SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-23121
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U.S.A. Floral Products, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 52-2030697
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1025 Thomas Jefferson Street, N.W., Suite 300 East Washington, DC 20007
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (202) 333-0800
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check 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
------ ------
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share (which is the only outstanding class of the registrant's
common stock) was 16,520,753 shares at November 14, 2000.
1
U.S.A. FLORAL PRODUCTS, INC.
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INDEX
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2000 and December 31, 1999
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2000 and 1999 and for the Three Months Ended
September 30, 2000 and 1999
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 2000
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Forward Looking Statements
In this Form 10-Q ("Form 10-Q"), "USA Floral," "we," "us," and "our" refer
to U.S.A. Floral Products, Inc. and its subsidiaries, unless the context
otherwise requires. This Form 10-Q contains (or incorporates by reference)
certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"intend," "estimate," "anticipate," "believe," "expect," or "continue" or
variations thereon or similar terminology. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about USA Floral, including among other things:
. general economic and business conditions;
. changes in political, social and economic conditions and local
regulations, particularly in Central America and South America;
. changes in, or failure to comply with, government regulations;
. demographic changes;
. change in our sales mix;
. seasonal and holiday demand fluctuations;
. our ability to obtain floral products during periods of peak demand;
. changes in, or failure to maintain, current pricing levels;
. currency fluctuations;
. any reduction in sales to or loss of any significant customers;
. competition;
. changes in our business strategy or development;
. availability of sufficient capital to meet our needs or on terms or at
times acceptable to us; and
. availability of qualified personnel
. our ability to estimate fair market value of long-lived assets
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Because of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Form 10-Q might not occur.
3
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements
4
U.S.A. FLORAL PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except par value)
(Unaudited)
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,210 $ 10,048
Accounts receivable, net of allowance of
$9,634 and $7,774, respectively 81,531 102,524
Inventory 20,938 24,569
Prepaid expenses and other assets 8,863 14,444
Recoverable income taxes 3,196 -
Deferred income tax assets - 2,931
--------------- ----------------
Total current assets 123,738 154,516
Property and equipment, net 44,940 53,357
Goodwill, net 103,148 267,590
Restricted cash 3,954 3,834
Deferred financing costs 4,735 2,971
Other assets 2,514 4,542
--------------- ----------------
Total assets $ 283,029 $ 486,810
=============== ================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 195,433 $ 4,919
Accounts payable 43,027 60,574
Accrued expenses 18,443 15,501
Restructuring reserve 3,864 269
Due to stockholders 1,217 2,278
Income taxes payable 1,460 2,328
--------------- ----------------
Total current liabilities 263,444 85,869
Long-term debt 1,058 195,914
Deferred income tax liabilities 4,783 3,469
Other liabilities 496 618
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Total liabilities 269,781 285,870
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Minority interests in subsidiaries 274 363
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Commitments and contingencies
Stockholders' equity:
Common stock, $0.001 par value; 100,000 shares authorized;
16,358 and 16,266 shares issued, respectively 16 16
Treasury stock (14 shares) (287) (287)
Additional paid-in capital 191,754 193,477
Retained earnings (accumulated deficit) (180,840) 5,093
Accumulated other comprehensive income 2,331 2,278
--------------- ----------------
Total stockholders' equity 12,974 200,577
--------------- ----------------
Total liabilities and stockholders' equity $ 283,029 $ 486,810
=============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
5
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
-------------------- -------------------- -------------------- --------------------
Net revenues $ 657,371 $ 699,786 $ 165,425 $ 189,402
Cost of sales 497,955 518,991 126,598 138,375
-------------------- -------------------- -------------------- --------------------
Gross margin 159,416 180,795 38,827 51,027
Selling, general and administrative expenses 157,909 159,687 53,281 52,623
Goodwill amortization 5,261 5,299 1,737 1,792
Integration charge 10,155 40 - -
Impairment charge 156,620 - 156,620 -
-------------------- -------------------- -------------------- --------------------
Income (loss) from operations (170,529) 15,769 (172,811) (3,388)
Other income (expense):
Interest expense (14,664) (12,337) (5,159) (4,426)
Interest income 789 1,613 177 619
Other 246 516 222 194
Gain (loss) on sale of business assets (3,124) - 549 -
-------------------- -------------------- -------------------- --------------------
Income (loss) before provision for income taxes (187,282) 5,561 (177,022) (7,001)
Provision for (benefit from) income taxes (1,358) 5,305 (916) (1,514)
-------------------- -------------------- -------------------- --------------------
Net income (loss) before minority interest (185,924) 256 (176,106) (5,487)
Minority interest (9) 12 14 9
-------------------- -------------------- -------------------- --------------------
Net income (loss) $ (185,933) $ 268 $ (176,092) $ (5,478)
==================== ==================== ==================== ====================
Net income (loss) per share:
Basic $ (11.30) $ 0.02 $ (10.69) $ (0.33)
Diluted $ (11.30) $ 0.02 $ (10.69) $ (0.33)
Weighted average shares outstanding:
Basic 16,457 16,331 16,472 16,365
Diluted 16,457 16,545 16,472 16,643
The accompanying notes are an integral part of these consolidated financial
statements.
6
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
Retained Accumulated
Common Stock Additional Earnings Other Total
---------------- Treasury Paid-in (Accumulated Comprehensive Stockholders'
Shares Amount Stock Capital Deficit) Income Equity
------ ------ --------- ---------- ------------ ------------- -------------
Balances at December 31, 1999 16,252 $ 16 $ (287) $ 193,477 $ 5,093 $ 2,278 $ 200,577
Issuance of common stock and warrants 495 2,581 2,581
Receipt and retirement of common stock (403) (4,304) (4,304)
Net loss (185,933) (185,933)
Foreign currency adjustment 53 53
------------------------------------------------------------------------------------------
Balances at September 30, 2000 16,344 $ 16 $ (287) $ 191,754 $ (180,840) $ 2,331 $ 12,974
==========================================================================================
The accompanying notes are an integral part of these consolidated
financial statements
7
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
---------------- ---------------
Cash flows from operating activities:
Net income (loss) $(185,933) $ 268
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation 7,412 7,308
Amortization of goodwill 5,261 5,299
Amortization of deferred financing costs 1,318 574
Loss (gain) on disposal of property and equipment (153) 233
Loss on disposal of business assets 3,124 -
Loss (gain) applicable to minority interests 9 (12)
Impairment charge 156,620 -
Changes in operating assets and liabilities,
exclusive of acquired/divested companies:
Accounts receivable 14,097 (8,352)
Inventory 2,988 (6,151)
Prepaid expenses and other current assets 748 (2,852)
Other assets 1,935 1,294
Income taxes payable 962 1,059
Accounts payable (13,803) (1,898)
Accrued expenses 4,713 -
Other liabilities (1,594) (168)
Integration reserve 6,291 -
---------------- ---------------
Net cash provided by (used in) operating activities 3,995 (3,398)
---------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (3,944) (9,514)
Proceeds from sale of property and equipment - 1,274
Proceeds from sale of business assets 1,000 -
Payments to stockholders (800) (7,500)
Payment for business acquisitions (433) -
Increase in restricted cash (107) (100)
Increase in minority interest (26) (77)
---------------- ---------------
Net cash used in investing activities (4,310) (15,917)
---------------- ---------------
Cash flows from financing activities:
Proceeds from and (repayments of) debt 1,728 (1,534)
Increase in deferred financing costs (1,820) (225)
Proceeds from issuance of common stock 57 379
Proceeds from exercise of stock options - 87
Stock issuance costs - (88)
---------------- ---------------
Net cash used in financing activities (35) (1,381)
---------------- ---------------
Effect of exchange rates on cash (488) 5,033
---------------- ---------------
Net decrease in cash and cash equivalents (838) (15,663)
Cash and cash equivalents - beginning of the period 10,048 20,196
---------------- ---------------
Cash and cash equivalents - end of the period $ 9,210 $ 4,533
================ ===============
See Note 13 for supplemental cash flow information
The accompanying notes are an integral part of these consolidated financial
statements.
