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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 on
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) - April 30, 1999
GERALD STEVENS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as Specified in its Charter)
Delaware 0-05531 41-0719035
- ---------------------------- ---------------- -------------------
(State or other jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification No.)
301 East Las Olas Blvd., Suite 300 Ft. Lauderdale, Florida 33301
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(Address of principal executive offices) (Zip Code)
(954) 713-5000
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(Registrant's Telephone Number, Including Area Code)
- -------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
This Form 8-K/A reports the completion on April 30, 1999 of the merger
between the Registrant and Gerald Stevens Retail. The Registrant's
acquisition of Gerald Stevens Retail was accounted for as a pooling of
interest. As required by Item 2 and Item 7 of Form 8-K, the Registrant
is filing the following financial statements, which give retroactive
effect to the Registrant's acquisition of Gerald Stevens Retail:
(i) The Registrant's "Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to the
supplemental financial statements for each of the periods presented;
(ii) Supplemental consolidated financial statements of the
Registrant for the three years ended August 31, 1998; and
(iii) Supplemental condensed consolidated financial statements
(unaudited) of the Registrant for the six months ended February 28, 1999
and 1998.
The index to the supplemental financial statements presented is
contained at page F-1.
Also filed in this Form 8-K/A are updated historical financial
statements of significant businesses acquired or probable of acquisition
by the Registrant. The index to the financial statements of businesses
acquired by the Registrant is presented at F-1.
(b) Pro Forma Financial Information
Pro forma financial statements as described in the Index to Pro forma
Supplemental Consolidated Financial Statements on PF-1, are presented to
give proforma effect to the significant businesses acquired or to be
acquired, and a planned public offering of the Registrant's common
stock.
(c) Exhibits
Exhibit No. Description
----------- -----------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
99.2 Letter from Ernst & Young LLP to the
Commission regarding the dismissal of such
firm as the independent auditors of the
Registrant.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GERALD STEVENS, INC.
Date: June 4, 1999 By: /s/ Adam D. Phillips
---------------------------------
Adam D. Phillips
Senior Vice President, Secretary
and General Counsel
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On April 30, 1999, Gerald Stevens, Inc. ("Gerald Stevens"), formerly known
as Florafax International, Inc. and Gerald Stevens Retail, Inc. ("Gerald Stevens
Retail"), which was formerly known as Gerald Stevens, Inc., completed a merger
accounted for as a pooling of interests. This Management's Discussion and
Analysis of Financial Condition and Results of Operations gives retroactive
effect to the merger, and reference is made to the supplemental financial
statements of Gerald Stevens which are being filed as part of this Form 8-K. In
the merger, Gerald Stevens issued 1.35 shares of its common stock for each share
of Gerald Stevens Retail common stock outstanding at the effective time of the
merger. In total, Gerald Stevens issued 28.1 million shares of its common stock
to the stockholders of Gerald Stevens Retail and as a result, the stockholders
of Gerald Stevens Retail now hold approximately 77.5% of Gerald Stevens' total
outstanding shares of common stock.
We are an integrated retailer and marketer of flowers, plants,
complementary gifts and decorative accessories. We currently operate the largest
company-owned network of floral specialty retail stores in the United States,
with 126 locations. We are building a national brand and transforming the retail
floral industry by integrating our operations throughout the floral supply
chain, from product sourcing to delivery, and by managing every interaction with
the customer, from order generation to order fulfillment. We ultimately intend
to provide all of our retail customers with a unique and enhanced shopping
experience under the Gerald Stevens brand.
Upon consummation of its merger with Gerald Stevens Retail, management
redefined the manner in which it evaluates and reports the operating results of
its newly combined business for internal purposes. In this regard, management
has chosen to break down its component businesses into two segments: (1) the
Retail Segment and (2) the Order Generation Segment. The Retail Segment will
consist of all of the Company's retail and import businesses and operations
while the Order Generation Segment will consist of all non-retail order
generation and fulfillment businesses and operations.
BUSINESS COMBINATIONS
From October 1, 1998 through February 28, 1999, Gerald Stevens acquired 17
retail florist businesses, an Internet-based order generation business, and a
floral import business for total consideration of $50,070,600, consisting of
$27,090,496 in cash and 6,185,179 shares of its common stock. During March 1999
and April 1999, Gerald Stevens acquired six retail florist businesses, a small
order generation business and National Flora, a floral order generation
business, for total consideration of $39,189,940, consisting of $26,198,088 in
cash and 2,144,876 shares of its common stock.
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The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above. All of the acquisitions were
accounted for under the purchase method of accounting, with results of
operations included in Gerald Stevens' results from date of acquisition.
PURCHASE PRICE
------------------------- SHARE
COMPANY TOTAL CASH STOCK SHARES PRICE
- ------- ----------- ----------- ----------- ---------- ------
(ACTUAL DOLLARS)
THROUGH FEBRUARY 28, 1999:
Royer's.............................. $11,158,046 $ 6,333,566 $ 4,824,480 1,371,168 $ 3.52
Boesen............................... 5,150,007 2,485,000 2,665,007 757,423 3.52
Maple Lee............................ 4,698,003 2,539,000 2,159,003 613,612 3.52
Dr. Delphinium....................... 3,102,326 879,825 2,222,501 631,658 3.52
Cactus............................... 3,000,002 1,800,000 1,200,002 341,053 3.52
AGA.................................. 2,935,000 1,467,502 1,467,498 417,079 3.52
Eastern.............................. 2,924,000 2,924,000 -- -- N/A
Martina's............................ 1,948,038 1,168,036 780,002 221,685 3.52
Norton's............................. 1,566,000 548,099 1,017,901 289,298 3.52
Fallon's............................. 1,917,094 1,117,094 800,000 227,368 3.52
Jennie's............................. 3,575,000 2,000,000 1,575,000 354,375 4.44
Other acquisitions................... 8,097,084 3,828,374 4,268,710 960,460 4.44
----------- ----------- ----------- ----------
Total...................... 50,070,600 27,090,496 22,980,104 6,185,179
----------- ----------- ----------- ----------
March and April 1999:
Phoebe's............................. 2,816,622 2,194,770 621,852 98,765 6.30
National Flora....................... 19,727,200 9,952,200 9,775,000 1,552,500 6.30
Exotic Gardens and Kuhn.............. 6,200,000 5,580,000 620,000 49,236 12.59
Other Acquisitions................... 10,446,118 8,471,118 1,975,000 444,375 4.44
----------- ----------- ----------- ----------
Total...................... 39,189,940 26,198,088 12,991,852 2,144,876
----------- ----------- ----------- ----------
Total...................... $89,260,540 $53,288,584 $35,971,956 8,330,055
=========== =========== =========== ==========
In May 1999, Gerald Stevens entered into an agreement to acquire Calyx &
Corolla, Inc., a floral catalog and Internet business, for total consideration
of approximately $14.3 million, consisting of approximately 934,000 shares of
common stock and approximately 160,000 options to acquire shares of common stock
with exercise prices ranging from $.36 per share to $9.44 per share. The
acquisition is expected to be consummated in June 1999.
The Gerald Stevens' pro forma supplemental (as adjusted for the offering),
goodwill related to acquired businesses at February 28, 1999 was approximately
$84.3 million, which represents approximately 48% of our pro forma as adjusted
total assets of approximately $174.6 million and approximately 57% of our pro
forma as adjusted total stockholders equity of approximately $146.7 million. The
$84.3 million of goodwill will result in an annual amortization expense of
approximately $2.6 million, based upon the amortization of goodwill related to
the acquisition of retail floral businesses over useful lives of 40 years, as
well as the amortization of goodwill related to the acquisition of National
Flora, an order generation business, and Calyx & Corolla, a floral catalog and
Internet business, over useful lives of 20 years. Goodwill and related
amortization are expected to increase principally as a result of future retail
floral business acquisitions, and the amortization of goodwill and other
intangible assets could adversely affect financial condition and results of
operations. Gerald Stevens has considered various factors, including projected
future cash flows, in determining the purchase prices of acquired retail floral
businesses, and does not believe that any material portion of the goodwill
related to any of these acquisitions will dissipate over a period shorter than
40 years. However, earnings in future years could be significantly adversely
affected if management later determines either that the remaining balance of
goodwill is impaired or that a shorter amortization period is applicable.
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RESULTS OF OPERATIONS
Six Months Ended February 28, 1999 Compared to Six Months Ended February 28,
1998
The table below presents the results of operations through operating income
(loss) of Gerald Stevens' Retail and Order Generation segments and Corporate
Overhead for the six month periods ended February 28, 1999 and 1998. The Retail
Segment results include the post-acquisition operating results of the 17 retail
florist businesses and one import business acquired by Gerald Stevens during the
six month period ended February 28, 1999. The Order Generation Segment results
include the operating results of our historical wire service, credit and charge
card processing, and The Flower Club business units, in addition to the
activities of Gerald Stevens' newly formed Internet-based order generation
business unit. Prior to the acquisition of its initial retail florist and import
businesses on October 1, 1998, Gerald Stevens operated in only the Order
Generation Segment.
SIX MONTHS ENDED FEBRUARY 28, 1999 SIX MONTHS ENDED FEBRUARY 28, 1998
------------------------------------------ -----------------------------------------
ORDER CORPORATE ORDER CORPORATE
RETAIL GENERATION OVERHEAD TOTAL RETAIL GENERATION OVERHEAD TOTAL
------- ---------- --------- ------- ------- ---------- --------- ------
(DOLLARS IN THOUSANDS)
Revenue:
Product sales, net................. $28,373 $ -- $ -- $28,373 $ -- $ -- $ -- $ --
Service and other revenue.......... 2,736 8,886 -- 11,622 -- 8,194 -- 8,194
------- ------ ------- ------- ------- ------ ------- ------
31,109 8,886 -- 39,995 -- 8,194 -- 8,194
------- ------ ------- ------- ------- ------ ------- ------
Operating costs and expenses:
Cost of product sales.............. 12,744 -- -- 12,744 -- -- -- --
Operating.......................... 13,356 -- -- 13,356 -- -- -- --
Selling, general and
administrative................... 2,619 7,352 4,289 14,260 -- 6,830 303 7,133
Merger expenses.................... -- -- 4,051 4,051 -- -- -- --
------- ------ ------- ------- ------- ------ ------- ------
28,719 7,352 8,340 44,411 -- 6,830 303 7,133
------- ------ ------- ------- ------- ------ ------- ------
Operating income (loss)...... $ 2,390 $1,534 $(8,340) $(4,416) $ -- $1,364 $ (303) $1,061
======= ====== ======= ======= ======= ====== ======= ======
Retail Segment. Product sales in the retail segment for the six months
ended February 28, 1999 include sales of floral and gift products at retail
businesses of $23,379,000 and sales of floral product by Gerald Stevens' import
business of $4,994,000. Service and other revenue in the retail segment consists
principally of delivery and other service fees charged to customers and
commissions on orders transmitted to and fulfilled by other retail florists.
Cost of product sales in the retail segment for the six months ended
February 28, 1999 include cost of products sold at retail businesses of
$8,932,000 and cost of products sold at Gerald Stevens' import business of
$3,812,000. Gross margins on product sales and gross margins on total revenue at
retail businesses averaged 62% and 66%, respectively, during the period. Gross
margins on product sales at Gerald Stevens' import business averaged 24% during
the period.
Operating expenses in the retail segment for the six months ended February
28, 1999 include expenses at retail businesses of $12,710,000 and expenses at
Gerald Stevens' import business of $646,000. Operating expenses are comprised of
salaries and benefit expenses of $9,856,000, occupancy expenses of $1,956,000,
vehicle expenses of $737,000, depreciation and amortization expenses of
$787,000, and other expenses of $20,000.
Selling, general and administrative expenses in the retail segment for the
six months ended February 28, 1999 include expenses at retail businesses of
$2,426,000 and expenses at Gerald Stevens' import business of $193,000, and
consist primarily of advertising expense, commissions paid on orders transmitted
from third parties, and legal and accounting expenses.
Order Generation Segment. Total revenue in the order generation segment
for the six months ended February 28, 1999 increased by $692,000, or 8%, to
$8,886,000, compared to the same period in 1998. Service and other revenue in
the order generation segment consists of floral order processing, member dues
and fees, directory and advertising fees and charge card processing. Floral
order revenue increased by $317,000, or 6%, to $5,348,000 due primarily to an
increase in The Flower Club revenue, as well as an increase in store-to-store
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revenue. Member dues and fees increased by $106,000, or 8%, to $1,458,000 due
primarily to an increase in member florists and an increase in dues. Publication
and advertising fees increased by $230,000, or 28%, to $1,054,000 due to the
publication of a new selection guide. New selection guides are published
approximately every three years. Credit card processing and other revenue
increased by $39,000, or 4%, to $1,026,000, with gross dollars processed
increasing and margins remaining relatively constant with the prior year period.
The credit card processing industry continues to be extremely competitive with
increasing costs from card issuers and demands by larger customers for lower
discount rates. Gerald Stevens continues to adjust the pricing of its products
to remain competitive in the market. Gerald Stevens' response to the increased
competition could lead to lower margins in the future.
Total selling, general and administrative expenses in the order generation
segment for the six months ended February 28, 1999 increased by $522,000, or 8%,
to $7,352,000, compared to the same period in 1998. The expense increase is due
in part to start-up costs of $219,000 incurred in connection with Gerald
Stevens' newly formed Internet-based order generation business unit and an
increase in depreciation and amortization expenses of $149,000 related to new
computer and telephone equipment and an increase in intangible assets purchased
in the Marketing Projects, Inc. ("MPI") transaction, as more fully described
later in the section entitled "MPI Agreement."
Corporate Overhead. Total Corporate Overhead selling, general and
administrative expenses for the six months ended February 28, 1999 increased to
$4,289,000 from $303,000 in the same period in 1998 due primarily to corporate
overhead expenses of $2,610,000 incurred by the Gerald Stevens Retail
organization and non-cash compensation expense of $1,373,000 recorded in
connection with the vesting of certain non-plan stock options. The non-plan
stock options are fully vested and will cause no further compensation expense to
be recorded in future periods. Gerald Stevens plans to expand its business over
the next several years, largely through the acquisition of retail florist
businesses. Gerald Stevens expects Corporate Overhead expenses to increase
significantly over this time period, due principally to integration costs
planned to be incurred in connection with the development and implementation of
centralized operational and financial systems and the establishment of the
Gerald Stevens brand name. See "Liquidity and Capital Resources."
Merger Expenses. During the six months ended February 28, 1999, Gerald
Stevens incurred a total of $4,051,000 in investment banking, accounting, and
legal costs in connection with its merger with Gerald Stevens Retail. In
accordance with the accounting rules governing business combinations accounted
for as a pooling of interests, all merger-related costs were recognized as an
expense during the period in which they were incurred.
Operating Income (Loss). Our operating loss during the six months ended
February 28, 1999 was $(4,416,000) compared to operating income of $1,061,000
during the six months ended February 28, 1998. The primary causes of the 1999
operating loss were the merger expenses of $4,051,000 and the non-cash
compensation expense recorded in connection with the vesting of non-plan stock
options of $1,373,000.
Income Taxes. The provision for income taxes for the six months ended
February 28, 1999 was $2,127,000 compared to $424,000 during the same period in
1998. The increase in income tax expense was due principally to an increase in
the deferred tax asset valuation allowance of $1,407,000 for net operating
losses and basis differences in assets which, because of the uncertainty
associated with our near-term future combined operating results, now requires
the valuation allowance.
Gerald Stevens' future effective tax rate will depend on various factors
including the mix between state taxable income or losses, amounts of
nondeductible goodwill, and the timing of adjustments to the valuation allowance
on our net deferred tax assets.
Net Income. As a result of the above factors, net loss for the six months
ended February 28, 1999 was $(6,457,000) compared to net income of $718,000 for
the same period in 1998.
Year Ended August 31, 1998 Compared to Year Ended August 31, 1997
Revenue. Total revenue for fiscal 1998 increased by $1,782,000, or 15%, to
$13,391,000 compared to $11,609,000 during fiscal 1997.
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Net revenue from member dues and fees during fiscal 1998 increased by
$386,000, or 16%, to $2,778,000 compared to 1997. During fiscal 1998, Gerald
Stevens continued to experience an increase in its dues-paying floral members.
Dues-paying floral members at August 31, 1998 totaled approximately 5,200
compared to 4,850 at August 31, 1997. Management believes that the increased
number of orders Gerald Stevens provided to its members assisted Gerald Stevens
in retaining its existing member florists and adding new member florists.
Floral order processing revenue continued to grow during fiscal 1998,
increasing by $1,027,000, or 17%, to $7,189,000 compared to fiscal 1997. The
increase is due primarily to orders generated by The Flower Club. In addition to
the growth of The Flower Club revenue, Gerald Stevens also experienced an
increase in its florist shop-to-shop orders, Talking Bouquet revenue and gift
basket revenue during fiscal 1998 compared to fiscal 1997.
Directory fees and advertising revenue during fiscal 1998 increased by
$71,000, or 5%, to $1,476,000 compared to fiscal 1997 due to moderate increases
in both advertising and directory fees.
Net revenue from charge card processing increased by $204,000, or 13%, to
$1,822,000 during fiscal 1998 compared to fiscal 1997. The fiscal 1998 increase
is attributable to an increase in dollar volumes processed. During fiscal 1998,
gross dollars processed were $392,000,000 compared to $318,000,000 in fiscal
1997.
