LLC, a New York limited liability company, as Landlord (the
"Landlord"), with its address c/o Treeline Management Corp., 200 Garden City
Plaza, Suite 325, Garden City, New York 11530, and 1-800 FLOWERS.COM, INC., a
Delaware corporation, with offices at 1600 Stewart Avenue, Westbury, New York
11590 (the "Tenant").
W I T N E S S E T H:
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, trustees, successors and
assigns, hereby covenant as follows:
ARTICLE A
Lease Definitions
In addition to other terms elsewhere defined in this Lease, the
Following terms whenever used in this Lease shall have the meanings set forth
below.
(1) Building: 1 Old Country Road, Carle Place, New York 11514.
--------
(2) Demised Premises: The Demised Premises shall consist of Suites 500, 110,
112, and LL08, which comprises approximately 74,773 rentable square feet (the
"Original Premises"); Suites 122 and 120, which comprise approximately 3,513
rentable square feet (the "First Expansion Space"); and Suite 300 which
comprises approximately 9,057 rentable square feet (the "Second Expansion
Space", and collectively with the First Expansion Space, the "Expansion Space").
Furthermore, Landlord shall lease to Tenant on the Commencement Date
approximately 5,085 rentable square feet of Storage Space in the Building,
consisting of Suites LL14, 470, 497 and 432. Tenant shall have the right to
lease from Landlord, as more fully set forth below, up to an additional 5,000
rentable square feet of Storage Space. Landlord represents that Suites 112, 120
and 122 are contiguous spaces. The Demised Premises may also from time to time
referred to herein as the "Premises". A copy of the approved space plan for each
of the suites comprising the Demised Premises (the "Plan") shall be prepared by
Landlord's architects and shall be incorporated herein as "Exhibit A" in an
addendum as soon as the same has been prepared and agreed upon by the parties
hereto.
Tenant shall, within seven (7) BUSINESS days from FULL execution AND DELIVERY of
this Lease, deliver to Landlord and Landlord's architect ("Architect") its
specifications with respect to the proposed Plan whereupon Landlord shall cause
the Architect to promptly prepare the proposed Plan. Tenant shall have UNTIL
JUNE 20, 2005 (TIME BEING OF THE ESSENCE) to review, revise and approve the
proposed Plan so that the same may be finalized and construction drawings
prepared for filing. In the event that Tenant is unable to approve the Plan
(Through no fault of landlord ITS AGENTS, SERVANTS, EMPLOYEES, CONTRACTORS,
SUBCONTRACTORS or the architect) BY june 20, 2005 (TIME BEING OF THE ESSENCE) it
shall be subject to the penalty set forth in Article 2.06.
(3) Commencement Date: Upon substantial completion of Landlord's Work and
obtaining all necessary written approvals ("Occupancy Approvals") in connection
with Landlord's Work (which shall in no event be deemed to include the Retail
Use Approvals, as defined in Section (9) below) from all municipal and
governmental agencies having jurisdiction for the property on which the Building
is situated (the "Property"), currently estimated to be September 1, 2005 for
the Original Premises and on or about June 1, 2006 for the Expansion Space.
Except as specifically set forth in Article 1.02 below, Fixed Annual Rent shall
commence for the Original Premises upon substantial completion of Landlord's
Work for said space. Landlord shall provide Tenant with ten (10) days written
notice of when it will have substantially completed the (i) Original Premises
and (ii) Expansion Space. [NEED TO REINSERT INDEMNITY][NEED TO REINSERT
COMMENCEMENT DATE MEMORANDUM]
(4) Expiration Date: Twelve (12) Years Six (6) Months after the Commencement
Date, currently estimated to be February 28, 2018. Notwithstanding the
foregoing, the Expiration Date for the Original Premises, the Storage Space and
the Expansion Space shall be co-terminus.
(5) Term of Lease: Twelve (12) Years Six (6) Months from the Commencement
Date for the Original Premises.
-------------
(6) Fixed Annual Rent:
(i) Any Space Above Lower Level: $24.50 per rentable square foot per
annum in the first Lease Year, with an annual escalation of $0.75 per rentable
square foot in each of Lease Years 2 through 7 (imposed on each anniversary of
the Commencement Date for the applicable space) and an annual escalation of
$1.00 per rentable square foot in each Lease Year from 8 through the remainder
of the original term of the Lease (imposed on each anniversary of the
Commencement Date for the applicable space).
(ii) Any Space on Lower Level: $22.00 per rentable square foot per
annum in the first Lease Year, with an annual escalation of $0.75 per rentable
square foot in each of Lease Years 2 through 7 (imposed on each anniversary of
the Commencement Date for the applicable space) and an annual escalation of
$1.00 per rentable square foot in each Lease Year from 8 through the remainder
of the original term of the Lease (imposed on each anniversary of the
Commencement Date for the applicable space).
(iii) Storage Space: $9.00 per rentable square foot per annum in the
first Lease Year, with an annual escalation of three percent (3%), imposed upon
each anniversary of the Commencement Date.
(iv) "Lease Year" shall mean the twelve month period between the
Commencement Date and each succeeding anniversary thereof.
(7) Tenant's Proportionate Share: Tenant's proportionate share (calculated using
a total Building size of 314,614 rentable square feet) shall be as follows: (i)
upon delivery of the Original Space, 23.77% in total; upon delivery of the First
Expansion Space, 24.88% in total; and upon delivery of the Second Expansion
Space, 27.76% in total.
(8) Base Year: 2005-06 School Tax; 2006 Town Tax; Electric Base Year - Calendar
Year 2006. At no time shall Tenant be charged or held responsible to pay any
additional rent pertaining to Real Estate Taxes during the initial twelve months
of the Lease term.
(9) Permitted Use: General Business Offices (which shall include the use of the
Demised Premises as an internet and telephone call center provided that the same
does not in any way violate the Building's certificate of occupancy). Provided
Tenant, at its sole cost and expense, obtains all necessary approvals
(including, but not limited to any special use or variances that may be
necessary) from any and all applicable municipal and governmental agencies
having jurisdiction over the Property (the "Retail Use Approvals"), Landlord
consents to Tenant's use of a portion of the Demised Premises on the first floor
only for retail sales of flowers, plants, gourmet baskets, and other gifts and
products presently offered by Tenant or any of its Affiliates. Tenant's right to
use any of the Demised Premises for retail use shall be limited to Tenant and
shall at no time extend to any assignee of Tenant with the exception of any of
Tenant's Affiliates or in the case of a merger or acquisition of or by Tenant.
Tenant may however, sublet the retail space, subject to Landlord's right of
recapture as set forth in Article 11.04. The parties hereto acknowledge and
understand that at no time shall Landlord be responsible to obtain the Retail
Use Approvals, nor shall any delay in Tenant obtaining the same in any way
affect the Commencement Date.
(10) Broker(s): Real Estate Strategies, Ltd. and Treeline Leasing LLC.
(11) Security Deposit: None.
ARTICLE 1.
DEMISED PREMISES; RENT
1.01. Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord,
the Demised Premises for the term to commence on the respective Commencement
Date and to end at 11:59 p.m. on the Expiration Date or until such term shall
sooner cease and terminate as hereinafter provided.
1.02. (a) Notwithstanding the Commencement Date set forth above, unless the
Original Premises and the Expansion Space are substantially completed and
delivered to Tenant on the first day of a given month, the Fixed Annual Rent for
the first month shall not be payable until the first day of the second calendar
month following the month in which the Landlord substantially completes
Landlord's Work and either (i) all necessary written Occupancy Approvals have
been obtained or (ii) Landlord indemnifies Tenant in accordance with Article A,
Section 3 (the "Rent Commencement Date"). By way of example, in the event the
Commencement Date is set for June 15, 2005, Fixed Annual Rent shall commence on
August 1, 2005 subject to the rent abatement, as set below, bringing the first
actual payment of Fixed Annual Rent to September 1, 2005; in the event the
Commencement Date is set for June 1, 2005, the Fixed Annual Rent shall commence
on July 1, 2005, subject to the rent abatement set forth below as set below,
bringing the first actual payment of Fixed Annual Rent to August 1, 2005.
(b) From and after the Rent Commencement Date, subject to the rent
abatement set forth in Article 1.06 below, Tenant shall pay to Landlord the
Fixed Annual Rent as stated below in each period, said sum to be paid in advance
on the first of each and every calendar month in an amount equal to one-twelfth
thereof during the term of this Lease as follows:
[RENT SCHEDULES BEGIN ON NEXT PAGE]
<PAGE>
ORIGINAL PREMISES
Suite LL08 12,865 RSF Proportionate Share: 4.09%
- ----------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $283,030.00 $23,585.83
2 9/1/2006 8/31/2007 $292,678.75 $24,389.90
3 9/1/2007 8/31/2008 $302,327.50 $25,193.96
4 9/1/2008 8/31/2009 $311,976.25 $25,998.02
5 9/1/2009 8/31/2010 $321,625.00 $26,802.08
6 9/1/2010 8/31/2011 $331,273.75 $27,606.15
7 9/1/2011 8/31/2012 $340,922.50 $28,410.21
8 9/1/2012 8/31/2013 $353,787.50 $29,482.29
9 9/1/2013 8/31/2014 $366,652.50 $30,554.38
10 9/1/2014 8/31/2015 $379,517.50 $31,626.46
11 9/1/2015 8/31/2016 $392,382.50 $32,698.54
12 9/1/2016 8/31/2017 $405,247.50 $33,770.63
13 9/1/2017 2/28/2018 $418,112.50 $34,842.71
Suite 110 2,084 RSF Proportionate Share: 0.66%
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $51,058.00 $4,254.83
2 9/1/2006 8/31/2007 $52,621.00 $4,385.08
3 9/1/2007 8/31/2008 $54,184.00 $4,515.33
4 9/1/2008 8/31/2009 $55,747.00 $4,645.58
5 9/1/2009 8/31/2010 $56,760.00 $4,730.00
6 9/1/2010 8/31/2011 $58,308.00 $4,859.00
7 9/1/2011 8/31/2012 $59,856.00 $4,988.00
8 9/1/2012 8/31/2013 $61,920.00 $5,160.00
9 9/1/2013 8/31/2014 $63,984.00 $5,332.00
10 9/1/2014 8/31/2015 $66,048.00 $5,504.00
11 9/1/2015 8/31/2016 $68,112.00 $5,676.00
12 9/1/2016 8/31/2017 $70,176.00 $5,848.00
13 9/1/2017 2/28/2018 $72,240.00 $6,020.00
Suite 112 6,824 RSF Proportionate Share: 2.17%
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $167,188.00 $13,932.33
2 9/1/2006 8/31/2007 $172,306.00 $14,358.83
3 9/1/2007 8/31/2008 $177,424.00 $14,785.33
4 9/1/2008 8/31/2009 $182,542.00 $15,211.83
5 9/1/2009 8/31/2010 $187,660.00 $15,638.33
6 9/1/2010 8/31/2011 $192,778.00 $16,064.83
7 9/1/2011 8/31/2012 $197,896.00 $16,491.33
8 9/1/2012 8/31/2013 $204,720.00 $17,060.00
9 9/1/2013 8/31/2014 $211,544.00 $17,628.67
10 9/1/2014 8/31/2015 $218,368.00 $18,197.33
11 9/1/2015 8/31/2016 $225,192.00 $18,766.00
12 9/1/2016 8/31/2017 $232,016.00 $19,334.67
13 9/1/2017 2/28/2018 $238,840.00 $19,903.33
<PAGE>
Suite 500 53,000 RSF Proportionate Share: 16.85%
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $1,298,500.00 $108,208.33
2 9/1/2006 8/31/2007 $1,338,250.00 $111,520.83
3 9/1/2007 8/31/2008 $1,378,000.00 $114,833.33
4 9/1/2008 8/31/2009 $1,417,750.00 $118,145.83
5 9/1/2009 8/31/2010 $1,457,500.00 $121,458.33
6 9/1/2010 8/31/2011 $1,497,250.00 $124,770.83
7 9/1/2011 8/31/2012 $1,537,000.00 $128,083.33
8 9/1/2012 8/31/2013 $1,590,000.00 $132,500.00
9 9/1/2013 8/31/2014 $1,643,000.00 $136,916.67
10 9/1/2014 8/31/2015 $1,696,000.00 $141,333.33
11 9/1/2015 8/31/2016 $1,749,000.00 $145,750.00
12 9/1/2016 8/31/2017 $1,802,000.00 $150,166.67
13 9/1/2017 2/28/2018 $1,855,000.00 $154,583.33
FIRST EXPANSION SPACE
Suite 122 207 RSF Proportionate Share: 0.07%
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $5,071.50 $422.63
2 9/1/2006 8/31/2007 $5,226.75 $435.56
3 9/1/2007 8/31/2008 $5,382.00 $448.50
4 9/1/2008 8/31/2009 $5,537.25 $461.44
5 9/1/2009 8/31/2010 $5,692.50 $474.38
6 9/1/2010 8/31/2011 $5,847.75 $487.31
7 9/1/2011 8/31/2012 $6,003.00 $500.25
8 9/1/2012 8/31/2013 $6,210.00 $517.50
9 9/1/2013 8/31/2014 $6,417.00 $534.75
10 9/1/2014 8/31/2015 $6,624.00 $552.00
11 9/1/2015 8/31/2016 $6,831.00 $569.25
12 9/1/2016 8/31/2017 $7,038.00 $586.50
13 9/1/2017 2/28/2018 $7,245.00 $603.75
Suite 120 3,306 RSF Proportionate Share: 1.05%
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $80,997.00 $6,749.75
2 9/1/2006 8/31/2007 $83,476.50 $6,956.38
3 9/1/2007 8/31/2008 $85,956.00 $7,163.00
4 9/1/2008 8/31/2009 $88,435.50 $7,369.63
5 9/1/2009 8/31/2010 $90,915.00 $7,576.25
6 9/1/2010 8/31/2011 $93,394.50 $7,782.88
7 9/1/2011 8/31/2012 $95,874.00 $7,989.50
8 9/1/2012 8/31/2013 $99,180.00 $8,265.00
9 9/1/2013 8/31/2014 $102,486.00 $8,540.50
10 9/1/2014 8/31/2015 $105,792.00 $8,816.00
11 9/1/2015 8/31/2016 $109,098.00 $9,091.50
12 9/1/2016 8/31/2017 $112,404.00 $9,367.00
13 9/1/2017 2/28/2018 $115,710.00 $9,642.50
<PAGE>
SECOND EXPANSION SPACE [REPLACE WITH CORRECT SCHEDULE]
STORAGE SPACE
Suite LL14 1,471 RSF
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $13,239.00 $1,103.25
2 9/1/2006 8/31/2007 $13,636.17 $1,136.35
3 9/1/2007 8/31/2008 $14,045.26 $1,170.44
4 9/1/2008 8/31/2009 $14,466.61 $1,205.55
5 9/1/2009 8/31/2010 $14,900.61 $1,241.72
6 9/1/2010 8/31/2011 $15,347.63 $1,278.97
7 9/1/2011 8/31/2012 $15,808.06 $1,317.34
8 9/1/2012 8/31/2013 $16,282.30 $1,356.86
9 9/1/2013 8/31/2014 $16,770.77 $1,397.56
10 9/1/2014 8/31/2015 $17,273.89 $1,439.49
11 9/1/2015 8/31/2016 $17,792.11 $1,482.68
12 9/1/2016 8/31/2017 $18,325.87 $1,527.16
13 9/1/2017 2/28/2018 $18,875.65 $1,572.97
Suite 470 921 RSF
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $8,289.00 $690.75
2 9/1/2006 8/31/2007 $8,537.67 $711.47
3 9/1/2007 8/31/2008 $8,793.80 $732.82
4 9/1/2008 8/31/2009 $9,057.61 $754.80
5 9/1/2009 8/31/2010 $9,329.34 $777.45
6 9/1/2010 8/31/2011 $9,609.22 $800.77
7 9/1/2011 8/31/2012 $9,897.50 $824.79
8 9/1/2012 8/31/2013 $10,194.42 $849.54
9 9/1/2013 8/31/2014 $10,500.26 $875.02
10 9/1/2014 8/31/2015 $10,815.26 $901.27
11 9/1/2015 8/31/2016 $11,139.72 $928.31
12 9/1/2016 8/31/2017 $11,473.91 $956.16
13 9/1/2017 2/28/2018 $11,818.13 $984.84
<PAGE>
Suite 497 1,400 RSF
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $12,600.00 $1,050.00
2 9/1/2006 8/31/2007 $12,978.00 $1,081.50
3 9/1/2007 8/31/2008 $13,367.34 $1,113.95
4 9/1/2008 8/31/2009 $13,768.36 $1,147.36
5 9/1/2009 8/31/2010 $14,181.41 $1,181.78
6 9/1/2010 8/31/2011 $14,606.85 $1,217.24
7 9/1/2011 8/31/2012 $15,045.06 $1,253.75
8 9/1/2012 8/31/2013 $15,496.41 $1,291.37
9 9/1/2013 8/31/2014 $15,961.30 $1,330.11
10 9/1/2014 8/31/2015 $16,440.14 $1,370.01
11 9/1/2015 8/31/2016 $16,933.35 $1,411.11
12 9/1/2016 8/31/2017 $17,441.35 $1,453.45
13 9/1/2017 2/28/2018 $17,964.59 $1,497.05
Suite 432 1,293 RSF
- ---------
Lease Total Fixed Annual Monthly
Year From To Base Rent Installment
---- ---- -- - --------- -----------
1 9/1/2005 8/31/2006 $11,637.00 $969.75
2 9/1/2006 8/31/2007 $11,986.11 $998.84
3 9/1/2007 8/31/2008 $12,345.69 $1,028.81
4 9/1/2008 8/31/2009 $12,716.06 $1,059.67
5 9/1/2009 8/31/2010 $13,097.55 $1,091.46
6 9/1/2010 8/31/2011 $13,490.47 $1,124.21
7 9/1/2011 8/31/2012 $13,895.19 $1,157.93
8 9/1/2012 8/31/2013 $14,312.04 $1,192.67
9 9/1/2013 8/31/2014 $14,741.40 $1,228.45
10 9/1/2014 8/31/2015 $15,183.65 $1,265.30
11 9/1/2015 8/31/2016 $15,639.15 $1,303.26
12 9/1/2016 8/31/2017 $16,108.33 $1,342.36
13 9/1/2017 2/28/2018 $16,591.58 $1,382.63
The Commencement Dates reflected in the above charts may be modified in the
event that the Commencement Dates for the Original Premises, the Expansion Space
or the Storage Space differ from that stated in the above charts. Landlord and
Tenant shall execute a certificate ("Commencement Date Memorandum") confirming
(i) the actual Commencement Date and Expiration Date (subject to Tenant's
Renewal Option set forth in Article 41 hereof) for each of the spaces rented to
Tenant; (ii) the actual rentable square footage for each of the spaces rented to
Tenant; (iii) Tenant's Proportionate Share for each of the spaces rented to
Tenant; and the total Fixed Annual Rent for each such space. Said Commencement
Date Memorandum being jointly executed upon confirmation and delivery by
Landlord to Tenant of the applicable space.
(c) Tenant acknowledges that the Expansion Space, with the exception of Suite
122 (which is occupied by a month-to-month tenant) is presently occupied by
other tenants pursuant to valid leases in full force and effect. Landlord shall
use best efforts to cause such spaces to be vacated by the tenants in possession
of said spaces as soon as is reasonably practical after execution of this Lease.
Notwithstanding, Tenant shall accept possession of the Expansion Space on such
date as Landlord is able to deliver same to Tenant in the condition contemplated
by this Lease.
(d) Landlord shall, on the Commencement Date for the Original Premises, deliver
to Tenant the Storage Space. The Storage Space shall initially consist of
approximately 5,085 rentable square feet of space. Tenant shall have the right
to lease from Landlord during the term of this Lease up to an additional 5,000
rentable square feet of storage space in the basement of the Building.
Notwithstanding anything to the contrary herein contained, Landlord may, at any
time and in Landlord's sole discretion, relocate all or any portion of the
Storage Space to an alternative location within the Building upon ten (10) days
prior written notice to Tenant; provided, however, that the replacement Storage
Space provided by Landlord contains approximately the same rentable square
footage as the Storage Space Landlord is requiring Tenant to vacate. Landlord
shall bear all reasonable and actual costs of relocating Tenant's Storage Space.
(e) The parties hereto acknowledge that the Fixed Annual Rent due for the
Demised Premises is an aggregate of all of the rent schedules and nothing herein
shall in any manner be construed as to separate the Demised Premises or the
obligations set forth herein it being understood and agreed by the purpose of
the separate rent schedules is for convenience purposes only as there is a
possibility that the commencement date may not be the same for each of the
suites.
(f) The parties hereto acknowledge that the term of the Lease shall be
co-terminus for all of the Demised Premises. As such, the term for the Expansion
Space shall terminate on the same date as the term for the Original Space.
1.03. (a) Intentionally Omitted.
(b) All sums (other than Fixed Annual Rent) payable hereunder shall be
deemed additional rent, and together with Fixed Annual Rent shall be payable
without setoff or deduction whatsoever, except as may be occasioned by the
occurrence of any event permitting a deduction from or abatement of rent as
specifically set forth in Articles 10 and 14. It is expressly understood and
agreed that the Base Electric Charge (as hereinafter defined) that is due
hereunder are part of the additional rent due and owing and Tenant's failure to
pay same as and when due shall be a material default hereunder. Fixed Annual
Rent and additional rent shall be paid in lawful money of the United States by
electric funds transfer ("EFT"), or by good and sufficient check (subject to
collection) drawn to Landlord's order on a bank which is a member of the New
York Clearinghouse Association or a successor thereto or by money order. Said
checks shall be sent to Landlord at the office of Landlord's Managing Agent,
Treeline Management Corp., P.O. Box 341, Carle Place, New York 11514 or to such
other party or parties and/or at such other address(es) as Landlord shall
designate by written notice to Tenant.