8
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1 - GENERAL
USA Floral is the largest integrated distributor of floral products in the
world. We are organized into two divisions, an International Division and a
North American Division. Within each of these divisions, we have three
reportable operating segments: Import/Export, Wholesale Distribution and Bouquet
Making and Distribution.
Through these divisions, we:
. import, export and distribute floral products and floral-related hardgoods;
. engage in brokerage and shipping services for wholesale distributors of
both international and domestic cut flowers;
. provide traditional and Internet floral fulfillment services to non-store
retailers; and
. provide in-store merchandising services to certain supermarkets and
mass-market retailers.
The unaudited condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal, recurring nature.
The unaudited interim financial information should be read in conjunction
with the consolidated financial statements contained in the Company's 1999
Annual Report on Form 10-K.
NOTE 2 - IMPAIRMENT CHARGE
The Company accounts for the impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". SFAS No. 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances have occurred that indicate possible
impairment. In accordance with SFAS No. 121, the Company uses an estimate of the
future undiscounted cash flows of the related asset or asset grouping over the
remaining life in measuring whether the assets are recoverable. The Company
evaluates at each balance sheet date whether events or circumstances have
occurred which indicate possible impairment. Management began an evaluation of
all Company operations in August 2000 as a result of the continued poor
operating performance of the Company. As a result of this evaluation, on
November 3, 2000, the Company announced a strategic plan, approved by the Board
of Directors, that will focus corporate resources on its North American
import/export and bouquet making and distribution business segments. Under the
terms of the plan, the Company has retained a financial advisor to effect the
sale of its International Division and its North American wholesale distribution
business segment as soon as possible.
Due to the significance of the changes above and the decision to divest of
the Company's International Division and its North American wholesale
distribution business segment, management performed an evaluation of the
9
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
recoverability of all the assets of the Company as proscribed in SFAS No. 121,
including an independent valuation analysis. Management concluded from the
results of this evaluation that a significant impairment of goodwill had
occurred. An impairment charge totaling $156.6 million was recorded for certain
business units because the respective estimated fair values were less than the
respective carrying value of the long-lived assets. Considerable management
judgement is necessary to estimate fair value. Accordingly, actual results could
vary significantly from management's estimates.
NOTE 3 - ACQUISITIONS
Pursuant to the terms of the purchase agreement, contingent consideration
in the amount of $4,304, originally paid to the former shareholders of Maxima
was returned to the Company in April 2000 as a result of their 1999 adjusted
earnings before interest and taxes being lower than the 1998 adjusted earnings
before interest and taxes (the condition for the return of contingent
consideration under the purchase agreement). The common shares associated with
the contingent consideration were retired during the three-month period ended
June 30, 2000. Additional contingent purchase consideration related to earn-out
arrangements included in the definitive agreements for Allan Stanley were
finalized during the three months ended March 31, 2000. Subsequent to March 31,
2000, the total additional purchase consideration paid to the former owners of
Allan Stanley was $350 ($150 in cash and $200 in shares of common stock).
NOTE 4 - LOSS ON SALE OF BUSINESS ASSETS
On June 30, 2000, the Company executed a definitive agreement to sell the
assets and liabilities of its Alpine Gem subsidiary. Management determined that
the Alpine Gem subsidiary no longer fit with the strategic direction of USA
Floral. As a result, the Company incurred a loss on sale of approximately $3.7
million, primarily related to the unamortized goodwill balance. During the
quarter ended September 30, 2000 a credit of $549 was recorded due to the
finalization of the sale of Alpine Gem.
NOTE 5 - EARNINGS PER SHARE
The shares used in computing net income (loss) per share are as follows:
Nine months ended Three months ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Weighted average shares outstanding - basic 16,457 16,331 16,472 16,365
Dilution attributable to options - 100 - -
Dilution attributable to potentially issuable
shares under earnout arrangements - 114 - 278
------------- ------------- ------------- -------------
Weighted average shares outstanding - diluted 16,457 16,545 16,472 16,643
------------- ------------- ------------- -------------
Included in the weighted average shares outstanding - basic are 69 shares
of common stock issued under the employee stock purchase plan for the nine
months ended September 30, 2000. As the Company reported a loss for the
10
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
period ended September 30, 2000, 367 warrants were excluded from the weighted
average shares outstanding - diluted calculation for the three months ended
September 30, 2000 and 13 options and 355 warrants were excluded from the
weighted average shares outstanding - diluted calculation for the nine months
ended September 30, 2000 because inclusion of such shares in the calculation
would have been anti-dilutive.
NOTE 6 - INVENTORY
Inventory consists of the following finished goods:
September 30, December 31,
2000 1999
--------------------- --------------------
Hardgoods $16,118 $20,430
Hardgoods inventory allowance (513) (642)
--------------------- --------------------
Hardgoods, net of allowance 15,605 $19,788
Perishables 5,333 4,781
--------------------- --------------------
$20,938 $24,569
===================== ====================
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. The Company does not believe that any of these
proceedings will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
Antidumping
Beginning in 1986, the U.S. Department of Commerce (the "DOC") imposed an
antidumping duty deposit ("ADD") on the importation of certain flowers (the
"Antidumping Order") from Colombia. Such antidumping duty is subject to change
based upon annual reviews of the flower growers' margins. On May 20, 1999, a
settlement was reached whereby all open review periods through February 28, 1997
(periods 5, 6, 7, 9 and 10) were finalized at the cash deposit rate. That is,
the Company does not owe any additional antidumping duties for those periods. On
July 20, 1999, the DOC revoked the Antidumping Order on fresh cut flowers from
Colombia retroactive to March 1, 1997, the beginning of period 11. Further, the
DOC stated that, as a result of the retroactive revocation, the DOC has
terminated its reviews of periods 11 and 12 and that the DOC intends to refund
any ADD collected on or after March 1, 1997. Therefore, as a result of the final
determinations by the DOC regarding open review periods and the DOC's
retroactive revocation of the Antidumping Order, the Company released
antidumping reserves aggregating $2.2 million as a reduction to cost of sales
during the second quarter of 1999. Further, ADD refunds aggregating $1.9 million
related to periods subsequent to March 1, 1997, were received during the first
quarter of 2000 and were recorded as a reduction to cost of sales. Management
believes that the majority of refunds related to periods subsequent to March 1,
1997, have been received at September 30, 2000.
11
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 8 - INTEGRATION AND RESTRUCTURING PLANS
March 2000 Restructuring Plan
In the first quarter of 2000, the Company recorded a integration charge of
approximately $10.2 million before income taxes. In connection with its decision
to discontinue several strategic initiatives, close certain under-performing and
unprofitable business locations and re-focus on its core business operations.
The charge principally relates to severance payments, lease termination costs,
write-down of information technology assets and write-down of property and
equipment associated with the discontinuance of strategic initiatives and the
write-down of assets, including property and equipment and goodwill related to
the closure of one company and two branch locations. The closure of the
unprofitable locations was substantially completed as of September 30, 2000. The
balance of the restructuring plan is expected to be completed by year-end. The
Company expects to reduce the number of employees by 85 or approximately 3% of
the North American workforce.
The major components of the integration charge as originally estimated are as
follows:
Severance and related costs $1,869
Write-down of property and equipment 1,932
Write-down of goodwill 710
Write-down of information technology assets 4,215
Lease termination costs 228
Contract termination costs 980
Other costs 221
---------------
$10,155
===============
At September 30, 2000, $3.9 million of the integration charge remained in
accrued liabilities and 71 employees had been terminated. Management believes
the remaining accrual will be sufficient to cover the remaining costs associated
with the restructuring plan. A summary of the integration and restructuring
activity is presented below:
Initial Balance $10,155
Restructuring activity:
Severance and related costs (1,818)
Non cash write-down of property and equipment (1,428)
Non cash write-down of goodwill (704)
Non cash write-down of information
technology assets (115)
Loss on sale of business unit excluding
goodwill and property and equipment (676)
Lease termination costs (191)
Contract termination costs (980)
Other cash outflows (379)
---------------
Balance at September 30, 2000 $3,864
===============
During the quarter ended September 30, 2000 management performed an
analysis of the remaining restructuring accrual and revised its original
estimated cost to write-down information technology assets from $4.2 million to
$3.5 million.