Other revenue for fiscal 1998 increased by $94,000 to $126,000 compared to
fiscal 1997.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for fiscal 1998 increased by $3,281,000, or 34%, to
$12,972,000 compared to the same period in fiscal 1997.
General and administrative expenses in fiscal 1998 increased by $2,331,000,
or 40%, to $8,169,000 compared to fiscal 1997. The increase was due primarily to
start-up expenses of approximately $1,645,000 incurred in connection with Gerald
Stevens' expansion into the retail distribution segment of the floral industry,
consisting principally of audit, consulting, legal and compensation costs. These
start-up expenses include a write-off of $479,860 related to Gerald Stevens'
acquisition of the assets of International Floral Network, Inc., a business
whose acquired assets consisted solely of rights to acquire 33 retail florist
businesses under non-binding letters of intent with the owners of those
businesses, and approximately $540,000 of costs reimbursed to SB Management
Corp., a corporation controlled and managed by two directors of Gerald Stevens.
To a lesser extent, salary and telephone cost increases related to The Flower
Club's higher volume were also responsible for the overall general and
administrative expense increase.
Selling, advertising and promotion expense in fiscal 1998 increased by
$808,000, or 22%, to $4,400,000 compared to fiscal 1997. The increase was
comprised of two main components. First, Gerald Stevens established its own
marketing department to interface with current partners of The Flower Club, as
well as prospect for new partners. Second, Gerald Stevens introduced several new
marketing campaigns during fiscal 1998, which caused a significant increase in
the cost of marketing materials. Conversely, Gerald Stevens experienced a
decline in commissions paid to MPI, an independent marketing firm which had been
Gerald Stevens' primary source of marketing until the third quarter of fiscal
1998, at which time Gerald Stevens modified its contract with this firm, thereby
eliminating the commissions.
Depreciation and amortization expenses increased during fiscal 1998 by
$142,000, or 54%, to $403,000 compared to 1997. During fiscal 1997 and 1998,
Gerald Stevens expanded its facilities as well as purchased new computer and
telephone equipment, thereby causing an increase in depreciation. In addition,
the contract modification agreement entered into in fiscal 1998 with MPI caused
Gerald Stevens to record an intangible asset related to marketing techniques, as
well as a noncompete agreement. The amortization of these intangible assets
increased amortization expense in fiscal 1998.
Contract Modification Charge. During fiscal 1998, Gerald Stevens paid
$3,495,000 to MPI to modify a servicing agreement with MPI. Prior to modifying
this servicing agreement, MPI acted as an agent that interfaced with The Flower
Club's corporate customers. By modifying the servicing agreement, Gerald Stevens
began interfacing with the corporate customers directly, thereby strengthening
these relationships. See "-- MPI Agreement."
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Operating Income (Loss). Our operating loss during the year ended August
31, 1998 was $(3,076,000) compared to operating income of $1,918,000 during the
year ended August 31, 1997. The primary causes of the fiscal 1998 operating loss
were the contract modification charge of $3,495,000 and start-up expenses of
$1,645,000 incurred in connection with our expansion into the retail
distribution segment of the floral industry.
Other Income (Expense). Other income (expense) for the year ended August
31, 1997 totalled $819,000 and consisted of a gain, net of related legal fees,
of $1,041,000 recognized in connection with the resolution of a 1990 lawsuit,
offset by charges of $222,000 related to consulting agreement and contingency
reserve write-offs.
Income Taxes. During fiscal 1998, Gerald Stevens recognized a net deferred
income tax benefit of $682,000 due to the utilization of net operating loss
carryforwards. During fiscal 1997, Gerald Stevens recognized a net income tax
benefit of $519,000. The benefit consisted of a deferred income tax benefit of
$637,000 from the utilization of net operating loss carryforwards and a current
income tax expense of $118,000.
Net Income. Net income declined from $3,433,000 in fiscal 1997 to a net
loss of $(2,268,000) in fiscal 1998, due primarily to two reasons. First,
start-up expenses related to Gerald Stevens' expansion into the retail
distribution segment of the floral industry of $1,645,000 were incurred during
fiscal 1998. Second, Gerald Stevens recorded $3,495,000 as a contract
modification expense related to the MPI transaction during fiscal 1998.
Additionally, in fiscal 1997 Gerald Stevens recorded other income of $819,000
resulting primarily from litigation proceeds.
Year Ended August 31, 1997 Compared to Year Ended August 31, 1996
Revenue. Total revenue for fiscal 1997 increased by $1,310,000, or 13%, to
$11,609,000 compared to fiscal 1996.
Net revenue from member dues and fees during fiscal 1997 increased by
$379,000, or 19%, to $2,392,000 compared to 1996. During fiscal 1997, Gerald
Stevens continued to experience an increase in its dues-paying floral members.
Dues-paying members at August 31, 1997 totaled approximately 4,850 compared to
4,300 at August 31, 1996. Management believes that the increased number of
orders that Gerald Stevens was providing to its members has assisted Gerald
Stevens in retaining its existing member florists and adding new member
florists.
Floral order processing revenue during fiscal 1997 increased by $578,000,
or 10%, to $6,162,000 compared to fiscal 1996. The increase is due primarily to
orders generated by The Flower Club.
Directory and advertising fees increased by $127,000, or 10%, to $1,405,000
in fiscal 1997 compared to fiscal 1996 as a result of growth in membership
during fiscal 1997.
Net revenue from charge card processing increased by $240,000, or 17%, to
$1,618,000 during fiscal 1997 compared to fiscal 1996. The increase during
fiscal 1997 is attributable to an increase in dollar volumes processed. During
fiscal 1997 gross dollars processed were $318,000,000 compared to $261,000,000
in 1996. During fiscal 1997 Gerald Stevens did not experience a significant
increase in cost from the credit card companies. However, as in the past few
years, Gerald Stevens lowered the discount rate charged to certain customers to
remain competitive.
Other revenue for fiscal 1997 decreased $14,000 to $32,000 compared to
fiscal 1996.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for fiscal 1997 increased by $954,000, or 11%, to
$9,691,000 compared to fiscal 1996.
General and administrative expenses increased by $505,000, or 9%, to
$5,838,000 in fiscal 1997 compared to 1996. The main component of this increase
was in salaries and wages, which increased due to an increase in phone operators
needed to handle The Flower Club's increased volume, as well as general wage
increases necessary to remain competitive in the job market. In addition to
greater labor costs, there was also an increase in building rent necessary to
accommodate the additional telephone operators.
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Selling and advertising expenses increased by $581,000, or 19%, to
$3,592,000 in fiscal 1997 compared to fiscal 1996. The primary cause for this
increase are the marketing expenses associated with generating and maintaining
The Flower Club order volume. The Flower Club expenses included in selling
expenses are commissions paid to MPI, an outside marketing firm, printing costs
for marketing pieces provided to The Flower Club members, and certain
promotional floral arrangements. In addition to The Flower Club related expense
increases, in fiscal 1997 Gerald Stevens also incurred increased costs in sales
salaries and commissions.
Depreciation and amortization expenses decreased by $132,000, or 34%, to
$261,000 in fiscal 1997 compared to fiscal 1996 primarily due to the write-off
of an intangible asset related to the start-up of The Flower Club which was
previously being amortized.
Other Income (Expense). Other income (expense) for the year ended
August 31, 1997 totalled $819,000 and consisted of a gain, net of related legal
fees, of $1,041,000 recognized in connection with the resolution of a 1990
lawsuit, offset by charges of $222,000 related to consulting agreement and
contingency reserve write-offs.
Income Taxes. During fiscal 1997, Gerald Stevens recognized a net income
tax benefit of $519,000. The benefit consisted of a deferred income tax benefit
of $637,000 from the utilization of net operating loss carryforwards and a
current income tax expense of $118,000. Gerald Stevens recognized a net income
tax benefit in fiscal 1996 of $817,000 consisting of a deferred income tax
benefit of $863,000 related to the reduction of a valuation allowance
established in prior years and a current provision for federal alternative
minimum taxes of $46,000.
Net Income. As a result of the above factors net income for fiscal 1997 was
$3,433,000 compared to $2,262,000 for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to October 1, 1998, operating cash flow has been generated primarily
from processing floral orders and charge card transactions for Gerald Stevens'
member florists, as well as collecting dues, fees and directory advertising from
the members. Charge card processing generally allows Gerald Stevens to collect
funds from the charge card issuer prior to settlement with the member florist.
Historically, operating cash flow benefited significantly from orders generated
by The Flower Club. Because all orders of The Flower Club are paid for by credit
cards, Gerald Stevens receives a significant portion of the money from these
orders within days after processing the transaction.
During the years ended August 31, 1998, 1997, and 1996, Gerald Stevens
generated the majority of the cash necessary to operate and expand its business
from operations, due principally to the growth in The Flower Club orders during
these years. For the three years ended August 31, 1998, cash flow from operating
activities totalled $3,786,000, inclusive of the unfavorable impact of
$3,495,000 paid to MPI in fiscal 1998 under the terms of a contract modification
agreement and the favorable impact of $1,041,000 received in connection with the
settlement of a lawsuit in fiscal 1997. Capital expenditures during the three
years ended August 31, 1998 totalled $2,416,000 and related principally to the
purchase of the land and building which were previously leased as the Company's
corporate headquarters and other facility and equipment expansion costs.
During fiscal 1997 and 1996, Gerald Stevens retired substantially all of
its existing long-term debt, with outstanding borrowings reduced by a total of
$792,000 for these years.
During fiscal 1998 and 1997, Gerald Stevens repurchased 519,975 shares of
treasury stock at a total cost of $1,616,000. Additionally, during the three
years ended August 31, 1998, Gerald Stevens issued a total of 584,000 shares of
common stock and received total proceeds of $95,000 in connection with the
exercise of stock options and warrants.
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In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 12,863,290 shares of common stock were issued to
various founding shareholders for total consideration of $9,338,000. In August
1998, Gerald Stevens also paid $1,500,000 in cash and issued 641,997 shares of
its common stock in connection with the acquisition of International Floral
Network, Inc., a business whose acquired assets consisted solely of rights to
acquire 33 retail florist businesses under non-binding letters of intent with
the owners of those businesses. Additionally, a total of 224,000 shares of
common stock were issued for total consideration of $275,000 in connection with
the exercise of stock options and warrants during the six months ended February
28, 1999.
During the six months ended February 28, 1999, Gerald Stevens used a total
of $485,000 of cash in operating activities, as it expanded its business
operations into the retail distribution segment of the floral industry compared
to cash provided by operating activities of $1,674,000 for the six months ended
February 28, 1998. The cash portion of the purchase prices for all acquisitions
completed by Gerald Stevens during the six month period ended February 28, 1999,
net of cash acquired, aggregated $25,638,000, as more fully described in the
preceding section entitled "Business Combinations". Capital expenditures during
the six month period totalled $1,359,000 and primarily included the costs of
building one new retail hub store and equipment purchases at existing retail
stores.
During the six months ended February 28, 1999, Gerald Stevens issued
6,217,537 shares of its common stock in private placement transactions for
consideration of $21,066,000, net of underwriting fees and expenses.
In September 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank in which the bank agreed to loan Gerald Stevens Retail up
to $20 million for a term of 18 months. In February 1999, the credit agreement
was amended to increase the line of credit to $40 million. Borrowings under the
credit agreement bear interest at either the Eurodollar market rate plus a
percentage ranging from 100 to 225 basis points depending on the consolidated
leverage ratio for the preceding quarter, or at Gerald Stevens Retail's option,
a base rate equal to the higher of the federal funds rate plus .5% or the prime
rate. At February 28, 1999, Gerald Stevens Retail had no indebtedness from
borrowings under the credit facility.
8
12
In February 1999, Gerald Stevens Retail and its primary lender also agreed
to the terms and conditions of an arrangement whereby the bank will act as the
sole and exclusive agent and lead arranger for a $50 million to $75 million
syndicated bank credit facility on a best efforts basis and also offer its
commitment to lend up to $15 million of the facility. Toward this end, Gerald
Stevens Retail and its primary lender expect to amend and restate their existing
$40 million revolving credit agreement. Gerald Stevens, the parent of Gerald
Stevens Retail, will agree to guarantee payment of all obligations under the
amended and restated agreement. Gerald Stevens has terminated its existing $5
million bank credit agreement.
The amended and restated credit agreement will provide for borrowings over
a term of 36 months which will bear interest at either the Eurodollar market
rate plus a percentage ranging from 125 to 250 basis points, depending on the
consolidated leverage ratio for the previous quarter, or at Gerald Stevens
option, at a base rate equal to the sum of the higher of the federal funds rate
plus .5% or the prime rate plus a percentage ranging from 0 to 100 basis points
depending on the consolidated leverage ratio for the previous quarter. The line
of credit will be used to finance business acquisitions and capital expenditures
and to provide working capital for general corporate purposes. Gerald Stevens'
effective Eurodollar borrowing rate and its base rate as of June 2, 1999 are
6.19% and 7.75%, respectively. Outstanding borrowings under the current credit
facility at June 2, 1999 were $27.3 million.
Borrowings under the amended and restated credit agreement will be secured
by all Gerald Stevens' current and future assets, including a pledge of the
stock of each business that is acquired by Gerald Stevens. The credit agreement
will contain covenants requiring bank approval of certain business acquisitions,
and the maintenance of agreed upon financial ratios, as more specifically
described in the following paragraphs.
In the event that Gerald Stevens' consolidated leverage ratio is greater
than 1.5 to 1.0 (or assuming the offering is completed, 2.0 to 1.0), and the
cash portion of the cost of a business acquisition exceeds $3 million, certain
acquisition specific covenants are applicable. These covenants include, among
other things, the requirement that at least 35% of the cost of an acquisition be
paid for in the form of common stock, that the proceeds of loans used to pay the
cost of an acquisition cannot exceed 3 times the acquired company's earnings
before interest, taxes, depreciation and amortization, and that the lender be
provided certain financial information and give consent to the acquisition.
The amended and restated credit agreement will also require Gerald Stevens
to maintain financial ratios which limit total debt and capital expenditures.
Consolidated debt cannot exceed earnings before interest, taxes, depreciation
and amortization by a ratio of 2.75 to 1.00 (3.00 to 1.00 on or prior to August
31, 1999) or exceed consolidated shareholders' equity. In addition, the ratio of
EBIT plus lease payments to the sum of interest expense, current maturities of
debt, cash income taxes and lease payments must not be less than 1.10 to 1.00
prior to December 31, 2000 and 1.25 to 1.00 thereafter. Assuming the offering is
completed, capital expenditures in any fiscal year cannot exceed $22 million for
the fiscal year ending 1999, $42 million for the fiscal year ending 2000, $50
million for the fiscal year ending 2001 and $52 million for the fiscal year
ending 2002.
Gerald Stevens is currently in discussions with a number of financial
institutions regarding their participation in the syndicated bank credit
facility. Gerald Stevens anticipates that, assuming there are not material
adverse changes or material disruption of conditions in the financial, banking
or capital markets, its credit facility syndication can be completed and its
borrowing limits increased from $40 million to approximately $50 million to $75
million by July 1999.
Gerald Stevens intends to implement its business strategy largely by the
acquisition of retail florist and other florist related businesses throughout
the country. Upon acquisition, Gerald Stevens expects to incur significant
expenditures to remodel and retrofit some of its acquired stores to be
consistent with the Gerald Stevens store format. Additionally, Gerald Stevens
plans to fill out regional markets by constructing a number of new hub or
satellite stores. To facilitate its high rate of planned growth and to
effectively integrate business activities and processes, Gerald Stevens expects
to incur substantial computer and communication costs in the future. Over the
next two to three years, we expect to spend approximately $10.0 million for
remodeling and retrofitting acquired stores, $50.0 million for construction of
new stores and $15.0 million on information systems.
Gerald Stevens also expects to incur significant expenditures over the next
several years, in connection with the development and marketing of its newly
formed Internet based order generation business unit and the establishment of
the Gerald Stevens brand name. In this regard, Gerald Stevens plans to incur
approximately $20.0 million of advertising costs during the remainder of fiscal
1999 and fiscal 2000. The Internet based floral order generation industry is
highly competitive and there can be no assurance that Gerald Stevens' new
Internet based business unit will be successful in achieving sufficient market
share to enable it to operate on a profitable basis.
Gerald Stevens intends to finance the costs of its business acquisitions
and capital expenditures with a combination of debt and equity capital,
including the net proceeds from the sale of the shares of common stock in the
offering as well as cash generated from internal operations. Specifically, it
expects to finance the cost of future business acquisitions by paying cash and
issuing shares of common stock to the sellers of these businesses in reasonably
equal values. In addition to increasing its line of credit, Gerald Stevens also
plans to offer for sale, in either private placements or public offerings,
shares of its common stock as circumstances and market conditions dictate.
Gerald Stevens believes that its existing credit facilities, in addition to
the net proceeds from the offering, will provide adequate capital to meet its
ongoing cash requirements over the next 12 months. Gerald Stevens also believes
that it will be successful in raising additional debt and equity capital in the
future, including but not limited to increasing its credit facility from $40.0
million to $50.0-$75.0 million. However, Gerald Stevens cannot provide assurance
that temporary or long-term adverse changes in global capital markets will not
interrupt or curtail its growth plans.