1.04. If Tenant shall fail to pay any installment of Fixed Annual Rent or any
payment of additional rent for a period of five (5) days after such installment
or payment shall have become due, Tenant shall pay a late charge to Landlord of
$350.00 plus interest at the Interest Rate (as such term is defined in Article
33 hereof), from the date when such installment or payment shall have become due
to the date of the payment thereof, and such interest shall be deemed additional
rent.
1.05. Tenant shall have twenty four (24) hour a day, seven (7) day a week access
to, and use of the Demised Premises, the Building, and the Property (with the
exception of the gated parking area in which access will only be available until
on Business Days, Monday through Friday from 7:00 A.M. to 9:00 P.M.), which
access shall be by passcard access after business hours and on days other than
Business Days. Notwithstanding the foregoing, Landlord shall provide Tenant with
up to twelve (12) gated and marked parking spaces on the upper level of the
parking garage, as to which Tenant will have access twenty four (24) hours a
day, seven (7) days a week, via passcard access. Landlord shall provide Tenant
with five (5) passcards per each 1,000 rentable square feet of space being
leased by Tenant upon commencement of the Lease Term. Additional passcards (at
the same ratio) will be delivered to Tenant upon the commencement of the Lease
term for the Expansion Space. Tenant shall have the right to fifty (50)
replacement cards per year at no cost to Tenant. In addition, Tenant shall have
the right to additional passcards (at the same ratio of five (5) passcards per
each 1,000 rentable square feet of space being leased) in the event it exercises
its right of first offer as set forth in Article 42 herein. Subject to the above
rights, if Tenant shall require replacement of any passcard issued to it, Tenant
shall pay to Landlord as additional rent a charge of $50.00 per passcard
requiring replacement. Tenant shall surrender to Landlord all passcards issued
to it upon the expiration or earlier termination of this Lease. Landlord shall
have no liability to Tenant in the event that the passcard access system
malfunctions and Tenant cannot gain access to the Demised Premises and the
Building after business hours or on days other than business days; provided,
however, that Landlord agrees to regularly service and maintain the passcard
access system in good working order and shall promptly repair the passcard
access system as soon as is reasonably practical after receipt of written or
oral notice that same has malfunctioned.
1.06. Tenant shall be entitled to an abatement of Fixed Annual Rent for the
first month of the initial term of this Lease as to the Original Space and the
Expansion Space. Said free rent period shall consist of the first full calendar
month after the Commencement Date of the term of this Lease for the applicable
space.
ARTICLE 2.
CONDITION OF PREMISES
2.01. Landlord, at Landlord's sole cost and expense, shall perform the work in
and to the Demised Premises described in Exhibit B annexed to this Lease (the
"Workletter"). Tenant acknowledges that the Workletter represents the agreement
of Landlord and Tenant concerning all work to be performed by Landlord in the
Demised Premises and that any work not specifically delineated in the Workletter
shall not be performed by Landlord. Landlord reserves the right to make such
changes and/or substitutions in the Workletter as may be required by any
governmental agency having jurisdiction over the Demised Premises or as may be
required by site conditions, subject to Tenant's written approval, which
approval shall not be unreasonably withheld or delayed. All of the facilities,
materials and work to be furnished, installed and performed by Landlord in the
Demised Premises pursuant to the Workletter are referred to herein as
"Landlord's Work". Any upgrades or additional work not included in the
Workletter and any amendments or addendums thereto, that Tenant requests
Landlord to perform shall not be deemed a portion of Landlord's Work and may be
performed by Landlord after payment by Tenant of the cost of such upgrades or
additional work in cash, electronic funds transfer ("EFT") or by check, as
directed by Landlord; it is expressly understood and agreed that Landlord shall
have no obligation whatsoever to perform any such additional work, except as
stated expressly in the Workletter and any amendments or addendums thereto,
unless the same is required for the issuance of the certificate of occupancy for
the Original Premises and for the Expansion Space, as the same is applicable.
Attached hereto as Exhibit "T" is a list of Tenant's requested upgrades or
additional work that Landlord has agreed as of the date hereof to perform.
Landlord shall not be obligated to accept any additional requests from Tenant
for additional work in the Demised Premises except as set forth on Exhibit "T".
2.02. Landlord's Work for the Original Premises and/or the Expansion Space shall
be deemed to have been substantially completed notwithstanding that minor or
insubstantial details of construction, decoration or mechanical adjustment
and/or minor "punch list" items remain to be performed, provided that (x) any
and all required life safety systems (as hereinafter defined) in connection with
the issuance of certificate of occupancy for the respective space are installed
and properly functioning; (y) the aggregate cost of the "punch list" items for
the Original Premises does not exceed One Hundred and Forty Thousand ($140,000)
Dollars and the aggregate cost of the "punch list" items for the Expansion Space
does not exceed Forty Thousand ($40,000) Dollars; and (z) the Original Premises
or Expansion Space, as the same is applicable, are accessible and reasonably
usable for the conduct of Tenant's business. Landlord shall provide Tenant with
ten (10) days prior written notice of when it will have substantially completed
the (i) Original Premises and (ii) the Expansion Space.. If Landlord shall be
delayed in substantially completing Landlord's Work as a direct result of any
act, neglect, failure or omission of Tenant, its agents, servants, employees,
contractors, or subcontractors such delay shall be deemed a "Tenant Delay". A
Tenant Delay shall include, without limitation, the following items:
(i) Tenant's failure to supply necessary information requested by Landlord
necessary to substantially complete the Demised Premises after written request
by Landlord; or
(ii) Tenant's untimely request for materials, finishes or installations other
than as set forth in the Workletter which are not readily available at the time
Landlord is ready to install same or are not consistent with the Workletter or
the Tenant Upgrades; or (iii) Tenant's changes in drawings, plans or
specifications for Landlord's Work in the Demised Premises pursuant to the
Workletter which would require Landlord to either refile or amend its filings
with the Building Department.
2.03. Tenant shall pay to Landlord a sum equal to any reasonable additional cost
to Landlord (i.e., the total cost incurred by Landlord for labor, materials and
engineering in excess of the aggregate costs which Landlord would have incurred
to complete Landlord's Work if there had been no Tenant Delay) in completing
Landlord's Work resulting from any Tenant Delay. Any such sums shall be paid to
Landlord within thirty (30) days after Tenant receives Landlord's invoices
therefor. Such costs shall be collectible in the same manner as additional rent
whether or not the term of this Lease shall have commenced, and in default of
payment thereof, Landlord shall (in addition to all other remedies) have the
same rights as in the event of default of payment of Fixed Annual Rent.
2.04. If the occurrence of the Commencement Date shall be delayed by direct
result of any Tenant Delay, the Commencement Date shall be accelerated by the
number of days of such Tenant Delay.
2.05. Tenant, by entering into possession of the Original Premises and/or the
Expansion Space for the conduct of its business, shall be deemed to have
conclusively agreed that Landlord has performed all of its obligations hereunder
solely with respect to Landlord's Work with respect to applicable space, and
that the Original Premises and/or the Expansion Space are in satisfactory
condition as of the date of such possession, except for latent defects and items
remaining to be performed by Landlord pursuant to Section 2.01 above and subject
to the one (1) year warranty given to Tenant by Landlord as set forth in Article
7.
2.06. Notwithstanding anything to the contrary contained herein, (a) if Tenant
provides Landlord with an approved Plan for the Original Premises by June 20,
2005 (TIME BEING OF THE ESSENCE), and Landlord fails to deliver possession to
Tenant of the Original Premises in the condition required by this Lease by (i)
October 15, 2005, Tenant shall be entitled to a rent abatement equal to one (1)
day of Fixed Annual Rent for the Original Premises for each day thereafter that
Landlord fails to so deliver the Original Premises to Tenant, or (ii) November
1, 2005, Tenant shall be entitled to a rent abatement equal to two (2) days of
Fixed Annual Rent for the Original Premises for each day thereafter that
Landlord fails to so deliver the Original Premises to Tenant; or (b) if Tenant
fails to deliver to Landlord an approved Plan for the Original Premises by June
20, 2005, (i) Landlord's time to complete the Original Space shall be extended
for two (2) days for each day that Tenant fails to so deliver the approved Plan
to Landlord, and (ii) Tenant shall forfeit one (1) day of Holdover Rent (as
defined in Article 44) for each day after June 20, 2005 that Tenant fails to so
deliver the approved Plan to Landlord.
ARTICLE 3.
CAFETERIA
3.01. The parties hereto acknowledge that there is currently a cafeteria in the
Building (the "Cafeteria") pursuant to a lease (the "Cafeteria Lease") with
Landlord (the "Cafeteria Tenant"). Landlord shall notify Tenant in the event the
Cafeteria Tenant is unable to meet its obligations pursuant to its lease and
vacates the Cafeteria whereupon Landlord and Tenant shall each endeavor to find
a new cafeteria operator for the Cafeteria. The business terms for the new
cafeteria operator shall be based upon the same material terms (i.e. the same
rental charge per annum with similar annual escalations for any period remaining
in the term of the Cafeteria Lease, regardless of whether the lease with the
prospective cafeteria operator is for the remaining term of the Cafeteria Lease
or for an extended term) as the Cafeteria Lease. At no time shall this Article
be deemed to require Landlord to accept a cafeteria operator which Landlord does
not wish to accept as a tenant in the Building, however Landlord's acceptance of
the cafeteria operator shall not be unreasonably withheld, conditioned or
delayed. In the event Landlord does not accept the cafeteria operator chosen by
Tenant, Landlord shall notify Tenant of the same and Landlord's reasons for its
refusal to accept said cafeteria operator.
ARTICLE 4.
REAL ESTATE TAX ESCALATION
4.01. For the purposes of this Article 4, the following definitions shall apply:
(a) The term "Base Tax" shall mean the Taxes payable for the
Base Year, net of any special assessments and as finally determined. If
the Base Tax subsequently shall be adjusted, corrected or reduced
whether as the result of protest, by means of agreement or as the
result of legal proceedings, the Base Tax for the purpose of computing
any additional rent payable pursuant to this Article shall be the Base
Tax as so adjusted, corrected or reduced. Until the Base Tax is so
adjusted, corrected or reduced, if ever, Tenant shall pay additional
rent hereunder based upon the unadjusted, uncorrected or unreduced Base
Tax and upon such adjustment, correction or reduction occurring, any
additional rent payable by Tenant prior to the date of such occurrence
shall be recomputed and Tenant shall pay to Landlord any additional
rent found due by such recomputation within ten days after being billed
therefor (which bill shall set forth in reasonable detail the pertinent
date causing and comprising such recomputation).
(b) The term "Taxes" shall mean all fully assessed real estate
taxes, assessments or any other governmental charge, general or
special, ordinary or extraordinary, unforeseen as well as foreseen, of
any kind or nature whatsoever, that are or may be assessed, levied or
imposed upon all or any part of the land (hereinafter referred to as
the "Land") on which the Building is situated, the Building and
sidewalks or streets in front of or adjacent thereto imposed by
Federal, State or local government (but excluding any income,
franchise, corporate, estate, inheritance, succession, capital stock,
transfer or mortgage recording tax, unless same shall be in
substitution for or in lieu of a real estate tax assessment) and any
and all personal property taxes imposed upon the fixtures, machinery,
equipment, apparatus, systems and appurtenances in, upon or used in
connection with the Building and Land for operation thereof; it being
expressly understood and agreed that it is the intention of the parties
for the term "Taxes" to have the broadest possible meaning and not to
be limited by the foregoing description. If, due to a future change in
the method of taxation or in the taxing authority, a new or additional
tax or assessment is imposed against Landlord, and/or the Land and/or
the Building, and/or the sidewalks or streets in front of or adjacent
thereto or the rents or income therefrom, in addition to, or in
substitution in whole or in part for any tax which would constitute
"Taxes", or in lieu of additional Taxes, such tax or imposition shall
be deemed for the purposes hereof to be included within the term
"Taxes".
(c) The term "Tax Year" shall mean each calendar year in which
occurs any part of the term of this Lease or such other period of
twelve (12) months occurring during the term of this Lease as hereafter
may be duly adopted as the fiscal year for real estate tax purposes of
the taxing authorities.
(d) The term "Escalation Statement" shall mean a statement
setting forth the amount payable by Tenant for a specified Tax Year
pursuant to this Article 4.
4.02. (a) Tenant shall pay as additional rent for each Tax Year a sum ("Tenant's
Tax Payment") equal to Tenant's Proportionate Share of the amount by which the
Taxes for such Tax Year exceed the Base Tax. Tenant's Tax Payment for each Tax
Year shall be due and payable in twelve equal monthly installments, in advance,
on the first day of each month during the Tax Year, based upon the Escalation
Statement furnished prior to the commencement of such Tax Year, until such time
as a new Escalation Statement for a subsequent Tax Year shall become effective.
If an Escalation Statement is furnished to Tenant after the commencement of the
Tax Year in respect of which such Escalation Statement is rendered, Tenant
shall, within thirty (30) days thereafter, pay to Landlord an amount equal to
the amount of any underpayment of Tenant's Tax Payment with respect to such Tax
Year and, in the event of any overpayment, Landlord shall permit Tenant to
credit against subsequent payments under this Section 4.02 the amount of
Tenant's overpayment, or if the Lease has expired or terminated, provided there
are no outstanding amounts due to Landlord, promptly reimburse said overpayment
to Tenant. If there shall be any increase in Taxes for any Tax Year, whether
during or after such Tax Year, Landlord shall furnish a revised Escalation
Statement for such Tax Year, and Tenant's Tax Payment for such Tax Year shall be
adjusted and paid substantially in the same manner as provided in the preceding
sentence. If during the term of this Lease, Taxes are required to be paid
(either to the appropriate taxing authorities or as tax escrow payments to a
superior mortgagee) in full or in other installments, on any other date or dates
than as presently required, then at Landlord's option, Tenant's Tax Payments
shall be correspondingly accelerated or revised so that said Tenant's Tax
Payments are due to the taxing authorities or the superior mortgagee. Provided
Tenant has timely paid the Taxes due hereunder to Landlord, Tenant shall not be
liable for the payment of any interest or penalties associated with the late or
partial payment of such Taxes by Landlord to any federal, state or local
government or agency.
(b) If the real estate tax fiscal year of any taxing authority
shall be changed during the term of this Lease, any Taxes for such fiscal year,
a part of which is included within a particular Tax Year and a part of which is
not so included, shall be apportioned on the basis of the number of days in such
fiscal year included in the particular Tax Year for the purpose of making the
computations under this Section 4.02.
(c) If the Taxes for any Tax Year for which Tenant shall have
paid additional rent pursuant to this Article shall be adjusted, corrected or
reduced whether as the result of protest of any tentative assessment, or by
means of agreement, or as the result of legal proceedings, the additional rent
becoming due in said Tax Year pursuant to this Article shall be determined on
the basis of said corrected, adjusted or reduced Taxes. If Tenant shall have
paid any additional rent pursuant to this Article for such Tax Year prior to any
said adjustment, Landlord shall credit or refund to Tenant any excess amount
thus paid as reflected by said adjusted Taxes, less Tenant's Proportionate Share
of any cost, expense or fees (including reasonable experts' and reasonable
attorneys' fees ) incurred by Landlord in obtaining said tax adjustment. If said
tax adjustment shall occur prior to Tenant's payment of any of said Taxes due
hereunder as additional rent, Tenant shall pay, as additional rent, Tenant's
Proportionate Share of any cost, expenses or fees (including reasonable experts'
and reasonable attorneys' fees ) incurred by Landlord in obtaining said tax
adjustment.
4.03. In the event that the Commencement Date shall be other than the first day
of a Tax Year or the date of the expiration or other termination of this Lease
shall be a day other than the last day of a Tax Year, then, in applying the
provisions of this Article 4 with respect to any Tax Year in which such event
shall have occurred, appropriate adjustments shall be made to reflect the
occurrence of such event on the basis of the portion of such Tax Year that shall
have elapsed after the term hereof commences in the case of the Commencement
Date, and prior to the date of such expiration or termination in the case of the
Expiration Date or other termination.
4.04. Payments shall be made pursuant to this Article 4 notwithstanding the fact
that an Escalation Statement is furnished to Tenant after the expiration of the
term of this Lease. In no event shall the Fixed Annual Rent be reduced by the
operation of this Article 4. The rights and obligations of Landlord and Tenant
under the provisions of this Article 4 with respect to any additional rent shall
survive the expiration or other termination of this Lease.
4.05. Landlord's failure to render an Escalation Statement with respect to any
Tax Year shall not prejudice Landlord's right thereafter to render an Escalation
Statement with respect thereto or with respect to any subsequent Tax Year,
provided said Escalation Statement does not relate to any Tax Year more than
thirty six (36) months from the date the Escalation Statement should have been
presented to Tenant.
4.06. Each Escalation Statement shall be conclusive and binding upon Tenant
unless within the later of thirty (30) days after receipt of such Escalation
Statement and ten (10) days from Tenant's receipt of the Tax Records, as defined
below. At Tenant's request Landlord shall provide Tenant with evidence
supporting the tax amount, either with a complete copy of the tax bill or such
other evidence as is in Landlord's possession ("Tax Records"). Tenant shall
notify Landlord that it disputes the correctness of such Escalation Statement
and shall state the basis upon which Tenant believes in good faith that same is
incorrect. Pending the determination of such dispute, Tenant shall pay all
amounts due pursuant to the Escalation Statement in dispute, without prejudice
to Tenant's position, however, such payment shall in no way prejudice Tenant's
right to dispute said payment.
4.07. If Tenant shall fail to pay any amounts due pursuant to this Article as
and when due, the terms of Section 1.04 hereof shall apply and Landlord shall be
entitled to impose late charges and interest in accordance with the terms of
that Section.
4.07. 4.08. In the event Tenant applies for and receives a reduction and/or an
abatement of the Taxes as part of any economic incentive program directly due to
Tenant's use or occupancy of the Building or directly due to its conducting its
business operations in the state, county or local municipality and Tenant can
provide Landlord with evidence of the same, Tenant shall receive a credit
against its proportionate share of Taxes owed to Landlord in an amount equal to
such reduction and/or abatement upon Landlord's receipt of said reduction and/or
abatement. Landlord shall cooperate with Tenant in connection with Tenant's
application for such economic development incentives pursuant to Article 47.02
herein but in no event shall Landlord be required to execute any documentation
which would in any manner materially adversely affect Landlord, the Property or
the Building. Tenant shall reimburse Landlord for any and all reasonable costs
incurred by Landlord (including but not limited to reasonable attorneys' fees)
in connection with the application.
4.09. Notwithstanding anything to the contrary herein contained, Tenant shall
not be charged any additional rent pertaining to Real Estate Taxes during the
initial twelve months of the initial term of this Lease.
ARTICLE 5.
USE
5.01. The Demised Premises shall be used by Tenant solely as and for the
Permitted Use and for no other purpose. No sublease, assignment or other
transfer of any of Tenant's rights hereunder shall be inconsistent with the
Permitted Use, absent Landlord's consent which shall not be unreasonably
withheld, conditioned or delayed. In no event shall Landlord be required to
consent to a change in the Permitted Use that, in Landlord's reasonable
judgment, is inconsistent with the Building's status as a Class A office
building in Nassau County, New York.
5.02. Tenant shall not use or permit the use of the Demised Premises or any part
thereof in any way that would violate the Permitted Use or any of the covenants,
agreements, terms, provisions and conditions of this Lease or for any unlawful
purpose or in any unlawful manner or in violation of the Certificate of
Occupancy for the Demised Premises or the Building, and Tenant shall not suffer
or permit the Demised Premises or any part thereof to be used in any manner, or
anything to be done therein or anything to be brought into or kept therein,
that, in the reasonable judgment of Landlord, in any way impairs or tends to
impair the character, reputation or appearance of the Building as a high quality
office building, impairs or interferes with, or tends to impair or interfere
with, any of the Building services or the proper and economic heating, cleaning,
air-conditioning, ventilating or other servicing of the Building or the Demised
Premises, or impairs or interferes with, or tends to impair or interfere with,
the use of any of the other areas of the Building by, or occasions material
discomfort, inconvenience or annoyance of, any other tenants or occupants of the
Building, or increases, or tends to increase, Landlord's costs of operating the
Building. Tenant shall not install any electrical or other equipment of any kind
that, on the reasonable judgment of Landlord, might cause any such impairment,
interference, discomfort, inconvenience or annoyance. Upon ten (10) days written
notice to Tenant (except in the case which Landlord, in its reasonable
discretion, deems a bona fide emergency, in which case no notice is required)
Landlord shall be permitted to take such "peaceable" actions as Landlord
reasonably deems necessary to obtain Tenant's compliance with this Section
including, without limitation, removal at Tenant's sole cost and expense of any
installations of Tenant that violate the terms of this Section in Landlord's
judgment.
5.03. Landlord shall at all times comply with all applicable federal, state and
local laws with respect to the Building and the Property. If any governmental
license or permit, other than a Certificate of Occupancy for the Building, shall
be required for the proper and lawful conduct of Tenant's business in the
Demised Premises or any part thereof, Tenant at its expense shall procure and
maintain and comply with the terms and conditions of such license or permit and
submit the same to Landlord for inspection.
ARTICLE 6.
ALTERATIONS AND INSTALLATIONS
6.01. Tenant shall make no alterations, installations, additions or improvements
in or to the Demised Premises without Landlord's prior written consent and then
only by contractors or mechanics first approved by Landlord, which consent and
approval may be withheld in Landlord's reasonable discretion. Landlord's
approval shall not be construed as a representation, warranty or statement by
Landlord that any work to be performed by Tenant in the Demised Premises is in
compliance with applicable law or is otherwise properly designed or efficacious
for Tenant's intended purpose. All work, alterations, installations, additions
and improvements shall be done at Tenant's sole expense and at such times and in
such manner as Landlord may from time to time designate in Landlord's sole
discretion, shall be done in a good and workmanlike manner, and shall be
effected in compliance with all applicable laws, ordinances, rules and
regulations, including, without limitation, the Americans with Disabilities Act.