12
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
Additionally, during the quarter ended September 30, 2000 management sold one of
the operations it originally planned to close under the restructuring plan. The
loss on sale of the business unit was $0.7 million more than the original
estimated cost to close the unit.
NOTE 9 - GEOGRAPHIC REGION AND BUSINESS SEGMENT INFORMATION
Segment information has been provided for each of the periods presented in
the Company's Statement of Operations. The Company is organized primarily on a
geographic basis with an International Division and a North American Division
and secondarily based on the products and services that it offers. Each division
has three segments: import/export, wholesale distribution and bouquet making and
distribution. The import/export segment purchases flowers from farms located
primarily in South America, Africa and Europe and sells them to wholesale and
bouquet making and distribution companies. The wholesale distribution segment
purchases perishable flowers and floral related hardgoods from growers,
importer/exporters and brokers and sells them to retail florists and mass
marketers. The bouquet making and distribution segment procures and produces
fresh cut floral bouquets for distribution primarily to mass marketers, broadly
defined as supermarkets and discount retailers. The Company's reportable
divisions and segments are strategic business units that offer different floral
related products and services. They are managed separately because each business
division and segment requires different marketing and management strategies. The
Company evaluates segment performance and allocates resources to business
segments based primarily on gross margin and income from operations.
The accounting policies of the segments are the same as those described in
the Company's 1999 Annual Report on Form 10K. Segment data includes intersegment
sales and transfers which the Company accounts for as if the sales or transfers
were to third parties, that is, at current market prices.
The following tables present information about reported segments:
For the Nine Months For the Three Months
Revenues - external customers Ended September 30, Ended September 30,
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $129,883 $163,550 $26,964 $40,677
Wholesale Distribution 135,566 143,115 36,210 39,446
Bouquet Making and Distribution 124,669 131,257 29,353 33,634
- -------------------------------------------------------------------------------------------------------------------
Total North American Division 390,118 437,922 92,527 113,757
- -------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 146,503 168,962 43,041 51,487
Wholesale Distribution 75,613 50,190 19,762 14,013
Bouquet Making and Distribution 45,137 42,712 10,095 10,145
- -------------------------------------------------------------------------------------------------------------------
Total International Division 267,253 261,864 72,898 75,645
- -------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 276,386 332,512 70,005 92,164
Wholesale Distribution 211,179 193,305 55,972 53,459
Bouquet Making and Distribution 169,806 173,969 39,448 43,779
- -------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $657,371 $699,786 $165,425 $189,402
- -------------------------------------------------------------------------------------------------------------------
13
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the Nine Months For the Three Months
Revenues - intercompany Ended September 30, Ended September 30,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $29,253 $33,012 $6,075 $8,007
Wholesale Distribution 2,586 2,235 697 1,315
Bouquet Making and Distribution 10,080 4,216 2,177 1,426
- ---------------------------------------------------------------------------------------------------------------------
Total North American Division 41,919 39,463 8,949 10,748
- ---------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 32,530 51,863 10,430 15,236
Wholesale Distribution 4,476 101 957 33
Bouquet Making and Distribution 456 464 86 226
- ---------------------------------------------------------------------------------------------------------------------
Total International Division 37,462 52,428 11,473 15,495
- ---------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 61,783 84,875 16,505 23,243
Wholesale Distribution 7,062 2,336 1,654 1,348
Bouquet Making and Distribution 10,536 4,680 2,263 1,652
- ---------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $79,381 $91,891 $20,422 $26,243
- ---------------------------------------------------------------------------------------------------------------------
For the Nine Months For the Three Months
Gross Margin Ended September 30, Ended September 30,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $38,087 $50,505 $6,672 $12,367
Wholesale Distribution 42,032 45,004 11,281 12,526
Bouquet Making and Distribution 23,622 26,776 4,428 7,462
- -----------------------------------------------------------------------------------------------------------------------
Total North American Division 103,741 122,285 22,381 32,355
- -----------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 32,139 37,263 10,113 12,663
Wholesale Distribution 16,463 13,130 4,600 3,829
Bouquet Making and Distribution 7,073 8,117 1,733 2,180
- -----------------------------------------------------------------------------------------------------------------------
Total International Division 55,675 58,510 16,446 18,672
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 70,226 87,768 16,785 25,030
Wholesale Distribution 58,495 58,134 15,881 16,355
Bouquet Making and Distribution 30,695 34,893 6,161 9,642
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $159,416 $180,795 $38,827 $51,027
- -----------------------------------------------------------------------------------------------------------------------
14
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the Nine Months For the Three Months
Depreciation and Amortization Ended September 30, Ended September 30,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $3,005 $ 3,518 $ 941 $1,183
Wholesale Distribution 2,320 2,367 727 876
Bouquet Making and Distribution 1,491 1,762 482 646
- -----------------------------------------------------------------------------------------------------------------------
Total North American Division 6,816 7,647 2,150 2,705
- -----------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 958 1,613 314 504
Wholesale Distribution 1,475 1,258 441 351
Bouquet Making and Distribution 611 752 212 248
- -----------------------------------------------------------------------------------------------------------------------
Total International Division 3,044 3,623 967 1,103
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 3,963 5,131 1,255 1,687
Wholesale Distribution 3,795 3,625 1,168 1,227
Bouquet Making and Distribution 2,102 2,514 694 894
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $9,860 $11,270 $3,117 $3,808
- -----------------------------------------------------------------------------------------------------------------------
For the Nine Months For the Three Months
Integration Charge Ended September 30, Ended September 30,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $ 30 $ - $ - $ -
Wholesale Distribution 3,135 40 - -
Bouquet Making and Distribution 50 - - -
- -----------------------------------------------------------------------------------------------------------------------
Total North American Division 3,215 40 - -
- -----------------------------------------------------------------------------------------------------------------------
International Division
Import/Export - - - -
Wholesale Distribution - - - -
Bouquet Making and Distribution - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total International Division - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 30 - - -
Wholesale Distribution 3,135 40 - -
Bouquet Making and Distribution 50 - - -
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $3,215 $40 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
15
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the Nine Months For the Three Months
Income (loss) from Operations Ended September 30, Ended September 30,
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $ (23,704) $16,109 $ (31,788) $1,036
Wholesale Distribution (48,694) 1,465 (48,762) (1,763)
Bouquet Making and Distribution (23,034) 1,992 (28,247) (540)
- -----------------------------------------------------------------------------------------------------------------------
Total North American Division (95,432) 19,566 (108,797) (1,267)
- -----------------------------------------------------------------------------------------------------------------------
International Division
Import/Export (24,275) 2,717 (28,646) 901
Wholesale Distribution (20,396) 165 (21,656) (332)
Bouquet Making and Distribution (5,478) 1,322 (6,478) 140
- -----------------------------------------------------------------------------------------------------------------------
Total International Division (50,149) 4,204 (56,780) 709
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export (47,979) 18,826 (60,434) 1,937
Wholesale Distribution (69,090) 1,630 (70,418) (2,095)
Bouquet Making and Distribution (28,512) 3,314 (34,725) (400)
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $(145,581) $23,770 $(165,577) $ (558)
- -----------------------------------------------------------------------------------------------------------------------
Total Assets September 30, 2000 December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $110,670 $158,870
Wholesale Distribution 45,739 102,306
Bouquet Making and Distribution 39,540 71,896
- -----------------------------------------------------------------------------------------------------------------------
Total North American Division 195,949 333,072
- -----------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 47,373 61,634
Wholesale Distribution 33,563 17,431
Bouquet Making and Distribution 10,338 12,225
- -----------------------------------------------------------------------------------------------------------------------
Total International Division 91,274 91,290
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 158,043 220,504
Wholesale Distribution 79,302 119,737
Bouquet Making and Distribution 49,878 84,121
- -----------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $287,223 $424,362
- -----------------------------------------------------------------------------------------------------------------------
16
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
For the Nine Months For the Three Months
Capital Expenditures Ended September 30, Ended September 30,
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
North American Division
Import/Export $1,288 $3,609 $ 44 $1,477
Wholesale Distribution 213 2,462 112 393
Bouquet Making and Distribution 584 1,233 355 379
- --------------------------------------------------------------------------------------------------------------------------
Total North American Division 2,085 7,304 511 2,249
- --------------------------------------------------------------------------------------------------------------------------
International Division
Import/Export 737 1,152 324 216
Wholesale Distribution 548 46 76 28
Bouquet Making and Distribution 336 - 104 -
- --------------------------------------------------------------------------------------------------------------------------
Total International Division 1,621 1,198 504 244
- --------------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments
Import/Export 2,025 4,761 368 1,693
Wholesale Distribution 761 2,508 188 421
Bouquet Making and Distribution 920 1,233 459 379
- --------------------------------------------------------------------------------------------------------------------------
Total of Reportable Segments $3,706 $8,502 $1,015 $2,493
- --------------------------------------------------------------------------------------------------------------------------
A reconciliation of total segment income (loss) from operations to total
consolidated income (loss) before income taxes is as follows:
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
Income (loss) from Operations 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Total segment income (loss) from operations $(145,581) $ 23,770 $(165,577) $ (558)
Interest income 789 1,613 177 619
Interest expense (14,664) (12,337) (5,159) (4,426)
Other income 246 516 222 194
Gain (loss) on sale of business assets (3,124) - 549 -
Unallocated information technology expenses (5,670) - (1,088) -
Unallocated corporate S,G&A expenses (11,365) (6,664) (5,776) (2,459)
Unallocated goodwill amortization (973) (1,337) (370) (371)
Unallocated restructuring charge (6,940) - - -
- -------------------------------------------------------------------------------------------------------------------------
Total consolidated income (loss)
before income taxes $(187,282) $ 5,561 $(177,022) $(7,001)
- -------------------------------------------------------------------------------------------------------------------------
As part of the Company's increased focus to control costs a technology
department was established. Prior to January 1, 2000 the expenses associated
with information technology were recorded by each subsidiary and reported as a
component of total segment income from operations. Prior period information
technology expenses were not restated because to do so would be impracticable.