MPI AGREEMENT
Prior to May 1, 1998, under the terms of an existing joint marketing
service agreement, Gerald Stevens was required to pay MPI commissions equaling
8% of floral orders generated from marketing partners solicited by MPI. During
the years ended August 31, 1998, 1997 and 1996 Gerald Stevens recorded
commissions expense of $1,050,000, $1,455,000 and $1,219,000 relative to the
agreement.
Effective May 1, 1998, Gerald Stevens entered into an agreement with MPI
that (1) modified the rights and obligations of both parties under the existing
joint marketing servicing agreement and (2) provided for the acquisition of
MPI's proprietary marketing systems by Gerald Stevens. Also on May 1, 1998,
Gerald Stevens entered into a non-compete and non-disclosure agreement with MPI
and the principal employees of MPI. Total consideration of $3,670,000 was paid
to MPI at the time of closing and Gerald Stevens is further obligated to pay up
to $125,000 in cash in each of the following eight fiscal quarters, contingent
upon the attainment of quarterly revenue targets.
9
13
Of total consideration paid, $150,000 has been allocated to the purchase of
MPI's proprietary marketing systems and $100,000 has been allocated to the
non-compete agreement, with amortization provided over useful lives of 1 and 2
years, respectively. These assets, net of accumulated amortization, are included
in intangible assets in Gerald Stevens' consolidated balance sheet.
As a result of the contract modification, Gerald Stevens is no longer
obligated to pay commissions to MPI on future floral orders generated from
marketing partners solicited by MPI prior to May 1, 1998. Additionally, the
Company's obligations to support such marketing partners has not been
substantially increased. As the Company believes that its future revenue stream
from these marketing partner arrangements will be unaffected by the contract
modifications, Gerald Stevens determined that the remainder of the consideration
paid to MPI has no benefit to future periods and should be expensed at the date
of the contract modification. Accordingly, $3,495,000 of the total consideration
paid has been recognized as a contract modification expense during year ended
August 31, 1998.
Gerald Stevens will expense all quarterly contingent payments to the extent
and at the time they become earned. During the year ended August 31, 1998 and
the six month period ended February 28, 1999, contingent payments of $125,000
and $250,000, respectively, were earned, paid, and included within selling,
advertising, and promotion expenses.
YEAR 2000 ISSUE
Gerald Stevens has developed a Year 2000 compliance plan and completed a
preliminary assessment of Year 2000 issues, risks, and exposures. Gerald Stevens
and every business acquired by Gerald Stevens to date has Year 2000 issues in
various stages of investigation and resolution. The unresolved issues typically
relate to a network-based order entry system, telephone systems and switches,
voicemail systems, store server hardware and operating systems, and the business
software installed on these store systems.
Gerald Stevens operates a network based order entry system. The
manufacturers operating system software is Year 2000 compliant. However, not all
internally developed software applications have been modified to be Year 2000
compliant. Gerald Stevens is in the process of modifying its internally
developed software applications and expects to complete the modifications no
later than June 30, 1999. These internal programs are being modified by current
employees and, as a result, the cost of these modifications is not expected to
be material.
Gerald Stevens operates a telephone system which is integrated with the
order entry system discussed in the preceding paragraph. Gerald Stevens recently
learned that a primary component of this system will need to be upgraded or
replaced to be Year 2000 compliant. Gerald Stevens is in the process of
evaluating whether to upgrade or replace this component. Regardless of which
option is selected by Gerald Stevens, this component is expected to be
operational no later than July 31, 1999.
Gerald Stevens has reviewed the telephone switch hardware and software for
each acquired business. Year 2000 certified hardware and software upgrades are
available from the switch vendors for all currently acquired telephone systems.
Several of the switches have already been replaced or upgraded. The remaining
non-compliant equipment will be upgraded by the third quarter 1999. Gerald
Stevens has acquired certification letters from each affected telephone switch
and software vendor. Gerald Stevens believes it has taken appropriate and
reasonable steps to mitigate Year 2000 risk to its acquired telephone systems.
Gerald Stevens has reviewed the business-computing environment for each
acquired business. This typically consists of a UNIX server and several dumb
terminals used for point-of-sale and back office functions. Gerald Stevens is
currently upgrading all servers to the Year 2000 certified version of SCO UNIX.
Where necessary, the UNIX server hardware is being replaced to ensure Year 2000
compliance. These upgrades are expected to be complete by the third quarter of
1999.
Some of the businesses acquired by Gerald Stevens use commercially
available retail florist software that is not currently Year 2000 compliant.
Gerald Stevens has received written notification from their software vendors
that a software release that fixes all known Year 2000 problems will be
delivered to Gerald Stevens' affected retail florists during calendar year 1999
at no cost. Gerald Stevens plans to test the new software
10
14
releases immediately upon receipt from the vendors. Additionally, Gerald Stevens
has developed a contingency plan, which includes the replacement of any
non-compliant retail florist software with fully compliant software that is
being used today by one of Gerald Stevens' other retail florist businesses.
The impact of failure due to Year 2000 problems depends on the technology
affected. In the event that the telephone systems failed, the store would be
unable to take or fulfill telephone orders. This would have a substantial impact
on the store's ability to conduct business. To mitigate this risk, Gerald
Stevens has contracted with a third-party provider who has an inventory of Year
2000 compliant telephone switches, and who could replace the affected equipment
with a new telephone switch and software within 72 hours. While this would
increase Gerald Stevens' costs, it would minimize any loss of sales resulting
from the failure.
In the event the computer hardware failed in the store, it would impact the
ability of the store to make computer-supported transactions, including
point-of-sale, ordering, and receipt transactions. This would have a substantial
impact on the store's ability to conduct business. To mitigate this risk, Gerald
Stevens will acquire Year 2000 compliant computing platforms to deploy if
necessary to any affected location. While this would increase company costs, it
would minimize any loss of sales resulting from the failure.
In the event that the network based order entry system failed, automated
processing of floral orders would be prevented. Should this occur, Gerald
Stevens would be forced to process incoming orders manually until such time that
the failure could be corrected. While this would significantly increase
operating costs, loss of sales resulting from the failure would be minimized.
Gerald Stevens is currently conducting a review of significant third
parties that support any critical aspect of its business. Currently, all of
Gerald Stevens' significant software and hardware providers have indicated,
either orally or in writing, that they are, or expect to be, Year 2000
compliant. Gerald Stevens is in the process of implementing each of these
providers' Year 2000 compliant products and expects to complete this
implementation by the third quarter of 1999. In addition, Gerald Stevens has
received confirmation from approximately 20% of its third-party trading
partners, support organizations and suppliers that they are Year 2000 compliant.
IBM is currently conducting a Year 2000 project for Gerald Stevens which will
allow Gerald Stevens to complete its Year 2000 compliance check of these third
parties by the end of May 1999. Gerald Stevens will continue this review, but
expects no significant Year 2000 issues to be discovered with its critical
third-party business partners.
Gerald Stevens plans to conduct a full Year 2000 exposure review of all
future 1999 acquisition target companies prior to consummating the acquisition.
The current estimate for expenditures related to investigating and
resolving Year 2000 issues within Gerald Stevens is $1.5 million. Based on its
preliminary assessment of Gerald Stevens' Year 2000 issues and considering its
primary and contingency plans, Gerald Stevens' management does not expect Year
2000 issues to have a material impact on its business, operations, or its
financial condition or results of operations.
INFLATION
Gerald Stevens anticipates that its business will be affected by general
economic trends. Because some of Gerald Stevens' inventory is grown in countries
other than the United States, economic conditions in those countries could
affect the cost of product purchases. During the past year, Gerald Stevens has
not experienced noticeable effects of inflation and believes that cost increases
due to inflation should be able to be passed on to its customers.
SEASONALITY
The floral industry is seasonal in that revenue is much greater during
holidays such as Thanksgiving, Christmas, Valentine's Day and Mother's Day.
Conversely, during the summer months, floral retailers tend to experience a
decline in revenue. In addition, the floral industry in general may be affected
by economic conditions and other factors, including floral promotions,
competition and the climate in key flower-growing regions.
11
15
RECENT ACCOUNTING PRONOUNCEMENTS
Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for
years ending after December 15, 1997. As a result, Gerald Stevens was required
to change the method used to compute earnings per share and to restate all prior
periods. Under the new requirements, primary earnings per share is replaced with
basic earnings per share which excludes the dilutive effect of stock options and
other common stock equivalents.
Comprehensive Income -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. The Statement requires that total comprehensive
income and comprehensive income per share be disclosed with equal prominence as
net income and earnings per share. Comprehensive income is defined as all
changes in stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends. The statement is effective for fiscal years
beginning after December 15, 1997, and accordingly will apply to Gerald Stevens'
fiscal year ended August 31, 1999.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14.
The Statement uses a management approach to report financial and descriptive
information about a company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ended August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption to include retail operations.
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. Gerald Stevens believes that this statement will not have a
material effect on its accounting for computer software development or
acquisition.
SOP 98-5, Reporting on the Costs of Start-Up Activities, requires the
immediate expensing of start-up costs as well as existing costs previously
capitalized for fiscal years beginning after December 15, 1998. Gerald Stevens
has no capitalized start-up costs as of February 28, 1999 or August 31, 1998.
12
16
GERALD STEVENS
INDEX TO PRO FORMA SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
PAGE
-----
Introduction to Pro Forma Supplemental Consolidated
Financial Statements...................................... PF-2
Pro Forma Supplemental Consolidated Balance Sheet at
February 28, 1999......................................... PF-3
Pro Forma Supplemental Consolidated Statement of Operations
for the year ended August 31, 1998........................ PF-4
Pro Forma Consolidated Statements of
Operations -- Acquisitions Closed -- for the year ended
September 30, 1998........................................ PF-5
Pro Forma Supplemental Consolidated Statement of Operations
for the six months ended February 28, 1999................ PF-6
Pro Forma Consolidated Statements of
Operations -- Acquisitions Closed -- for the periods
indicated................................................. PF-7
Notes to Unaudited Pro Forma Supplemental Consolidated
Financial Statements...................................... PF-8
PF-1
17
GERALD STEVENS
INTRODUCTION TO PRO FORMA SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma supplemental consolidated financial statements
present the pro forma supplemental consolidated balance sheet at February 28,
1999 and the pro forma supplemental consolidated statements of operations for
the fiscal year ended August 31, 1998 and the six months ended February 28,
1999. The pro forma supplemental consolidated financial statements:
(1) give effect to the significant acquisitions completed or probable of
completion by Gerald Stevens and the private placement of common stock
completed by Gerald Stevens on October 1, 1998 ("Pro Forma").
(2) give further effect to the offering contemplated in this prospectus
("Pro Forma, As Adjusted").
The pro forma supplemental consolidated balance sheet at February 28, 1999
presents the pro forma financial position as if (1) the significant completed
and probable post February 28, 1999 acquisitions made by Gerald Stevens and (2)
the offering contemplated in this prospectus, had been consummated on February
28, 1999. The pro forma supplemental consolidated statements of operations for
the year ended August 31, 1998 and the six months ended February 28, 1999
present the pro forma results of operations as if (1) the significant completed
and probable acquisitions made by Gerald Stevens during 1998 and 1999, the
private placement and (2) the offering, had been consummated at the beginning of
the periods presented.
The pro forma supplemental consolidated financial statements are based upon
available information and certain assumptions considered reasonable by
management. The pro forma supplemental consolidated financial statements do not
reflect all of the potential cost savings Gerald Stevens may have achieved had
the acquisitions taken place at the beginning of the periods presented nor do
they reflect the impact of additional corporate overhead costs that would have
been incurred had Gerald Stevens Retail been in existence for the entire period
presented prior to its inception on May 7, 1998. Accordingly, these statements
are not indicative of the actual results of operations that might have occurred,
nor are they necessarily indicative of expected results in the future.
The pro forma supplemental consolidated financial statements should be read
in conjunction with Gerald Stevens' supplemental consolidated financial
statements, management's discussion, and other financial information included
elsewhere in this Prospectus.
PF-2
18
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
UNAUDITED
(DOLLARS IN THOUSANDS)
ACQUISITIONS CLOSED
----------------------------------- PENDING
ACQUISITIONS
GERALD STEVENS NATIONAL EXOTIC/ ---------------- PRO FORMA
SUPPLEMENTAL PHOEBE'S FLORA KUHN CALYX & COROLLA ADJUSTMENTS
-------------- -------- -------------- ------- ---------------- -----------
ASSETS
Current assets
Cash and cash equivalents........ $ 4,768 $ 437 $ 900 $ 1,244 $ 3,623 $(17,727)(a)
9,151(c)
(396)(e)
Accounts receivable, net......... 8,895 265 870 484 173 --
Other receivables................ 574 -- -- -- -- --
Inventories...................... 3,714 177 3 263 1,079 --
Prepaid and other current
assets......................... 1,157 17 14 94 1,656 --
Deferred tax asset, net of
allowance...................... 150 -- -- -- 229 --
------- ------- ------- ------- ------- --------
Total current assets....... 19,258 896 1,787 2,085 6,760 (8,972)
Property and equipment, net...... 6,933 190 117 2,217 1,311 (2,010)(b)
Intangible assets, net........... 45,012 -- -- 224 -- 39,429(a)
(406)(b)
Other assets..................... 341 25 31 72 471 --
------- ------- ------- ------- ------- --------
Total assets............ $71,544 $ 1,111 $ 1,935 $ 4,598 $ 8,542 $ 28,041
======= ======= ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................. $10,196 $ 166 $ 3,934 $ 613 $ 1,773 $ --
Accrued liabilities.............. 7,924 98 81 363 156 --
Deferred revenue................. -- 23 -- -- 1,951 --
Notes payable.................... -- -- -- 2,416 -- (2,416)(b)
Current maturities of long-term
debt........................... 45 69 -- -- 113 --
Other current liabilities........ -- 11 -- -- 134 --
------- ------- ------- ------- ------- --------
Total current liabilities........ 18,165 367 4,015 3,392 4,127 (2,416)
Long-term debt................... 1,138 26 -- -- 239 9,151(c)
Other liabilities................ 254 6 -- -- -- --
------- ------- ------- ------- ------- --------
Total liabilities....... 19,557 399 4,015 3,392 4,366 6,735
------- ------- ------- ------- ------- --------
Stockholders' equity
Common stock..................... 346 83 -- 1 132 (216)(a)
26(a)
Preferred stock.................. -- -- -- -- 11,741 (11,741)(a)
Additional paid-in capital....... 65,482 60 -- 5,219 69 (5,348)(a)
25,294(a)
Media credits.................... -- -- -- -- (2,577) 2,577(a)
Treasury stock................... (1,616) (368) -- -- -- 368(a)
Retained earnings................ (12,225) 937 (2,080) (4,014) (5,189) 10,742(a)
(396)(e)
------- ------- ------- ------- ------- --------
Total stockholders'
equity.................... 51,987 712 (2,080) 1,206 4,176 21,306
------- ------- ------- ------- ------- --------
Total liabilities and
stockholders'
equity................ $71,544 $ 1,111 $ 1,935 $ 4,598 $ 8,542 $ 28,041
======= ======= ======= ======= ======= ========
GERALD STEVENS
GERALD STEVENS OFFERING PRO FORMA AS
PRO FORMA ADJUSTMENTS ADJUSTED
-------------- ----------- --------------
ASSETS
Current assets
Cash and cash equivalents........ $ 2,000 $ 58,790(d) $ 60,790
Accounts receivable, net......... 10,687 -- 10,687
Other receivables................ 574 -- 574
Inventories...................... 5,236 -- 5,236
Prepaid and other current
assets......................... 2,938 -- 2,938
Deferred tax asset, net of
allowance...................... 379 -- 379
-------- -------- --------
Total current assets....... 21,814 58,790 80,604
Property and equipment, net...... 8,758 -- 8,758
Intangible assets, net........... 84,259 -- 84,259
Other assets..................... 940 -- 940
-------- -------- --------
Total assets............ $115,771 $ 58,790 $174,561
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................. $ 16,682 $ -- $ 16,682
Accrued liabilities.............. 8,622 -- 8,622
Deferred revenue................. 1,974 -- 1,974
Notes payable.................... -- -- --