Landlord may impose such conditions in addition to those expressly provided in
this Lease as to guaranty of completion and payment, or otherwise, as Landlord
may consider necessary in its sole and absolute discretion.
Notwithstanding anything herein to the contrary, provided Tenant is not in
default under the terms of this Lease beyond any applicable notice and cure
period, Tenant may, without notice or consent of Landlord perform Cosmetic
Alterations (as hereinafter defined below) to the interior of the Demised
Premises provided that (i)Tenant shall, at all times comply with the Building
Rules and Regulations as well as any requirements that are, or may at some
future date, be set by Landlord's insurance carrier; (ii) Tenant shall deliver
such items as are required herein pursuant this Article 6 of the Lease,
including but limited to all insurance requirements set forth herein; (iii) at
no time shall the alterations be performed in a manner which may in any way
either unreasonably disturb other tenants in the Building or unreasonably
disturb the normal operations of the Building; (iv) the alteration must be
performed in a workmanlike manner and shall be performed and completed in
accordance with any and all federal, state and local laws and regulations; and
(v) the cost of said Cosmetic Alterations at no time, in the aggregate, exceeds
One Hundred and Eighty Thousand ($180,000.00) Dollars. For purposes of this
provision "Cosmetic Alterations" shall be deemed to mean alterations solely
cosmetic in nature (i.e. re-painting, replacement of floor covering; change of
ceiling tiles change of decorative fixtures or furniture) which do not, at any
time, require filing with the Building Department.
6.02. Any work, alterations, installations, additions or improvements in or to
the Demised Premises shall be effected solely in accordance with plans and
specifications first approved in writing by Landlord unless such items are
Cosmetic Alterations and meet the conditions hereinbefore set forth. Such plans
and specifications shall be prepared at Tenant's sole cost and expense by a
professional registered architect and shall be complete, finished detailed
architectural drawings and specifications for the work to be done. Tenant shall
reimburse Landlord promptly upon demand for any reasonable third party costs and
expenses incurred by Landlord in connection with Landlord's review of such
Tenant's plans and specifications.
6.03. Any approved alterations, installations, additions and improvements to the
Demised Premises shall be performed in accordance with the foregoing Sections
and the following provisions:
(a) Tenant shall furnish to Landlord copies of all
governmental permits and authorizations that are required in connection
with such work. All such governmental permits and authorizations shall
be obtained by Tenant at its sole cost and expense and Tenant shall pay
the cost of filing Tenant's plans and specifications with appropriate
governmental authorities in such form as Landlord has agreed to in its
reasonable discretion. Tenant shall also obtain all required sign-offs
of any permits applied for by Tenant. If Tenant fails to do so,
Landlord may, upon thirty (30) days written notice, do so at Tenant's
sole cost and expense and may charge Tenant as additional rent to be
paid immediately Landlord's actual costs associated with obtaining such
sign-offs.
Notwithstanding anything herein to the contrary, the thirty (30) day
written notice set forth above shall be reduced to ten (10) days
written notice in the event that Tenant's failure to obtain the
required sign-offs shall cause a delay in Landlord's ability to close
on either the sale or refinancing of the Building or in any way creates
a default under the terms of Landlord's then existing financing.
(b) All work to be performed by Tenant shall be done in a
manner that will not unreasonably interfere with or disturb other
tenants or occupants of the Building.
(c) Prior to commencement of any work, Tenant shall furnish to
Landlord certificates evidencing the existence of (i) workers'
compensation insurance covering all persons employed for such work; and
(ii) comprehensive general liability (including contractual liability)
and property damage insurance from an insurance company or companies
acceptable to Landlord in its reasonable discretion, naming Landlord,
its designees and Tenant as insured, with coverage of at least
$3,000,000 per occurrence for bodily or personal injury (including
death) and $1,000,000 in respect of property damage, or in such higher
amounts as Landlord may reasonably require. Such insurance shall be
maintained at all times during the performance of the work and shall
not be cancelable except on 30 days' prior written notice to Landlord.
6.04. Tenant shall cause to be removed and discharged of record, at Tenant's
sole cost and expense, any mechanic's lien or other similar lien filed, or
attaching by operation of law, against the Demised Premises or the Building for
work claimed to have been done for, or materials claimed to have been furnished
to, Tenant by payment or filing of any bond required by law or otherwise, within
thirty (30) days after Tenant's notice of any such filing or attachment of any
such lien, whether by Landlord or otherwise.
6.05. Except for Tenant's trade fixtures, equipment and improvements all
fixtures, improvements, alterations, installations, additions, paneling,
partitions, doors, railings and like installations installed in the Demised
Premises at any time, either by Tenant or by Landlord or others on Tenant's
behalf and whether installed or purchased at Landlord's or Tenant's expense
(collectively, the "Leasehold Improvements") shall become the property of
Landlord upon installation. The Leasehold Improvements shall remain upon, and
shall be surrendered with, the Demised Premises. At no time shall the any high
density file systems or the like, signage installed by Tenant pursuant to
Article 38 herein, nor the Satellite Equipment installed by Tenant pursuant to
Article 37 herein be deemed to be the property of Landlord it being expressly
understood and agreed that the same will be removed by Tenant, at its sole cost
and expense upon the expiration or earlier termination of this Lease. 6.06.
Where furnished by or at the expense of Tenant, all furniture, furnishings and
trade fixtures, and any other movable property shall remain the property of
Tenant and Tenant shall remove all of such property at any time prior to the
expiration or other termination of the term of this Lease.
6.07. If any alterations, installations, additions, improvements or other
property that Tenant is required to remove (unless otherwise agreed to by
Landlord)as provided in this Lease are not removed on or prior to the expiration
or sooner termination of the term of this Lease Landlord shall have the right to
remove such property and to dispose of the same without accountability to Tenant
and at the sole cost and expense of Tenant. In case of any damage to the Demised
Premises or the Building resulting from the removal of such property (whether
such removal is performed by Landlord due to Tenant's failure to do so as
required by the terms of this Lease, or by Tenant), Tenant shall repair such
damage or, in default thereof, shall reimburse Landlord for Landlord's actual
costs in repairing such damage. Tenant's obligations under this Section 6.07 and
under Sections 6.05 and 6.06 shall survive the expiration or other termination
of this Lease.
ARTICLE 7.
REPAIRS
7.01. Landlord, at its sole cost and expense, shall maintain and repair, as
necessary, the Life Safety System, roof, roof membrane and any interior ceiling
damage due to roof leaks, the Building mechanical systems, the electrical system
serving and/or in the Demised Premises, the structural components of the
Building including the structural components in the Demised Premises, the common
areas, the parking lot, the landscaping as well as all HVAC servicing and/or in
the Demised Premises (with the exception of the supplemental HVAC units
servicing and/or in Tenant's computer room [approximately 2,000 rsf] and the
Tenant's 24 hour call center area] in the Demised Premises (the "Supplemental
Units"), which Supplemental Units shall, after the first Lease Year, be
maintained at Tenant's sole cost and expense, the electric, the plumbing and any
sprinkler system (if the same is installed in the Demised Premises) in and
servicing the Demised Premises and the Building (collectively, the "Building
Systems"). Notwithstanding the foregoing, Landlord shall, at its sole cost and
expense, (i) for a period of one (1) year from the applicable Commencement Date,
repair the Original Premises and the Expansion Space, including, without
limitation the Supplemental Units (which shall, at all times, be maintained by
Tenant but shall be repaired by Landlord for the first year of the Lease term),
and the bathroom and plumbing fixtures and appurtenances in the Demised
Premises; and (ii) at all times throughout the term of this Lease repair the
supplemental air conditioning and ventilation units and the electric baseboard
heating installed in the President's office and the CEO's office, as indicated
on the Plan. Subsequent to the one year period, with the exception of the
Building Systems, Tenant shall, at its sole cost and expense, take good care of
the Demised Premises and the fixtures and appurtenances therein) and make all
non-structural repairs thereto as and when needed to preserve them in good
working order and condition, notwithstanding whether the repair in question is
ordinary or extraordinary, foreseen or unforeseen. All damage or injury to the
Building, the Property and/or the Demised Premises and to any Structural or
Non-Structural portions of the Building, the fixtures, appurtenances and
equipment caused by Tenant moving property in or out of the Building, or by the
installation or removal of furniture, fixtures or other property, or from any
other cause of any other kind or nature whatsoever due to carelessness,
omission, neglect, improper conduct or other cause on the part of Tenant, its
servants, employees, agents, visitors, invitees or licensees, shall be repaired,
restored or replaced promptly at Tenant's sole cost and expense to the
reasonable satisfaction of Landlord. All such repairs, restorations and
replacements made by Tenant shall be in quality and class equal to the original
work or installations that were damaged by Tenant. If Tenant fails to make such
repairs, restoration or replacements within a commercially reasonable time
period, but in no event more than ten (10) days, upon written notice to Tenant,
the same may be made by Landlord at the sole cost and expense of Tenant and such
expenses shall be collectible as additional rent and shall be paid by Tenant
within thirty (30) days after rendition by Landlord of a bill therefor.
7.02. Tenant shall not, without prior written consent of Landlord, install a
high density file system or any similar equipment or fixture of similar weight
and density. without Landlord's consent, which consent shall not be unreasonably
withheld, conditioned or delayed.
7.03. There shall be no allowance to Tenant for a diminution of rental value and
no liability on the part of Landlord by reason of any inconvenience, annoyance
or injury to Tenant's business arising from the making of any repairs,
alterations, additions, improvements in or to any portion of the Building or the
Demised Premises or in or to fixtures, appurtenances or equipment thereof by
Landlord, Tenant or any other tenant or other third party. Landlord shall
exercise ordinary diligence in performing work in the Building so as to minimize
interference with Tenant's business operations, if possible, but shall not be
required to perform any work on an overtime or premium pay basis to avoid,
reduce or minimize any such interference.
Notwithstanding anything herein to the contrary, Landlord shall act
expeditiously to repair conditions in the Building that would potentially
interfere with Tenant's normal operations in the Demised Premises so that the
same is restored in a prompt and timely manner. Landlord further agrees that it
will incur extra shipping charges to obtain necessary parts to repair building
systems and pay for overtime work in the event the HVAC or the main electrical
panel fails to operate.
7.04. Notwithstanding anything to the contrary herein contained, with the
exception of the first year of the Lease term for each of the respective spaces,
Landlord shall not be responsible for the replacement of light bulbs, ballasts
or other electrical equipment and facilities in the Demised Premises. If Tenant
requests that Landlord repair or replace any of the foregoing, and Landlord
elects to do so in its sole and absolute discretion, Landlord shall bill Tenant
for such materials and services at Landlord's customary rates. All such charges
incurred by Tenant shall be deemed additional rent and shall be payable by
Tenant within thirty (30) days from Landlord invoicing Tenant therefor.
7.05. Notwithstanding anything to the contrary herein contained, in the event
that Landlord is required to perform any repairs in the Demised Premises, with
the exception of that specifically noted in the second paragraph of Article 7.03
above, under no circumstances and in no event shall Landlord be required to
perform same on overtime or premium pay hours. Landlord shall be entitled to
perform such repairs during normal business hours on business days, if Landlord
deems it appropriate, and Tenant shall not be entitled to any rent abatement as
a result of the conduct by Landlord of repair work in the Demised Premises.
ARTICLE 8.
REQUIREMENTS OF LAW
8.01. Landlord represents and warrants that Landlord's Work shall be performed
in compliance with all applicable laws, orders and regulations in connection
with the issuance of a certificate of occupancy for the Demised Premises. Tenant
shall comply in all respects with all present and future laws, orders and
regulations of federal, state, county and municipal authorities, and of all
insurance bodies, and with any direction of any public officer or officers,
pursuant to law, which shall impose any violation, order or duty upon Landlord
or Tenant with respect to the Demised Premises or the use or occupation thereof
.. If Tenant receives any notice of any violation of any law, ordinance, rule,
order or regulation applicable to the Demised Premises or the Building, Tenant
shall give prompt written notice thereof to Landlord. Notwithstanding the
foregoing, with the exception of all permits, approvals, etc. which Tenant may
be required to obtain pursuant to the terms of this Lease, to the extent the any
laws, orders and regulations relate to those portions of the Demised Premises
and the Building for which, under the terms of this Lease, Landlord is obligated
to repair and maintain, the Landlord shall be solely responsible for the same.
ARTICLE 9.
INSURANCE, LOSS REIMBURSEMENT, LIABILITY
9.01. Tenant shall not do, permit or suffer to be done any act or thing upon the
Demised Premises that would invalidate or be in conflict with New York standard
fire insurance policies covering the Building, and fixtures and property
therein, or that would increase the rate of fire insurance applicable to the
Building to an amount higher than it otherwise would be; and Tenant neither
shall do nor shall Tenant permit to be done any act or thing upon the Demised
Premises that shall or might subject Landlord to any liability or responsibility
for injury to any person or person to property by reason of any business or
operation being carried on within the Demised Premises.
9.02. If, as a result of any act or omission by Tenant or violation by Tenant of
the terms of this Lease, the rate of fire insurance applicable to the Building
shall be increased in an amount higher than it otherwise would be, Tenant shall
reimburse Landlord for all increases of Landlord's fire insurance premiums so
caused; such reimbursement to be additional rent payable upon the first day of
the month following any outlay by Landlord for such increased fire insurance
premiums. In any action or proceeding wherein Landlord and Tenant are parties, a
schedule or "make-up" of rates for the Building or Demised Premises by the body
making fire insurance rates for the Demised Premises, shall be presumptive
evidence of the facts therein stated and of the several items and charges in the
fire insurance rate then applicable to the Demised Premises.
9.03. Landlord and its agents shall not be liable for any injury or damage to
persons or property (including, but not limited to, loss of profits and injury
to business) resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or snow or leaks from any part of the Building, or from
the pipes, appliances or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of any nature,
unless any of the foregoing shall be caused by or due to the gross negligence or
willful misconduct of Landlord.
9.04. Landlord and its agents shall not be liable for any damage which Tenant
may sustain, if at any time any window of the Demised Premises is broken, or
temporarily or permanently closed, darkened or bricked up for any reason
whatsoever, except in the case of Landlord's arbitrary acts if the result is
permanent, and Tenant shall not be entitled to any compensation therefor or
abatement of rent or to any release from any of Tenant's obligations under this
Lease, nor shall the same constitute an eviction.
9.05. Landlord and its agents, officers, directors and shareholders shall have
absolutely no personal liability with respect to any provision of this Lease or
any obligation or liability arising therefrom or in connection therewith. Tenant
shall look solely to Landlord's estate and interest in the Land and Building for
the satisfaction of any right or remedy of Tenant for the collection of a
judgment (or other judicial process) requiring the payment of money by Landlord,
in the event of any liability by Landlord, and no other property or assets of
Landlord or any agent, officer, director or shareholders shall be subject to
levy, execution, attachment, or other enforcement procedure for the satisfaction
of Tenant's remedies under or with respect to this Lease, the relationship of
Landlord and Tenant hereunder, or Tenant's use and occupancy of the Demised
Premises, or any other liability of Landlord of Tenant. Nothing contained in
this Section shall be construed to permit Tenant to offset against rents due a
successor landlord a judgment (or other judicial process) requiring the payment
of money by reason of any default of a prior landlord unless such successor
landlord comprises the same or substantially the same members and/or principals
as a prior landlord or Landlord.
9.06. Tenant shall obtain on or before the Commencement Date and shall keep in
force during the term hereof, all-risk insurance, from an insurance company or
companies reasonably acceptable to Landlord , in an amount equal to eighty (80%)
percent of the full replacement cost of Tenant's furniture, furnishings and
other removable personal property and of all fixtures including Leasehold
Improvements.
9.07. Tenant shall provide on or before the Commencement Date and shall keep in
force during the term hereof for the benefit of Landlord and Tenant a
comprehensive general liability insurance policy , from an insurance company or
companies reasonably acceptable to Landlord , protecting Landlord and Tenant
against any liability whatsoever, arising out of the use of the Demised Premises
or any appurtenances thereto or occasioned by any occurrence on or about the
Demised Premises or any appurtenances thereto. Such policy shall be in such
limits as Landlord may reasonably require which, as of the date of this Lease,
are (a) not less than the amount of $1,000,000 per occurrence for bodily or
personal injury (including death) and (b) not less than the amount of $1,000,000
in respect of property damage. Landlord reserves the right to change such limits
in its reasonable discretion at any time, and from time to time, but in no event
more than twice within any twenty four (24) month period, that Landlord deems
necessary; provided, however, that Tenant shall have thirty (30) days from
receipt of written notice from Landlord regarding the date of any change in
Landlord's insurance limits to obtain any required additional coverage. Prior to
the time such insurance is first required to be carried by Tenant and
thereafter, at least fifteen (15) days prior to the effective date of any such
policy, Tenant shall deliver to Landlord either a duplicate original of the
aforesaid policies or evidence of such insurance. Said policy or evidence of
insurance shall name Landlord, Landlord's managing agent and, if Landlord so
requests, Landlord's mortgage lender, as additional insureds and contain an
endorsement that such insurance may not be cancelled except upon thirty (30)
days prior written notice to Landlord. Tenant's failure to provide and keep in
force the aforementioned insurance shall be regarded as a default hereunder
entitling Landlord to exercise any or all of the remedies provided in this Lease
in the event of Tenant's default.
ARTICLE 10.
DAMAGE BY FIRE OR OTHER CAUSE
10.01. If the Demised Premises or any part thereof shall be damaged by fire or
other casualty, Tenant shall give prompt notice thereof to Landlord and this
Lease shall continue in full force and effect except as hereinafter set forth.
10.02. (a) If the Demised Premises are partially damaged or rendered partially
untenantable by fire or other casualty (i.e., less than 50% of the rentable
square footage of the Demised Premises is substantially damaged or destroyed),
then, within thirty (30) days of the occurrence of such casualty, Landlord shall
commence repairing the damage and complete said repair within six (6) months of
the date of such notice. The damage thereto shall be repaired by and at the
expense of Landlord and the Fixed Annual Rent shall be apportioned from the day
following the casualty until such repair shall be substantially completed and
any required Occupancy Approvals are obtained by Landlord in connection with the
affected space.
(b) If the Demised Premises are substantially damaged or are
rendered wholly or substantially untenantable by fire or other casualty (i.e.,
more than 50% of the rentable square footage of the Demised Premises is
substantially damaged or destroyed), then, within thirty (30) days of the
occurrence of such a casualty, Landlord shall notify Tenant in writing if
Landlord is able to repair such casualty within six (6) months of the date of
such notice. If Landlord notifies Tenant that it can repair such damage within
such six (6) month period, the Fixed Annual Rent shall be paid up
proportionately to the time of the casualty and thenceforth shall cease until
the date when the Demised Premises shall have been repaired and restored by
Landlord and any required Occupancy Approvals are obtained by Landlord. If,
however, Landlord notifies Tenant that is cannot, or elects not to, repair said
damage within such six (6) month period, Tenant may, upon written notice given
no later than thirty (30) days after receipt of Landlord's notice, cancel this
Lease.
(c) If the Demised Premises or Building are totally destroyed
due to fire or other casualty, Tenant shall have the right to terminate this
Lease by written notice to Landlord within thirty (30) days and this Lease shall
be cancelled and terminated.
(d) If the Demised Premises are totally or substantially
damaged or if the Building shall be so damaged that Landlord shall decide to
demolish it or to rebuild it, or if at least 50% of the floor area of the
Demised Premises is damaged or destroyed during the last 18 months of the then
current term of this Lease, then, in any of such events, Landlord may elect to
terminate this Lease by written notice to Tenant given within ninety (90) days
after such fire or casualty specifying a date for the expiration of the Lease,
which date shall not be more than sixty (60) days after the giving of such
notice. Upon the expiration date specified in such notice, the term of this
Lease shall expire as fully and completely as if such date were the date set
forth above for the termination of this Lease and Tenant shall forthwith quit,
surrender and vacate the Demised Premises without prejudice, except to
Landlord's rights and remedies against Tenant under the Lease provisions in
effect prior to such termination, and any rent owing shall be paid up to such
date (subject to abatement as provided in subparagraph (b) above) and any
payments of rent made by Tenant that were on account of any period subsequent to
such date shall be returned to Tenant. Unless Landlord shall serve a termination
notice as provided for herein (or unless Tenant has terminated the Lease
pursuant to its rights herein), Landlord shall make the repairs and restorations
under the conditions of (a) and (b) hereof, with ordinary diligence during
business days and business hours, subject to delays due to adjustment of
insurance claims, labor troubles and causes beyond Landlord's control. After any
such casualty, Tenant shall cooperate with Landlord's restoration by removing
from the Demised Premises as promptly as reasonably possible, all of Tenant's
salvageable inventory and movable equipment, furniture and other property.
Tenant's liability for rent shall resume thirty (30) days after written notice
from Landlord that the Demised Premises shall be substantially ready for
Tenant's occupancy and Landlord's receipt of all Occupancy Approvals.
10.03. No damages, compensation or claim shall be payable by Landlord for
inconvenience, loss of business or annoyance arising from any repair or
restoration of any portion of Demised Premises or of the Building pursuant to
this Article 10.
10.04. Landlord will not carry separate insurance of any kind on Tenant's
property and, except as provided by a law or by reason of its breach of any of
its obligations hereunder, shall not be obligated to repair any damage thereto
or replace the same.