17
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
A reconciliation of total segment assets to consolidated total assets is as
follows:
September 30, December 31,
Total Assets 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Total segment assets $287,223 $424,362
Elimination of intercompany receivable (12,832) (592)
Goodwill not allocated to segments - 54,200
Other assets 8,638 8,840
- ---------------------------------------------------------------------------------------------------------------------
Total consolidated assets $283,029 $486,810
=====================================================================================================================
The following table presents revenues and long-lived assets information by
geographic area. Sales are based on the country in which the sale originates
(i.e., where the legal subsidiary is domiciled) and does not include
intercompany sales.
For the Nine Months For the Three Months
Revenues Ended September 30, Ended September 30,
2000 1999 2000 1999
------------------------------------------------------------------------
United States $387,351 $413,773 $107,600 $106,812
Germany 72,259 103,516 18,783 43,331
Netherlands 116,716 82,465 29,749 7,628
Other foreign countries 81,045 100,032 9,293 31,631
------------------------------------------------------------------------
Total $657,371 $699,786 $165,425 $189,402
========================================================================
Long-lived Assets September 30, 2000 December 31, 1999
------------------------------------------------------------------------
United States $128,189 $230,503
Germany 12,359 72,734
Netherlands 6,712 7,681
Other foreign countries 12,031 21,376
------------------------------------------------------------------------
Total $159,291 $332,294
========================================================================
NOTE 10 - INCOME TAXES
The effective income tax rate is different than the statutory rate
primarily due to the non-deductibility of certain goodwill amortization and
valuation allowance placed on the current net operating losses. During the nine
month period ended September 30, 2000, the Company recorded an income tax
benefit of $2.4 million in the North American Division and an income tax
provision of $1.1 million in the International Division. The income tax benefit
in North America relates to certain net operating loss carrybacks that will be
utilized in the next fiscal year. At September 30, 2000, the Company established
a valuation allowance of $2.2 million for deferred income tax benefits related
to the North American Division loss carryforwards that may not be realized.
18
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 11 - CREDIT FACILITY
Effective October 2, 1998, the Company amended and restated its existing
credit agreement with a syndicate of lenders for which Bankers Trust Company
(the "Bank") serves as agent (the "Amended Credit Agreement"). Pursuant to the
terms of the Amended Credit Agreement, the amount of the Company's revolving
credit facilities was increased to $200 million, of which the sub-limit for
permitted acquisitions is $180 million and the sub-limit for working capital
purposes and letters of credit is $20 million. In addition, of the $200 million
in revolving credit facilities, up to $15 million has been designated to be a
revolving loan, which is available to certain foreign subsidiaries of USA Floral
in either Deutsche Marks or Guilders. Further, a new $50 million Deutsche Mark
denominated term loan was created as an additional source of borrowings in
excess of the $200 million revolving credit facilities. Borrowings under the
revolving credit facilities bear interest, at the Company's option, at (a)
Bankers Trust Company's base rate plus an applicable margin of up to 1.25% or
(b) a Eurodollar rate plus an applicable margin of up to 2.50%. Borrowings under
the term loan bear interest at the interbank rate for Deutsche Marks plus an
applicable margin of up to 2.50%. The Company paid aggregate financing fees of
approximately $3.9 million, which has been deferred and will be amortized over
the term of the Amended Credit Agreement. In addition, a commitment fee of 0.50%
will be charged on the unused portion of the revolving credit facilities on a
quarterly basis. Both the revolving credit facilities and the term loan mature
five years from the closing date. The installments of the term loan in the next
four years are: 2000 - $2.5 million, 2001 - $12.5 million, 2002 - $20 million
and 2003 - $15 million. At September 30, 2000, the aggregate outstanding
indebtedness under both the revolving credit facilities and the term loan,
including issued Letters of Credit, was approximately $199.6 million and the
effective interest rate was approximately 9.25% on the revolving credit facility
and approximately 7.0% on the term loan.
Borrowings under the Amended Credit Agreement are collateralized by
receivables, inventories, equipment and certain real property. Under the terms
of the Amended Credit Agreement, the Company is required to maintain certain
financial ratios and other financial and non-financial conditions. The Amended
Credit Agreement prohibits the Company from incurring additional indebtedness,
limits certain investments, advances or loans, and restricts substantial asset
sales, capital expenditures and cash dividends.
On March 24, 2000, the financial covenants, including the leverage ratio
and consolidated interest coverage ratio, were amended under the Fourth
Amendment and Waiver to the Credit Agreement ("Fourth Amendment"). Pursuant to
the terms of the Fourth Amendment, the Company is required to achieve minimum
EBITDA levels. The minimum EBITDA levels established in the Fourth Amendment are
based upon the objectives set forth in the Company 2000 operating plan.
Additionally, the Fourth Amendment limits the level of the Company's total
outstanding borrowings to $224.0 million. As a result of the Fourth Amendment,
the level of available total outstanding borrowings to the Company was reduced
and the Company recorded a charge of $0.3 million in the first quarter 2000,
representing a write-off of a prorata portion of the unamortized deferred
financing fees related to the Amended Credit Agreement, which has been recorded
as interest expense in the accompanying Consolidated Statement of Operations.
19
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
In consideration for the Fourth Amendment, the Company agreed to pay a
financing fee of $1.75 million on March 31, 2001 and issue approximately 865
warrants to purchase common stock of the Company at an exercise price of $0.25
per share. The warrants issued are exercisable anytime after March 31, 2001 and
expire March 31, 2010. Both the financing fee and the fair value of the warrants
issued have been deferred and will be amortized over the remaining term of the
Amended Credit Agreement.
At September 30, 2000, the Company was not in compliance with the
applicable financial covenants, including the leverage ratio, of the Fourth
Amendment. Pursuant to the terms of the Amended Credit Agreement, non-compliance
with one or more financial covenants permits the Bank to exercise certain
remedies, which include termination of the commitment and declaration that the
principal balance and any accrued interest on all loans and obligations are
immediately due and payable. Hence, the outstanding balance has been classified
as a current liability at September 30, 2000. Rather than exercise these
remedies, the Bank granted the Company a waiver letter through October 31, 2000.