Current maturities of long-term
debt........................... 227 -- 227
Other current liabilities........ 145 -- 145
-------- -------- --------
Total current liabilities........ 27,650 -- 27,650
Long-term debt................... 10,554 (10,554)(d) --
Other liabilities................ 260 -- 260
-------- -------- --------
Total liabilities....... 38,464 (10,554) 27,910
-------- -------- --------
Stockholders' equity
Common stock..................... 372 50(d) 422
Preferred stock.................. -- -- --
Additional paid-in capital....... 90,776 69,294(d) 160,070
Media credits.................... -- -- --
Treasury stock................... (1,616) -- (1,616)
Retained earnings................ (12,225) -- (12,225)
-------- -------- --------
Total stockholders'
equity.................... 77,307 69,344 146,651
-------- -------- --------
Total liabilities and
stockholders'
equity................ $115,771 $ 58,790 $174,561
======== ======== ========
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-3
19
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PENDING GERALD
ACQUISITION GERALD STEVENS
GERALD STEVENS ACQUISITIONS CALYX & PRO FORMA STEVENS OFFERING PRO FORMA
SUPPLEMENTAL CLOSED COROLLA ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------------- ------------ ------------- ----------- --------- ----------- -----------
Revenue:
Product sales............. $ -- $71,671 $18,093 $ -- $89,764 $ -- $ 89,764
Service & other revenue... 13,391 19,049 1,972 -- 34,412 -- 34,412
------- ------- ------- ------- ------- ------- --------
Total revenue....... 13,391 90,720 20,065 -- 124,176 -- 124,176
------- ------- ------- ------- ------- ------- --------
Operating costs and
expenses:
Cost of product sales..... -- 32,543 6,034 -- 38,577 -- 38,577
Operating expenses........ -- 36,097 -- (1,608)(a) 37,107 -- 37,107
2,618(b)
Selling, general, and
administrative
expenses................ 16,467 15,189 15,160 -- 46,816 -- 46,816
------- ------- ------- ------- ------- ------- --------
Total operating costs and
expenses................ 16,467 83,829 21,194 1,010 122,500 -- 122,500
------- ------- ------- ------- ------- ------- --------
Operating income
(loss)............ (3,076) 6,891 (1,129) (1,010) 1,676 -- 1,676
------- ------- ------- ------- ------- ------- --------
Other
Interest expense.......... (82) (592) (24) (257)(c) (955) 955(f) --
Interest income........... 165 96 285 -- 546 -- 546
Other income (expense),
net..................... 43 713 -- -- 756 -- 756
------- ------- ------- ------- ------- ------- --------
Total other......... 126 217 261 (257) 347 955 1,302
------- ------- ------- ------- ------- ------- --------
Income (loss) before
income taxes...... (2,950) 7,108 (868) (1,267) 2,023 955 2,978
Provision (benefit) for
income taxes............ (682) 2,712 (380) (341)(d) 1,309 380(d) 1,689
------- ------- ------- ------- ------- ------- --------
Net income (loss)......... $(2,268) $ 4,396 $ (488) $ (926) $ 714 $ 575 $ 1,289
======= ======= ======= ======= ======= ======= ========
Earnings (loss) per share:
Basic................... $ (0.26) $ 0.02 $ 0.03
Diluted................. $ (0.26) $ 0.02 $ 0.03
Weighted average shares
outstanding:
Basic................... 8,581 36,255 41,255
Diluted................. 8,581 37,291 42,291
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-4
20
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS CLOSED
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
ROYERS BOESEN MAPLE DR. DEL CACTUS AGA EASTERN MARTINAS NORTONS JENNIES
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Revenue:
Product sales........ $13,566 $ 4,898 $ 5,980 $3,293 $ 3,972 $10,936 $ 6,356 $ 1,662 $ 2,151 $ 3,697
Service & other
revenue............ 2,475 522 419 194 825 -- 476 179 270 421
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total revenue.... 16,041 5,420 6,399 3,487 4,797 10,936 6,832 1,841 2,421 4,118
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales.............. 4,026 2,133 2,333 1,129 1,410 8,323 2,560 845 839 1,412
Operating expense.... 9,101 2,277 1,936 1,430 2,292 428 3,791 602 1,176 1,743
Selling, general, and
administrative
expenses........... 2,123 1,027 1,795 575 968 1,676 214 286 281 1,028
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total operating costs
and expenses....... 15,250 5,437 6,064 3,134 4,670 10,427 6,565 1,733 2,296 4,183
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Operating income
(loss).......... 791 (17) 335 353 127 509 267 108 125 (65)
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Other
Interest expense..... (14) (23) (10) -- (20) (27) (57) (72) (3) (35)
Interest income...... 42 -- -- -- 1 11 -- -- -- --
Other income
(expense), net..... 89 -- 38 -- -- -- 153 5 31 141
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total other.......... 117 (23) 28 -- (19) (16) 96 (67) 28 106
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Income (loss)
before income
taxes........... 908 (40) 363 353 108 493 363 41 153 41
Provision (benefit)
for income taxes... 368(e) (17) 130(e) 144 43(e) 159 111(e) -- 35 20
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Net income (loss).... $ 540 $ (23) $ 233 $ 209 $ 65 $ 334 $ 252 $ 41 $ 118 $ 21
======= ======= ======= ======= ======= ======= ======= ======== ======== ========
TOTAL
NATIONAL EXOTIC/ ACQUISITION
FALLONS PHOEBE'S FLORA KUHN CLOSED
-------- -------- -------- -------- -----------
Revenue:
Product sales........ $ 2,490 $ 3,750 $ -- $ 8,920 $ 71,671
Service & other
revenue............ 551 427 10,023 2,267 19,049
-------- -------- -------- -------- --------
Total revenue.... 3,041 4,177 10,023 11,187 90,720
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales.............. 1,109 2,422 -- 4,002 32,543
Operating expense.... 1,019 1,280 3,622 5,400 36,097
Selling, general, and
administrative
expenses........... 614 291 2,828 1,483 15,189
-------- -------- -------- -------- --------
Total operating costs
and expenses....... 2,742 3,993 6,450 10,885 83,829
-------- -------- -------- -------- --------
Operating income
(loss).......... 299 184 3,573 302 6,891
-------- -------- -------- -------- --------
Other
Interest expense..... (46) (9) (67) (209) (592)
Interest income...... -- 26 13 3 96
Other income
(expense), net..... 1 41 -- 214 713
-------- -------- -------- -------- --------
Total other.......... (45) 58 (54) 8 217
-------- -------- -------- -------- --------
Income (loss)
before income
taxes........... 254 242 3,519 310 7,108
Provision (benefit)
for income taxes... 89 98(e) 1,408(e) 124(e) 2,712
-------- -------- -------- -------- --------
Net income (loss).... $ 165 $ 144 $ 2,111 $ 186 $ 4,396
======== ======== ======== ======== ========
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-5
21
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
PENDING GERALD
GERALD ACQUISITION GERALD STEVENS
STEVENS ACQUISITIONS CALYX & PRO FORMA STEVENS OFFERING PRO FORMA
SUPPLEMENTAL CLOSED COROLLA ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------- ----------- --------- ----------- -----------
Revenue:
Product sales............... $28,373 $11,541 $ 9,283 $ -- $49,197 $ -- $49,197
Service & other revenue..... 11,622 6,912 1,233 -- 19,767 -- 19,767
------- ------- ------- ------- ------- ---- -------
Total revenue......... 39,995 18,453 10,516 -- 68,964 -- 68,964
------- ------- ------- ------- ------- ---- -------
Operating costs and expenses:
Cost of product sales....... 12,744 5,383 3,400 -- 21,527 -- 21,527
Operating expense........... 13,356 6,440 -- (134)(a) 20,629 -- 20,629
967(b)
Selling, general, and
administrative expenses... 14,260 5,299 9,033 -- 28,592 -- 28,592
Merger expense.............. 4,051 -- -- (4,051)(g) -- --
------- ------- ------- ------- ------- ---- -------
Total operating costs and
expenses.................. 44,411 17,122 12,433 (3,218) 70,748 -- 70,748
------- ------- ------- ------- ------- ---- -------
Operating income
(loss).............. (4,416) 1,331 (1,917) 3,218 (1,784) -- (1,784)
------- ------- ------- ------- ------- ---- -------
Other
Interest expense............ (183) (144) (19) (280)(c) (626) 626(f) --
Interest income............. 173 35 99 -- 307 -- 307
Other income (expense),
net....................... 96 748 223 -- 1,067 -- 1,067
------- ------- ------- ------- ------- ---- -------
Total other........... 86 639 303 (280) 748 626 1,374
------- ------- ------- ------- ------- ---- -------
Income (loss) before
income taxes........ (4,330) 1,970 (1,614) 2,938 (1,036) 626 (410)
Provision (benefit) for
income taxes.............. 2,127 867 -- (2,265)(d) 729 251(d) 980
------- ------- ------- ------- ------- ---- -------
Net income (loss)........... $(6,457) $ 1,103 $(1,614) $ 5,203 $(1,765) $375 $(1,390)
======= ======= ======= ======= ======= ==== =======
Earnings (loss) per share:
Basic..................... $ (0.21) $ (0.05) $ (0.03)
Diluted................... $ (0.21) $ (0.05) $ (0.03)
Weighted average shares
outstanding:
Basic..................... 31,198 36,255 41,255
Diluted................... 31,198 36,255 41,255
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-6
22
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS CLOSED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
FOR THE PERIOD FROM SEPTEMBER 1, 1998 TO ACQUISITION DATE
----------------------------------------------------------------------------------
ROYERS BOESEN MAPLE DR. DEL CACTUS AGA EASTERN MARTINAS
------- ------- ------- ------- ------- ------- ------- --------
Revenue:
Product sales....... $ 948 $ 337 $ 375 $ 241 $ 272 $ 586 $ 453 $ 114
Service & other
revenue........... 144 35 27 15 53 1 31 13
------- ------- ------- ------- ------- ------- ------- --------
Total revenue... 1,092 372 402 256 325 587 484 127
------- ------- ------- ------- ------- ------- ------- --------
Operating costs and
expenses:
Cost of product
sales............. 341 120 142 91 81 456 185 51
Operating expense... 762 182 252 121 218 118 288 35
Selling, general,
and administrative
expenses.......... 507 40 40 51 66 49 41 45
------- ------- ------- ------- ------- ------- ------- --------
Total operating
costs and
expenses.......... 1,610 342 434 263 365 623 514 131
------- ------- ------- ------- ------- ------- ------- --------
Operating income
(loss)......... (518) 30 (32) (7) (40) (36) (30) (4)
------- ------- ------- ------- ------- ------- ------- --------
Other
Interest expense.... (8) (2) -- (1) -- -- (5) --
Interest income..... 7 -- -- -- -- -- 4 --
Other income
(expense), net.... 92 -- (10) -- -- -- 180 --
------- ------- ------- ------- ------- ------- ------- --------
Total other......... 91 (2) (10) (1) -- -- 179 --
------- ------- ------- ------- ------- ------- ------- --------
Income (loss)
before income
taxes.......... (427) 28 (42) (8) (40) (36) 149 (4)
Provision (benefit)
for income
taxes............. (171)(e) 11 4(e) 35 --(e) -- 43(e) --
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)... $ (256) $ 17 $ (46) $ (43) $ (40) $ (36) $ 106 $ (4)
======= ======= ======= ======= ======= ======= ======= ========
FOR THE SIX MONTH PERIODS ENDED
------------------------------------------
FEBRUARY 28,
MARCH 31, 1999 1999
---------------------- -------------
EXOTIC/ NATIONAL
NORTONS JENNIES FALLONS PHOEBE'S KUHN FLORA
-------- -------- -------- -------- -------- ------------
Revenue:
Product sales....... $ 113 $ 1,053 $ 220 $ 1,900 $ 4,929 $ --
Service & other
revenue........... 18 151 41 237 1,203 4,943
-------- -------- -------- -------- -------- --------
Total revenue... 131 1,204 261 2,137 6,132 4,943
-------- -------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales............. 47 383 114 1,168 2,204 --
Operating expense... 79 639 106 644 2,996 --
Selling, general,
and administrative
expenses.......... 29 205 35 180 583 3,428
-------- -------- -------- -------- -------- --------
Total operating
costs and
expenses.......... 155 1,227 255 1,992 5,783 3,428
-------- -------- -------- -------- -------- --------
Operating income
(loss)......... (24) (23) 6 145 349 1,515
-------- -------- -------- -------- -------- --------
Other
Interest expense.... (2) (23) (3) (4) (86) (10)
Interest income..... -- -- -- 13 6 5
Other income
(expense), net.... 3 33 -- 3 30 417
-------- -------- -------- -------- -------- --------
Total other......... 1 10 (3) 12 (50) 412
-------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes.......... (23) (13) 3 157 299 1,927
Provision (benefit)
for income
taxes............. -- (9) -- 63(e) 120(e) 771(e)
-------- -------- -------- -------- -------- --------
Net income (loss)... $ (23) $ (4) $ 3 $ 94 $ 179 $ 1,156
======== ======== ======== ======== ======== ========
TOTAL
ACQUISITIONS
CLOSED
------------
Revenue:
Product sales....... $ 11,541
Service & other
revenue........... 6,912
--------
Total revenue... 18,453
--------
Operating costs and
expenses:
Cost of product
sales............. 5,383
Operating expense... 6,440
Selling, general,
and administrative
expenses.......... 5,299
--------
Total operating
costs and
expenses.......... 17,122
--------
Operating income
(loss)......... 1,331
--------
Other
Interest expense.... (144)
Interest income..... 35
Other income
(expense), net.... 748
--------
Total other......... 639
--------
Income (loss)
before income
taxes.......... 1,970
Provision (benefit)
for income
taxes............. 867
--------
Net income (loss)... $ 1,103
========
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-7
23
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS
1. HISTORICAL FINANCIAL STATEMENTS
The supplemental historical financial data presented in these pro forma
supplemental consolidated financial statements represents the consolidated
financial position of Gerald Stevens and subsidiaries at February 28, 1999 and
their results of operations for the year ended August 31, 1998 and the six
months ended February 28, 1999 restated to give effect to the merger with Gerald
Stevens Retail. The historical balance sheet data presented for the post
February 28, 1999 acquisitions of Gerald Stevens represents the financial
position of each acquired business at March 31, 1999 except that the financial
position of National Flora is presented at February 28, 1999. Acquisitions
closed through February 28, 1999 are included in Gerald Stevens' historical
supplemental consolidated balance sheet at February 28, 1999. The results of
operations for the year ended August 31, 1998 include the results of the
acquisitions of Gerald Stevens for the year ended September 30, 1998, except
that the results of Arizona Wholesale Floral, Inc. ("Cactus") are for the year
ended August 31, 1998, while the results of J.J. Fallon Company, Inc. and Calyx
& Corolla are presented for the year ended June 30, 1998. The results of
operations for the six months ended February 28, 1999 include the results of the
acquisitions of Gerald Stevens from September 1, 1998 to acquisition date with
the exception of Phoebe's, The Exotic Gardens, Inc./Kuhn Flowers, Inc. and Calyx
& Corolla which are presented for the six months ended March 31, 1999 and
National Flora which is presented for the six months ended February 28, 1999.
2. GERALD STEVENS ACQUISITIONS
During the period from October 1, 1998 to February 28, 1999, Gerald Stevens
completed the acquisition of seventeen retail florist businesses, one internet
based order generation business, and also acquired AGA Flowers, Inc. ("AGA"), a
floral import business. Based upon insignificance, the pre-acquisition results
of operations of seven of the seventeen retail florist businesses and the
internet based order generation business acquired by Gerald Stevens have not
been included in the pro forma supplemental consolidated financial statements.
During the period from February 28, 1999 to June 2, 1999, Gerald Stevens
acquired or entered into probable agreements to acquire six retail florist
businesses and a small order generation business and also acquired National
Flora, a floral order generator. Based upon insignificance, the pre-acquisition
results of operations of four of these retail florist businesses and the small
order generation business have not been included in the pro forma supplemental
consolidated financial statements. During May 1999, Gerald Stevens entered into
an agreement to acquire Calyx & Corolla, a floral catalog and internet business.
The acquisition is considered probable by the Company and is expected to be
consummated in June 1999. All acquired businesses have been accounted for in the
pro forma consolidated financial statements using the purchase method of
accounting. The pro forma supplemental consolidated financial statements reflect
Gerald Stevens preliminary allocations of purchase prices, which will be subject
to further adjustments as Gerald Stevens finalizes the allocations of purchase
prices in accordance with generally accepted accounting principles.
PF-8
24
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the acquisitions of Gerald Stevens which
were included in the pro forma consolidated financial statements on a pro forma
basis:
ACQUISITION TANGIBLE INTANGIBLE
DATE CONSIDERATION ASSETS ASSETS LIABILITIES
----------- ------------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
Flower Franchising, Inc.
("Royers")........................ 10/1/98 $11,158 $ 4,797 $ 7,483 $ 1,122
Boesen the Florist, Inc.
("Boesen")........................ 10/1/98 5,150 1,619 4,131 600
Maple Lee Flowers, Inc. and Maple
Lee Farm 'N' Garden Center, Ltd.
("Maple")......................... 10/1/98 4,698 1,387 4,310 999
Dr.Delphinium Designs, Inc. ("Dr.
Del")............................. 10/1/98 3,102 545 2,894 337
Arizona Wholesale Floral, Inc.
("Cactus")........................ 10/1/98 3,000 542 3,217 759
AGA Flowers, Inc. ("AGA")........... 10/1/98 2,935 1,263 2,333 661
Eastern Floral & Gift Shop, Inc.
("Eastern")....................... 10/1/98 2,924 2,043 1,839 958
Martina's Flowers & Gifts, Inc.
("Martinas")...................... 10/1/98 1,948 366 1,909 327
Norton Group, Inc. & Subsidiaries
("Nortons")....................... 10/1/98 1,566 532 1,229 195
J.J. Fallon Company, Inc.
("Fallons")....................... 10/1/98 1,917 625 1,483 191
Jennie's Flower Shop, Inc.
("Jennies")....................... 12/7/98 3,575 531 3,343 299
National Flora...................... 3/3/99 19,727 1,935 21,807 4,015
Phoebe's............................ 3/31/99 2,817 715 2,501 399
The Exotic Gardens, Inc. and Kuhn
Flowers, Inc. ("Exotic/Kuhn")..... 4/30/99 6,200 2,588 4,588 976
Calyx & Corolla..................... Pending 14,303 8,542 10,127 4,366
------- ------- ------- -------
Total Gerald Stevens Acquisitions... $85,020 $28,030 $73,194 $16,204
======= ======= ======= =======
The purchase agreements for Eastern and Cactus provide that additional
consideration will be paid to the sellers contingent upon the occurrence of
certain specified future events. Since the outcome of these contingencies is not
presently determinable, no consideration has been recorded. Gerald Stevens
management believes that the amount of any contingent consideration determined
to be payable in the future will not be material.