10.05. The provisions of this Article 10 shall be considered an express
agreement governing any cause of damage or destruction of the Demised Premises
by fire or other casualty, and Section 227 of the Real Property Law of the State
of New York, providing for such a contingency in the absence of an express
agreement, and any other law of like import, now or hereafter in force, shall
have no application in such case.
ARTICLE 11.
ASSIGNMENT, MORTGAGING, SUBLETTING, ETC.
11.01. Tenant shall not by operation of law or otherwise (a) assign or otherwise
transfer this Lease or the term and estate hereby granted, (b) sublet the
Demised Premises or any part thereof or allow the same to be used or occupied by
others, other than Tenant's employees, (c) mortgage, pledge or encumber this
Lease or the Demised Premises or any part thereof in any manner by reason of any
act or omission on the part of Tenant, or (d) advertise, or authorize a broker
to advertise, for a subtenant or an assignee, without, in each instance,
obtaining the prior written consent of Landlord which shall not be unreasonably
withheld, conditioned, or delayed. For purposes of this Article 11, (i) the
transfer of a majority of the issued and outstanding capital stock of any
corporate tenant, or of a corporate subtenant, or the transfer of a majority of
the total interest in any partnership tenant or subtenant, or the transfer of
control in any limited partnership tenant or subtenant, however accomplished,
whether in a single transaction or in a series of related or unrelated
transactions, shall be deemed an assignment of this Lease, except that the
transfer of the outstanding capital stock of any corporate tenant, or subtenant,
shall be deemed not to include the sale of such stock by persons or parties
other than those deemed "Affiliates" of Tenant within the meaning of Rule 144
promulgated under the Securities Act of 1933, as amended, through the
"over-the-counter market" or through any recognized stock exchange, (ii) a
takeover agreement shall be deemed a transfer of this Lease, (iii) an agreement
by any other person or entity, directly or indirectly, to assume Tenant's
obligations under this Lease shall be deemed an assignment, (iv) any person or
legal representative of Tenant, to whom Tenant's interest under this Lease
passes by operation of law, or otherwise, shall be bound by the provisions of
this Article 11, and (v) a modification, amendment or extension of a sublease
shall be deemed a sublease. Tenant shall promptly notify Landlord of any
proposed assignment, sublease or "transfer", as defined in this Section.
Notwithstanding anything herein to the contrary, provided Tenant is not
in default beyond any notice and cure period, under the terms of this Lease,
Tenant shall have the right to assign the Lease or sublet portions of the
Demised Premises (i) to an affiliate of Tenant, (ii) in connection with any
merger or acquisition of or by Tenant or (iii)to any applicable governmental
agency in connection with any economic development incentives received by Tenant
without Landlord's prior written consent, provided that Tenant notifies Landlord
of said assignment or sublease, in writing, which notice shall include a copy of
the fully executed assignment or sublease, as the same may be applicable.
Nothing herein will allow Tenant or its subtenant or assignee to use the Demised
Premises in any manner other than the Permitted Use.
11.02. Any assignment or transfer shall be made only if, and shall not be
effective until, the assignee shall execute, acknowledge and deliver to Landlord
a recordable agreement, in form and substance reasonably satisfactory to
Landlord, whereby the assignee shall assume the obligations and performance of
this Lease and shall agree to be bound by and upon all of the covenants,
agreements, terms, provisions and conditions hereof on the part of Tenant to be
performed or observed and whereby the assignee shall agree that the provisions
of Section 11.01 hereof shall, notwithstanding any assignment or transfer,
whether or not in violation of the provisions of this Lease, and notwithstanding
the acceptance of rent by Landlord from an assignee or transferee or any other
party, remain in full force and effect. Tenant shall remain fully and primarily
liable for the payment of the Fixed Annual Rent and additional rent due and to
become due under this Lease and for the performance of all of the covenants,
agreements, terms, provisions and conditions of this Lease on the part of Tenant
to be performed or observed, notwithstanding any such assignment. No sublease
shall release Tenant of any liability hereunder of any kind or nature
whatsoever.
11.03. Landlord shall not unreasonably withhold, condition or delay its consent
to an assignment of this Lease or a subletting of the whole or part of the
Demised Premises for substantially the remainder of the term of this Lease,
provided:
(a) Tenant shall furnish Landlord with the name and business
address of the proposed subtenant or assignee, information with respect
to the nature and character of the proposed subtenant's or assignee's
business, or activities, such references and current financial
information with respect to net worth, credit and financial
responsibility as are reasonably satisfactory to Landlord, and an
executed counterpart of the sublease or assignment agreement;
(b) The proposed subtenant or assignee is a reputable party
whose financial net worth, credit and financial responsibility is,
considering the responsibilities involved, reasonably satisfactory to
Landlord;
(c) The nature and character of the proposed subtenant or
assignee, its business or activities and intended use of the Demised
Premises is, in Landlord's reasonable judgment, in keeping with the
standards of the Building and the floor or floors on which the Demised
Premises are located (it is expressly understood and agreed that
Landlord will not consent to the assignment or subletting of the
Demised Premises to any physician or other medical practitioner that
performs abortions or to any other organization that Landlord deems in
its sole and absolute discretion to be inconsistent with the character
of the Building notwithstanding that the proposed assignee or
subtenant's use of the Demised Premises conforms with the Permitted
Use);
(d) The proposed subtenant or assignee is not then an occupant
of any part of the building or a party who dealt with Landlord or
Landlord's agent (directly or through a broker) with respect to space
in the Building during the twelve (12) months immediately preceding
Tenant's request for Landlord's consent;
(e) All costs incurred with respect to providing reasonably
appropriate means of ingress and egress from the sublet space or to
separate the sublet space from the remainder of the Demised Premises
shall, subject to the provisions of Article 6 with respect to
alterations, installations, additions or improvements, be borne by
Tenant;
(f) Each sublease shall state specifically that (i) it is
subject to all of the terms, covenants, agreements, provisions and
conditions of this Lease, (ii) the subtenant or assignee, as the case
may be, will not have the right to a further assignment thereof or
sublease or assignment thereunder, or to allow the Demised Premises to
be used by others, without the consent of Landlord in each instance,
(iii) a consent by Landlord thereto shall not be deemed or construed to
modify, amend or affect the terms and provisions of this Lease, or
Tenant's obligations hereunder, which shall continue to apply to the
premises involved, and the occupants thereof, as if the sublease or
assignments had not been made, (iv) if Tenant defaults in the payment
of any rent, Landlord is authorized to collect any rents due or
accruing from any assignee, subtenant or other occupant of the Demised
Premises and to apply the net amounts collected to the Fixed Annual
Rent and additional rent reserved herein, (v) the receipt by Landlord
of any amounts from an assignee or subtenant, or other occupant of any
part of the Demised Premises shall not be deemed or construed as
releasing Tenant from Tenant's obligations hereunder (except to the
extent that Tenant will receive a credit for any amounts received by
Landlord from third parties, it being the intent of the parties that
Landlord shall not be entitled to a double recovery)or the acceptance
of that party as a direct tenant, and (vi) Tenant is not released from
primary liability hereunder as a result of any assignment or sublease;
and
(g) Tenant, together with requesting Landlord's consent
hereunder, shall have paid Landlord One Thousand ($1,000) Dollars to
review the requested consent including any attorneys' fees incurred by
Landlord.
Landlord may withhold its consent to any assignment or sublease if Tenant fails
to provide in a timely fashion any and all reasonably required information
hereunder or if any of the information concerning the proposed assignment or
sublease is reasonably unacceptable to Landlord .
11.04. Provided Tenant is not in default pursuant to the terms of this Lease
beyond any applicable notice and grace period, Tenant may notify Landlord that
it wishes to sublet the portion of the first floor space which is utilized for
retail sales (the "Retail Space") to a bona fide third party (other than
Tenant's Affiliates or as a result of a merger or acquisition of or by Tenant).
Upon receipt of said notice and Tenant's compliance with those items set forth
in (a) through (g) above, Landlord may, in its sole and absolute discretion,
either, (i) accept said sublease or (ii) recapture the Retail Space within
ninety (90) days from the date of said notice from Tenant. Upon recapture, the
Lease shall no longer apply with respect to the Retail Space and the Fixed
Annual Rent, additional rent (to the extent applicable) and Tenant's
Proportionate Share shall be reduced proportionately based upon the size of the
Retail Space.
11.05. (a) Subject to Tenant's right to assign or sublet without Landlord's
consent, as specifically set forth herein, if, without first obtaining
Landlord's written consent thereto Tenant shall have assigned this Lease or
sublet the Demised Premises, in whole or in part, to any assignee, sublessee ,
then Landlord shall have the right of "Recapture" (hereinafter defined) as set
forth below, in addition to any other right or remedy available to Landlord
under this Lease or at law or in equity, and without limiting any of such
rights;in the case of an assignment of this Lease, or a proposed assignment of
this Lease to any third party other than an Affiliate of Tenant or in connection
with a merger or acquisition of or by Tenant, Landlord shall have the right to
terminate this Lease (a "Recapture") by giving Tenant a notice of termination
(the "Recapture Notice") within twenty (20) days following Landlord's receipt of
Tenant's notice or request for consent to such assignment or within six (6)
months following Landlord's actual knowledge of such assignment, whereupon this
Lease (including all renewal options, whether or not theretofore exercised by
Tenant) shall cease and terminate on the date set forth in Landlord's Recapture
Notice as though such date were the date herein originally fixed for the
expiration of this Lease and Tenant and every assignee or occupant of the
Demised Premises claiming by, under or through Tenant shall surrender this Lease
and possession of the Demised Premises to Landlord in the condition required
pursuant to this Lease and Landlord may thereafter re-let the Demised Premises
for Landlord's sole benefit. In addition to the foregoing, Landlord may exercise
all rights and remedies available to it upon the occurrence of an event of
default under this Lease.
ARTICLE 12.
ELECTRICITY
12.01. Landlord shall, at its sole cost and expense, furnish an electric
sub-meter for the Original Premises and Expansion Space only (it being
understood that this shall not include any additional space leased in connection
with Article 42). The meter shall measure all electric usage in the Demised
Premises including but not limited to lighting, office equipment, computer
equipment and any other related equipment. Tenant will be responsible for all
electric charges determined by such sub-meter, billed at the actual cost,
including the actual cost to read the sub-meter and any and all actual
maintenance costs in connection with the submeter, and billed as additional rent
to Tenant each month (such charge shall be referred to herein as either the
"sub-meter electric charge" or the "Base Electric Charge"). In consideration of
Tenant's timely payment of the sub-metered electric charge, Landlord shall
furnish electric energy to the Demised Premises as is ordinarily and reasonably
required by Tenant for use of the Demised Premises in accordance with the
Permitted Use. Consistent with the electrical capacity contained, or the
capacity to be furnished to Landlord, at its sole cost and expense, of no more
and no less than seven (7) watts per rentable square foot in the Demised
Premises, Landlord shall permit Tenant to use the electric facilities for
Tenant's reasonable lighting and other ordinary electrical fixtures, appliances
and equipment (such as personal computers, telephones and fax machines) as
Landlord may permit to be installed in the Demised Premises, consistent with
Tenant's business operations and the Permitted Use.
12.02. Tenant's use of electric energy in the Demised Premises shall not at any
time, (i) exceed the capacity of any of the electrical conductors and equipment
in or otherwise serving the Demised Premises (which shall be no less than seven
(7) watts per rentable square foot) or (ii) cause or result in any adverse
impairment or interference with Building systems, annoyance or inconvenience to
other tenants or the overloading of the risers or feeders serving the Building.
Tenant shall not, without Landlord's prior consent in each instance, connect any
fixtures, appliances or equipment to the Building's electric distribution system
or make any alteration or addition to the electric system of the Demised
Premises. Should Landlord grant such consent, all additional risers or other
equipment required therefore shall be provided by Landlord and the cost thereof
shall be paid by Tenant to Landlord on demand. As a condition to granting such
consent, Landlord may require Tenant to agree to an increase in the additional
annual rent to an amount which will reflect the value to Tenant of the potential
additional electric energy to be made available to Tenant based upon the
estimated additional capacity of such additional risers or the connected load of
such fixtures, appliances or equipment. The amount of such increase shall be
determined by an electrical consultant selected by Landlord and paid by Tenant.
Such determination shall be binding and conclusive upon the parties. Landlord,
its agents and consultants may survey the electrical fixtures, appliances and
equipment in the Demised Premises and Tenant's use of electric energy therein
from time to time to ascertain whether Tenant is complying with its obligations
under this Section. Each increase in the additional rent under this Section
shall be effective from the date such additional electric energy is made
available to Tenant.
ARTICLE 13.
PARKING
13.01. Landlord shall provide Tenant with seventy five (75) gated reserved
parking spaces (which spaces shall be marked by number), in the parking area
designated for use by tenants of the Building, and the related parking passes,
at no cost to Tenant for use throughout the term of this Lease; provided,
however, that if Tenant requires replacement of any parking passes, Landlord
shall provide eight replacement parking passes per year free of charge and
thereafter Tenant shall pay to Landlord the sum of $50.00 per parking pass prior
to the issuance of same. Of the aforementioned seventy five (75) gated reserved
parking spaces, twelve (12) spaces shall be marked and located on the upper
level of the parking garage in the gated area (with access 24 hours a day, 7
days a week by passcard access) and the remaining sixty three (63) spaces shall
be located on the lower level of the parking garage. Landlord reserves the right
to relocate (except for the purpose of allocating such reserved parking for any
other tenant in the Building or to any other third party) Tenant's reserved
parking spaces within the parking areas for the Building, provided that Tenant's
parking spaces are at all times within reasonable proximity to the Building or
to Tenant's reserved parking spaces that Landlord seeks to relocate. Tenant
acknowledges that the reserved parking is within an area and is not by
assignment but rather access and that the spaces are on a first come first serve
basis. Tenant shall not have the right to use any other parking spaces at the
Building, except for those that are not designated for use by other tenants,
other than Tenant's reserved parking spaces. In the event that Tenant materially
defaults under the Lease (i.e. any default in the payment of Annual Fixed Rent
or additional rent), as modified hereby, beyond the expiration of any applicable
grace period, Landlord may immediately and without notice to Tenant revoke
Tenant's reserved parking provided hereunder until such time as such default is
cured. Landlord represents that inclusive of the foregoing gated reserved
parking spaces (and not including in said calculation any parking space on the
upper level of the parking garage), there is no less than five (5) parking
spaces per 1,000 rentable square feet of space in the Building.
ARTICLE 14.
CONDEMNATION
14.01. In the event that the whole of the Demised Premises lawfully shall be
condemned or taken in any manner for any public or quasi-public use, this Lease
and the term and estate hereby granted shall cease and terminate as of the date
of vesting of title. In the event that only a part of the Demised Premises shall
be so condemned or taken, then, effective as of the date of vesting of title,
the Fixed Annual Rent and the additional rent payable pursuant to Articles 3 and
4 hereunder shall be abated in an amount thereof apportioned according to the
area of the Demised Premises so condemned or taken. If a condemnation or taking
shall be of a substantial part of the Demised Premises or of a substantial part
of the means of access thereto, Tenant, at Tenant's option, by delivery of
notice in writing to Landlord within thirty (30) days following the date on
which Tenant shall have received notice of vesting or impending vesting of
title, may terminate this Lease and the term and estate hereby granted as of the
date of vesting of title. If Tenant elects not to terminate this Lease, as
aforesaid, this Lease shall be and shall remain unaffected by such condemnation
or taking, except that the Fixed Annual Rent and the additional rent payable
pursuant to Article 4 shall be abated to the extent hereinbefore provided in
this Article 14. In the event that only a part of the Demised Premises shall be
so condemned or taken and this Lease and the term and estate hereby granted with
respect to the remaining portion of the Demised Premises are not terminated as
hereinbefore provided, Landlord, with reasonable diligence and at its expense,
will restore the remaining portion of the Demised Premises as nearly as
practicable to the same condition as it was in prior to such condemnation or
taking.
14.02. In the event of the termination of this Lease in any of the cases
hereinbefore provided, this Lease and the term and estate hereby granted shall
expire as of the date of such termination with the same effect as if that were
the Expiration Date and the Fixed Annual Rent and the additional rent payable
under Article 4 shall be apportioned as of such date.
14.03. Except as specifically set forth below, in the event of any condemnation
or taking hereinbefore mentioned of all or a part of the Building, Landlord
shall be entitled to receive the entire award in the condemnation proceeding.
Tenant shall be entitled to make separate claim for the unamortized value of its
trade fixtures actually taken, leasehold interest, for moving expenses and "good
will" value.
14.04. The provisions of this Article 14 shall not be applicable to any
condemnations or taking for governmental occupancy for a limited period of less
than ten (10) days.
14.05. In the event of any taking of less than the whole of the Building that
does not result in a termination of this Lease, or in the event of a taking for
a temporary use or occupancy of all or any part of the Demised Premises that
does not result in a termination of this Lease, Landlord, at its expense, to the
extent that any award or awards shall be sufficient for the purpose, shall
proceed with reasonable diligence to repair, alter and restore the remaining
parts of the Building and the Demised Premises to substantially their former
condition to the extent that the same may be feasible and so as to constitute a
complete and tenantable Building and Demised Premises. Tenant shall, in such an
event, continue to pay that portion of the Fixed Annual Rent and additional rent
attributable to the unaffected portions of the Demised Premises due hereunder
during the period that Landlord is restoring the Building and the Demised
Premises. Fixed Annual Rent and Additional Rent for those affected portions of
the Demised Premises shall be abated.
14.06. In the event that any part of the Demised Premises are taken to effect
compliance with any law or requirement of public authority other than in the
manner hereinabove provided in this Article 14, then, (i) if such compliance is
the obligation of Tenant under this Lease, Tenant shall not be entitled to any
diminution or abatement of rent or other compensation from Landlord therefor,
but (ii) if such compliance is the obligation of Landlord under this Lease, the
Fixed Annual Rent payable under Article 1 shall be reduced and additional rent
payable under Articles 3 and 4 shall be adjusted in the same manner as is
provided in Section 14.01 according to the reduction in rentable area of the
Demised Premises resulted from such taking.
ARTICLE 15.
ACCESS TO DEMISED PREMISES; CHANGES
15.01. Tenant shall permit Landlord to erect, use and maintain pipes, ducts and
conduits in and through the Demised Premises, provided that the same are
installed and/or concealed in a manner reasonably consistent with Tenant's decor
or concealed behind walls and ceilings of the Demised Premises or otherwise
installed in such manner as shall not materially and adversely impair Tenant's
business operations and use of the Demised Premises consistent with the
Permitted Use. To the extent reasonably practical, Landlord shall install such
pipes, ducts and conduits by methods and at locations that will not materially
interfere with or impair Tenant's layout, business operations or use of the
Demised Premises consistent with the Permitted Use. Except in the case of a bona
fide emergency upon which Landlord may enter the Demised Premises at any time,
Landlord or its agents or designees shall have the right to enter the Demised
Premises, upon 24 hours written notice, at reasonable times during business
hours on business days and at other times, provided it shall not materially and
adversely impair Tenant's business operations, to examine same or to make such
repairs or alterations that Landlord may deem necessary or desirable for the
Building, or that Landlord shall be required to, or shall have the right to,
make by the provisions of this Lease. At no time and in no event shall Tenant
have the right to delay Landlord from entering the Demised Premises for a period
in excess of ten (10)days. Landlord's failure or delay in making any repairs to
the Demised Premises due to Tenant exercising its rights pursuant to this
provision shall at no time be deemed a default under the terms of this Lease
Landlord, upon twenty four (24) hours prior written notice, shall have the right
to enter the Demised Premises for the purpose of exhibiting them to prospective
purchasers or lessees of the entire Building or to prospective mortgagees or to
prospective assignees of any such mortgages or to the holder of any mortgage on
the Landlord's interest in the Building, its agents or designees. Landlord shall
be allowed to take all material into and upon the Demised Premises (but shall
not store its materials overnight without Tenant's consent, which consent shall
not be unreasonably withheld, conditioned or delayed)that may be required for
the repairs or alterations above mentioned without the same constituting an
eviction of Tenant in whole or in part, and the Fixed Annual Rent and additional
rent due hereunder shall in no way abate while said repairs or alterations are
being made by reason of loss or interruption of the business of Tenant because
of the prosecution of any such work. Landlord shall exercise reasonable
diligence to minimize the disturbance but nothing contained herein shall be
deemed to require Landlord to perform the same on an overtime or premium pay
basis.
15.02. Landlord reserves the right, without the same constituting an eviction
and without incurring liability to Tenant therefor, to change the arrangement
and/or location of public entrances, passageways, doors, doorways, corridors,
elevators, stairways, bathrooms and other public areas and amenities of the
Building; provided, however, that reasonable access to the Building during
business hours on business days shall not be cut off without Landlord providing
an alternative means of access thereto.
15.03. Landlord may, during the twelve (12) months prior to expiration of the
term of this Lease, exhibit the Demised Premises for rent to prospective tenants
upon not less than twenty four (24) hours prior written notice.
15.04. In case of fire or other bona fide emergency, affecting the Demised
Premises or any other part of the Building and if Tenant is not present in that
portion of the Demised Premises to open and permit an entry into the Demised
Premises Landlord or Landlord's agents may enter upon the Demised Premises
forcibly without rendering Landlord or such agents liable therefor and without
in any manner affecting the obligations and covenants of this Lease. If during
the last month of the term of this Lease, Tenant shall have removed all or
substantially all of Tenant's property from the Demised Premises, Landlord
immediately may enter, alter, renovate or redecorate the Demised Premises
without limitation or abatement of rent and without incurring liability to
Tenant for any compensation and such act shall have no effect on this Lease or
Tenant's obligations hereunder.
ARTICLE 16.