As part of such waiver, the Bank required that the Company engage a transaction
advisor to prepare a written report for presentation to the Bank concerning a
possible restructuring of the Company.
The Company, with assistance from its advisors, developed a restructuring
strategy which contemplates (i) the sale of the Company's International Division
and North American wholesale distribution segment, and (ii) the focus by the
Company on strengthening its import and bouquet operations in Miami, Florida and
on the West Coast of the United States. The Bank, as part of a Fifth Amendment
and Waiver to the Credit Agreement (the "Fifth Amendment") dated October 31,
2000, has endorsed the Company's restructuring strategy and amended the
financial covenants. Pursuant to the terms of the Fifth Amendment, all financial
covenants have been waived through December 31, 2000. Commencing January 1, 2001
the Company is required to achieve new monthly minimum EBITDA levels for each
operating division through June 30, 2000. The monthly minimum EBITDA levels
established in the Fifth Amendment are based upon historical results and the
objectives set forth in the Company's 2001 operating plan. The Fifth Amendment
allows the Company to utilize its credit facility to borrow funds at levels
which coincide with the forecasted cash flow requirements of the Company through
June 30, 2001 and limits the level of the Company's total outstanding borrowings
to $224.0 million. Installment payments of the term loan due December 31, 2000,
March 31, 2001 and June 30, 2001 in the aggregate amount of $5.5 million (12.6
million Deutsche Marks) have been postponed and are due in aggregate on July 1,
2001. Additionally, the Company has agreed that the proceeds realized by it from
the sale of its International Division and North American wholesale distribution
segment will be applied to reduce the amount of the outstanding loans from the
Bank. The Company has retained a financial advisor to act on behalf of the
Company during the sales process.
The Company anticipates that after the sale of its International Division
and North American wholesale distribution segment, the remaining indebtedness
owed to the Bank will be in excess of the amount that the Company can service
from cash flow of the Company's remaining business operations. As a result, the
Company believes that in order for its restructuring plan to be successful, it
will be necessary for the Bank to make significant amendments to the Amended
Credit Agreement. There can be no assurances that any such amendment will be
available on terms favorable to the Company. Inability of the Company to reach
an agreement with the Bank on amendments or to arrange
20
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
alternative financing could have a material adverse effect on the Company. If
the current credit agreement is refinanced or the borrowed amount is declared by
the Lenders to be payable on demand, the remaining unamortized deferred
financing costs of $4.7 million will be adjusted in the period of refinancing or
when the debt is declared payable.
NOTE 12 - COMPREHENSIVE INCOME (LOSS)
The table below presents the components of the Company's comprehensive income
(loss) for the three and nine month periods ended September 30, 2000 and 1999:
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
--------------------------------------------------------------------
Net income (loss) $(185,933) $268 $(176,092) $(5,478)
Foreign currency translation
adjustment 53 676 610 (167)
----------------- ------------- -- ------------------ --------------
Comprehensive income (loss) $(185,880) $944 $(175,482) $(5,645)
================= ============= == ================== ==============
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information:
Nine months ended September 30,
2000 1999
--------------------------------------
Cash paid during the period for interest $13,561 $9,723
======= ======
Cash paid during the period for income taxes $2,382 $4,500
====== ======
During the nine months ended September 30, 2000 the Company issued warrants
valued at $1,262 in consideration for the Fourth Amendment and Waiver to the
Credit Agreement. The Company satisfied its obligations under certain earnout
arrangements through aggregate cash payments of $150 and through the issuance of
common stock in the aggregate amount of $1,261 during the nine months ended
September 30, 2000.
NOTE 14 - FINANCIAL DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments. It requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137 which deferred the
effective date for SFAS No. 133 to all fiscal years beginning after June 15,
2000. Therefore, SFAS No. 133 will be effective for the Company on January 1,
2001, the beginning of fiscal year 2001. Due to the Company's minimal use of
derivatives, the Company does not expect that the adoption of the new standard
will have a material impact on the results of operations or financial condition
of the Company.
21
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 15 - SUBSEQUENT EVENT
On November 3, 2000, the Company announced a strategic plan, approved by
the Board of Directors and in connection with its request for waiver of certain
loan covenants and amendment of the credit facility with the Bank, that will
focus corporate resources on its North American import/export and bouquet making
and distribution business segments. Under the terms of the plan, the Company has
retained a financial advisor to effect the sale of its International Division
and the Company's North American wholesale distribution business segment. The
Company's intent is to divest of these operations as soon as possible.
22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended September 30, 2000
Statement of Operations: For the Three For the Three
(in thousands except per Months ended Months ended
share data) September 30, 2000 September 30, 1999
---------------------------------- -------------------------------
Net revenue $165,425 100.0% $189,402 100.0%
Cost of sales 126,598 76.5% 138,375 73.1%
------------------- -------------- ------------------- -----------
Gross margin 38,827 23.5% 51,027 26.9%
Selling, general and
administrative expenses 53,281 32.2% 52,623 27.8%
Goodwill amortization 1,737 1.0% 1,792 0.9%
Integration charges - 0.0% - 0.0%
Impairment charge 156,620 94.7% - 0.0%
------------------- -------------- ------------------- -----------
Loss from operations (172,811) (104.4)% (3,388) (1.8)%
Interest expense (5,159) (3.1)% (4,426) (2.3)%
Interest income 177 0.1% 619 0.3%
Other 222 0.1% 194 0.1%
Gain on sale of business assets 549 0.3% - 0.0%
------------------- -------------- ------------------- -----------
Loss before income taxes and minority interest (177,022) (107.0)% (7,001) (3.7)%
Benefit from income taxes (916) (0.6)% (1,514) (0.8)%
------------------- -------------- ------------------- -----------
Loss before minority interest (176,106) (106.4)% (5,487) (2.9)%
Minority interest 14 0.0% 9 0.0%
------------------- -------------- ------------------- -----------
Net Loss $(176,092) (106.4)% $(5,478) (2.9)%
=================== ============== =================== ===========
Net loss per share:
Basic and Diluted $(10.69) $ (0.33)
Net loss before integration and
impairment charges and sale
of business assets: $(20,021) $(5,478)
=================== ===================
Net loss per share before
integration and impairment
charges and sale of business
assets:
Basic and Diluted $(1.22) $ (0.33)
Shares used in computing net loss per share:
Basic 16,472 16,365
Diluted 16,472 16,643
23
Results of Operations
- ---------------------
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Net Revenues. Net revenues for the quarter ended September 30, 2000 were $165.4
million. Revenues decreased from $189.4 million in the same quarter last year.
Revenues for the North America Division were $92.5 million or 55.9% of the
consolidated revenues and revenues for the International Division were $72.9
million, or 44.1%. Revenues for the International Division consisted primarily
of revenues from Germany, the Netherlands, Italy and Japan. The Company
experienced a decrease in revenues for the three months ended September 30, 2000
when compared to the same period in the prior year primarily due to the North
American Division, which experienced a decline in revenues of approximately
$21.2 million or 18.6% to $92.5 million. Revenues for the import segment of the
North American Division decreased $13.7 million or 33.7% to $27.0 million for
the three months ended September 30, 2000. The decline in revenues can be
attributable to the following: increased competition, a continuing trend of
growers selling directly to wholesalers and increased level of sales personnel
turnover. The Company is in the process of establishing a national accounts
program with designated account managers to enhance revenues in future periods
and hiring new sales personnel to improve revenues. The International Division
revenues decreased to $72.9 million for the quarter ended September 30, 2000
from $75.6 million during the comparable quarter last year. The Company derives
over 40% of its revenue internationally, primarily from Europe, and management
estimates that the stronger U.S. dollar versus the Euro negatively impacted
reported revenues by approximately 15% during the third quarter of 2000. On a
currency adjusted basis the International Division revenues increased
approximately 10% for the quarter primarily as a result of strong export sales
and increased bouquet sales to the mass markets.