3. PRO FORMA ADJUSTMENTS
BALANCE SHEET
a. Represents preliminary adjustments to record the post February 28, 1999
acquisitions of Gerald Stevens, including: (i) the consideration paid by Gerald
Stevens in connection with such acquisitions, including repayment of assumed
debt and liabilities, (ii) the elimination of the historical stockholders'
equity account balances of these acquired businesses and (iii) the allocation of
excess purchase prices over individual assigned values to goodwill.
b. To adjust for real estate assets not acquired and related debt not assumed in
connection with Gerald Stevens acquisition of Exotic/Kuhn.
PF-9
25
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c. Represents borrowings under Gerald Stevens Retail's revolving credit facility
related to its post February 28, 1999 acquisitions.
d. Assumes an offering of 5 million shares at an estimated price of $15 per
share, less underwriting fees and miscellaneous costs. Assumes further that pro
forma debt related to acquisitions is retired.
e. Adjustment for cash not acquired from Phoebe's.
STATEMENTS OF OPERATIONS
a. Adjustment to reduce historical pre-acquisition compensation and benefits of
certain former owners and executives of the Gerald Stevens Acquisitions to
amounts consistent with employment arrangements entered into with these
individuals.
b. Adjustment to recognize the amortization of goodwill resulting from the
Gerald Stevens retail florists and AGA acquisitions using an estimated life of
40 years, and its acquisitions of National Flora and Calyx and Corolla using an
estimated life of 20 years. Management believes that 40 years and 20 years,
respectively, are reasonable lives for goodwill in light of the characteristics
present in the floral industry such as the significant number of years that the
industry has been in existence, recent industry growth and consumer trends in
purchasing flowers for many different occasions, and the long-term need for the
timely design and delivery of floral arrangements by local florists. In
addition, Gerald Stevens has focused on acquiring well established companies
that have been in existence for many years.
c. To record interest on borrowings related to acquisitions under Gerald Stevens
Retail's revolving credit facility, net of interest reductions related to debt
not assumed or paid off at date of acquisition. Based upon current market rates,
an incremental borrowing rate of 8% was used to determine interest on the
amounts borrowed under the credit facility. A change of one-eighth of a percent
would result in a $11 thousand increase or reduction in the pro forma adjustment
to annual interest expense.
d. To adjust income taxes based on normalized rates in effect during the period
as if the entities had filed a consolidated tax return for the period presented.
e. To record pro forma provision for income taxes for entities which were S
corporations during the year ended August 31, 1998, assuming an effective rate
of 40%.
f. Represents the elimination of interest expense due to the retirement of debt
with a portion of the proceeds from the contemplated offering.
g. To eliminate non-recurring merger expenses, including investment banking,
legal, and accounting costs.
PF-10
26
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PRO FORMA SUPPLEMENTAL DILUTED AND BASIC EARNINGS PER SHARE
Pro forma supplemental diluted and basic earnings per share are calculated
based on the weighted average shares outstanding during the year ended August
31, 1998 and the six months ended February 28, 1999, and gives effect to the
shares issued for acquisitions, in the private placement and in the contemplated
offering as if these shares were outstanding at the beginning of the year,
excluding shares issued in connection with the acquisition of insignificant
businesses. The shares used to calculate pro forma diluted and basic earnings
per share are as follows:
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, 1998 FEBRUARY 28, 1999
--------------------------- -----------------------
DILUTED BASIC DILUTED BASIC
------------ ------------ ---------- ----------
Average Shares Outstanding...................... 41,254,705 41,254,705 41,254,705 41,254,705
Common Stock Equivalents........................ 1,036,129 -- -- --
---------- ---------- ---------- ----------
42,290,834 41,254,705 41,254,705 41,254,705
========== ========== ========== ==========
PF-11
27
GERALD STEVENS, INC., FORMERLY FLORAFAX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
REGISTRANT
Reports of Independent Certified Public Accountants......... F-2
Supplemental Consolidated Balance Sheets as of February 28,
1999 (unaudited) and August 31, 1998 and 1997............. F-4
Supplemental Consolidated Statements of Operations for the
six month periods ended February 28, 1999 and 1998
(unaudited), and the years ended August 31, 1998, 1997 and
1996...................................................... F-5
Supplemental Consolidated Statements of Stockholders' Equity
for the six months ended February 28, 1999 (unaudited) and
for the years ended August 31, 1998, 1997 and
1996...................................................... F-6
Supplemental Consolidated Statements of Cash Flows for the
six month periods ended February 28, 1999 and 1998
(unaudited), and the years ended August 31, 1998, 1997 and
1996...................................................... F-7
Notes to Supplemental Consolidated Financial Statements..... F-8
GERALD STEVENS RETAIL, INC., FORMERLY GERALD STEVENS, INC.
Report of Independent Certified Public Accountants.......... F-27
Balance Sheets as of March 31, 1999 (unaudited) and
September 30, 1998........................................ F-28
Statements of Operations for the six months ended March 31,
1999 (unaudited) and for the period from inception (May 7,
1998) to September 30, 1998............................... F-29
Statements of Stockholders' Equity for the six months ended
March 31, 1999 (unaudited) and for the period from
inception (May 7, 1998) to September 30, 1998............. F-30
Statements of Cash Flows for the six months ended March 31,
1999 (unaudited) and for the period from inception (May 7,
1998) to September 30, 1998............................... F-31
Notes to Financial Statements............................... F-32
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
Report of Independent Certified Public Accountants.......... F-42
Combined Balance Sheets as of March 31, 1999 (unaudited) and
September 30, 1998 and 1997............................... F-43
Combined Statements of Operations for the six month periods
ended March 31, 1999 and 1998 (unaudited), and the years
ended September 30, 1998 and 1997......................... F-44
Combined Statements of Stockholders' Equity for the six
months ended March 31, 1999 (unaudited) and for the years
ended September 30, 1998 and 1997......................... F-45
Combined Statements of Cash Flows for the six month periods
ended March 31, 1999 and 1998 (unaudited), and the years
ended September 30, 1998 and 1997......................... F-46
Notes to Financial Statements............................... F-47
CALYX AND COROLLA, INC.
Independent Auditors' Report................................ F-52
Balance Sheets as of March 31, 1999 (unaudited), June 30,
1998 and 1997............................................. F-53
Statements of Operations for the nine months ended March 31,
1999 and 1998 (unaudited) and for the years ended June 30,
1998 and 1997............................................. F-54
Statements of Shareholders' Equity for the nine months ended
March 31, 1999 (unaudited) and for the years ended June
30, 1998 and 1997......................................... F-55
Statements of Cash Flows for the nine months ended March 31,
1999 and 1998 (unaudited) and for the years ended June 30,
1998 and 1997............................................. F-56
Notes to Financial Statements............................... F-57
J.J. FALLON COMPANY, INC.
Report of Independent Public Accountants.................... F-64
Balance Sheets as of September 30, 1998 (unaudited) and
June 30, 1998............................................. F-65
Statement of Operations for the three months ended
September 30, 1998 and 1997 (unaudited) and for the
year ended June 30, 1998.................................. F-66
Statement of Stockholders' Equity for the three months
ended September 30, 1998 (unaudited) and for the year
ended June 30, 1998....................................... F-67
Statement of Cash Flows for the three months ended
September 30, 1998 and 1997 (unaudited) and for
the year ended June 30, 1998.............................. F-68
Notes to Financial Statements............................... F-69
PHOEBE FLORAL, INC.
Report of Independent Certified Public Accountants.......... F-73
Balance Sheet as of December 31, 1998 (unaudited) and
September 30, 1998........................................ F-74
Statements of Income for the three month periods ended
December 31, 1998 and 1997 (unaudited) and for the year
ended September 30, 1998.................................. F-75
Statements of Stockholders' Equity for the three month
period ended December 31, 1998 (unaudited) and the
year ended September 30, 1998............................. F-76
Statements of Cash Flows for the three month periods ended
December 31, 1998 and 1997 (unaudited) and for the year
ended September 30, 1998.................................. F-77
Notes to Financial Statements............................... F-78
F-1
28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gerald Stevens, Inc. (formerly Florafax International, Inc.):
We have audited the balance sheet of Gerald Stevens Retail, Inc. (formerly
Gerald Stevens, Inc.) (a Delaware corporation) as of August 31, 1998, and the
related statements of operations, stockholders' equity and cash flows for the
period from inception (May 7, 1998) to August 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gerald Stevens Retail, Inc.
as of August 31, 1998, and the results of its operations and its cash flows for
the period from inception (May 7, 1998) to August 31, 1998 in conformity with
generally accepted accounting principles.
We have also audited the accompanying supplemental consolidated balance
sheet of Gerald Stevens, Inc. (formerly Florafax International, Inc.) and
subsidiaries as of August 31, 1998, and the related supplemental consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. The supplemental consolidated financial statements give retroactive
effect to the merger with Gerald Stevens Retail, Inc. on April 30, 1999, which
has been accounting for as a pooling of interests as described in Note 1. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Gerald Stevens, Inc. and subsidiaries as of August 31, 1998 and the results of
their operations and their cash flows for the year then ended, after giving
retroactive effect to the merger with Gerald Stevens Retail, Inc. as described
in Note 1, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
May 13, 1999.
F-2
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Gerald Stevens, Inc.
(Formerly Florafax International, Inc.)
We have audited the supplemental consolidated balance sheets of Gerald
Stevens, Inc. (formerly Florafax International, Inc. and formed as a result of
the combination of Gerald Stevens, Inc. and Florafax International, Inc.) as of
August 31, 1997 and the related supplemental consolidated statements of
operations, stockholder's equity, and cash flows for each of the two years in
the period ended August 31, 1997. The supplemental consolidated financial
statements give retroactive effect to the merger of Gerald Stevens, Inc. and
Florafax International, Inc. on April 30, 1999, which has been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of Gerald Stevens, Inc. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gerald Stevens, Inc. (formerly known as Florafax International, Inc.) at August
31, 1997, and the consolidated results of its operations and its cash flows for
each of the two years in the period August 31, 1997, after giving retroactive
effect to the merger of Gerald Stevens, Inc., as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
October 8, 1998
F-3
30
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
AUGUST 31,
FEBRUARY 28, ------------------------
1999 1998 1997
------------ ------------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,768 $ 7,148 $ 4,267
Accounts receivable, net of allowance for doubtful
accounts of $1,010 (unaudited), $482 and $509 at
February 28, 1999, August 31, 1998, and August 31, 1997,
respectively............................................ 8,895 1,421 1,317
Other receivables......................................... 574 371 437
Inventories............................................... 3,714 -- --
Subscription receivable................................... -- 4,183 --
Deferred tax asset, net of allowance...................... 150 775 264
Prepaid and other current assets.......................... 1,157 165 40
-------- ------- -------
Total current assets................................ 19,258 14,063 6,325
-------- ------- -------
PROPERTY AND EQUIPMENT, net................................. 6,933 2,046 943
-------- ------- -------
OTHER ASSETS:
Intangible assets, net.................................... 45,012 3,791 2,090
Deferred tax asset, net of allowance...................... -- 1,407 1,236
Other..................................................... 341 28 --
-------- ------- -------
Total other assets.................................. 45,353 5,226 3,326
-------- ------- -------
Total assets........................................ $ 71,544 $21,335 $10,594
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 45 $ 80 $ --
Accounts payable.......................................... 10,196 4,336 3,754
Accrued expenses.......................................... 7,924 2,099 1,455
-------- ------- -------
Total current liabilities........................... 18,165 6,515 5,209
LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 1,138 2,018 80
OTHER....................................................... 254 52 52
-------- ------- -------
Total liabilities................................... 19,557 8,585 5,341
-------- ------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 6 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 600,000 shares authorized,
none issued............................................. -- -- --
Common stock $0.01 par value, 250,000,000 shares
authorized, 34,581,500 (unaudited), 21,954,483, and
8,253,004 shares issued and outstanding as of February
28, 1999, August 31, 1998, and August 31, 1997,
respectively............................................ 346 220 83
Additional paid-in capital................................ 65,482 19,914 10,108
Accumulated deficit....................................... (12,225) (5,768) (3,500)
Treasury stock, at cost, 519,975 (unaudited), 519,975 and
480,975 shares at February 28, 1999, August 31, 1998,
and August 31, 1997, respectively....................... (1,616) (1,616) (1,438)
-------- ------- -------
Total stockholders' equity.......................... 51,987 12,750 5,253
-------- ------- -------
Total liabilities and stockholders' equity.......... $ 71,544 $21,335 $10,594
======== ======= =======
The accompanying notes are an integral part of these supplemental consolidated
balance sheets.
F-4
31
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
----------------- --------------------------------
1999 1998 1998 1997 1996
------- ------- ------------- ------ -------
(UNAUDITED)
REVENUE:
Product sales, net.......................... $28,373 $ -- $ -- $ -- $ --
Service and other revenue................... 11,622 8,194 13,391 11,609 10,299
------- ------- ------- ------ -------
39,995 8,194 13,391 11,609 10,299
------- ------- ------- ------ -------
OPERATING COSTS AND EXPENSES:
Cost of product sales....................... 12,744 -- -- -- --
Operating................................... 13,356 -- -- -- --
Selling, general and administrative......... 14,260 7,133 12,972 9,691 8,737
Contract modification charge................ -- -- 3,495 -- --
Merger expenses............................. 4,051 -- -- -- --
------- ------- ------- ------ -------
44,411 7,133 16,467 9,691 8,737
------- ------- ------- ------ -------
Operating income (loss)............. (4,416) 1,061 (3,076) 1,918 1,562
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Interest expense............................ (183) (3) (82) (6) (361)
Interest income............................. 173 76 165 183 115
Other....................................... 96 8 43 819 1
------- ------- ------- ------ -------
86 81 126 996 (245)
------- ------- ------- ------ -------
Income (loss) before income taxes... (4,330) 1,142 (2,950) 2,914 1,317
PROVISION (BENEFIT) FOR INCOME TAXES.......... 2,127 424 (682) (519) (817)
------- ------- ------- ------ -------
Income (loss) before extraordinary
item.............................. (6,457) 718 (2,268) 3,433 2,134
EXTRAORDINARY ITEM, net of income taxes....... -- -- -- -- 128
------- ------- ------- ------ -------
Net income (loss)........................ $(6,457) $ 718 $(2,268) $3,433 $ 2,262
======= ======= ======= ====== =======
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before extraordinary item..... $ (0.21) $ 0.09 $ (0.26) $ 0.43 $ 0.36
Extraordinary item.......................... -- -- -- -- 0.02
------- ------- ------- ------ -------
Net income (loss)................... $ (0.21) $ 0.09 $ (0.26) $ 0.43 $ 0.38
======= ======= ======= ====== =======
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item..... $ (0.21) $ 0.08 $ (0.26) $ 0.39 $ 0.33
Extraordinary item.......................... -- -- -- -- 0.02
------- ------- ------- ------ -------
Net income (loss)................... $ (0.21) $ 0.08 $ (0.26) $ 0.39 $ 0.35
======= ======= ======= ====== =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic.................................... 31,198 7,677 8,581 8,076 5,988
Diluted.................................. 31,198 8,714 8,581 8,715 6,375
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-5
32
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
----------------- ADDITIONAL
PAR PAID-IN ACCUMULATED TREASURY
SHARES VALUE CAPITAL DEFICIT STOCK TOTAL
--------- ----- ---------- ----------- -------- -------
BALANCE, August 31, 1995.............................. 5,794 $ 58 $ 7,381 $ (9,195) $ -- $(1,756)
Sale of common stock, net........................... 368 4 41 -- -- 45
Issuance of warrants................................ -- -- 97 -- -- 97
Conversion of debt.................................. 2,071 21 2,568 -- -- 2,589
Net income.......................................... -- -- -- 2,262 -- 2,262
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1996.............................. 8,233 83 10,087 (6,933) -- 3,237
Sale of common stock, net........................... 20 -- 21 -- -- 21
Purchase of treasury stock.......................... -- -- -- -- (1,438) (1,438)
Net income.......................................... -- -- -- 3,433 -- 3,433
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1997.............................. 8,253 83 10,108 (3,500) (1,438) 5,253
Sale of common stock, net........................... 13,059 131 9,236 -- -- 9,367
Common stock issued in acquisitions................. 642 6 494 -- -- 500
Purchase of treasury stock.......................... -- -- -- -- (178) (178)
Compensation expense under stock option plan........ -- -- 76 -- -- 76
Net loss............................................ -- -- -- (2,268) -- (2,268)
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1998.............................. 21,954 220 19,914 (5,768) (1,616) 12,750
Sale of common stock, net........................... 6,442 64 21,277 -- -- 21,341
Common stock issued in acquisitions (unaudited)..... 6,186 62 22,918 -- -- 22,980
Compensation expense under stock option plan
(unaudited)....................................... -- -- 1,373 -- -- 1,373
Net loss (unaudited)................................ -- -- -- (6,457) -- (6,457)
------ ---- ------- -------- ------- -------
BALANCE, February 28, 1999 (unaudited)................ 34,582 $346 $65,482 $(12,225) $(1,616) $51,987
====== ==== ======= ======== ======= =======
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-6
33
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
----------------- ---------------------------------
1999 1998 1998 1997 1996
------- ------- ------------- ------- -------
(UNAUDITED)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,457) $ 718 $(2,268) $ 3,433 $ 2,262
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Extraordinary gain from forgiveness of debt............. -- -- -- -- (128)
Deferred income tax expense (benefit)................... 25 364 (682) (637) (863)
Depreciation and amortization........................... 1,078 120 882 261 488
Compensation expense under stock option plan............ 1,373 -- 76 -- --
Provision for doubtful accounts......................... 76 86 127 170 210
Changes in operating assets and liabilities:
Accounts receivable................................... (3,868) (1,279) (115) (323) (647)
Inventories........................................... 219 -- -- -- --
Prepaid and other current assets...................... 213 (254) (649) 14 (23)
Other assets.......................................... 1,908 31 262 84 --
Accounts payable...................................... 1,985 1,921 582 (159) 378
Accrued expenses...................................... 2,920 (40) 644 249 165
Other long-term liabilities........................... 43 7 -- (1) (6)
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities........................................ (485) 1,674 (1,141) 3,091 1,836
------- ------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,359) (1,171) (1,382) (844) (190)
Collection of amounts due from former owners of subsidiary
acquired................................................ 1,300 -- -- -- --
Advance to company subsequently acquired.................. (113) -- -- -- --
Payments for acquisitions, net of cash acquired........... (25,638) -- (1,500) -- --
Investment in common stock................................ -- (100) (100) -- 500
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities........................................ (25,810) (1,271) (2,982) (844) 310
------- ------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 2,500 -- 2,500
Proceeds from issuance of common stock, net............... 25,523 12 5,184 21 45
Purchase of treasury stock................................ -- (178) (178) (1,438) --
Payments on long-term debt................................ (1,304) -- (482) (333) (2,959)
Payment of commitment fee on credit facility.............. (304) -- (20) -- --
Proceeds from credit facility............................. 16,900 -- -- -- --
Payment of credit facility................................ (16,900) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities........................................ 23,915 (166) 7,004 (1,750) (414)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (2,380) 237 2,881 497 1,732
CASH AND CASH EQUIVALENTS, beginning of period.............. 7,148 4,267 4,267 3,770 2,038
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 4,768 $ 4,504 $ 7,148 $ 4,267 $ 3,770
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 74 $ -- $ 53 $ 1 $ 317
======= ======= ======= ======= =======
Cash paid during the period for income taxes............ $ 320 $ 60 $ 82 $ 52 $ --
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES
Issuance of common stock for acquisitions............... $22,980 $ -- $ 437 $ -- $ --
======= ======= ======= ======= =======
Subscription receivable................................. $ 4,183 $ -- $(4,183) $ -- $ --
======= ======= ======= ======= =======
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-7
34
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED FEBRUARY 28, 1999 ARE UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gerald Stevens, Inc. ("Gerald Stevens") formerly Florafax International,
Inc., a Delaware corporation, has historically been engaged in the
flowers-by-wire business of generating floral orders and providing floral order
placement services to retail florists throughout the United States and credit
and charge card processing for third parties.