CONDITIONS OF LIMITATION
16.01. This Lease and the term and estate hereby granted are subject to the
limitation that whenever Tenant or any guarantor of Tenant's obligations
hereunder shall be unable to pay its debts generally as they become due, or
shall make an assignment of the property of Tenant or any guarantor of Tenant's
obligations hereunder for the benefit of creditors, or shall consent to, or
acquiesce in, the appointment of a liquidator, receiver, trustee, or other
custodian of itself or the whole or any part of its properties or assets, or
shall commence a voluntary case for relief under the United States Bankruptcy
Code or file a petition or take advantage of any bankruptcy or insolvency act or
applicable law of like import, or whenever an involuntary case under the United
States Bankruptcy Code shall be commenced against Tenant or any guarantor of
Tenant's obligations hereunder or if a petition shall be filed against it
seeking similar relief under any bankruptcy or insolvency or other applicable
law of like import, or whenever a receiver, liquidator, trustee, or other
custodian of Tenant or any guarantor of Tenant's obligations hereunder or for
substantially all of the property of Tenant shall be appointed without Tenant's
consent or acquiescence, then, (a) at any time after receipt of notice of the
occurrence of any such event, or (b) if such event occurs without the
acquiescence of Tenant or any guarantor of Tenant's obligations hereunder, at
any time after the event continues for thirty (30) days, Landlord may give
Tenant a notice of intention to end the term of this Lease at the expiration of
five (5) days from the date of service of such notice of intention, and upon the
expiration of said five (5) day period, this Lease and the term and estate
hereby granted, whether or not the term shall theretofore have commenced, shall
terminate with the same effect as if that day were the Expiration Date, but
Tenant shall remain liable for damages as provided in Article 18.
16.02. This Lease and the term and estate hereby granted are subject to further
limitation as follows:
(a) whenever Tenant shall default in the payment of any
installment of Fixed Annual Rent or in the payment of any additional rent on any
day that the same become due, and such default shall continue uncured for ten
(10) days; provided, however, that if Tenant is delinquent in the payment of
Fixed Annual Rent or additional rent beyond the expiration of the foregoing
grace period more than three (3) times in any Lease Year, the grace period
herein provided shall no longer apply and Landlord may immediately proceed to
exercise its rights and remedies herein provided; or
(b) whenever Tenant shall do or permit anything to be done,
whether by action or inaction, contrary to any of Tenant's obligations
hereunder, and if such default shall continue and shall not be remedied by
Tenant within twenty (20) days (within ten (10) days, in the case of Tenant's
failure to furnish any certificate of insurance required hereunder) after
Landlord shall have given to Tenant a notice specifying the same, or, in the
case of a happening or default that cannot with due diligence be cured within a
period of twenty (20) days and the continuation of which for the period required
for cure will not subject Landlord to the risk of criminal liability or
termination of any superior lease or foreclosure of any superior mortgage, if
Tenant shall not, (i) within said twenty (20) days period advise Landlord of
Tenant's intention duly to institute all steps necessary to remedy such
situation, (ii) duly institute within said twenty (20) day period, and
thereafter diligently and continuously prosecute to completion all steps
necessary to remedy the same and (iii) complete such remedy within such time
after the date of the giving of said notice by Landlord as is reasonably
necessary; or
(c) whenever any event shall occur or any contingency shall
arise whereby this Lease or the estate hereby granted or the unexpired balance
of the term hereof, by operation of law or otherwise, would devolve upon or pass
to any person, firm or corporation other than Tenant, except as expressly
permitted by Article 11; or
(d) whenever Tenant shall abandon the Demised Premises, except
in the case of an assignment of sublease in accordance with Article 11; or
(e) whenever Tenant shall default in the due keeping,
observing or performance of any other covenant, agreement, provision or
condition of this Lease which are not incorporated in (a) through (d) above, on
the part of Tenant to be kept, observed or performed and such default shall
continue and shall not be remedied by Tenant within twenty (20) days after
Landlord shall have given to Tenant a notice specifying the same;
then in any of said cases set forth in the foregoing subsections (a), (b), (c),
(d) and (e), Landlord may give to Tenant a notice of intention to end the term
of this Lease at the expiration of five (5) days from the date of the service of
such notice of intention, and upon the expiration of said five (5) days this
Lease and the term and estate hereby granted, whether or not the term shall
theretofore have commenced, shall terminate with the same effect as if that day
were the Expiration Date, but Tenant shall remain liable for damages as provided
in Article 18.
ARTICLE 17.
RE-ENTRY BY LANDLORD; INJUNCTION
17.01.If Tenant shall default in the payment of any installment of Fixed Annual
Rent, or of any additional rent, on any date that the same becomes due, and such
default shall continue uncured for ten (10) days, or if this Lease shall expire
as provided in Article 16, Landlord and Landlord's agents and employees
immediately or at any time thereafter may peaceably re-enter the Demised
Premises, or any part thereof, either by summary dispossess proceedings or by a
suitable action or proceeding at law without being liable to indictment,
prosecution or damages therefrom, to the end that Landlord may have, hold and
enjoy the Demised Premises again as and of its first estate and interest
therein. In the event of any termination of this Lease under the provisions of
Article 16 or if Landlord shall re-enter the Demised Premises under the
provisions of this Article 17 or in the event of the termination of this Lease,
or of re-entry, by or under any summary dispossess or other proceeding or action
or any provision of law, by reason of default hereunder on the part of Tenant,
(i) Tenant thereupon shall pay to Landlord the Fixed Annual Rent and additional
rent payable by Tenant to Landlord up to the time of such termination of this
Lease, or of such recovery of possession of the Demised Premises by Landlord, as
the case may be, (ii) Tenant shall pay to Landlord all actual and reasonable
expenses, including court costs and reasonable attorneys' fees and
disbursements, incurred by Landlord in recovering possession of the Demised
Premises and all costs and charges for the care of the Demised Premises while
vacant and (iii) Tenant also shall pay to Landlord damages as provided in
Article 18. 17.02. In the event of a breach by Tenant of any of its obligations
under this Lease which continues beyond any applicable cure period, Landlord
also shall have the right of injunction in any case in which Landlord in its
reasonable discretion deems Tenant is adversely affecting the normal operation
of the Building or any of the other tenant's use thereof. The special remedies
to which Landlord may resort hereunder are cumulative and are not intended to be
exclusive of any other remedies or means of redress to which Landlord lawfully
may be entitled at any time and Landlord may invoke any remedy allowed at law or
in equity as if specific remedies were not provided for herein.
17.03. If this Lease shall terminate under the provisions of Article 16, or if
Landlord shall re-enter the Demised Premises under the provisions of this
Article 17, or in the event of the termination of this Lease, or of re-entry, by
or under any summary dispossess or other proceeding or action or any provision
of law by reason of default hereunder on the part of Tenant, Landlord shall be
entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as
advance rent, security or otherwise, but such moneys shall be credited by
Landlord against the time of such termination or re-entry or, at Landlord's
option against any damages payable by Tenant under Article 18 or pursuant to
law, it being the parties intent that at no time shall Landlord receive a
double-recovery for amounts owed.
ARTICLE 18.
DAMAGES
(a) 18.01. If this Lease is terminated under the provisions of Article 16, or if
Landlord shall re-enter the Demised Premises under the provisions of Article 17,
or in the event of the termination of this Lease, or of re-entry, by or under
any summary dispossess or other proceeding or action or any provision of law by
reason of any default hereunder on the part of Tenant, Tenant shall pay to
Landlord as damages, sums equal to Landlord's costs in connection with the
leasing of the Demised Premises (as well as any additional space leased to
Tenant pursuant to Article 42 herein)to Tenant, including, but not limited to
any and all cost in connection with (i)Landlord's Work, (ii) leasing commissions
paid in connection with this Lease, (iii)the Relocation Allowance set forth in
Article 45 herein, (iv)the Holdover Rent set forth in Article 44 herein, (v)the
Work Allowance set forth in Article 41 herein and the cost of restoring the
Demised Premises to its original condition (herein collectively referred to as
"Landlord's Costs"). The amount of said damage shall be reduced annually on a
straight line basis over the term of this Lease. The parties hereto acknowledge
that the above referenced damages are due and payable upon default so that the
same is to be collected immediately.
(a) sums equal to the aggregate of the Fixed Annual Rent and
the additional rent (as above presumed) payable hereunder that would have been
payable by Tenant had this Lease not so terminated, or had Landlord not so
re-entered the Demised Premises, payable upon the due dates therefor specified
herein following such termination or such reentry and until the Expiration Date;
provided, however, that Landlord shall make commercially reasonable effort to
mitigate its damages and re-let the Demised Premises during said period and if
Landlord shall re-let the Demised Premises during said period, Landlord shall
credit Tenant with the net rents received by Landlord from such re-letting, such
net rents to be determined by first deducting from the gross rents as and when
received by Landlord from such re-letting, the actual reasonable expenses
incurred or paid by Landlord in terminating this Lease in re-entering the
Demised Premises and in securing possession thereof, as well as the expenses of
re-letting, including altering and preparing the Demised Premises for new
tenants, brokers' commissions, reasonable attorneys' fees and disbursements, and
all other expenses properly chargeable against the Demised Premises and the
rental thereof; it being understood that any such re-letting may be for a period
shorter or longer than the remaining term of this Lease and that Landlord may
grant concessions and free rent; but in no event shall Tenant be entitled to
receive any excess of such net rents over the sums payable by Tenant to Landlord
hereunder, nor shall Tenant be entitled in any suit for the collection of
damages pursuant to this subsection to a credit in respect of any net rents from
a re-letting, except to the extent that such net rents actually are received by
Landlord. If the Demised Premises or any part thereof should be re-let in
combination with other space, then proper apportionment on a square foot basis
shall be made of the rent received from such re-letting and of the expenses of
re-letting. Landlord in no event shall be liable in any way whatsoever for
failure to re-let the Demised Premises nor shall such failure affect Tenant's
liability for damages, it being expressly understood and agreed that Landlord
has no obligation to mitigate Tenant's damages hereunder.
If the Demised Premises or any part thereof shall be re-let by Landlord for the
unexpired portion of the term of this Lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal, the
amount of rent reserved upon such re-letting, prima facie, shall be the fair and
reasonable rental value for the Demised Premises, or part thereof, so re-let
during the term of the re-letting.
18.02. Suit or suits for the recovery of such damages, or any installments
thereof, may be brought by Landlord from time to time at its election, and
nothing contained herein shall be deemed to require Landlord to postpone suit
until the date when the term of this Lease would have expired if it had not been
so terminated under the provisions of Article 16, or under any provision of law,
or had Landlord not re-entered the Demised Premises. Nothing herein contained
shall be construed to limit or preclude recovery by Landlord against Tenant of
any sums or damages to which, in addition to the damages particularly provided
above, Landlord lawfully may be entitled by reason of any default hereunder on
the part of Tenant. Nothing herein contained shall be construed to limit or
prejudice the right of Landlord to prove and obtain as liquidated damages by
reason of the termination of this Lease or re-entry of the Demised Premises or
the default of Tenant under this Lease, an amount equal to the maximum allowed
by any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved whether or not such amount
be greater than, equal to, or less than any of the sum referred to in Section
18.01.
18.03. Notwithstanding the foregoing, in no event shall Landlord be entitled to
accelerate the Fixed Annual Rent or additional rent.
ARTICLE 19.
LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
19.01. If Tenant shall default in the observance or performance of any term or
covenant on Tenant's part to be observed or performed under or by virtue of any
of the terms or provisions in any Article of this Lease, (a) Landlord may, but
shall not be obligated to, remedy such default for the account of Tenant,
immediately and without notice in case of emergency, or in any other case only
provided that Tenant shall fail to remedy such default within twenty (20) days
after Landlord shall have notified Tenant in writing and Tenant's receipt of the
same) of such default and the applicable grace period for curing such default
shall have expired; and (b) if Landlord makes any reasonable expenditures or
incurs any expenses in connection with such default including, but not limited
to, reasonable attorneys' fees in instituting, prosecuting or defending any
action or proceeding, such sums paid or obligations incurred, with interest at
the Interest Rate, shall be deemed to be additional rent hereunder and shall be
paid by Tenant to Landlord as additional rent upon rendition of a bill to Tenant
therefor.
ARTICLE 20.
QUIET ENJOYMENT
20.01. Landlord covenants and agrees that, subject to the terms and provisions
of this Lease, if, and so long as, Tenant keeps and performs each and every
material covenant, agreement, term, provision and condition herein (which shall
include, but shall not be limited to any the payment of any monetary obligation
set forth herein) contained on the part or on behalf of Tenant to be kept or
performed, then Tenant's rights under this Lease shall not be cut off or ended
before the expiration of the term of this Lease, subject however, to (i) the
obligations of this Lease, and (ii) the matters provided in Article 25 hereof
that affect this Lease.
ARTICLE 21.
SERVICES AND EQUIPMENT
21.01. Landlord shall:
(a) provide necessary elevator facilities on business days
from 8:00 a.m. to 7:00 p.m. and on Saturdays from 8:00 a.m. to 1:00 p.m. and
shall have at least two elevators subject to call 24 hours a day, 7 days per
week.
(b) maintain and keep in good order and repair the all air
conditioning, heating and ventilating systems ("HVAC") servicing and/or in the
Demised Premises and the Building regardless of where said systems are located
in or about the Building (with the exception of the Supplemental Units, beyond
the one year period herein specified) installed by Landlord or existing in the
Demised Premises at the Commencement Date. The heating system will function when
seasonably required on business days from 8:00 a.m. to 7:00 p.m.and on Saturdays
from 8:00 a.m. to 1:00 p.m. The air-conditioning and ventilating systems will
function when seasonably required on business days from 8:00 a.m. to 7:00 p.m.
and on Saturdays from 8:00 a.m. to 1:00 p.m. Landlord shall have no
responsibility or liability for the ventilating conditions and/or temperature of
the Demised Premises during the hours or days Landlord is not required to
furnish heat, ventilation or air-conditioning pursuant to this subsection (b).
Landlord shall maintain the temperature in and throughout the Demised Premises
at 70 to 74 degrees (the "Temperature"), other than in the President's office
and the CEO's office, as indicated on Plan, as these spaces will have separate
heating and air conditioning not connected to the Building system and subject to
the Tenant's control. Landlord's obligation to maintain the Temperature is
conditioned upon (i) Tenant not over utilizing any area in the Demised Premises
(i.e. the assembly of large groups of people in any area beyond that set forth
in the Plan) and (ii) the heat generated from Tenant's equipment (i.e. personal
computers, printers, fax machines) in the Demised Premises. Tenant shall comply
with and observe all regulations and requirements prescribed by Landlord for the
proper functioning of the heating, ventilating and air-conditioning systems.
Landlord shall, at no cost to Tenant, supply HVAC from 8:00 A.M. to 8:00 P.M.
for an aggregate period of up to six days a year during the Christmas,
Valentines Day and Mother's Day season, which days shall be chosen by Tenant, in
its discretion upon ten (10) days written notice to Landlord. If Tenant shall
require air-conditioning, heating or ventilation at times when Landlord is not
required to furnish same, Tenant shall give Landlord reasonable advance notice
(oral or written)of such requirement and, provided Tenant is not in material
default after any applicable notice and grace period Landlord shall furnish same
to Tenant and Tenant shall pay within thirty (30) days of receipt of Landlord's
invoice Landlord's customary charges (which charges are currently at a rate of
$150.00 per hour but may escalate from time to time)therefor as additional rent.
(c) provide cleaning and janitorial services on business days,
which shall include cleaning of the bathrooms common areas and removal of trash
from the Demised Premises. Landlord represents that a day porter or matron will
clean the restrooms in the Building once per day on business days during normal
business hours and that the restrooms will be cleaned again each night after
normal business hours. A copy of the janitorial services provided to the
Building are annexed hereto as Exhibit "E".
(d) furnish hot and cold water for pantry and lavatory
purposes (including private restrooms in accordance with Exhibit "B").
(e) allow Tenant to utilize the Building's trash compactor at no additional
charge.
(f) provide an on site security guard from 7:00 A.M. to 9:00 P.M., Monday
through Friday who will circulate in and around the Building, including but not
limited to the lobby areas. If Tenant shall at any time request that Landlord
deactivate the passcard access system for the Building in order to permit Tenant
expanded after business hours access to the Building and the Demised Premises,
Landlord shall have the right, at Tenant's sole cost and expense, to post a
security guard at the Building for the duration of the time that the passcard
system is deactivated. Tenant shall promptly pay to Landlord upon demand the
cost of such security guard, which Landlord represents is presently $15 per
hour. In the event that the cost of security services increases, Tenant shall
pay to Landlord any such increased amount, provided that in no event shall
Landlord make any profit with respect to providing the security guard and that
such rates remain competitive.
(g) provide a security patrol car which shall circulate the parking lot of the
Building, seven days a week from 10:00 P.M. to 6:00 A.M. Tenant acknowledges and
agrees that Landlord may use the same security patrol car to patrol other
buildings in the Central Nassau County area presently owned, or hereinafter
acquired, by Landlord or affiliates of Landlord.
21.02. Landlord reserves the right, without any liability whatsoever and without
abatement of Fixed Annual Rent or additional rent, to stop the heating,
air-conditioning, elevator, plumbing, sanitary, electric and other systems when
necessary by reason of accident or emergency or for repairs, alterations,
replacements or improvements, provided that, except in the case of emergency,
Landlord will reasonably notify Tenant in advance, in writing, of any such
stoppage and, if ascertainable, its estimated duration, and will proceed
diligently with the work necessary to resume such service as promptly as
reasonably possible and in a manner so as to minimize interference with Tenant's
use and enjoyment of the Demised Premises. Landlord shall not be liable in any
way to Tenant for any failure of the heating, air-conditioning, elevator,
plumbing, sanitary, electric and other systems by reason of any failure or
defect in the supply or character of electric energy furnished to the Building
or the Demised Premises by the public utility serving the Building nor shall
Tenant be entitled to any rent abatement whatsoever in the event of such a
failure or interruption of service.
21.03. Landlord shall not be required to furnish any other services, except as
otherwise provided in this Lease.
21.04. Tenant acknowledges that the lower level gated parking area shall only be
accessible on Business Days from 7:00 A.M. Monday through 9:00 P.M. Friday.
ARTICLE 22.
FAILURE TO GIVE POSSESSION
22.01. If the Demised Premises, any portion thereof, or any additional space to
be included within the Demised Premises shall not be available for occupancy by
Tenant on the specific date (if any) hereinbefore designated for the
commencement of term of this Lease or for the inclusion of such space for any
reason whatsoever, then this Lease shall not be affected thereby but, in such
case, said specific date shall be deemed to be postponed until the date when the
Demised Premises or such additional space shall be available for occupancy by
Tenant, and Tenant shall not be entitled to possession of those affected
portions of the Demised Premises or such additional space until the same are
available for occupancy by Tenant; provided, however, unless specifically set
forth in this Lease to the contrary, that Tenant shall have no claim against
Landlord, and Landlord shall have no liability to Tenant by reason of any such
postponement of said specific date, and the parties hereto further agree that
any failure to have the Demised Premises or such additional space available for
occupancy by Tenant on said specific date or on the Commencement Date shall in
no way affect the obligations of Tenant hereunder nor shall the same be
construed in anyway to extend the term of this Lease and furthermore, this
Section 22.01 shall be deemed to be an express provision to the contrary of
Section 223-a of the Real Property Law of the State of New York and any other
law of like import now or hereafter in force.
Notwithstanding anything herein to the contrary, provided (i)Tenant approves the
Plan for the Original Premises by no later than June 20, 2005 in accordance with
Article A(2) and (ii) there are no Tenant Delays, as hereinbefore defined, in
the event Landlord is unable to substantially complete Landlord's Work in the
Original Premises by October 15, 2005, Tenant shall receive a rent abatement
equal to one (1) day of Fixed Annual Rent for each day subsequent to October 15,
2005 in which Landlord's Work is not substantially completed. In the event
Landlord's Work is not substantially completed by November 1, 2005 the rent
abatement shall be increased from one (1) day of Fixed Annual Rent for each day
of delay to two (2) days of Fixed Annual Rent for each day of delay.
ARTICLE 23.
INVALIDITY OF ANY PROVISION
23.01. If any term, covenant, condition or provision of this Lease or the
application thereof to any circumstance or to any person, firm or corporation
shall be invalid or unenforceable to any extent, the remaining terms, covenants,
conditions and provisions of this Lease or the application thereof to any
circumstances or to any person, firm or corporation other than those as to which
any term, covenant, condition and provision of this Lease shall be valid and
shall be enforceable to the fullest extent permitted by law.
ARTICLE 24.
BROKERAGE
24.01. Each party hereto covenants, represents and warrants to the other that
they have had no dealings or negotiations with any broker or agent other than
the Broker(s)(as hereinbefore defined)in connection with the consummation of
this Lease, and each party covenants and agrees to pay, hold harmless and
indemnify the other from and against any and all cost, expense (including
reasonable attorneys' fees and costs) and liability in connection with any
compensation, commissions or charges claimed by any broker or agent, other than
the Brokers, with respect to this Lease or the negotiation thereof.
ARTICLE 25.
SUBORDINATION
25.01. This Lease is and shall be subject and subordinate to all present and
future ground or underlying leases and to all mortgages, options, and building
loan agreements that may now or hereafter affect such leases or the real
property of which the Demised Premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such ground or
underlying leases, options, building loan agreements and mortgages. The
provisions of this Section 25.01 shall be self-operative and no further
instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall execute and deliver promptly at its own cost and
expense any instrument, in recordable form, if required, that Landlord, the
lessor of any ground or underlying lease or the holder of any such mortgage or
any of their respective successors in interest or assigns may request to
evidence such subordination. Tenant shall be liable to Landlord for damages,
including actual, consequential and punitive damages, caused by Tenant's failure
to deliver a subordination agreement in form acceptable to Landlord and the
party requesting same.