Gross Margin. Gross margins for the three months ended September 30, 2000
and 1999 were $38.8 and $51.0 million, respectively. Gross margin as a
percentage of net revenue was 23.5%, for the three months ended September 30,
2000 and 26.9% for the three months ended September 30, 1999. The North American
Division gross margin was 24.2% for the three months ended September 30, 2000
and 28.4% for the three months ended September 30, 1999. The decline in gross
margin was the result of increases in grower credits at the North American
import segment and increased pricing pressure in the bouquet operations from
mass market customers which is expected to continue in the foreseeable future.
The International Division's gross margin was 22.6% for the three months ended
September 30, 2000 and 24.7% for the three months ended September 30, 1999. The
decline in gross margin as a percentage of revenues in the International
Division is due primarily to firmer flower pricing at the Dutch auctions and
higher labor costs associated with bouquet manufacturing during the three months
ended September 30, 2000.
Selling, General and Administrative. Selling, general and administrative
expenses were $53.3 million in the three months ended September 30, 2000, or
32.2% of net revenues, and $52.6 million, or 27.8% of net revenues, in the three
months ended September 30, 1999. The increase in selling, general and
administrative expenses for the three months ended September 30, 2000 is the
result of an increase in the Company's allowance for bad debt of approximately
$2.5 million and professional fees associated with the
24
development of the strategic plan to focus corporate resources on its North
American import/export and bouquet making distribution business segments.
Impairment Charge. A one-time impairment charge of $156.6 million was
recorded in the three-month period ended September 30, 2000. Management began an
evaluation of all Company operations in August 2000 as a result of the continued
poor performance of the Company. As a result of this evaluation, on November 3,
2000, the Company announced a strategic plan, approved by the Board of
Directors, that will focus corporate resources on its North American
import/export and bouquet making and distribution business segments. Under the
terms of the plan, the Company has retained a financial advisor to effect the
sale of its International Division and its North American wholesale distribution
business segment as soon as possible.
Due to the significance of the changes above and the decision to divest of
the Company's International Division and its North American wholesale
distribution business segment, management performed an evaluation of the
recoverability of all the assets of the Company as proscribed in SFAS No. 121,
including an independent valuation analysis. Management concluded from the
results of this evaluation that a significant impairment of goodwill had
occurred. An impairment charge totaling $156.6 million was recorded for certain
business units because the respective estimated fair values were less than the
respective carrying value of the long-lived assets. Considerable management
judgement is necessary to estimate fair value. Accordingly, actual results could
vary significantly from management's estimates.
Loss from operations. For the reasons discussed above, loss from operations
was $172.8 million, or (104.4)% of net revenues, for the three months ended
September 30, 2000 as compared to $3.4 million, or (1.8)% of net revenues, for
the three months ended September 30, 1999.
Interest expense. For the three months ended September 30, 2000, interest
expense was approximately $5.2 million as compared to $4.4 million for the three
months ended September 30, 1999, an increase of $0.8 million due to higher
interest rates and an increase in the amortization of deferred financing fees.
The Company's average borrowing rate for the three month period ended September
30, 2000 and 1999 was 10.4% and 9.2%, respectively, based on the Company's
weighted average outstanding debt balance.
Gain on sale of business assets. On June 30, 2000, the Company executed a
definite sales agreement to sell the assets and liabilities of its Alpine Gem
subsidiary. Management determined that the Alpine Gem subsidiary no longer fit
with the strategic direction of USA Floral. As a result of the sale, the Company
incurred a loss on sale of approximately $3.7 million, primarily related to the
goodwill balance. During the quarter ended September 30, 2000 a credit of $549
was recorded due to the finalization of the sale of Alpine Gem.
Provision for income taxes. The benefit from income taxes was a $0.9
million for the three months ended September 30, 2000 on a pre-tax loss of
$177.0 million compared to $1.5 million for the three months ended September 30,
1999 on a pre-tax loss of $7.0 million. During the three month period ended
September 30, 2000, the Company recorded an income tax benefit of $0.5 million
in the North American Division and an income tax benefit of $0.4 million in the
International Division. The income tax benefit in North America relates to
certain net operating loss carrybacks which are expected
25
be utilized in the next fiscal year. At September 30, 2000, the Company
established a valuation allowance of $2.2 million for deferred income tax
benefits related to the North American Division loss carryforwards that may not
be realized. The 2000 and 1999 effective income tax rates are different than the
statutory rate primarily due to the non-deductibility of certain goodwill
amortization and the valuation allowance placed on current net operating losses.
Net loss. As a result of the factors discussed above, the Company had a net
loss of $176.1 million for the three months ended September 30, 2000, or
$(10.69) per basic and diluted share. The Company had net loss of $5.5 million
for the three months ended September 30, 1999, or $(0.33) per basic and diluted
share. Before the integration and impairment charges and sale of business
assets, the Company had a net loss of $20.0 million for the three months ended
September 30, 2000, or $(1.22) per basic and diluted share.
26
Nine months ended September 30, 2000
- ------------------------------------
Statement of Operations: For the Nine For the Nine
(in thousands except per Months ended Months ended
share data) September 30, 2000 September 30, 1999
--------------------------------- ------------------------------
Net revenue $657,371 100.0% $699,786 100.0%
Cost of sales 497,955 75.8% 518,991 74.2%
------------------ -------------- ------------------ -----------
Gross margin 159,416 24.2% 180,795 25.8%
Selling, general and
Administrative expenses 157,909 24.0% 159,687 22.8%
Goodwill amortization 5,261 0.8% 5,299 0.7%
Integration charges 10,155 1.5% 40 0.0%
Impairment charge 156,620 23.8% - 0.0%
------------------ -------------- ------------------ -----------
Income (loss) from operations (170,529) (25.9)% 15,769 2.3%
Interest expense (14,664) (2.2)% (12,337) (1.8)%
Interest income 789 0.1% 1,613 0.2%
Other 246 0.0% 516 0.1%
Loss on sale of business assets (3,124) (0.5)% - 0%
------------------ -------------- ------------------ -----------
Income (loss) before income taxes and minority
interest (187,282) (28.5)% 5,561 0.8%
Provision for (benefit from) income taxes (1,358) (0.2)% 5,305 0.8%
------------------ -------------- ------------------ -----------
Income (loss) before minority interest (185,924) (28.3)% 256 0.0%
Minority interest (9) (0.0)% 12 0.0%
------------------ -------------- ------------------ -----------
Net income (loss) $(185,933) (28.3)% $268 0.0%
================== ============== ================== ===========
Net income (loss) per share:
Basic $(11.30) $0.02
Diluted $(11.30) $0.02
Net income (loss) before
integration and impairment
charges and sale of business
assets: $(16,034) $308
================== ==================
Net income (loss) per share
before integration and
impairment charges and sale
of business assets:
Basic $(0.97) $0.02
Diluted $(0.97) $0.02
Shares used in computing
net income (loss) per share:
Basic 16,457 16,331
Diluted 16,457 16,545
27
Results of Operations
- ---------------------
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Net Revenues. Net revenues for the nine months ended September 30, 2000
were $657.4 million. Revenues decreased from $699.8 million in the same period
last year. Revenues for the North American Division were $390.1 million, or
59.3% of the consolidated revenues and revenues for the International Division
were $267.3 million, or 40.7%. In 1999, 62.6% of revenues were generated by the
North American Division and 37.4% were generated by the International Division.
The North American Division experienced a decline in revenues of approximately
$47.8 million or 10.9% to $390.1 million. Revenues for the North American import
segment decreased $33.7 million or 20.6% to $129.9 million for the nine months
ended September 30, 2000 when compared to the first nine months of 1999. The
decline in revenues can be attributable to the following: increased competition,
a continuing trend of growers selling directly to wholesalers and increased
level of sales personnel turnover. The Company is in the process of establishing
a national accounts program with designated account managers to enhance revenues
in future periods and hiring new sales personnel to improve revenues. The
International Division revenues increased to $267.3 million for the nine months
ended September 30, 2000 from $261.9 million as a result of firmer flower
pricing at the Dutch auction. Revenues for the International Division consisted
primarily of revenues from Germany, the Netherlands, Italy and Japan. The
Company derives over 40% of its revenue internationally, primarily from Europe,
and management estimates that the stronger U.S. dollar versus the Euro
negatively impacted reported revenues by approximately 13.5% during the nine
month period ended September 30, 2000. On a currency adjusted basis the
International Division revenues increased approximately 15% for the nine-month
period ended September 30, 2000.