On April 30, 1999, Gerald Stevens completed a merger with Gerald Stevens
Retail, Inc. ("Gerald Stevens Retail") which was formerly known as Gerald
Stevens, Inc. Gerald Stevens Retail was formed on May 7, 1998 and through
September 30, 1998 was in the development stage, had no revenue and all of its
efforts were directed to developing a business strategy, raising capital and
acquiring leading retail flower shops and other floral related businesses. On
October 1, 1998, Gerald Stevens Retail commenced its operations upon the
completion of its acquisition of ten operating flower businesses and, as a
result, emerged from the development stage. Under the terms of the merger
agreement, based on an exchange formula, Gerald Stevens issued 28.1 million
shares of its common stock for all of Gerald Stevens Retail's common stock
outstanding. The merger was accounted for under the pooling of interests method
of accounting. The accompanying Supplemental Consolidated Financial Statements
give retroactive effect to the merger. Gerald Stevens' fiscal year end is August
31.
Details of the results of operations of Gerald Stevens and Gerald Stevens
Retail for the periods before the pooling of interest combination was
consummated are as follows:
1998
-------
Revenue:
Gerald Stevens, as previously reported.................... $13,391
Gerald Stevens Retail..................................... --
-------
$13,391
=======
Net loss:
Gerald Stevens, as previously reported.................... $ (623)
Gerald Stevens Retail..................................... (1,645)
-------
$(2,268)
=======
Interim Financial Statements
In the opinion of management, the accompanying unaudited interim
supplemental consolidated financial statements of Gerald Stevens contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Gerald Stevens as of February 28, 1999,
and the results of its operations and its cash flows for the six months ended
February 28, 1999 and 1998. The results of operations and cash flows for the six
months ended February 28, 1999 are not necessarily indicative of the results of
operations or cash flows which may be reported for fiscal year 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of Gerald
Stevens and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
F-8
35
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
Gerald Stevens considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of August
31, 1998 and 1997, cash and cash equivalents included $6,870 and $3,865,
respectively, of interest bearing cash. Also included in cash and cash
equivalents as of August 31, 1998 and 1997, are $106 and $97, respectively, of
restricted cash relating to Gerald Stevens' credit card processing agreement
with its sponsoring bank.
Revenue Recognition
Gerald Stevens' revenue consists of product sales and service and other
revenues. Product sales revenue are recognized at the time of delivery
acceptance of products by the customer. Service and other revenue consists of
floral order processing, member dues and fees, directory and advertising fees
and charge card processing.
Floral Order Processing -- Floral order processing revenues consist of
orders placed through Gerald Stevens' order center, which are recorded at the
time the order is placed which coincides with delivery, and orders sent between
Gerald Stevens' member florists, which are recorded upon receipt of the
reporting document, prepared by the delivering florist, that confirms delivery.
Member dues and fees and directory and advertising fees -- At the time a
florist applies for membership they are billed a non-refundable account set up
fee. The account set up fee is ninety-nine dollars, and is recognized as revenue
at the time the florist is accepted as a member to offset costs incurred. Once a
florist has been accepted as a member, they are billed dues and advertising fees
on a monthly basis, and those billings are recognized as income at that time.
Monthly dues and advertising fees are billed at different rates and amounts,
depending on the location of the florist and the size of the advertisement
placed by the florist. The benefits of membership include the ability to send
and receive orders to and from other members, receive orders generated by Gerald
Stevens via fax or telephone, the ability to send gift baskets anywhere in the
country, and certain other benefits. A florist may cancel their membership at
any time, but are responsible for monthly dues and advertising fees as long as
they remain in the membership directory. Billings for directories occur twice
per year, while the actual directories are produced and distributed several
times per year. Directory revenues are deferred until the directories are
distributed to member florists.
Charge card processing -- Charge card processing revenue represents fees
for processing credit card transactions for members and others. Revenues are
recognized when the service is provided.
Inventory
Inventory is valued at lower of cost or market, with cost determined on a
first-in, first-out basis.
Seasonality
Sales of floral products have historically been seasonal, concentrated
primarily in the first and second calendar quarters as a result of holidays such
as Valentine's Day and Mother's Day. In particular, a significant portion of
annual revenue is expected to be derived from sales of floral products for
Valentine's Day.
In contrast to the first and second calendar quarters, sales of floral
products are significantly lower in the third and fourth calendar quarters.
These quarters have relatively few flower-giving holidays. Management expects to
experience quarterly fluctuations in operating results due to the factors
discussed above and other factors. These factors include additional selling,
general and administrative expenses to acquire and support new business and the
timing and magnitude of capital expenditures.
F-9
36
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Concentration of Credit Risk
A significant portion of Gerald Stevens' accounts receivable is
concentrated in the floral wire service industry. Credit risk is inherent in the
floral wire service industry. Consequently, to reduce this risk Gerald Stevens
reviews new member applications for credit worthiness. If a florist applying for
membership does not meet certain credit standards the florists application for
membership is usually declined. Once a florist has been accepted as a member,
the account is monitored by accounts receivable analysts who maintain continuous
direct contact with the florist. If the account becomes delinquent, the florist
is turned over to a collection agency to begin immediate collection procedures.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Gerald Stevens records depreciation and amortization using the straight-line
method over the following estimated useful lives:
DESCRIPTION ESTIMATED USEFUL LIVES
- ----------- ----------------------
Building and leasehold improvements......................... 3 to 30 years
Furniture, fixtures and equipment........................... 2 to 10 years
Computer hardware and software.............................. 3 to 10 years
Communication systems....................................... 2 to 5 years
Vehicles.................................................... 3 years
Intangible Assets
Intangible assets, net consists of the following:
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- ------
Goodwill............................................. $45,253 $ 1,995 $1,995
Letters of intent.................................... -- 1,520 --
Other................................................ 250 616 311
------- ------- ------
45,503 4,131 2,306
Less: Accumulated amortization....................... (491) (340) (216)
------- ------- ------
$45,012 $ 3,791 $2,090
======= ======= ======
Goodwill consists of the excess of purchase price over the fair value of
assets and liabilities acquired in acquisitions accounted for under the purchase
method of accounting. Included in goodwill for all periods is $1,995 from an
acquisition prior to October 31, 1970 which is not required to be amortized.
Amortizable goodwill is amortized over periods ranging from 20 to 40
years, which management believes is a reasonable life in light of the
characteristics present in the floral industry such as the significant number of
years that the industry has been in existence, the continued trends by consumers
in purchasing flowers for many different occasions, and the stable nature of the
customer base. Amortization of goodwill for the six months ended February 28,
1999 is $395. There was no goodwill amortization in prior periods presented.
Letters of intent represents fair value allocated to letters of intent of
an acquired business (see Note 2). Upon completion of the acquisitions, the
value assigned to the underlying letters of intent was included as a component
of the purchase price for the acquired business.
F-10
37
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of, Gerald Stevens periodically analyzes the carrying value of its
goodwill and other long-lived assets for indicators of impairment, using an
undiscounted projected cash flow approach. If such cash flows indicate an
impairment is present, Gerald Stevens makes adjustments to the carrying value of
long-lived assets based upon appraisals, discounted cash flows, or otherwise as
Gerald Stevens considers appropriate. After reviewing the results and
considering other qualitative factors, management is of the opinion that the
carrying amount of goodwill has not been impaired.
Deferred Financing Costs
Included in other assets in the accompanying supplemental consolidated
balance sheets are deferred financing costs of $304 (unaudited), $20 and $0, as
of February 28, 1999, August 31, 1998 and 1997, respectively, related to amounts
incurred in connection with obtaining a credit facility. Gerald Stevens began
recording amortization in September 1998 on a straight-line basis over the term
of the financing agreement (18 months). Accumulated amortization as of February
28, 1999 was $86.
Income Taxes
Gerald Stevens accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes. SFAS No. 109 requires the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recorded in income in the
period that includes the enactment date.
Earnings Per Share
Basic and diluted earnings per share in the accompanying supplemental
consolidated statements of operations are based upon the weighted average shares
outstanding during the applicable period. The impact of common stock equivalents
has not been included for loss periods, as they are anti-dilutive, in accordance
with the provisions of SFAS No. 128, Earnings Per Share. The components of
diluted earnings per share are as follows:
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
-------------- ---------------------
1999 1998 1998 1997 1996
------ ----- ----- ----- -----
(IN THOUSANDS)
Basic Average Shares Outstanding........................ 31,198 7,677 8,581 8,076 5,988
Common Stock Equivalents................................ -- 1,037 -- 639 387
------ ----- ----- ----- -----
Diluted Average Shares Outstanding...................... 31,198 8,714 8,581 8,715 6,375
====== ===== ===== ===== =====
Common stock equivalents not included in the calculation
of diluted earnings per share because their impact is
antidulutive.......................................... 2,542 80 1,563 305 --
====== ===== ===== ===== =====
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the
F-11
38
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Impact of Recently Issued Accounting Standards
Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for
years ending after December 15, 1997. As a result, Gerald Stevens was required
to change the method used to compute earnings per share and to restate all prior
periods. Under the new requirements, primary earnings per share is replaced with
basic earnings per share which excludes the dilutive effect of stock options and
other common stock equivalents.
Comprehensive Income -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. The Statement requires that total comprehensive
income and comprehensive income per share be disclosed with equal prominence as
net income and earnings per share. Comprehensive income is defined as all
changes in stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends. The statement is effective for fiscal years
beginning after December 15, 1997, and accordingly will apply to Gerald Stevens'
fiscal year ended August 31, 1999.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14.
The Statement uses a management approach to report financial and descriptive
information about a company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ended August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption to include retail operations.
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. Gerald Stevens believes that this statement will not have a
material effect on Gerald Stevens' accounting for computer software development
or acquisition.
SOP 98-5, Reporting on the Costs of Start-Up Activities, requires the
immediate expensing of start-up costs as well as existing costs previously
capitalized for fiscal years beginning after December 15, 1998. Gerald Stevens
has no capitalized start-up costs as of February 28, 1999 or August 31, 1998.
Stock-Based Compensation
As allowed by SFAS No. 123 Accounting for Stock-Based Compensation, Gerald
Stevens accounts for stock-based compensation to employees in accordance with
APB No. 25, Accounting for Stock Issued to Employees, and, in cases where fixed
plan exercise prices equal or exceed fair market value, recognizes no
compensation expense for the stock option grants.
In cases where exercise prices are less than fair value, compensation is
recognized over the period of performance or the vesting period or, in cases of
the variable plan, compensation expense is recognized at the time when both
exercise price and the number of shares are determinable.
F-12
39
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Costs
Advertising costs associated with the cost of coupons included in corporate
partner advertising campaigns are expensed upon first showing. Advertising
expense amounted to $1,350, $881 and $741 in fiscal 1998, 1997 and 1996,
respectively.
2. ACQUISITIONS
On July 31, 1998, Gerald Stevens acquired all of the assets of
International Floral Network, Inc. ("IFN"), a Florida corporation, for $1,500 in
cash and 641,997 shares of common stock valued at $500 or $0.78 per share. IFN's
assets consisted solely of the right to acquire 33 retail floral chains pursuant
to non-binding letters of intent with these chains. Gerald Stevens allocated the
aggregate consideration of approximately $2 million to the nine letters of
intent it intended to pursue. Prior to yearend, Gerald Stevens ceased
discussions with one of these entities at which time the unamortized allocated
portion of the consideration of $480 was charged to amortization expense. Eight
of these retail floral chains were subsequently acquired by Gerald Stevens in
transactions accounted for under the purchase method of accounting in October
1998. Intangible assets as of February 28, 1999 includes $1,520 related to the
IFN transaction.
During the six months ended February 28, 1999, Gerald Stevens acquired
several businesses. The acquisitions were accounted for under the purchase
method of accounting and accordingly the post-acquisition results of operations
of the acquired businesses have been included in Gerald Stevens' results of
operations for the six months ended February 28, 1999.
The following table sets forth businesses acquired during the six months
ended February 28, 1999 and the consideration paid. Consideration for these
acquisitions consisted of cash, stock, and debt paid on behalf of former owners.
The total consideration amounts below reflect certain working capital
adjustments called for in the acquisition agreements.
PURCHASE PRICE
DATE OF TOTAL ----------------- NUMBER OF SHARE
NAME OF BUSINESS ACQUISITION CONSIDERATION CASH STOCK SHARES PRICE
---------------- ----------- ------------- ------- ------- --------- -----
(IN THOUSANDS)
Eastern Floral & Gift Shop, Inc..................... 10/01/98 $ 2,924 $ 2,924 $ -- -- $ --
The Norton Group, Inc............................... 10/01/98 1,566 548 1,018 289 3.52
Arizona Wholesale Floral Company, (d/b/a Cactus
Flowers).......................................... 10/01/98 3,000 1,800 1,200 341 3.52
Dr. Delphinium Designs, Inc......................... 10/01/98 3,103 880 2,223 632 3.52
Boesen the Florist, Inc............................. 10/01/98 5,150 2,485 2,665 757 3.52
J.J. Fallon Company, Inc............................ 10/01/98 1,917 1,117 800 227 3.52
Martina's Inc....................................... 10/01/98 1,948 1,168 780 222 3.52
Flower Franchising, Inc. (d/b/a Royer's Flower
Shops)............................................ 10/01/98 11,158 6,334 4,824 1,371 3.52
AGA Flowers, Inc.................................... 10/01/98 2,935 1,468 1,467 417 3.52
Jennie's Flower Shop, Inc........................... 12/07/98 3,575 2,000 1,575 354 4.44
Maple Lee Flowers, Inc. and Maple Lee Farm "n"
Garden Center, Ltd................................ 10/01/98 4,698 2,539 2,159 614 3.52
Other acquisitions.................................. Various 8,097 3,828 4,269 961 4.44
------- ------- ------- ------
$50,071 $27,091 $22,980 6,185
======= ======= ======= ======
The preliminary purchase price allocation for businesses acquired under the
purchase method of accounting is as follows:
Assets...................................................... $15,804
Intangible assets........................................... 41,519
Liabilities................................................. (7,252)
-------
$50,071
=======
F-13
40
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of two of Gerald Stevens' purchase agreements, Gerald Stevens may
be required to make additional payments to the sellers of up to $580.
The pro forma results of operations, assuming each of the significant
acquisitions described above was consummated as of the beginning of the period
presented are as follows:
FOR THE
SIX MONTHS
PERIOD ENDED
FEBRUARY 28, 1999
-----------------
Revenue..................................................... $45,170
=======
Net loss.................................................... $(2,884)
=======
Net loss per share:
Basic..................................................... $ (0.09)
=======
Diluted................................................... $ (0.09)
=======
Gerald Stevens is a party to various letters of intent, subject to certain
customary conditions, to acquire various retail flower shops. To the extent
consummated, these pending acquisitions will be accounted for under the purchase
method of accounting.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Gerald Stevens in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate their fair values.