Landlord shall obtain a non-disturbance agreement from the existing, and
all future lenders that have a mortgage interest in the Building ("Mortgagee"),
as well as any party in which Landlord may convey the Building or ground lease
("Future Owner") substantially similar to provisions set forth in the
Subordination Non-Disturbance and Attornment Agreement ("SNDA")annexed hereto as
Exhibit "F" within ninety (90) days (but in no event sooner than ninety (90)
days from the Commencement Date) or the conveyance of the mortgage interest,
ground lease or title, as the case may be.
25.02. In the event of a termination of any ground or underlying lease, or if
the interests of Landlord under this Lease are sold, transferred by reason of,
or assigned in lieu of, a mortgage or if the holder of any mortgage acquires
this lease in substitution therefor, then Tenant, at the option of the lessor
under such ground or underlying lease or such mortgagee or purchaser, assignee
or lessee, as the case may be, either (i) will attorn to it as if said lessor,
such mortgagee or purchaser, assignee or lessee, were the landlord originally
named in this Lease, or (ii) will enter into a new lease with said lessor or
such mortgagee or purchaser, assignee or lessee, as landlord, for the remaining
term of this Lease and otherwise on the same terms and conditions as this Lease.
The foregoing provisions of clause (i) of this Section 25.02 shall inure to the
benefit of such lessor, mortgagee, purchaser, assignee or lessee and the Tenant,
shall be self-operative upon the exercise of such option, and no further
instrument shall be required to give effect to said provisions. Tenant, however,
upon demand of any such lessor, mortgagee, purchaser, assignee or lessee, shall
execute, from time to time, instruments in confirmation of the foregoing
provisions of this Section 25.02, reasonably satisfactory to the Tenant and to
any such lessor, mortgagee, purchaser, assignee or lessee, acknowledge in such
attornment and setting forth the terms and conditions of its tenancy.
25.03. Intentionally Omitted.
ARTICLE 26.
CERTIFICATE OF TENANT
26.01. Tenant, without charge, at any time and from time to time, within fifteen
(15) days after request by Landlord, shall deliver a written instrument to
Landlord or to any other person, firm or corporation specified by Landlord, duly
executed and acknowledged, certifying, among other things (it being expressly
understood and agreed that the list of items below shall not act to limit the
scope of items as to which Landlord may request Tenant to certify):
(a) that this Lease is unmodified and in full force and effect
or, if there has been any modification, that the same is in full force and
effect as modified and stating any such modification, that there is no existing
basis to cancel or terminate this Lease, or shall advise otherwise, and to the
best of Tenant's knowledge Landlord is not in default thereunder, provided that
is in fact the case;
(b) whether the term of this Lease has commenced and rent
become payable thereunder, and whether Tenant is in possession of all of the
Demised Premises except for such portions of the Demised Premises that have been
sublet or being held for sublet pursuant to the provisions of this Lease;
(c) whether or not there are then existing any defenses or
offsets that are not claims under paragraph (e) of this Section 26.01 against
the enforcement of any of the agreements, terms, covenants, or conditions of
this Lease and any modification thereof upon the part of Tenant to be performed
or complied with, and, if so, specifying the same;
(d) the amount of the Fixed Annual Rent payable under this
Lease and the dates to which the Fixed Annual Rent and additional rent and other
charges thereunder have been paid;
(e) whether or not Tenant has made any claims against Landlord
under this Lease and, if so, the nature and the dollar amount, if any, of such
claim.
Tenant acknowledges and agrees that any estoppel certificate delivered by Tenant
may be relied upon by any prospective purchaser of the Building, any lender,
mortgagee, lessee, assignee or other party as Landlord may designate.
26.02. It is expressly understood and agreed by Tenant that it shall be an event
of default under this Lease for Tenant to fail to deliver the certificate
required by this Article 26, in the form requested by Landlord or to demand any
concession or payment of any kind or nature in connection with the delivery of
this certificate. It is further expressly understood and agreed that delivery of
this certificate shall not be excused as a result of Tenant asserting any claims
against Landlord. Tenant agrees that it shall be liable to Landlord for damages
and all costs incurred as a result of Tenant's delay or failure to deliver such
certificate in a timely fashion (including reasonable attorneys' fees). Without
limiting the generality of the foregoing, if Tenant shall fail to deliver to
Landlord an estoppel certificate within fifteen (15) days after Landlord's
request for the same, if the same is not executed and returned to Landlord
within ten (10) days of Landlord's second request for the same, in addition to
damages, Tenant shall pay to Landlord an administrative fee of $250.00 per day
that the estoppel certificate is not so delivered.
ARTICLE 27.
LEGAL PROCEEDINGS; WAIVER OF JURY TRIAL; ATTORNEYS' FEES
27.01. Landlord and Tenant hereby waive trial by jury in any action, proceeding
or counterclaim brought by either of the parties hereto against the other on any
matters whatsoever arising out of or in anyway connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use or occupancy of the Demised
Premises, and/or any other claims (except claims for personal injury or property
damage), and any emergency statutory or any other statutory remedy. If Landlord
commences any summary proceeding for non-payment of rent, Tenant shall not
interpose and hereby waives the right to interpose any counterclaim of whatever
nature or description in any such proceeding with the exception of any
compulsory counterclaim. Notwithstanding the foregoing, Tenant shall be entitled
to commence a separate action or proceeding against Landlord regarding any claim
or defense it may have against Landlord. Tenant shall reimburse Landlord, in
such amounts as determined by the court, for all costs and expenses (including
reasonable attorneys' fees and disbursements and court costs, whether in
connection with an action or proceeding commenced by Landlord, by Tenant, by a
third party or otherwise) incurred by Landlord in connection with (i) enforcing
Tenant's obligations under this Lease, (ii) the termination of this Lease and
the eviction of Tenant through summary or other proceedings or for any other
relief against Tenant including the recovery of damages pursuant to Article 18
hereof, (iii) recovering any sums due under this Lease or any damages for
Tenant's breach of the terms of this Lease, (iv) the defense of any claim
against Landlord or any shareholder partner, officer, director, employee, agent
or servant of Landlord arising under this Lease, whether brought by Tenant or a
third party , and (v) as otherwise provided in this Lease. All such amounts
shall be deemed to be additional rent, but shall be collectible whether incurred
before or after the expiration or termination of this Lease.
27.02. Provided Tenant prevails on the merits, Landlord shall reimburse Tenant,
as determined by the court, for all reasonable costs and expenses (including
reasonable legal fees and disbursements and court costs) incurred by Tenant in
connection with (i) enforcing Landlord's obligations under this Lease, and (ii)
the wrongful termination of this Lease by Landlord, (iii) recovering any sums
due under this Lease or any damages for Landlord's breach of the terms of this
Lease but only to the extent the right to damages against Landlord, if any, are
specifically set forth in this Lease; and (iv) the defense of any claim against
Tenant or any shareholder, partner, officer, director, employee, agent or
servant of Tenant arising under the Lease due to Landlord's failure to comply
with the terms of this Lease.
ARTICLE 28.
SURRENDER OF PREMISES
28.01. Upon the expiration or other termination of the term of this Lease,
Tenant shall quit and surrender the Demised Premises to Landlord, broom clean,
in good order and condition, ordinary wear and tear and damage excepted, and
Tenant shall remove all of its high density file systems and the like, trade
fixtures, equipment and personal property (collectively, the "Leasehold
Improvements")as herein provided. Without limiting the generality of the
foregoing, Tenant shall remove, upon the expiration or earlier termination of
this Lease, signage and rooftop equipment and all such other items installed in
or on the Building and the Demised Premises by Tenant. Tenant's obligation to
observe or perform this covenant shall survive the expiration or other
termination of the term of this Lease. If Tenant shall fail to remove its
Leasehold Improvements, signage and Rooftop Equipment from the Demised Premises
upon the expiration or earlier termination of this Lease, such Leasehold
Improvements Rooftop Equipment, signage property shall be deemed abandoned by
Tenant and Landlord shall have the right to remove such property and dispose of
same in any manner that Landlord deems appropriate, in its sole and absolute
discretion. Landlord shall have no liability to Tenant for such Leasehold
Improvements Rooftop Equipment and signage or any damage thereto as a result of
such removal, it being expressly understood and agreed that Landlord may do
whatever it wishes with Leasehold Improvements, the Rooftop Equipment and
signageleft in the Demised Premises after the expiration or earlier termination
of this Lease. Tenant shall be liable to Landlord for all damages, costs and
expenses associated with the removal of any of Tenant's Leasehold Improvement,
Rooftop Equipment and signage from the Demised Premises. The provisions of this
Section 28.01 shall survive the expiration or earlier termination of this
Lease.28.02. Tenant acknowledges that possession of the Demised Premises must be
surrendered to Landlord at the expiration or earlier termination of the term of
this Lease. The parties recognize and agree that the damage to Landlord
resulting from any failure by Tenant to timely surrender possession of the
Demised Premises as aforesaid may be substantial, may exceed amount of the
monthly rent and additional rent theretofore payable hereunder, and maybe
impossible to accurately measure. Tenant therefore agrees that if possession of
the Demised Premises is not surrendered to Landlord within 48 hours after the
expiration or earlier termination of the term of this Lease, then,
notwithstanding anything to the contrary contained in this Lease, Tenant shall
pay to Landlord for each month and for each portion of any month during which
Tenant holds over in the Demised Premises after the expiration or sooner
termination of the term of this Lease, rent at a rate equal to the greater of
(a) one hundred and fifty percent (150%) of that portion of the Fixed Annual
Rent and additional rent that was payable under this Lease for the last month of
the term hereof Nothing herein contained shall be deemed to permit Tenant to
retain possession of the Demised Premises after the expiration or sooner
termination of the term of this Lease. The provisions of this Section 28.02
shall survive the expiration or earlier termination of this Lease.
ARTICLE 29.
RULES AND REGULATIONS
29.01. Tenant and Tenant's invitees, employees and agents shall observe
faithfully and comply strictly with such Rules and Regulations as Landlord or
Landlord's agents may reasonably adopt from time to time (a copy of the present
Rules and Regulations are annexed hereto as Exhibit C); provided, however, that
in case of any conflict or inconsistency between the provisions of this Lease
and of any of the Rules and Regulations as originally or as hereafter adopted,
the provisions of this Lease shall control. Reasonable written notice of any
changes to the Rules and Regulations shall be given to Tenant. Landlord shall
uniformly enforce the Rules and Regulations and shall not enforce the Rules and
Regulations against Tenant in a discriminatory manner.
29.02. Landlord shall have no liability to Tenant, nor shall Tenant be entitled
to any abatement of rent whatsoever, as a result of the failure of any other
tenant in the Building to comply with the Rules and Regulations or for the
failure of Landlord to enforce the Rules and Regulations in any respect.
ARTICLE 30.
CONSENTS AND APPROVALS
30.01. Wherever in this Lease Landlord's consent or approval is required, if
Landlord shall unreasonably delay, condition, or withhold such consent or
approval (unless Landlord has the right to grant such approval in its sole and
absolute discretion, in which event Tenant shall have no claim or remedy against
Landlord whatsoever), Tenant in no event shall be entitled to make, nor shall
Tenant make, any claim, and Tenant hereby waives any claim, for money damages
(nor shall Tenant claim any money damages by way of set-off, counterclaim or
defense) based upon any claim or assertion by Tenant that Landlord unreasonably
withheld or unreasonably delayed its consent or approval. Tenant's sole remedy
shall be an action or proceeding to enforce any such provision, for specific
performance, injunction or declaratory judgment. The losing party shall pay all
of the prevailing party's costs in, including but not limited to all reasonable
attorney's fees connection with the claim, action or proceeding.
ARTICLE 31.
NOTICES
31.01. Any notice, demand, consent, approval, disapproval, or statement
(collectively, "Notices") from Landlord to Tenant or from Tenant to Landlord
shall be in writing and shall be deemed duly given: (i) if mailed by certified
mail, postage prepaid, return receipt requested, (ii) if sent via nationally
recognized overnight mail carrier with receipt acknowledged, or (iii) only in
the case of Notices that are Escalation Statements or bills for rent, if mailed
by first class mail, postage prepaid, to the address(es) for Notices set forth
in this Article 31. Notices to Tenant shall be sent to the address of Tenant set
forth on page 1 of this Lease until Tenant shall be in occupancy of the Demised
Premises and, thereafter, to the Demised Premises. Any Notices to Tenant, with
the exception of billing invoices, shall also be sent to Gallagher, Walker,
Bianco & Plastaras, Esqs.98 Willis Avenue, Mineola, New York 11501 to the
attention of Gerard M. Gallagher, Esq. or such other address as Tenant, or their
attorneys, may designate in writing from time to time. Landlord's attorney shall
be entitled to serve any required notices hereunder on behalf of Landlord.
Notices to Landlord shall be sent (i) to the address of Landlord set forth on
page 1 of this Lease or (ii) to such other address as Landlord shall have last
designated by notice in writing to Tenant. Notice shall be deemed given on the
third (3rd) business day after depositing same in an official depository of the
United States Postal Service (or successor organization) or, if given by
nationally recognized overnight mail carrier, upon delivery to Landlord or
Tenant, as the case may be.
31.02. Notwithstanding anything to the contrary contained in this Lease, prior
to entering in and upon the Demised Premises (except in the case of an
emergency, in which event this clause shall be inapplicable), Landlord shall
provide Tenant with written notice of such planned entry at least twenty four
(24) hours prior thereto, and shall, in such notice, provide Tenant with the
approximate time of such entry. Said written notice may be in any reasonable
format such as a facsimile, hand delivered or mail delivered letter, email or
other generally acceptable format. Landlord shall not be required to deliver
such a notice to any party other than Tenant at the Demised Premises.
ARTICLE 32.
NO WAIVER
32.01. No agreement to accept a surrender of this Lease shall be valid unless in
writing signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys to the Demised Premises prior to the
termination of this Lease. The delivery of keys to any employee of Landlord or
Landlord's agent shall not operate as termination of this Lease or a surrender
of the Demised Premises. If Tenant at any time desires to have Landlord sublet
the Demised Premises for Tenant's account, Landlord or Landlord's agents are
authorized to receive said keys for such purpose without releasing Tenant from
any of the obligations under this Lease. The failure of either party to seek
redress for violation of, or to insist upon the strict performance of, any
covenant or condition of this Lease or any of the Rules and Regulations adopted
by Landlord, shall not prevent a subsequent act, which would have originally
constituted a violation, from having all the force and effect of an original
violation. The receipt by Landlord of rent, nor the payment of such rent by
Tenant, with knowledge by either party of the breach of any covenant of this
Lease shall not be deemed a waiver of such breach. The failure ofLandlord to
enforce (or the Tenant to insist upon enforcement) of any of the Rules and
Regulations shall not be deemed a waiver by either party of any violation
thereof or of Landlord's right to enforce, or Tenant's right to insist upon
enforcement,same according to their terms in the future. No provision of this
Lease shall be deemed to have been waived by either party, unless such waiver is
in writing signed by the party to be charged by the waiver. Except as may be
specifically set forth to the contrary, no payment by Tenant or receipt by
Landlord of a lesser amount than the full Fixed Annual Rent and additional rent
stipulated herein shall be deemed a satisfaction of Tenant's obligations
hereunder. All partial payments shall be applied to the earliest outstanding
amounts owed by Tenant to Landlord. No endorsement or statement on any check or
any letter accompanying any check or payment of rent shall be deemed an accord
and satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such rent or pursue any
other remedy provided in this Lease.
ARTICLE 33.
DEFINITIONS
33.01. Except as otherwise set forth to the contrary herein, the term "Landlord"
as used in this Lease means only the owner, or the mortgagee in possession, for
the time being of the Land and Building (or the owner of a lease of the Building
or of the Land and Building), so that in the event of any transfer of title to
said Land and Building or said lease, or in the event of a lease of the
Building, or of the Land and Building, upon notification to Tenant of such
transfer or lease the said transferor landlord shall be and hereby is entirely
freed and relieved of all existing or future covenants, obligations and
liabilities of Landlord hereunder, and it shall be deemed and construed as a
covenant running with the land without further agreement between the parties or
their successors in interest, or between the parties and the transferee of title
to said Land and Building or said lease, or the said lessee of the Building, or
of the Land and Building, that the transferee or the lessee has assumed and
agreed to carry out any and all such covenants, obligations and liabilities of
Landlord hereunder.
33.02. The term "business days" as used in this Lease shall exclude Saturdays,
Sundays and all days observed by the federal, state or local government as legal
holidays as well as all other days recognized as holidays under applicable union
contracts.
33.03. The term "Interest Rate" shall mean a fluctuating rate of interest per
annum equal to the lesser of (a) 1% above the prime commercial lending rate of
interest listed from time to time by Citibank, N.A., or, if such bank is no
longer in business, such other lending institution as the Landlord shall
designate in its reasonable discretion or (b) the maximum applicable legal rate
of interest, if any.
33.04. The term "Life Safety System" shall mean those safety systems required by
federal, state and local law in connection with the Building.
33.05 The term "Affiliates" with respect to Tenant, shall mean any person or
entity directly or indirectly controlling, controlled by, or under
common control with Tenant.
ARTICLE 34.
INABILITY TO PERFORM
34.01. Except as may be otherwise specifically set forth to the contrary, this
Lease and the obligation of Tenant to pay rent hereunder and to perform all of
the other covenants and agreements hereunder on the part of Tenant to be
performed shall in no way be affected, impaired or excused because Landlord is
unable to fulfill any of its obligations under this Lease or to supply, or is
delayed in supplying, any service expressly or impliedly to be supplied, or is
unable to make, or is delayed in making, any repairs, additions, alterations or
decorations or is unable to supply, or is delayed in supplying, any equipment or
fixtures if Landlord is prevented or delayed from so doing by reason of strike
or labor troubles or any cause whatsoever beyond the reasonable control of
Landlord including, but not limited to, government preemption in connection with
a National Emergency or by reason of any rule, order or regulation of any
department or subdivision thereof or any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency, provided however, Landlord shall be required to promptly notify
Tenant, in writing, of its inability to perform under this Lease and shall
promptly resume performance as soon as said impediment is no longer present.
ARTICLE 35.
ENTIRE AGREEMENT; NO REPRESENTATIONS; NO ORAL MODIFICATION
35.01. This Lease and the Schedules attached hereto set forth all of the
covenants, promises, assurances, agreements, representations, conditions,
warranties, statements and understandings (collectively, the "Representations")
between Landlord and Tenant concerning the Demised Premises and the Building,
and there are no Representations, either oral or written, between Landlord and
Tenant other than those set forth in this Lease.
35.02. This Lease supercedes and revokes all previous negotiations,
arrangements, letters of intent, offers to lease, lease proposals, brochures,
Representations, and information conveyed whether oral or in writing, between
Landlord and Tenant or their respective representatives or any other person
purporting represent Landlord to Tenant. Tenant acknowledges that it has not
been induced to enter into this Lease by any Representations of Landlord not
expressly set forth in this Lease, it has not relied on any such
Representations, no such Representations shall be used in the interpretation or
construction of the Lease, and Landlord shall have no liability for any
consequences arising as a result of any such Representations.
35.03. Except as otherwise provided in this Lease, no subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Landlord or
Tenant unless in writing and signed by the party against whom enforcement of the
alteration, amendment, change or addition is sought.
ARTICLE 36.
NON-LIABILITY AND INDEMNIFICATION
36.01. Neither Landlord nor any partner, member, director, officer, agent,
servant or employee of Landlord shall be liable to Tenant for any loss, injury
or damage to Tenant or to any other person, or to its or their property,
irrespective of the cause of such injury, damage or loss. exceptto the extent
the same are caused by or result from the negligence or willful misconduct of
Landlord, its agents, servants or employees in the operation or maintenance of
the Demised Premises or the Building.
36.02. Tenant shall indemnify and hold harmless Landlord and all lessors under
underlying leases, of, and mortgagees under mortgages affecting, the Land and/or
the Building and its and their respective partners, members, directors,
officers, agents and employees from and against any and all claims arising from
or in connection with the use or occupation of the Demised Premises by Tenant or
anyone in the Demised Premises with Tenant's permission or from any breach of
this Lease by Tenant.
36.03 Landlord shall indemnify and hold harmless Tenant and its Affiliates and
their respective directors, officers, agents and employees from and against any
and all claims arising from or in connection with the ownership, operation or
maintenance (to the extent Landlord is responsible for the same) of the Demised
Premises or the Building by Landlord, its agents or employees or from any breach
of this Lease by Landlord. This provision shall at no time be deemed to create
any third party beneficiary rights between Tenant and Landlord's insurance
carrier.
ARTICLE 37.