Gross Margin. Gross margins for the nine months ended September 30, 2000
and 1999 were $159.4 million and $180.8 million. Gross margin as a percentage of
net revenue was 24.2% (including the effect of the anti-dumping deposit refunds)
and 25.8% (including the effect of the final determination of antidumping
duties) for the nine months ended September 30, 2000 and September 30, 1999,
respectively. Included in the gross margin for September 30, 1999 was
approximately $2.2 million from the final determination of antidumping duties.
Beginning in 1986, the U.S. Department of Commerce (the "DOC") imposed an
antidumping duty deposit ("ADD") on the importation of certain flowers (the
"Antidumping Order") from Colombia. As a result of the final determinations by
the DOC regarding open review periods and the DOC's retroactive revocation of
the Antidumping Order, the Company released approximately $2.2 million in
antidumping reserves at September 30, 1999. The release of the reserves was
recorded as a reduction of cost of sales in the three-month period ended
September 30, 1999. ADD refunds aggregating $1.9 million related to periods
subsequent to March 1, 1997, were received during the first quarter of 2000 and
were recorded as a reduction to cost of sales. The North American Division gross
margin was 26.6% for the nine months ended September 30, 2000 and 27.9% for the
nine months ended September 30, 1999. The International Division's gross margin
was 20.8% for the nine months ended September 30, 2000 and 22.3% for the nine
months ended September 30, 1999. The decline in gross margin as a percentage of
revenues in the International Division is due primarily to firmer flower pricing
at the Dutch auctions and
28
increase cost of labor in bouquet manufacturing during the nine months ended
September 30, 2000.
Selling, General and Administrative. Selling, general and administrative
expenses were $157.9 million in the nine months ended September 30, 2000, or
24.0% of net revenues and $159.7 million in the nine months ended September 30,
1999, or 22.8% of net revenues. The decrease in selling, general and
administrative expenses for the nine months ended September 30, 2000 is the
primary result of integration and consolidation of operations and a reduction in
sales volume. The Company continues to integrate all its Miami-based import
companies into one facility to improve efficiencies and eliminate redundancies.
The decrease in selling, general and administrative expenses is offset by an
increase in the Company's allowance for bad debt of approximately $2.5 million
and professional fees associated with the development of a strategic plan to
focus corporate resources on its North American import/export and bouquet making
distribution business segments.
Integration charge. As part of our increased focus on operational matters,
we have pursued cost reduction measures, including the elimination of
duplicative facilities, the consolidation of certain operating functions and the
deployment of common information systems. In implementing these cost reduction
measures, we have incurred, and may incur in the future, certain integration
charges associated with such cost reduction measures.
In the first quarter of 2000, the Company recorded a restructuring charge
of approximately $10.2 million before income taxes in connection with its
decision to discontinue several strategic initiatives, close certain
under-performing and unprofitable business locations and re-focus on the core
business operations. The charge principally relates to severance payments, lease
termination costs, the write-down of information technology assets and the
write-down of property and equipment associated with the discontinuance of
strategic initiatives and the write-down of assets, including property and
equipment and goodwill related to the closure of one company and two branch
locations. The closure of the unprofitable locations were substantially
completed as of September 30, 2000. The balance of the restructuring plan is
expected to be completed by year-end.
Impairment Charge. A one-time impairment charge of $156.6 million was
recorded in the three-month period ended September 30, 2000. Management began an
evaluation of all Company operations in August 2000 as a result of the continued
poor performance of the Company. As a result of this evaluation, on November 3,
2000, the Company announced a strategic plan, approved by the Board of
Directors, that will focus corporate resources on its North American
import/export and bouquet making and distribution business segments. Under the
terms of the plan, the Company has retained a financial advisor to effect the
sale of its International Division and its North American wholesale distribution
business segment as soon as possible.
Due to the significance of the changes above and the decision to divest of
the Company's International Division and North American wholesale distribution
business segment, management performed an evaluation of the recoverability of
all the assets of the Company as proscribed in SFAS No. 121, including an
independent valuation analysis. Management concluded from the results of this
evaluation that a significant impairment of goodwill had occurred. An impairment
charge totaling $156.6 million was recorded for certain business units because
the respective estimated fair values were less than
29
the respective carrying value of the long-lived assets. Considerable management
judgement is necessary to estimate fair value. Accordingly, actual results could
vary significantly from management's estimates.
Income (loss) from operations. For the reasons discussed above, income
(loss) from operations was $(170.5) million, or (25.9)% of net revenues, for the
nine months ended September 30, 2000 and $15.8 million, or 2.3% of net revenues,
for the nine months ended September 30, 1999.
Interest expense. For the nine months ended September 30, 2000, interest
expense was approximately $14.7 million as compared to $12.3 million for the
nine months ended September 30, 1999, an increase of $2.4 million due to higher
interest rates and increase in the amortization of deferred financing fees.
Interest expense for the nine months ended September 30, 2000 includes a charge
of approximately $0.3 million related to the write-off of deferred financing
fees related to the amendment limits on the level of the Company's total
outstanding borrowings. The Company's average borrowing rate for the nine month
period ended September 30, 2000 and 1999 was 9.7% and 8.3%, respectively, based
on the Company's weighted average outstanding debt balance.
Loss on sale of business assets. On June 30, 2000, the Company executed a
definite sales agreement to sell the assets and liabilities of its Alpine Gem
subsidiary. Management determined that the Alpine Gem subsidiary no longer fit
with the strategic direction of USA Floral. As a result of the sale, the Company
incurred a loss on sale of approximately $3.7 million, primarily related to the
goodwill balance. During the quarter ended September 30, 2000 a credit of $549
was recorded due to the finalization of the sale of Alpine Gem.
Provision for income taxes. The benefit from income taxes was a $1.4
million for the nine months ended September 30, 2000 on a pre-tax loss of $187.3
million compared to $5.3 million in income tax expense for the nine months ended
September 30, 1999 on a pre-tax income of $5.6 million for the period. During
the nine month period ended September 30, 2000, the Company recorded an income
tax benefit of $2.5 million in the North American Division and an income tax
provision of $1.1 million in the International Division. The income tax benefit
in North America relates to certain net operating loss carrybacks which are
expected to be utilized in the next fiscal year. At September 30, 2000, the
Company established a valuation allowance of $2.2 million for deferred income
tax benefits related to the North American Division loss carryforwards that may
not be realized. The 2000 and 1999 effective income tax rates are different than
the statutory rate primarily due to the non-deductibility of certain goodwill
amortization and valuation allowances placed on current net operating losses.
Net income (loss). As a result of the factors discussed above, the Company
had a net loss of $185.9 million for the nine months ended September 30, 2000,
or $(11.30) per basic and diluted share. The Company had net income of $0.27
million for the nine months ended September 30, 1999, or $0.02 per basic and
diluted share. Before the integration and impairment charges and loss on sale of
business assets the Company had a net loss of $16.0 million for the nine months
ended September 30, 2000, or $(0.97) per basic and diluted share.
30
Liquidity and Capital Resources
- ------------------------------
Historical. Historically, the Company's primary sources of liquidity have
been cash from operations and borrowings under our credit facility. The
Company's principal uses of liquidity have been to provide working capital, to
meet debt service requirements and finance the Company's strategic plans. For
fiscal 1999, quarterly net revenues as a percentage of total revenues were
approximately 29%, 26%, 21%, and 24%, respectively, for the first through fourth
quarters of the fiscal year. The Company's need for cash has historically been
greater in its first and second quarters when cash generated from operating
activities coupled with draw-downs from bank lines have been invested in
receivables and to a lesser extent inventories. The Company experiences higher
levels of sales in the first two quarters of the year due to the traditional
flower giving holidays, such as Valentine's Day in February and Mother's Day in
May. For the nine months ended September 30, 2000 the Company used $4.0 million
in proceeds from operating activities and $1.0 million in proceeds from the sale
of business assets to invest $3.9 million in capital expenditures and fund
working capital for operating activities.