Accounts receivable and accounts payable: The carrying amounts
reported in the balance sheet for accounts receivable and accounts payable
approximate their fair value.
Long-term debt: The fair values of Gerald Stevens' long-term debt are
estimated using discounted cash flow analyses based on Gerald Stevens'
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts reported in the balance sheet for
long-term debt approximate their fair value.
4. LONG-TERM DEBT
At August 31, 1998, long-term debt included a bank line of credit in the
amount of $2,018 with interest payable monthly at the prime rate of the lending
institution, currently 8 1/2%, collateralized by substantially all assets of
Gerald Stevens. Under the terms of the note, Gerald Stevens may borrow up to
$5,000 until February 16, 2000. No principal payments are due until February 16,
2000, at which time any principal amounts outstanding at the end of this period
will convert to a 36-month fully amortizing loan based on level principal
payments plus interest. At August 31, 1998, approximately $2,982 is available
for future borrowings under the bank line of credit.
At August 31, 1998 and 1997, long-term debt included a 5% subordinate
debenture in the amount of $80, maturing on December 27, 1998 with interest
payable annually on December 31.
Gerald Stevens entered into an 18-month senior secured revolving credit
facility (the "Credit Facility") with a bank on September 30, 1998 with
borrowings up to $20,000 and which includes a letter of credit facility of up to
$3,000 for the issuance of standby letters of credit. This line of credit is
used to finance acquisitions and for other, general corporate purposes. Cash
borrowings bear interest at either the Eurodollar market rate
F-14
41
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plus a percentage ranging from 100 basis points to 225 basis points (Eurodollar
at February 28, 1999 was 5%) or, at Gerald Stevens' option, the greater of the
Federal funds rate plus 50 basis points or the Prime rate ("adjusted base rate
loan"). The Federal funds rate and Prime rate were 4.88% and 7.75%,
respectively, at February 28, 1999. The percentage over the Eurodollar market
rate is based on Gerald Stevens' financial performance as measured by a total
funded debt ratio (as defined in the Credit Facility).
For Eurodollar-based loans, principal and interest payments are due at the
end of the chosen Eurodollar instrument term, or if the applicable period is
greater than three months, then interest is due at the end of each three-month
interval and at the end of the applicable period. For adjusted base rate loans,
the interest is due quarterly and the principal is due upon demand.
The Credit Facility is secured by all of the assets of Gerald Stevens,
including a pledge of the stock of each of Gerald Stevens' subsidiaries. As of
February 28, 1999, no amount was outstanding on the Credit Facility. In
addition, the Credit Facility agreement provides for an unused facility fee
ranging from 25 basis points to 50 basis points on an annual basis depending on
the extent of Gerald Stevens' ratio of total funded debt (as defined in the
Credit Facility).
Restrictive covenants contained in Gerald Stevens' Credit Facility may
limit Gerald Stevens' ability to finance future acquisitions, new locations and
other expansion of operations. These covenants require Gerald Stevens to achieve
specific financial ratios and may require Gerald Stevens to obtain bank consent
prior to completing acquisitions.
In connection with the attainment of the Credit Facility, Gerald Stevens
agreed to pay a $250 underwriting fee, $20 of which was paid in September 1998
and the remaining balance was paid in October 1998.
In October 1998, Gerald Stevens borrowed $16,000 on the Credit Facility to
fund the cash portion of the purchase price for acquisitions. These amounts were
subsequently repaid in October 1998 with proceeds from the private placement.
In February 1999, Gerald Stevens and its primary lender amended the Credit
Facility to increase it from $20,000 to $40,000. In June 1999, in connection
with a planned syndication and further increase in the size of the Credit
Facility, Gerald Stevens and its primary lender agreed to amend and restate
certain Credit Facility terms and conditions, including among other things,
increasing the term of the Credit Facility to 36 months.
Scheduled maturities of long-term debt at August 31, 1998 for each of the
next five years are as follows:
1999........................................................ $ 80
2000........................................................ 336
2001........................................................ 673
2002........................................................ 673
2003........................................................ 336
------
2,098
Current portion............................................. (80)
------
$2,018
======
F-15
42
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- -------
Land, building and leasehold improvements............... $ 6,337 $ 1,282 $ 524
Furniture, fixtures and equipment....................... 1,858 1,621 1,324
Computer hardware and software.......................... 1,196 1,015 798
Communication systems................................... 1,305 1,121 1,010
Vehicles................................................ 383 -- --
------- ------- -------
11,079 5,039 3,656
------- ------- -------
Accumulated depreciation and amortization............... (4,146) (2,993) (2,713)
------- ------- -------
$ 6,933 $ 2,046 $ 943
======= ======= =======
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- -------
Member benefits......................................... $ 118 $ 116 $ 147
Credit card fees........................................ 532 440 359
Professional fees....................................... 3,173 330 --
Salaries and benefits 1,057 144 61
Other................................................... 3,044 1,069 888
------- ------- -------
$ 7,924 $ 2,099 $ 1,455
======= ======= =======
6. LEASES
Noncancellable lease obligations of Gerald Stevens at August 31, 1998 call
for minimum annual lease payments under various operating leases for buildings
and equipment are as follows:
1999........................................................ $135
2000........................................................ 109
2001........................................................ 104
2002........................................................ 85
2003........................................................ 2
----
$435
====
Total rental expense for fiscal years 1998, 1997 and 1996, which includes
other than non cancelable agreements, was $164, $261 and $245, respectively.
Until January 1998 Gerald Stevens' building lease for its Vero Beach location
(annual rental $33 plus sales tax) was with a relative of the Chairman of the
Board of Directors. In January 1998, the company purchased this property (see
Note 11).
F-16
43
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SETTLEMENT OF LITIGATION
During 1990, Gerald Stevens filed a lawsuit against GTE Market Resources,
Inc. (GTE/MR) for failure on the part of GTE/MR to fulfill certain contractual
telecommunication services on behalf of Gerald Stevens. On November 23, 1993, a
jury awarded Gerald Stevens $1,481. GTE/MR appealed the case. In 1997 the
Oklahoma Supreme Court upheld the decision of the trial court, and ruled in
favor of Gerald Stevens. Gerald Stevens recognized a pretax gain, net of related
legal fees, of $1,041 resulting from the award, which is included in other
income in the accompanying supplemental consolidated statement of income for
fiscal 1997.
8. STOCKHOLDERS' EQUITY
On January 28, 1997 the stockholders approved an increase in the number of
shares of authorized common stock from 18,000,000 to 70,000,000. On April 30,
1999, the stockholders approved an increase in the number of shares of
authorized common stock from 70,000,000 to 250,000,000.
In August 1998, Gerald Stevens sold 10,975,814 shares of common stock for
an aggregate purchase price of $7,866 or $0.72 per share.
In August 1998, certain of Gerald Stevens' employees and certain other
investors purchased 1,887,476 shares of stock for an aggregate purchase price of
$1,472 or $0.78 per share.
All of the stockholders who were issued shares of Gerald Stevens' common
stock in August 1998 have entered into stockholders agreements that provide
Gerald Stevens with a right of first refusal for any sales of common stock
governed by such stockholder agreement in excess of $500,000 by such
stockholders until October 1, 2000.
In October 1998, Gerald Stevens issued 6,217,537 shares of common stock at
a price of $3.52 per share in a private placement. Proceeds totaled
approximately $21,066 net of $894 of underwriting fees and expenses. Individuals
who purchased shares in the private placement had agreed to give Gerald Stevens
a right of first refusal, prior to transferring such shares, until Gerald
Stevens became a public company on April 30, 1999.
9. STOCK OPTIONS AND WARRANTS
On October 26, 1995, the Board of Directors approved a Nonemployee
Directors' Stock Option Plan ("Director Plan"). On January 30, 1996, the
stockholders of Gerald Stevens approved the Director Plan. Under the terms of
the Director Plan each nonemployee director shall be granted an option to
purchase 20,000 shares at fair market value as of the date the Director is
elected as a Board member. After the initial grant to the directors, each
director shall be granted additional options to purchase 20,000 shares upon each
respective re-election to the Board of Directors. At August 31, 1998, 500,000
shares of Gerald Stevens' common stock were authorized under the Director Plan
and options covering 260,000 shares have been granted which expire on various
due dates through January 30, 2008. As of August 31, 1998, none of the options
have been exercised.
On October 26, 1995, the Board of Directors approved a Management Incentive
Stock Plan ("Management Plan"). On January 30, 1996, the stockholders of Gerald
Stevens approved the Management Plan. Under the terms of the Management Plan,
the Board of Directors, at their discretion, may grant options to purchase
common shares of Gerald Stevens to various employees of Gerald Stevens. The
maximum number of options which may be granted under the Management Plan is
1,000,000. As of August 31, 1998, options covering 355,000 shares have been
granted which expire on various dates through November 13, 2006. Options
exercised under this plan during 1998 and 1997 were 11,000 and 1,000,
respectively.
F-17
44
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options granted to employees under the Management Plan vest 25% upon
issuance with additional vesting of 25% after each year of continuous
employment. As of August 31, 1998 and 1997, options exercisable under the
Management Plan totaled 199,000 and 119,000, respectively.
On November 16, 1996 the Board of Directors granted options to purchase
50,000 shares of common stock at fair market value to a Board member. These
options vested 25% upon issuance with additional vesting of 25% each year. As of
August 31, 1998, none of these options have been exercised.
On June 25, 1997, the Board of Directors granted options for the purchase
of 305,000 shares of common stock at fair market value to officers and key
employees of Gerald Stevens at an exercise price of $4 per share. These options
vest in 25% increments when the market price of Gerald Stevens' common stock
reaches $5.00, $7.50, $10.00 and $12.50 per share, respectively, for twenty
consecutive trading days. Unexercised vested options expire in 2006. The portion
of unvested options, if any, expire in the year 2002. Compensation expense for
these variable plan options is recorded when the option vests, at the amount
that the targeted market price exceeds the exercise price. As of August 31,
1998, 76,000 of these shares had vested and were exercisable (none at August 31,
1997). Compensation expense of $76 was recorded for the year ended August 31,
1998 (none at August 31, 1997). During the six months ended February 28, 1999,
the remainder of the 305,000 options became vested and Gerald Stevens recorded
compensation expense of $1,373.
In connection with the issuance of a previous financing, Gerald Stevens
issued warrants to purchase 650,000 shares of common stock of Gerald Stevens
with an exercise price of $1.00 per share. During fiscal year 1997, 19,000
warrants were exercised for total proceeds of $19. During fiscal year 1998,
219,000 warrants were exercised in a cashless exercise, as allowed in the
warrant agreement for 176,000 shares of common stock. Additionally, 9,000
warrants were exercised for total proceeds of $9. At August 31, 1998, Gerald
Stevens had 403,000 warrants outstanding, all of which are currently
exercisable. All of these warrants expire on January 1, 2001. During the six
month period ended February 28, 1999, 163,137 warrants were exercised for total
proceeds of $163.
Gerald Stevens also approved a stock option plan (the "New Plan") on May
20, 1998, authorizing the issuance of stock options for up to 5,400,000 shares
of common stock. The number of shares of stock issuable pursuant to the options
outstanding (whether vested or not) cannot exceed 10 percent of the outstanding
shares of stock.
The purchase price of each share of common stock subject to an option is
determined by the Board of Directors and stated in each option agreement, and
will not be less than 100% of the fair market value of a share of the common
stock on the date the option is granted. The options have a term of ten years
from the date of grant and are non-qualified. The options vest in increments of
25% per year over a four-year period on the yearly anniversary of the grant
date.
Under the New Plan, in August 1998, 202,500 options were granted with an
exercise price of the then fair market value of $0.72. From September 1, 1998 to
February 28, 1999, a total of 1,206,726 options were granted at fair market
value exercise prices ranging from $3.52 to $6.30, with 3,307 of these options
subsequently cancelled during the period. As of February 28, 1999, none of the
options granted were exercisable. The weighted average remaining contractual
life of these options as of February 28, 1999 and August 31, 1998 is
approximately 9.5 and 10 years, respectively.
The occurrence of certain events may terminate the unvested options,
including, but not limited to, termination of employment, as defined in the New
Plan.
Pursuant to the New Plan, in the event of certain defined transactions
after the effective date of the New Plan, the number and kinds of shares for the
purchase of which options may be granted under the New Plan will be adjusted
proportionately by Gerald Stevens. In addition, the number and kind of shares
for which
F-18
45
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options are outstanding shall be adjusted proportionately so that the
proportionate interest of the holder of the option immediately following such
event will be the same as immediately prior to such event.
Information regarding stock options for fiscal years 1998 and 1997 is as
follows:
WEIGHTED
EXERCISE PRICE TOTAL AVERAGE
NUMBER OF RANGE PER EXERCISE EXERCISE
SHARES SHARE PRICE PRICE
--------- -------------- -------- --------
Shares under option at August 31,
1998..................................... 1,159,500 $0.72 to $5.88 $3,136 $2.71
1997..................................... 888,000 $1.41 to $4.00 $2,529 $2.85
Options granted during year ended
August 31,
1998..................................... 282,500 $0.72 to $5.88 $ 628 $2.22
1997..................................... 668,000 $2.66 to $4.00 $2,204 $3.30
Options exercised during year ended
August 31,
1998..................................... 11,000 $1.41 to $2.66 $ 20 $1.82
1997..................................... 1,000 $1.41 $ 1 $1.41
Options expired or canceled during year
ended August 31,
1998..................................... 1,000 $1.41 $ 1 $1.41
1997..................................... -- -- $ -- $ --
Options exercisable at August 31, 1998..... 560,000 $1.41 to $5.88 $1,651 $2.95
Shares reserved at August 31, 1998 for:
Director stock option plan............... 500,000
Management stock option plan............. 988,000
New stock option plan.................... 5,400,000
---------
6,888,000
=========
During the six month period ended February 28, 1999, 61,250 options were
exercised for total proceeds of $112.
In October 1995, the FASB issued SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation (SFAS No. 123), which encourages but does not require
companies to recognize compensation expense for stock awards based on their fair
value at the date of grant.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if Gerald Stevens had accounted for its employee stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998 and 1997: risk free interest rates from 4.7% to 6.0%;
dividend yield of zero; volatility factors of the expected market price of
Gerald Stevens' common stock based on historical trends; and weighted-average
expected lives of the options from four to ten years.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because Gerald Stevens' employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
F-19
46
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Gerald
Stevens' pro forma information is as follows:
1998 1997 1996
------- ------ ------
Pro forma net income (loss)..................... $(2,766) $3,016 $1,955
Pro forma earnings (loss) per share:
Basic......................................... $ (0.32) $ 0.37 $ 0.33
Diluted....................................... (0.32) 0.35 0.31
Weighted average shares:
Basic......................................... 8,581 8,076 5,988
Diluted....................................... 8,581 8,715 6,375
10. INCOME TAXES
The components of the income tax provision (benefit) as of August 31, 1998,
1997 and 1996 are as follows:
1998 1997 1996
----- ----- -----
Current income taxes....................................... $ -- $ 118 $ 46
Deferred income taxes...................................... (682) (637) (863)
----- ----- -----
Income tax provision....................................... $(682) $(519) $(817)
===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Gerald Stevens' net deferred income taxes as of August 31, 1998 and 1997 are as
follows:
1998 1997
------- -------
Allowances for bad debts.................................... $ 182 $ 191
Accrued liabilities and other............................... 110 73
Depreciation and amortization............................... 180 216
Net operating losses........................................ 1,070 1,110
General business credits.................................... 232 456
Basis difference in intangible assets....................... 1,432 --
------- -------
3,206 2,046
Valuation allowance......................................... (1,024) (546)
------- -------
Total deferred taxes.............................. $ 2,182 $ 1,500
======= =======
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. At
August 31, 1998, the remaining valuation allowance of $1,024 consists of $430
for net operating losses and $439 of basis differences in assets that do not
meet the requirements for recognition as an asset, as well as tax credits in the
amount of $155 that are not expected to be realized. This represents a change in
the valuation allowance for the current year of $478 as compared to change of
$1,606 in the prior year.
F-20
47
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of August 31, 1998, Gerald Stevens has available net operating loss
carryforwards of $2,843, which expire as follows:
EXPIRATION DATE AMOUNT
- --------------- ------
2007...................................................... $ 252
2008...................................................... 1,625
2009...................................................... 486
2018...................................................... 480
------
$2,843
======
SFAS 109 requires deferred tax assets related to net operating loss
carryforwards to be allocated between current and noncurrent based upon the
reversal date of the temporary differences. It was anticipated that $2,060 of
the net operating losses would be used to offset income in 1999, therefore $775
of the deferred tax assets relating to carryforwards were classified as current
and the balance as noncurrent as of August 31, 1998.
11. RELATED PARTY TRANSACTIONS
During 1998, Gerald Stevens purchased the land and buildings used for its
Vero Beach operations for approximately $673. The transaction was financed with
cash from operations. The property was previously leased from a trust
administered by a relative of the Chairman of the Board. See Note 12 for
information regarding a service agreement with a related party.