LICENSE TO USE ROOF IN CONNECTION
WITH SATELLITE DISH AND ANENNAS
37.01. Provided Tenant is not in default under the terms of this Lease beyond
any applicable notice and cure period, Tenant, upon ten (10) days written notice
to Landlord shall have the right to install a Satellite Dish, antennas and other
equipment/infrastructure supporting Tenant's operations (collectively,
"Satellite Equipment") on the roof of the Building on the following conditions:
(1) Tenant shall have the right to install the Satellite Equipment at no
additional charge to Tenant;
(2)Tenant may only run cable and conduits from the Satellite
Equipment to the Demised Premises (which shall include the
Expansion Space subsequent to its lease commencement date)
in the manner and location approved by Landlord, but in no
event through any other tenant's premises. Tenant shall
repair any damage to the roof or other parts of the
Building caused by the installation, presence, use of and
removal of the Satellite Equipment and any related cables,
conduits or equipment installed by or on behalf of Tenant;
(3) The Satellite Equipment, cables and conduits shall remain
the property of Tenant for the term of this Lease. Upon
the expiration of the Lease term, Tenant, at its sole cost
and expense, shall remove the Satellite Equipment and any
related cables, conduits or equipment and repair any
damage to the Building caused by the installation, use or
removal;
(4) Tenant shall provide Landlord with a survey describing the
proposed mounting method, location, point of entry to the
Building and cable route, which will require Landlord's
approval,which shall not be unreasonably withheld,
conditioned or delayed, prior to installation;
(5) Tenant may not hire any contractor to install the
Satellite Equipment without Landlord's prior written
consent, which consent shall not be unreasonably withheld,
conditioned or delayed. Tenant shall promptly notify
Landlord of the name of the contractor and provide
Landlord with whatever information Landlord deems
necessary in determining whether the contractor is
acceptable. All work shall be conducted by workmen bonded
in amounts reasonably acceptable to Landlord. Furthermore,
Tenant will provide insurance coverage and certificates in
the amounts more specifically set forth in the Lease,
naming Landlord, its lender, its managing agent, and any
and all other parties required by Landlord, as additional
insured;
(6) Tenant shall at no time create a nuisance or unreasonably
interfere with the rights of other tenants in the Building
or the use of common areas, elevators or stairways;
(7) Tenant will apply for all necessary approvals, permits and
licenses at no cost to Landlord. Tenant and its
contractors shall not perform any work unless and until
all necessary approvals, permits and licenses have been
obtained by Tenant. Tenant shall provide Landlord with
copies of all applications for approvals, permits and
licenses as well as all approvals, permits and licenses
issued prior to the commencement of any work for
Landlord's prior review;
(8) Tenant will provide Landlord with certificates of
completion and lien releases. Tenant warrants that no
mechanic's lien will attach as a result of the
installation and in the event a mechanic's lien is filed,
the same will be bonded and discharged within no more than
ten (10) days; (9) Tenant agrees that the use of the
Satellite Equipment will not materially interfere with the
transmission or reception equipment presently or
subsequently located on the Building. If the installation
of the Satellite Equipment should cause measurable
interference, Tenant shall eliminate it in a timely manner
after notice from Landlord. Furthermore, if the placement
of the Satellite Equipment in any way unreasonably
interferes with the Landlord's use of the roof, upon
written notice from Landlord, Tenant shall, at its sole
cost and expense, relocate the Satellite Equipment to a
different portion of the roof agreed upon by Landlord; and
(10) Tenant will indemnify and hold Landlord its agents,
employees harmless from and against all liability,
damages, costs and expenses, including reasonable
attorney's fees, incurred by Landlord arising out of or in
connection with Tenant's installation, use, maintenance
and removal of the Satellite Equipment, cables and
conduits.
ARTICLE 38.
SIGNAGE
38.01. 38.01. At the inception of the Lease, Landlord, at its sole cost and
expense, shall affix the Tenant's name to the building directory and to the
standard signage provided by the Landlord at the entrance to the Demised
Premises. Thereafter, if the Tenant wishes to change the nomenclature on the
signage it shall be done through the Landlord's office, with the Landlord's
express consent, which shall not be unreasonably withheld conditioned or delayed
and at the Tenant's sole cost and expense. If Tenant affixes any signage in
violation of this provision, among other remedies, Landlord may, without notice
to Tenant, remove and discard same and Tenant shall be immediately liable to
Landlord for the cost of such removal and the restoration of the Building
associated with such removal.
38.02. To the maximum extent permitted by zoning laws and regulations, by
variance or otherwise, Tenant, at its sole cost and expense, shall have (i) the
exclusive right (exclusive to any and all present and future tenants of the
Building, the Landlord, and any third parties) to exterior signage above the
first floor of the Building for its name or any of its subsidiaries' names, on
four sides (north, south, east, and west)of the Building as designated by
Tenant("Exterior Building Signage"), (ii) the right to install exterior retail
signage at the level of the first floor on the front (Southside) of the Building
("Exterior Retail Signage"), (iii) the exclusive right to install exterior
signage on or about the rear (Northside) of the parking garage visible from the
Long Island Railroad tracks ("Exterior Parking Garage Signage"), (iv) the
exclusive right to install exterior signage on and in conjunction with the
existing monument sign depicting the address of the Building, but in no event
shall it interfere with the existing lettering set forth on the sign ("Monument
Sign"), and (v) the right to install temporary exterior signage during the
Mother's Day peak selling period, which temporary signage shall cover, in whole
or in part, Tenant's Exterior Signage. Collectively the Exterior Building
Signage, Exterior Retail Signage, Exterior Parking Garage Signage and Monument
Sign may be referred to as "Exterior Signage". Tenant shall not be required to
obtain the approval or consent of Landlord to install said Exterior Signage to
the extent that Channel Letter signage similar to the signage used by Tenant at
its existing premises (1600 Stewart Avenue, Westbury, NY) is used. In addition,
Tenant shall be permitted to install any other interior or exterior signage
subject to the approval and consent of Landlord, which approval and consent
shall not be unreasonably withheld, conditioned or delayed.
38.03 Tenant shall be responsible for the installation and maintenance and
repair of the signage and shall remove the same so that the area is in
substantially the same condition, reasonable wear and tear excepted, as
immediately prior to the installation or erection of any Exterior Signage upon
the expiration or earlier termination of this Lease. Tenant shall at all times
comply with the terms set forth in Article 6 above (except as may be
specifically contrary herein) and acknowledges and agrees that Tenant shall be
responsible for any and all of Landlord's costs in connection with the signage.
In addition, Tenant shall indemnify and defend Landlord solely in connection
with any claims that may be made against Landlord, or losses sustained by
Landlord, directly due to or solely in connection with the signage (whether it
be directly due to the actual existence of the signage or with respect to the
installation, maintenance, or removal of the signage, or due to any damage or
repair required to the Building or elsewhere.
38.04 Tenant shall be responsible for any and all costs in connection with the
illumination of the Exterior Signage, including but not limited obtaining
electricity to the signage (via sub-meter) as well as the electric charges
associated with the illumination of the signage.
ARTICLE 39.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS
39.01. As used herein, "Hazardous Materials Laws" means all federal, state and
local laws, statutes, ordinances and regulations, rules, rulings, policies,
orders and administrative actions and orders relating to industrial hygiene,
environmental protection or the use, analysis, generation, manufacture, storage,
disposal or transportation of any oil, flammable explosives, asbestos, urea,
formaldehyde, radioactive materials or waste, infectious waste, or other
hazardous, toxic, contaminated or polluting materials, substances or wastes,
including, without limitation, any "hazardous substances," "hazardous wastes,"
"hazardous materials" or "toxic substances" under any such laws, ordinances or
regulations (collectively, Hazardous Materials"). Tenant shall, at its own
expense, at all times and in all respects: (i) comply with all Hazardous
Materials Laws regarding Hazardous Materials introduced in or about the Building
by or at the direction of Tenant or in connection with Tenant's use of the
Premises ("Tenant's Hazardous Materials"); and (ii) procure, maintain in effect
and comply with all conditions of any and all permits, licenses and other
governmental and regulatory approvals relating to Tenant's Hazardous Materials
within, on, under or about the Building in conformity with all applicable
Hazardous Materials Laws and prudent industry practices regarding management of
such Hazardous Materials. Landlord recognizes and agrees that Tenant may use
Tenant's Hazardous Materials in normal quantities that are applicable to general
office use and that such use by Tenant shall not be deemed a violation of this
Section, so long as the levels are not in violation of any Hazardous Materials
Laws. Upon termination or expiration of the term of this Lease, Tenant shall, at
its own expense, cause all of Tenant's Hazardous Materials to be removed from
the Demised Premises and the Building and transported for use, storage or
disposal in accordance and in compliance with all applicable Hazardous Materials
Laws. Tenant shall indemnify, protect, defend (by counsel reasonably acceptable
to Landlord), and hold Landlord and Landlord's employees, agents, principals,
partners, shareholders, members, attorneys, accountants, professionals and other
representatives, free and harmless from and against any and all claims,
liabilities, penalties, forfeitures, losses and expenses (including attorneys'
fees) or death of in injury to any person or damage to any property whatsoever,
including, without limitation, the Building common area, arising from or caused
in whole or in part, directly or indirectly, by the presence in or about the
Building of any of Tenant's Hazardous Materials or by Tenant's failure to comply
with any Hazardous Materials Laws regarding Tenant's Hazardous Materials or in
connection with any removal, remediation, clean up, restoration and materials
required hereunder to return the Demised Premises and any other property of
whatever nature to their condition existing prior to the appearance of Tenant's
Hazardous Materials. Landlord shall have the right from time to time, upon
reasonable prior written notice, to enter in and upon the Demised Premises and
to inspect same for the presence of Hazardous Materials and for Tenant's
compliance with all Hazardous Materials Laws.
39.02. A. Landlord represents and warrants that any handling, transportation,
storage, treatment or usage of Hazardous Materials that has occurred in the
Building and/or in, on, or under the Land was in compliance with all applicable
federal, state and local laws, regulations and ordinances. Landlord further
represents and warrants that no leak, spill, discharge, emission or disposal of
Hazardous Materials has occurred in the Building and/or in, on, or under the
Land and that the soil, groundwater and soil vapor in the Building and/or on or
under the Land is, or will be, free of Hazardous Materials as of the date
hereof. Landlord agrees to indemnify, defend and hold Tenant and its officers,
partners, directors, shareholders, Affiliates, employees and agents harmless
from any claims, judgments, damages, fines, penalties, costs (including
reasonable attorney, consultant and expert fees), liabilities (including sums
paid in settlement of claims) or loss which arise during or after the Lease term
or any thereof, in connection with the presence of Hazardous Materials in the
soil, groundwater, or soil vapor in, on or under the Building and/or the Land,
unless such Hazardous Materials are present as the result of the acts of Tenant,
its officers, employees or agents. Without limiting the generality of the
foregoing, this indemnification shall survive the expiration of this Lease and
does specifically cover costs incurred in connection with any investigation of
site conditions or any cleanup, remedial, removal or restoration work required
by any federal, state or local governmental agency or political subdivision
because of the presence of Hazardous Materials in the soil, groundwater or soil
vapor in, on or under the Building and/or the Land, unless the Hazardous
Materials are present as the result of the acts of Tenant, its officers, agents
or employees. Without limiting the generality of the foregoing, this
indemnification shall also specifically cover costs in connection with:
1. Hazardous Materials present or suspected to be present
in the soil, ground water or soil vapor in, on or under
the Building and/or the Land before the date hereof; or
2. Hazardous Materials that migrate, flow, percolate,
diffuse or in any way move into, onto or under the
Building and/or on the Land after date hereof; or
3. Hazardous Materials present in, on or under the
Building and/or the Land as a result of any discharge,
dumping, spilling (accidental or otherwise) onto or
into the Building and/or the Land during or after the
Lease term or any extension thereof by any person or
entity.
39.03. Landlord and Tenant shall comply with all laws, ordinances and
regulations of the State of New York and the County of Nassau regarding the
disclosure of the presence or danger of Tenant's Hazardous Materials. Tenant
acknowledges and agrees that all reporting and warning obligations required
under the Hazardous Materials Laws with respect to Tenant's Hazardous Materials
are the sole responsibility of Tenant, whether or not such Hazardous Materials
Laws permit or require Landlord to provide such reporting or warnings, and
Tenant shall be responsible for complying with such Hazardous Materials Laws
regarding the disclosure of, the presence or danger of Tenant's Hazardous
Materials. Landlord and Tenant shall each immediately notify the other, in
writing, of any complaints, notices, warnings, reports or asserted violations of
which it becomes aware relating to Hazardous Materials on or about the Premises.
Landlord and Tenant shall each immediately notify the other if either knows or
has reason to believe Hazardous Materials have or will be released in or about
the Building.
39.04. Tenant shall not perform or cause to be performed, any Hazardous
Materials surveys, studies, reports or inspection, relating to the Demised
Premises or the Building without obtaining Landlord's advance written consent,
which consent may be withheld in Landlord's sole and absolute discretion. At any
time prior to the expiration of the Lease Term, Landlord shall have the right
(in case of an emergency, with no notice and in cases of non-emergency, upon not
less than five (5) days written notice to Tenant) to enter upon the Demised
Premises in order to conduct appropriate tests and to deliver to Tenant the
results of such tests to demonstrate that levels of any Hazardous Materials in
excess of permissible levels has occurred as a result of Tenant's use of the
Demised Premises.
39.05. Tenant is advised that there is present within the Building certain
material which has been identified as asbestos containing material ("ACM").
Landlord represents and warrants to Tenant that as of the respective
Commencement Date that such ACM has been properly abated from the Original
Premises and the Expansion Space in accordance with industry standards and shall
not pose a health risk to Tenant, its agents, employees, customers and visitors.
The ACM is or may be located in the area in the hung ceiling of the common areas
of the Building and the shafts and chases located throughout the Building.
(a) Tenant is advised that due to the presence of this ACM, Tenant must
not at any time enter upon or open the ceiling in the common areas of the
Building or enter upon any shaft areas or penetrate any of the walls of the
Demised Premises. Tenant must advise all those that are in the Tenant's employ
or are its independent contractor's of the condition as stated.
(b) It is expressly understood and made a covenant of this Lease that
the Tenant shall not, without Landlord's prior written consent, enter upon,
allow any person, firm or corporation to enter upon the areas concealed by the
ceiling, the walls and any concealed area within the Demised Premises for any
reason whatsoever including but not limited to changing wiring, installing
wiring, cables or other conduits within the ceiling plenum.
(c) Tenant is advised that entry into such areas shall be only under
the Landlord's supervision and the supervision of the Asbestos Contractor or
Asbestos Consultant retained by the Landlord. All costs associated with such
supervision and entry through the use of the Landlord's Asbestos Contractor or
Asbestos Consultant shall be at Tenant's sole cost and expense, provided said
Asbestos Contractors or Asbestos Consultant's fees are competitive in the trade
in the Nassau County area
(d) Except as specifically set forth in (c) above, Tenant acknowledges
that the Landlord in its sole and absolute discretion shall have the right to
refuse access to the concealed areas, to mandate that contractor's used by the
Tenant have proper certification for the handling of ACM or in the alternative
require the Tenant to use such contractors designated by Landlord with such
qualifications.
(e) Tenant for itself, its heirs, successors, assigns and or subtenants
agrees to follow the Landlord's asbestos operations and maintenance program (the
"O&M Plan") in all respects and to fully cooperate to effect compliance with the
Landlord's O&M Plan which now exists or may be modified or changed in accord
with the requirements of law and the exigencies of the operation of the
building.
(f) Landlord through its consultant is monitoring the air quality in the Demised
Premises and the Building approximately twice a year. In the event that
Landlord's consultant recommends abatement of any area then and in such event,
Landlord shall commence such abatement as soon as is reasonably practical
thereafter. Tenant agrees to promptly, immediately and fully cooperate in such
abatement.
(g) In the event Tenant, in its reasonable discretion, has reason to believe
that there may be an issue with respect to the air quality in the Building, upon
Tenant's written request, but in no event more frequently than once every three
(3) months, Landlord shall supplement the air quality testing by retaining its
contractors to re-test the air quality prior to its customary six month
scheduled monitoring. The cost of any such supplemental air monitoring shall be
borne by Tenant and shall be due and payable to Landlord as additional rent.
39.05. The respective rights and obligations of Landlord and Tenant under this
Article shall survive the expiration or termination of this Lease.
ARTICLE 40.
RELOCATION OF DEMISED PREMISES; DEMOLITION, ALTERATION AND REMOVAL
40.01. Intentionally Omitted. 40.02 Intentionally Omitted.
40.03. During the term of this lease, Tenant acknowledges and agrees that
Landlord shall retain any and all rights (a) to cause all or any part of the
Demised Premises to be combined with any other premises so as to constitute the
combined premises into a single zoning lot or development or enlargement, (b) to
cause any lot, development or enlargement at any time constituting or including
all or any part of the Demised Premises to be subdivided into two or more lots,
developments or enlargements, (c) to cause development rights (whether from the
Demised Premises or other premises) to be transferred to any such lot,
development or enlargement, (d) to cause other combinations, subdivisions and
transfers to be effected, whether similar or dissimilar to those now permitted
by law and (e) to exploit, sell, convey, lease or otherwise transfer any so
called "air rights" or "air space" above the Building. Tenant acknowledges and
agrees that Tenant has no rights to any such development rights, "air rights" or
comparable rights appurtenant to the Land and the Building, and consents,
without further consideration, to any utilization of such rights by Landlord,
and agrees to promptly execute and deliver any instruments which may be
requested by Landlord, including, but not limited to, instruments merging zoning
lots, evidencing such acknowledgment and consent. Nothing herein shall be
construed to limit Landlord's rights to sell, convey, lease or otherwise
transfer all or any portion of its interest in the Demised Premises subject to
the provisions of this Lease.
ARTICLE 41
RENEWAL OPTION
41.01. Provided that Tenant has not been in default hereunder at any time beyond
the expiration of any applicable grace period, Tenant shall have the right,
exercisable upon one hundred twenty (120) days prior written notice to Landlord
(TIME BEING OF THE ESSENCE) to renew and extend the term of this Lease for up to
two (2) successive additional five (5)year periods. Tenant acknowledges and
agrees that the provision of timely notice of the exercise by Tenant of the
option herein contained is a material condition to the exercise of such option.
If Tenant shall default hereunder beyond any applicable notice and cure period,
between the date of exercise of its option herein contained and the date on
which the option period commences, Landlord shall have the right, by notice
given to Tenant, to negate Tenant's exercise of Tenant's option hereunder and to
have the Lease terminate or expire by its terms as provided herein.
41.02. The Fixed Annual Rent for the first year of the option period shall be
the then escalated rent increased by $1.00 per rentable square foot. Thereafter,
the Fixed Annual Rent shall continue to be escalated annually at a rate of $1.00
per rentable square foot. In no event and under no circumstance shall the Fixed
Annual Rent and the additional rent due hereunder during the first year of the
option period be less than the Fixed Annual Rent and additional rent payable
hereunder during the last month of the initial term of this Lease.
41.03. In connection with Tenant's exercise of its renewal option, upon the
commencement of each five (5) year renewal term, Landlord shall pay to Tenant as
a work allowance for the Demised Premises the sum of Three Hundred Thousand
($300,000) Dollars (the "Work Allowance"). Tenant shall utilize the Work
Allowance in connection with the Demised Premises or in such manner it deems
acceptable, in its sole discretion.
ARTICLE 42.
RIGHT OF FIRST OFFER
42.01. A. Provided Tenant is not in default under the terms of the Lease beyond
any applicable cure period, Landlord agrees not to lease any other space of
2,500 rental square feet or greater (the "Available Offer Space") to another
prospective tenant unless and until Landlord first offers the Available Offer
Space to Tenant in writing (the "First Offer Leasing Notice") and Tenant either
(i) rejects such offer in writing; or (ii) ten (10) business days elapse from
Tenant's receipt of the First Offer Leasing Notice and Tenant has not notified
Landlord in writing of its acceptance of such First Offer Leasing Notice,
whichever event occurs first. Tenant's right of First Offer is subject to
Landlord's right to first offer such space to the existing tenants occupying
their existing space in the Building who wish to extend the term of their lease.
In addition, Tenant's rights hereunder are subject to any existing right of
first offer for the same space. A list of tenant's with an existing right of
first offer are annexed hereto as Exhibit "G". The First Offer Leasing Notice
will contain, at miniumum, the following information:
(1) A description of the Available Offer Space (including
the area and location of such Available Offer Space)
and a floor plan showing the Available Offer Space
crosshatched and a summary of the work to be performed
by Landlord in said space;
(2) The anticipated date of availability of the Available Offer Space;
(3) The proportionate share referable to the Available Offer
Space; and
(4) The term of the Lease (which shall be at a minimum of
five (5) years notwithstanding anything in this Lease
which may require the term for all leased spaces to be
co-terminus.
B. If Tenant timely delivers to Landlord, in accordance with the
conditions of this Article, written notice of Tenant's exercise of the Right of
First Offer for all of the Available Offer Space (time being of the essence for
such time), then the Available Offer Space shall be deemed added to the Demised
Premises and subject to the terms and conditions of the Lease. The Fixed Annual
Rent for any additional space leased pursuant to this Article 14 will be
calculated at the then applicable base rent per square foot applicable to the
Demised Premises (the lower level being $2.50 per rsf less than any of the other
floors)as set forth in the above rent schedules. In addition, Tenant will
charged an electric charge based upon the lowest rate charged by Landlord to any
new tenant who has executed a lease within twenty four months of the right of
First Offer.
C. If Tenant declines or fails to duly and timely exercise its Right of
First Offer, Landlord will thereafter be free to lease the Available Offer Space
in portions or in its entirety to any third-party tenant at any time without
regard to the restrictions in this clause and on whatever terms and conditions
Landlord may decide, without again complying with all the provisions of this
Section 42.
ARTICLE 43.
NOTIFICATION OF SALE OF BUILDING
43.01. In the event Landlord decides to market the Building for sale to the
general public, Landlord shall notify Tenant of the same and, at Tenant's
request, Landlord shall provide Tenant will a copy of the same marketing
material being provided to the general public.
ARTICLE 44.