In the nine months ended September 30, 2000, operating activities provided
$4.0 million of net cash compared to $3.4 million of cash used in operations in
the same period last year. The increase in cash provided by operations is
principally attributable to improved management of accounts receivable balances.
The Company's days outstanding in accounts receivable improved to 34 days at
September 30, 2000 from 38 days at September 30, 1999.
Our capital expenditures for the nine months ended September 30, 2000 were
approximately $3.9 million. These capital expenditures were primarily for
vehicles, machinery, office equipment, computer equipment and software, building
additions, and facility upgrades. Although we currently do not have any
commitments to make significant capital expenditures, we expect to expend
approximately $6.0 million for capital expenditures in the next twelve months in
the normal course of business.
Financing. Our existing credit agreement is with a syndicate of lenders for
which Bankers Trust Company serves as agent (the "Credit Agreement"). Pursuant
to the terms of the Credit Agreement as of October 2, 1998, the amount of our
revolving credit facility was increased to $200 million, of which the sub-limit
for permitted acquisitions is $180 million and the sub-limit for working capital
purposes and letters of credit is $20 million. In addition, of the $200 million
in revolving credit facilities, up to $15 million has been designated to be a
revolving loan which is available to certain of our foreign subsidiaries in
either Deutsche Marks or Guilders. Further, a new $50 million, Deutsche Mark
denominated term loan was created as an additional source of borrowings in
excess of the $200 million revolving credit facility. Borrowings under the
revolving credit facility bear interest, at our option, at (a) Bankers Trust
Company's base rate plus an applicable margin of up to 1.25% or (b) a Eurodollar
rate plus an applicable margin of up to 2.50%. Borrowings under the term loan
bear interest at the inter-bank rate for Deutsche Marks plus an applicable
margin of up to 2.50%. For the execution of the Amended Credit Agreement the
Company paid aggregate financing fees of approximately $3.9 million, which has
been deferred and is being amortized over the term of the Credit Agreement. In
addition, a
31
commitment fee of up to 0.50% is being charged on the unused portion of the
revolving credit facility on a quarterly basis. Both the revolving credit
facilities and the term loan mature five years from the closing date. At March
31, 2000 outstanding borrowings under our Credit Agreement aggregated $205.5
million. The Company does not have any required repayments of term loans until
December 31, 2000.
On March 24, 2000, the financial covenants, including the leverage ratio
and consolidated interest coverage ratio, were amended under the Fourth
Amendment and Waiver to the Credit Agreement ("Fourth Amendment"). Pursuant to
the terms of the Fourth Amendment, the Company is required to achieve minimum
EBITDA levels. The minimum EBITDA levels established in the Fourth Amendment are
based upon the objectives set forth in the Company 2000 operating plan and
require that the Company's achieve the following EBITDA levels in fiscal year
2000; Q1 - $11.5 million, Q2 - $12.75 million, Q3 - $1.25 million, and Q4 - $8.0
million. Additionally, the Fourth Amendment limits the level of the Company's
total outstanding borrowings to $224.0 million and at September 30, 2000, the
aggregate outstanding borrowings were approximately $199.6 million. As a result
of the Fourth Amendment limits on the level of the Company's total outstanding
borrowings, approximately $0.3 million of the financing fees deferred and
amortized in October 1998 were written off and recorded as interest expense
during the first quarter of 2000. In consideration for the Fourth Amendment, the
Company agreed to pay a financing fee of $1.75 million on March 31, 2001 and
issue approximately 865 warrants to purchase common stock of the Company at an
exercise price of $0.25 per share. The warrants issued are exercisable anytime
after March 31, 2001 and expire March 31, 2010. Both the financing fee and the
fair value of the warrants issued have been deferred and will be amortized over
the remaining term of the Amended Credit Agreement.
At September 30, 2000, the Company was not in compliance with the
applicable financial covenants, including the leverage ratio, of the Fourth
Amendment. Pursuant to the terms of the Amended Credit Agreement, non-compliance
with one or more financial covenants permits the Bank to exercise certain
remedies, which include termination of the commitment and declaration that the
principal balance and any accrued interest on all loans and obligations are
immediately due and payable. Hence, the outstanding balance has been classified
as a current liability at September 30, 2000. Rather than exercise these
remedies, the Bank granted the Company a waiver letter through October 31, 2000.
As part of such waiver, the Bank required that the Company engage a transaction
advisor to prepare a written report for presentation to the Bank concerning a
possible restructuring of the Company.
The Company, with assistance from its advisors, developed a restructuring
strategy which contemplates (i) the sale of the Company's International Division
and North American wholesale distribution segment, and (ii) the focus by the
Company on strengthening its import and bouquet operations in Miami, Florida and
on the West Coast of the United States. The Bank, as part of a Fifth Amendment
and Waiver to the Credit Agreement (the "Fifth Amendment") dated October 31,
2000, has endorsed the Company's restructuring strategy and amended the
financial covenants. Pursuant to the terms of the Fifth Amendment, all financial
covenants have been waived through December 31, 2000. Commencing January 1, 2001
the Company is required to achieve new monthly minimum EBITDA levels for each
operating division through June 30, 2000. The monthly minimum EBITDA levels
established in the Fifth Amendment are based upon historical results and the
objectives set forth in the
32
Company's 2001 operating plan. The Fifth Amendment allows the Company to utilize
its credit facility to borrow funds at levels which coincide with the forecasted
cash flow requirements of the Company through June 30, 2001 and limits the level
of the Company's total outstanding borrowings to $224.0 million. Installment
payments of the term loan due December 31, 2000, March 31, 2001 and June 30,
2001 in the aggregate amount of $5.5 million (12.6 million Deutsche Marks) have
been postponed and are due in aggregate on July 1, 2001. Additionally, the
Company has agreed that the proceeds realized by it from the sale of its
International Division and North American wholesale distribution segment will be
applied to reduce the amount of the outstanding loans from the Bank. The Company
has retained a financial advisor to act on behalf of the Company during the
sales process.
The Company anticipates that after the sale of its International Division
and North American wholesale distribution segment, the remaining indebtedness
owed to the Bank will be in excess of the amount that the Company can service
from cash flow of the Company's remaining business operations. As a result, the
Company believes that in order for its restructuring plan to be successful, it
will be necessary for the Bank to make significant amendments to the Amended
Credit Agreement. There can be no assurances that any such amendment will be
available on terms favorable to the Company. Inability of the Company to reach
an agreement with the Bank on amendments or to arrange alternative financing
could have a material adverse effect on the Company. If the current credit
agreement is refinanced or the borrowed amount is declared by the Lenders to be
payable on demand, the remaining unamortized deferred financing costs of $4.7
million will be adjusted in the period of refinancing or when the debt is
declared payable.
Other. Effective August 29, 2000 USA Floral's common stock was moved to the
OTC Bulletin Board. This is a result of the Company's ineligibility to remain
listed on the SmallCap Market due to its non-compliance with the net tangible
asset/market capitalization/net income requirement for continued listing on the
Nasdaq SmallCap Market. The Company continues to trade under the symbol ROSI.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in the information set forth in our
December 31, 1999 Form 10-K filed with the Securities and Exchange Commission on
March 31, 2000.
33
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
U.S.A. Floral and its subsidiaries are from time to time parties to
lawsuits arising out of our respective operations. We believe that any
pending litigation to which we or our subsidiaries are parties will
not have a material adverse effect upon our consolidated financial
position or results of operations.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Pursuant to the Credit Agreement, the Company is not permitted to
pay dividends upon its common stock without the consent of the
lenders thereunder.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial data schedule
34
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S.A. FLORAL PRODUCTS, INC.
Date: November 17, 2000 By:/s/ Michael W. Broomfield
------------------------------------
Michael W. Broomfield
Chief Executive Officer
By: /s/ G. Andrew Cooke
------------------------------------
G. Andrew Cooke
Chief Financial Officer
35