PAYMENT OF TENANT'S HOLDOVER RENT ON EXISTING SPACE
44.01 As the term of Tenant's existing lease expires on May 31, 2005, Landlord
shall be responsible to reimburse Tenant for hold over rent being charged by its
current landlord and paid for by Tenant at a rate of $85,000 per month (the
"Holdover Rent") for a period of up to six (6) months (the "Holdover Payment
Period"). Upon execution of this Lease Landlord shall reimburse Tenant for the
first three month's of Holdover Rent and thereafter on the first day of each
month unless otherwise stated below. Notwithstanding the Holdover Payment Period
set forth above, unless the Original Premises are substantially completed and
delivered to Tenant on the first day of a given month, Landlord shall be
responsible for the payment of the Holdover Rent payable by Tenant until the
first day of the second calendar month following the month in which Landlord
delivers the Original Premises in accordance with Article 1.02. By way of
example, in the event the Commencement Date is set for June 15, 2005, Landlord
shall be responsible for the Holdover Rent through July 31, 2005. If however,
the Commencement Date is is June 1, 2005, Landlord shall be responsible for the
Holdover Rent through June 30, 2005. Furthermore, if the Original Premises is
not delivered by Landlord, as provided for herein due to a failure by Landlord
to substantially complete Landlord's Work and deliver the Original Premises,
then Landlord shall be responsible for Holdover Rent regardless of the Holdover
Payment Period as follows: (i)in the event the Commencement Date is a date other
than the first day of a month, then for the month in which the Commencement Date
takes place as well as the month immediately following the Commencement Date
(i.e. in the event of a April 15, 2006 Commencement Date, then Holdover Rent
shall continue through May 31, 2006 or (ii) in the event the Commencement Date
is on the first day of any given month, then solely for that entire month (i.e.
in the event of a April 1, 2006 Commencement Date, then Holdover Rent shall
continue through April 30, 2006).
ARTICLE 45.
RELOCATION ALLOWANCE
As an incentive to Tenant to enter into this Lease, upon Landlord executing
this Lease, Landlord shall pay to Tenant as a relocation allowance the following
sums:
(i) Nine Hundred Thousand ($900,000.00) Dollars upon Lease
Commencement; (ii) Five Hundred Thousand ($500,000.00) Dollars
upon completion of the fifth Lease Year;
(iii) Three Hundred Thousand ($300,000.00) Dollars upon completion of
the ninth Lease year. (collectively, the "Relocation Allowance").
Tenant shall utilize the Relocation Allowance as reimbursement of
its relocation costs or in such manner it deems acceptable, in its
sole discretion.
ARTICLE 46.
CONFERENCE ROOM FACILITY
46.01. As an accommodation, and at no cost or expense to Tenant, for use in
common by all tenants in the Building, a conference room facility is
available on the fourth floor of the Building during Normal Business
Hours on Business Days. Tenant shall have the right to utilize the
conference room at its option, either one (1) full day a week or two
(2) half days per week. Tenant may use the conference room under the
following terms and conditions, which terms and conditions are
subject to change at any time, in Landlord's reasonablediscretion:
(i) Tenant is not in default under the terms of this Lease beyond any
applicable cure period;
(ii) Tenant shall have the right to utilize the conference room provided
Tenant notifies Landlord in writing of its intent to use the
conference room at least twenty four (24) hours in advance and shall
not enter the conference room without confirmation from Landlord that
the same is available for use;
(iii) Tenant shall at all times adhere to the reserved time period and
vacate the conference room in broom clean condition at the end of
such designated time period;
(iv) Use of the conference room is on a "first come first serve basis" and
as such is subject to other tenant's prior reservation of the same;
and
(v) Landlord has the right, in its sole and absolute discretion, at any
time and without notice to relocate the conference room.
ARTICLE 47.
MISCELLANEOUS
47.01. Landlord shall provide a security patrol car which shall circulate the
parking lot of the Building. The parties hereto acknowledge that the security
patrol car shall also be utilized to circulate other Buildings within the Garden
City vicinity owned by affiliates of Landlord.
47.02. Landlord shall use commercially reasonable efforts to cooperate with
Tenant in connection with Tenant's application for any economic development
incentives, including any applications files with the IDA, LIPA and NYS Empire
Development Corp. Tenant shall reimburse Landlord with any and all costs,
including but not limited to any reasonable legal fees, associated with
Landlord's assistance in applying for said economic development incentive. Any
and all economic development incentives or benefits of any kind which are
awarded, in connection with Tenant's application, as the direct or indirect
result of Tenant's use, occupancy, or the conducting of its business operations
in the State, county or local municipality shall inure to the exclusive benefit
of Tenant and not to Landlord.
47.03. Tenant shall not, without Landlord's prior written consent, which consent
may be withheld in Landlord's sole and absolute discretion, record a memorandum
of this Lease or any other document related to this Lease is the land records
against the Building.
47.04. Irrespective of the place of execution or performance, this Lease shall
be governed and construed in accordance with the laws of the State of New York.
This Lease shall be construed without regard to any presumption or other rule
requiring construction against the party causing this Lease to be drafted.
47.05. Except as otherwise expressly provided in this Lease, each covenant,
agreement, obligation or other provision of this Lease on Tenant's part or
Landlord's part to be performed shall be deemed and construed as a separate and
independent covenant of Landlord and Tenant, not dependent on any other
provision of this Lease.
47.06. All terms and words used in this Lease, regardless of the number or
gender in which they are used, shall be deemed to include any other number and
other gender as the context may require.
47.07. Except as otherwise provided in this Lease, whenever the payment of
interest is required to be made by Tenant to Landlord by the terms hereof it
shall be at the Interest Rate. In the event that Tenant is in arrears in the
payment of Fixed Annual Rent or additional rent hereunder, Tenant waives
Tenant's right, if any, to designate the items against which any payments made
by Tenant are to be credited, and Tenant agrees that Landlord may apply any
payments made by Tenant to any items it sees fit, irrespective of and
notwithstanding any designation or request by Tenant as to the items against
which any such payments shall be credited.
47.08. The captions are inserted only as a matter of convenience and for
reference, and in no way define, limit or describe the scope of this Lease or
the intent of any provision hereof.
47.09. Landlord acknowledges that Tenant wishes to retain AT&T and MCI ("Telecom
Providers") in connection with its telecommunication systems which will be
brought to the Property, installed in the Building and the Demised Premises.
Tenant shall have the right to have the Telecom Providers install, maintain and
repair Tenant's telecommunications systems in the Demised Premises provided
however that (i) the installation, maintenance and repair shall be subject to
the terms of Article 6 herein; (ii) all of the Telecom Providers' work is
performed in accordance with all federal, state and local applicable law; (iii)
no surface mounting shall at any time occur; it being understood that all wiring
shall be performed within the walls of the Building; and (iv) Tenant and the
Telecom Providers shall reimburse Landlord for any and all losses and costs
incurred by Landlord in connection with the Telecom Providers' installation,
maintainance and repair of Tenant's telecommunications systems, including, but
not limited to the repair of any damage to the Property, Building or Demised
Premises caused during the installation, maintanence and repair of the same.
Landlord shall use commercially reasonable efforts to cooperate with Tenant and
its Telecom Providers in order to install, maintain and repair Tenant's
telecommunication systems during the term of this Lease. Tenant shall reimburse
Landlord for any and all costs associated with or in connection with any damage
that may be caused to the Property, the Building and the Demised Premises in
connection with same.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this
Lease as of the day and year first above written.
LANDLORD:
TREELINE MINEOLA LLC
By: TREELINE MINEOLA CORP.,
Its managing member
By: _______________________
C. Glenn Schor
President
TENANT:
1-800-FLOWERS.COM,INC.
By: _______________________
Name:______________________
Title:_____________________
Federal Identification No.__________________
<PAGE>
EXHIBIT A - PLAN OF DEMISED PREMISES
<PAGE>
EXHIBIT B - WORKLETTER
Landlord agrees, at its sole cost and expense, to perform the following work in
the Demised Premises, all of which, unless otherwise indicated, shall be of
material, manufacture, design, capacity and finish as established by Landlord's
standards of the Building ("Building Standard") and as indicated on the approved
drawing of the Demised Premises which shall be approved by both Landlord and
Tenant and which shall, upon approval, be annexed hereto as Exhibit A (the
"Plan") which work shall be a "turn key" build out and substantially similar to
Tenant's Existing Space.
Landlord will file for a Building Permit with the appropriate municipality and
will construct the Original Premises and the Expansion Space in accordance with
the Plan, as approved by Landlord and Tenant, and in accordance with the
building permit issued therefrom.
All furniture, workstations and related partitions, cabinetry and the like
delineated on the Plan are for reference only and shall not be constructed or
provided by Landlord unless otherwise stated herein.
1. Demolish existing partitions as required to permit the construction
delineated on the Plan. Construction of the plan is subject to site
conditions reasonably permitting the proposed layout. In the event that
site conditions require a change in layout Landlord, in consultation with
Tenant, will use reasonable efforts to substantially effect the plans.
2. Partitions: Construct interior partition walls per Plan, site conditions
permitting. Interior partition walls to be constructed of metal studs, 5/8"
sheetrock. Interior partition walls to be constructed up to the underside
of the hung ceiling, except for all offices which shall extend no less than
6 inches above the ceiling.
3. Electrical: (a) With the exception of the main conference room and the
CEO and President's offices (see No. 11 below) furnish and install Building
Standard 2x4 fluorescent fixtures with 18 cell parabolic lenses, one fixture per
seventy five (75) usable square feet of space; in offices and conference
rooms;(b) furnish and install duplex electrical outlets per code and not less
than one per wall (but not less than four outlets per room). Outlets to be
placed as per plan or if not denominated on Plan, as determined by electrician
in accordance with applicable building code; (c) Provide two (2) dedicated
electrical outlets per 5,000 rsfat locations designated on the Plan (if not
designated on Plan, as determined by electrician in accordance with applicable
building code); (d) as set forth in Section 11(ix)(Specialties) herein, finish
and install a floor junction box in the main conference room with a conduit to
the wall for low voltage wiring. Landlord to provide whips and connect the same
to Tenant's furniture, which Tenant shall install (the connection shall be
subsequent to the Commencement Date and shall at no time effect the Commencement
Date). Each cubicle to be wired as per Plan;(e)as set forth in Section
11(x)(Specialties)herein, with respect to the electric charge to any Exterior
Signage, Landlord sole responsibility will be to provide a metal conduit pipe
through the roof membrane from the fifth floor ceiling to the roof deck and seal
the membrane.
4. Ceiling: Furnish and Install Building Standard 2x4 ceiling tile with 2x2
"second look." New Grid to be installed or existing grid to be modified as
required to effect ceiling installation.
5. Doors and Trim: Furnish and install interior Building Standard doors in
quantity as shown on the Plan. Building Standard doors are solid core,
stain grade oak veneer doors with hollow metal door bucks. Door handles are
provided without locks except on offices which shall receive keyed locks,
not to exceed ten (10) locks. Provide and install glass doors at the
entrance and reception area of the Expansion Space provided that the same
is allowable by Building Code without Landlord being required to install
any other item or equipment or in any way modify the Fire Safety System
presently existing in the Building; i.e. installing a sprinkler system.
6. HVAC: Existing system to be re-ducted so as to deliver air conditioning to
each room on Plan. Placement of air-conditioning diffusers and return air
grilles per the design/building plans so as to provide efficient
air-cooling. Existing perimeter, fan coil units (if any) for cooling and/
or radiator to be painted and refurbished.
7. Flooring: See No. 11 Specialties.
Landlord will supply and install Building Standard ceramic tile in the file
rooms, storage areas, computer room, file areas, ADA bathroom (as further
described below),and utility areas. Landlord will supply and install
Building Standard ceramic tile in the non-ADA restroom (subject to the
terms described in Section 11(vii) (Specialties) herein, the pantry area
and the waiting/reception area. One (1) tile (color and style) for entire
areas to receive ceramic tile and one (1) tile (color and style)for entire
areas to received ceramic tile.
8. Finishes: Paint entire Demised Premises one (1) coat latex
primer and two (2) finish coats. Door frames painted same
color as walls; semi gloss finish. Finish coat to be latex
satin finish paint, color selected by Tenant with
LandlordBenjamin Moore Regal Wall Satin , no more than four
(4) colors for private offices and four (4) colors for common
areas, NO CUSTOM COLORS. All door bucks painted the same color
as wall but in semi - gloss finish. Color selection must be
concluded within ten (10) days of lease execution, time of the
essence. In the event a color is not designated within the
time period set forth Landlord may paint any basic white on
the standard paint chart.
9. Entry Door: Existing fire rated entry door to remain. If entry
door to be relocated per Plan, Landlord to provide and install
single fire rated entry door in style and size equivalent to
existing door. All entry doors to have existing door hardware
if possible; otherwise, Landlord to provide new entry door
hardware. Landlord does not replace or change locks or
cylinders to the Demised Premises.
10. Landlord shall provide and install Building Standard window
treatments on the perimeter windows of the Demised Premises.
Tenant on taking possession of the Demised Premises assumes
responsibility for the blinds including but not limited to the
cleaning and repair of the same. In the event Tenant elects to
install window treatments, the same must be approved by the
Landlord and shall be consistent with Building Standard.
11. Specialties:
(i) Landlord shall install glass front panels in perimeter offices
similar in size, style, and dimension as in Tenant's existing
premises at 1600 Stewart Avenue, Westbury, New York (the
"Existing Premises").
(ii) Landlord shall install indirect lighting in the open area
similar to the Existing Premises; all emergency lighting and
exit sign lighting shall be installed in accordance with
Building Code.
(iii) Landlord shall provide upgraded carpet consistent with the
quality of Tenant's carpet at the Existing Premises (i.e.
Collins & Aikman Carpet tiles). Carpet to be glued per
manufacturer's specifications with vinyl cove base as per
Tenant's specifications and wood floor molding in the main
conference room, CEO and President's office. In the event
Tenant does not select carpet within twenty (20) days of Lease
execution, time of the essence, Landlord may install its
selection of carpet and coves.
(iv) Landlord shall install a complex sheetrock ceiling in the main
conference room, as depicted in the Plan, and the ceiling in
the CEO's office and a plain sheetrock ceiling in the
President's office.
(v) Landlord shall supply and install up to twenty five Building
Standard hi hats in the conference room, CEO and President's
offices as per Plan.
(vi) Landlord shall install a private restroom (including plumbing) of
approximately 5 ft. by 9 ft. in dimension in the CEO and the President's
offices. Each restroom shall include a Building Standard single quiet flush
toilet, a Building Standard single pedestal or vanity cabinet and Building
Standard sink, Building Standard single mirrored medicine cabinet, Building
Standard fiberglass shower enclosure with glass shower door, Building Standard
ceramic tile floor and walls (collectively, the "Restroom Fixtures and Tiles").
Tenant shall select the Restroom Fixtures and Tiles within twenty (20) days of
executing this Lease. In the event Tenant does not select Restroom Fixtures and
Tiles within ten (10) days of Lease execution, time of the essence, Landlord may
install its selection of Restroom Fixtures and tiles.
NOTE: AS NOTED IN EXHIBIT T, LANDLORD SHALL ONLY BE RESPONSIBLE FOR THE
GREATER OF (i) THE COST OF ONE RESTROOM OR (ii) $20,000 TOWARDS THE COST OF
TWO (2) RESTROOMS. TENANT SHALL BEAR THE COST OF THE SECOND RESTROOM OR THE
BALANCE OF THE COST OF THE SECOND RESTROOM IN EXCESS OF LANDLORD'S $20,000
ALLOWANCE, AS THE CASE MAY BE.
(vii) Landlord shall install in the pantry area, as depicted on the
Plan, a building standard stainless steel sink and faucet
(including all required plumbing) set in a Building Standard
laminate lower sink base cabinet with a Building Standard
laminate countertop and upper cabinetry with Building Standard
ceramic tile flooring. The size and location of the sink,
cabinetry and the finish of the countertops (but no more than
30 linear feet) shall be as depicted on the Plan.
(viii) Landlord shall provide and install a back-up generator (250kw)
on the roof of the Building for Tenant's exclusive use for
which Landlord will tie into the circuits as per Tenant's
direction;
(ix) (a) Landlord shall supply and install a computer room air
conditioning system - minimum of two units (i.e. Liebert or
Mitsubishi) sized to adequately cool a +/-2,000 sq. ft.
computer room with 50% redundancy.
(b) Landlord shall supply and install a supplemental air conditioning
unit of up to 10 tons, located in the 24 hour call
center area.
(c) In lieu of connection to the Building systems, Landlord shall
supply and install electric baseboard heating in the President
and the CEO offices, as indicated on Plan, and provide a
supplemental air conditioning unit sufficient to cool these
offices.
(x) Landlord shall provide and install a double set of Building
Standard entry doors off the new parking spaces so that
Tenant's customers may walk directly into the westerly side of
the Demised Premises. Doors shall be located at depicted on
Plan.
(xi) In addition to the existing restrooms on the fifth floor,
Landlord shall install a Building Standard ADA compliant
unisex restroom (substantially similar to the ADA restroom
located on the lower level of the Building) on the Fifth
floor. The restroom shall contain a Building Standard wall
hung sink, a Building Standard vanity and toilet, Building
Standard ceramic tiles. The walls of the restroom shall be
painted as set forth in Section 8 of this Exhibit "B".
(xii) Landlord shall take steps to prevent other occupants of the
Building from being able to access the 5th floor by a one way
access to the fifth floor.
(xiii) Landlord shall purchase and install Tenant's computer wiring
up to $150,000.00. Any cost for the purchase and installation
of computer wiring above $150,000 shall be borne by Tenant.
(xiii) Finish and install a floor junction box in the main conference
room with a conduit to the wall for low voltage wiring.
Landlord to provide whips and connect the same to Tenant's
furniture, which Tenant shall install (which connection shall
be subsequent to the Commencement Date). Each cubicle to be
wired as per Plan;(Note: See Section 3: Electrical.
(xv) With respect to providing electric charge to any of the Exterior
Signage, Landlord sole responsibility will be to provide a metal
conduit pipe through the roof membrane from the fifth floor
ceiling to the roof deck and seal the membrane. Note: See Section
3: Electrical).
(xvi) Landlord to install Tenant supplied raised floor in the Computer
Room, as indicated on Plan. Tenant shall purchase such raised
floor, and ancillary required materials for its installation, in
sufficient quantities at Tenant's sole cost and expense. Tenant
shall provide Landlord with all required flooring and ancillary
materials within three (3) days after Landlord's request therefor.
If Tenant shall fail to provide such materials within such three
(3) day period, same shall be deemed a Tenant Delay solely with
respect to that portion of the Demised Premises.
12. Landlord shall provided and install a computer room of approximately
2,000 RSF with all electrical work per Plan, dedicated air conditioning
and generator, as specifically set forth in this Exhibit "B".
13. Landlord shall provide Tenant with plans and diagrams for all electrical
circuits and computer wiring throughout the Demised Premises.
13.Tenant's Responsibility: Except as specifically set forth in (xiii) above,
Landlord shall not install telephone lines, telephone cabling, gem
boxes, conduits or other materials used in the installation of any
telephone or computer cables. Landlord does not install any specialized
Tenant Equipment nor does landlord accept any responsibility to
coordinate the same with the Landlord's contractors. The Landlord
retains the right to work day to day to complete the work contemplated
herein in an expeditious manner without regard to any special needs of
the tenant's contractors. The Tenant agrees during the construction
process and prior to allowing any contractor access to the premises to
provide advance notice to the Landlord or its designee and to provide
and furnish appropriate insurance certificates and permits to the
Landlord. All work performed by Tenant's contractors (including but not
limited to the installation of telephone lines, telephone cabling, gem
boxes, conduits or other materials used in the installation of any
telephone or computer cables) shall be in accordance with applicable
federal, state and local laws and regulations.
the Terms of this workletter supercede all notations on the plan. Items noted on
the plan and not included on this workletter are for illustrative purposes.
Tenant must execute an extra authorization and pay for all extras in accord with
the terms of the lease.
NOTE: Any extras, changes, additions, or modifications ordered by the Tenant
either at the time of lease execution or thereafter are furnished by the
Landlord as an accommodation to Tenant. Tenant shall be required to take
possession of the Demised premises whether or not the extras, changes, or
modifications are complete. Landlord is only responsible for its own work not
Tenant's extras, changes, modifications or upgrades.
<PAGE>
EXHIBIT C - BUILDING RULES AND REGULATIONS
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
Demised Premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Landlord. There shall not be used in any space, or in the public areas of the
Building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and side guards. Tenant may use the area around the fifth (5th) floor elevators
for seating, displays, etc. provided the same complies with applicable Building
Code.
2. The water and wash closets and plumbing fixtures shall not be used
for any purpose other than those for which they were designed or constructed and
no sweeping, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any
window of the Building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the Demised Premises any dirt or other substances into any of the
corridors or halls, elevators, or out of the doors or windows or stairways of
the Building and Tenant shall not use, keep or permit to be used or kept any
foul or noxious gas or substance in the Demised Premises, or permit or suffer
the Demised Premises to be occupied or used in a manner unreasonably offensive
or objectionable to Landlord or other occupants of the Building by reason of
noise, odors (excluding flowers and plant odors), and/ or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be kept in or about the Building. Smoking or carrying
lighted cigars or cigarettes in the Building is strictly prohibited.
4. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of Landlord.
5. No Tenant shall mark, paint drill into, or in any way deface any
part of the Demised Premises or the Building of which they form a part. No
boring or cutting shall be permitted, except with the prior written consent of
the Lessor, and as Lessor may direct. No Tenant shall lay linoleum, or other
similar floor covering, so that the same shall come in direct contact with the
floor of the Demised Premises, and, if linoleum or other similar floor covering
is desired to be used an interlining of builder's deadening felt shall be first
affixed to the floor, by a paste or other material, soluble in water, the use of
cement or other similar adhesive material being expressly prohibited.
6. No additional locks or bolts of any kind shall be placed upon any of
the windows by any Tenant, nor shall any changes be made in existing locks or
mechanisms thereof. Each Tenant must, upon termination of its tenancy, restore
to Landlord all keys of offices and toilet rooms, either furnished to, or
otherwise procured by, such Tenant, and in the event of the loss of any keys, so
furnished, such Lessee shall pay to Landlord the cost thereof.
7. Freight, furniture, business equipment, merchandise and bulky matter
of