12. COMMITMENTS AND CONTINGENCIES
Employment Agreements
Gerald Stevens has entered into employment agreements with certain of its
officers and executives. The agreements expire on dates ranging until 2000 and
also include non-compete provisions. The aggregate minimum annual payments under
these agreements are $2,491 and $1,945 for the years ended December 31, 1999 and
2000, respectively.
Key employees of each of the acquired companies have agreed to enter into
2-year employment agreements with Gerald Stevens effective as of the closing
date of each respective acquisition. The annual salaries range from $20 to $150.
In addition, some of the employment agreements provide for the employee to
receive a bonus beginning in Gerald Stevens' 1999 calendar year of up to 20% of
the base salary depending on certain performance targets. The employment
agreements can be terminated earlier by either the employee or Gerald Stevens.
The employment agreements include non-compete clauses of up to two years after
the employment period. In addition, the former owners of each of the acquired
companies have agreed to non-compete agreements, effective as of the closing of
the acquisition, ranging from 2 to 5 years.
Services Agreement
On May 7, 1998, Gerald Stevens entered into a services agreement with SB
Management Corp. ("SBMC"), a corporation controlled by Mr. Steven R. Berrard,
that provides services to the general partner of New River pursuant to which
SBMC agreed to provide certain management services to and incur certain expenses
on behalf of Gerald Stevens, with the cost of such items to be reimbursed by
Gerald Stevens to SBMC. Gerald Stevens is to reimburse SBMC for a proportionate
share of any SBMC officer's salary, bonuses, and compensation if that employee
spends more than 50% of his time rendering services to Gerald Stevens, not to
exceed $200. One hundred percent of all out-of-pocket costs and fees paid to
advisors in connection with services to Gerald Stevens are to be reimbursed in
an amount not to exceed $500 prior to the
F-21
48
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
initial private placement of capital stock. After the initial private placement
of capital stock, there is no limit on the amount charged to Gerald Stevens for
out-of-pocket costs and fees paid to advisors. The agreement may be terminated
at any time by Gerald Stevens or SBMC upon thirty days prior written notice.
As of August 31, 1998, SBMC had incurred approximately $540 of expenses on
behalf of Gerald Stevens which is included in selling, general, and
administrative expenses in the accompanying supplemental consolidated statement
of operations. These expenses included payment of certain of Gerald Stevens'
employees' salaries and travel expenses and is included in accrued expenses in
the accompanying supplemental consolidated balance sheet at August 31, 1998 and
was subsequently paid.
In addition, SBMC leases office space which is also occupied by certain
employees of Gerald Stevens. SBMC does not allocate any of the rent expense for
this space to Gerald Stevens. The approximate annual rent expense to SBMC is
$61.
Duties
As a result of an investigation concerning the alleged dumping of flowers
in the U.S. market by foreign growers, the U.S. Department of Commerce began
assessing importers a duty based on the import value of certain flowers from
certain growers. Gerald Stevens currently estimates and remits the estimated
assessment based on the most current information available. The final assessment
is subject to determination by the U.S. Department of Commerce and may result in
additional charges or refunds.
Consulting Agreements
On October 1, 1998, Gerald Stevens entered into a two-year consulting
agreement with a former owner of an acquired company to provide various
services. The agreement provides for an annual fee of $50.
Services Agreement
On October 1, 1998, Gerald Stevens entered into a service agreement with a
Colombian farm (the "Provider") to provide services to A.G.A. Flowers, Inc., an
acquired subsidiary of Gerald Stevens. The agreement provides for compensation
to the Provider in the amount of $6 per month, plus any out-of-pocket costs
incurred by the Provider in providing services to Gerald Stevens. The agreement
was terminated on March 31, 1999.
Supply Agreement
On October 1, 1998, Gerald Stevens entered into a five-year supply
agreement with flower farms (the "Farms") which are affiliated with two of
Gerald Stevens' stockholders. The agreement requires that the Farms provide to
Gerald Stevens on a consignment basis a certain percentage of their flowers. The
Farms must produce and deliver a minimum number of stems for Gerald Stevens
during the growing year ("Growing Year") commencing on October 1, 1998 and
running until September 30, 1999. Each July, during the term of the agreement,
the parties will meet to establish the Minimum Stem Obligation for each species
for the upcoming Growing Year.
Gerald Stevens has no obligation to pay for any flowers it receives from
the Farms unless and until such flowers are sold by Gerald Stevens.
13. FOURTH QUARTER ADJUSTMENTS
As more fully discussed in Note 10, Gerald Stevens reduced its valuation
allowance against deferred tax assets in 1997. The reduction resulted in a
credit to income of $637 in 1997. The reduction was recorded in the
F-22
49
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fourth quarter of 1997, when all of the information upon which to make the
estimate became available to management of Gerald Stevens.
14. RETIREMENT PLAN
Gerald Stevens sponsors a 401(k) retirement plan covering all full-time
employees who have completed one year of service. Eligible employees may elect
quarterly to contribute up to 15% of their compensation, up to the maximum
contribution allowed by law. Gerald Stevens matches contributions up to a
maximum of 3% of compensation. In connection with the matching contribution,
Gerald Stevens' contribution in 1998 and 1997 was $41 and $30, respectively.
Subsequent to the merger between Florafax and Gerald Stevens, provisions have
been made to terminate this plan.
On December 1, 1998, Gerald Stevens adopted another 401(k) Plan, effective
January 1, 1999. All employees who have met minimum age and length of service
requirements are eligible to participate. Employer matching contributions are
fifty percent of the first three percent of compensation contributed by the
employee to the plan and generally require yearend employment and 1,000 hours
worked during the calendar year. An additional contribution is made at the
discretion of Gerald Stevens.
Employees of Gerald Stevens did not participate in both 401(k) plans
simultaneously.
15. OTHER INCOME
Other income in 1997 of $819 consists primarily of the GTE/MR lawsuit
settlement proceeds (see Note 7), reduced by a charge to earnings of the
unamortized balance of a terminated consulting agreement and a contingency
reserve.
F-23
50
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. BUSINESS SEGMENTS
Gerald Stevens has historically operated in two business segments:
Flowers-by-wire services and charge card processing for member florists, and
charge card processing for customers outside the floral industry. Net revenues,
operating income before and after allocating general and administrative
expenses, identifiable assets, depreciation expense and capital expenditures for
the two segments are provided for below:
1998 1997 1996
------- ------- -------
Net revenues:
Flowers-by-wire....................................... $12,119 $10,416 $ 9,041
Charge card processing................................ 1,272 1,193 1,258
------- ------- -------
$13,391 $11,609 $10,299
======= ======= =======
Operating profit (loss) after allocation of general and
administrative expenses:
Flowers-by-wire.................................... $ (52) $ 2,690 $ 2,176
Charge card processing............................. 68 98 233
------- ------- -------
Operating profit before allocation of Corporate
overhead...................................... 16 2,788 2,409
Corporate overhead................................. (3,092) (870) (847)
------- ------- -------
$(3,076) $ 1,918 $ 1,562
======= ======= =======
Identifiable assets:
Flowers-by-wire....................................... $ 5,992 $ 4,139 $ 3,737
Charge card processing................................ 569 472 325
General corporate assets.............................. 14,774 5,983 4,760
------- ------- -------
$21,335 $10,594 $ 8,822
======= ======= =======
Depreciation expense:
Flowers-by-wire....................................... $ 221 $ 146 $ 272
Charge card processing................................ 59 33 19
------- ------- -------
$ 280 $ 179 $ 291
======= ======= =======
Capital expenditures:
Flowers-by-wire....................................... $ 1,021 $ 625 $ 162
Charge card processing................................ 297 219 28
General corporate..................................... 64 -- --
------- ------- -------
$ 1,382 $ 844 $ 190
======= ======= =======
17. MARKETING PROJECTS, INC. AGREEMENT
Prior to May 1, 1998, under the terms of an existing marketing services
agreement, Gerald Stevens was required to pay Marketing Projects, Inc. ("MPI")
commissions on orders generated from marketing partners solicited by MPI. During
the years ended August 31, 1998, 1997 and 1996 Gerald Stevens recorded
commissions expense of $1,050, $1,455 and $1,219 relative to the agreement.
Effective May 1, 1998, Gerald Stevens entered into an agreement with MPI
that (1) modified the rights and obligations of both parties under the marketing
servicing agreement and (2) provided for the acquisition of MPI's proprietary
marketing systems by Gerald Stevens. Also on May 1, 1998, Gerald Stevens entered
into a non-compete and non-disclosure agreement with MPI and the principal
employees of MPI. Total
F-24
51
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consideration of $3,670 was paid to MPI at the time of closing and Gerald
Stevens is further obligated to pay up to $125 in cash in each of the following
eight fiscal quarters, contingent upon the attainment of quarterly revenue
targets.
Of total consideration paid, $150 has been allocated to the purchase of
MPI's proprietary marketing systems and $100 has been allocated to the
non-compete agreement, with amortization provided over useful lives of 1 and 2
years, respectively. These assets, net of accumulated amortization of $62, are
included in intangible assets, net at August 31, 1998.
Under the original marketing services agreement, Gerald Stevens was
obligated to pay MPI commissions equaling 8% of floral orders generated from
marketing partners solicited by MPI. This 8% commission was continuously payable
to MPI even in the event the marketing services agreement was terminated by
either party. As a result of the May 1, 1998 contract modification, Gerald
Stevens is no longer obligated to pay any commissions to MPI on future floral
orders generated from marketing partners solicited by MPI prior to May 1, 1998.
Gerald Stevens believes that this contract modification will result in the
realization of significant cost savings in future years due to the elimination
of the 8% MPI commission obligation. Gerald Stevens further believes that its
future revenue stream and support requirements relative to these marketing
partner arrangements will be generally unaffected by the contract modification.
Further, the May 1, 1998 payment also served to compensate MPI for the loss of
commissions that would have otherwise been payable to them. Since Gerald
Stevens' contractual relationship was directly with the respective marketing
partners and MPI was not expected to perform continuing services with regards to
these partners, Gerald Stevens believes that the MPI contract modification
represents the termination of a marketing agreement.
Based upon the above, Gerald Stevens determined that the remainder of the
consideration paid to MPI has no benefit to future periods and should be
expensed at the date of contract modification. Accordingly, $3,495 of the total
consideration paid has been recognized as a contract modification expense during
the year ended August 31, 1998.
The MPI contract modification further provided that any orders generated
from new marketing partners solicited by MPI after May 1, 1998 will be
commissionable at a 4% rate. Because this commission rate approximates the
current market rate within the floral industry and because of the uncertainty of
the amount of floral orders to be generated in the future on this reduced
commission basis, Gerald Stevens allocated no value to this contract provision.
Since the quarterly contingent payments are based upon the attainment of
future revenue targets, Gerald Stevens will record such payments as sales
commissions to the extent and at the time they become earned. For the quarter
ended August 31, 1998, the first contingent payment of $125 was earned and paid,
and is included within selling, general and administrative expenses.
18. SUBSEQUENT EVENT (UNAUDITED)
Acquisitions
From March 1, 1999 through April 30, 1999, Gerald Stevens acquired six
retail florist businesses and also acquired National Flora, a floral order
generation business, for total consideration of $39,031, consisting of $26,039
in cash and 2,145 shares of Gerald Stevens common stock.
F-25
52
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above:
PURCHASE PRICE
DATE OF -----------------
COMPANY ACQUISITION TOTAL CASH STOCK SHARES PRICE
------- ----------- ------- ------- ------- --------- ------
Phoebe's Floral Shop................. 3/31/99 $ 2,817 $ 2,195 $ 622 99 $ 6.30
National Flora....................... 3/03/99 19,727 9,952 9,775 1,553 6.30
Exotic Gardens, Inc. and Kuhn
Flowers, Inc....................... 4/30/99 6,200 5,580 620 49 12.59
Other acquisitions................... Various 10,446 8,471 1,975 444 4.44
------- ------- ------- ------
Total post February 28,
1999 acquisitions........ $39,190 $26,198 $12,992 2,145
======= ======= ======= ======
- -------------------------
Stock Options
Subsequent to February 28, 1999, Gerald Stevens issued 33,660 options at
fair market value price of $12.59 per share.
F-26
53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gerald Stevens Retail, Inc. (formerly Gerald Stevens, Inc.):
We have audited the accompanying balance sheet of Gerald Stevens Retail, Inc.
(formerly Gerald Stevens, Inc.) (a Delaware corporation) as of September 30,
1998, and the related statements of operations, stockholders' equity and cash
flows for the period from inception (May 7, 1998) to September 30, 1998. These
financial statements are the responsibility of Gerald Stevens Retail, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gerald Stevens Retail, Inc.
(formerly Gerald Stevens, Inc.) as of September 30, 1998, and the results of its
operations and its cash flows for the period from inception (May 7, 1998) to
September 30, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
December 31, 1998 (except with
respect to the matters discussed
in Notes 9 and 10, as to which
the date is March 26, 1999).
F-27
54
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
1999 1998
----------- -------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 530,086 $6,688,234
Accounts receivable, net of allowance for uncollectible
accounts of $0 and $581,589 (unaudited), as of
September 30, 1998 and March 31, 1998, respectively.... 6,199,587 --
Inventories............................................... 4,222,814 --
Other receivables......................................... -- 72,173
Interest receivable....................................... -- 22,134
Subscription receivable................................... -- 52,500
Other current assets...................................... 784,440 --
----------- ----------
Total current assets.............................. 11,736,927 6,835,041
----------- ----------
PROPERTY AND EQUIPMENT, net................................. 6,209,288 43,510
----------- ----------
OTHER ASSETS:
Intangible assets, net.................................... 71,521,099 1,520,140
Advance to company subsequently acquired.................. -- 113,327
Deferred financing costs, net............................. -- 18,889
Other..................................................... 430,418 7,548
----------- ----------
Total other assets................................ 71,951,517 1,659,904
----------- ----------
Total assets...................................... $89,897,732 $8,538,455
=========== ==========
CURRENT LIABILITIES:
Accounts payable.......................................... $ 6,697,413 $ 183,686
Accrued expenses.......................................... 7,623,445 633,620
Current portion long-term debt............................ 54,912 --
----------- ----------
Total current liabilities......................... 14,375,770 817,306
----------- ----------
LONG-TERM LIABILITIES:
Long-term debt............................................ 14,356,034 --
Other long-term liabilities............................... 205,758 --
----------- ----------
Total long-term liabilities....................... 14,561,792 --
----------- ----------
Total liabilities................................. 28,937,562 817,306
----------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 40,000,000 shares
authorized, 10,003,916 and 20,569,772 (unaudited)
shares issued and outstanding as of September 30, 1998
and March 31, 1999, respectively....................... 205,697 100,039
Additional paid-in capital................................ 65,005,023 9,737,526
Accumulated deficit....................................... (4,250,550) (2,116,416)
----------- ----------
Total stockholders' equity........................ 60,960,170 7,721,149
----------- ----------
Total liabilities and stockholders' equity........ $89,897,732 $8,538,455
=========== ==========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-28
55
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
STATEMENTS OF OPERATIONS
FOR THE FOR THE PERIOD
SIX MONTHS FROM INCEPTION
ENDED (MAY 7, 1998) TO
MARCH 31, SEPTEMBER 30,
1999 1998
------------ ----------------
(UNAUDITED)
REVENUE:
Product sales, net........................................ $35,486,446 $ --
Service and other revenue................................. 3,349,536 --
----------- -----------
Total revenues.................................... 38,835,982 --
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of product sales..................................... 15,203,115 --
Salaries and benefits..................................... 14,021,286 328,916
Operating expenses........................................ 3,607,234 --
Selling, general and administrative....................... 5,388,227 1,327,952
Depreciation and amortization............................. 881,317 480,571
Merger expenses........................................... 1,816,339 --
----------- -----------
Total operating costs and expenses................ 40,917,518 2,137,439
----------- -----------
Operating loss.................................... (2,081,536) (2,137,439)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 113,660 22,134
Interest expense.......................................... (219,755) (1,111)
Other income.............................................. 111,220 --
----------- -----------
Total other income................................ 5,125 21,023
----------- -----------
Loss before provision for income taxes............ (2,076,411) (2,116,416)
PROVISION FOR INCOME TAXES.................................. 57,723 --
----------- -----------
Net loss.......................................... $(2,134,134) $(2,116,416)
=========== ===========
BASIC LOSS PER SHARE........................................ $ (0.11) $ (0.21)
=========== ===========
DILUTED LOSS PER SHARE...................................... $ (0.11) $ (0.21)
=========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING................... 18,846,851 10,003,916
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING................. 18,846,851 10,003,916
=========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-29
56
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 7, 1998)
TO SEPTEMBER 30, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1999
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ----------- ----------- -----------
Sale of common stock, net................................ 9,528,363 $ 95,284 $ 9,242,281 $ -- $ 9,337,565
Issuance of common stock in acquisition.................. 475,553 4,755 495,245 -- 500,000
Net loss for the period from inception (May 7, 1998) to
September 30, 1998..................................... -- -- -- (2,116,416) (2,116,416)
---------- -------- ----------- ----------- -----------
BALANCE, September 30, 1998.............................. 10,003,916 100,039 9,737,526 (2,116,416) 7,721,149
Sale of common stock, net (Unaudited).................... 4,606,083 46,060 21,020,138 -- 21,066,198
Issuance of common stock in acquisitions (Unaudited)..... 5,959,773 59,598 34,247,359 -- 34,306,957
Net loss for the six months ended March 31, 1999
(Unaudited)............................................ -- -- -- (2,134,134) (2,134,134)
---------- -------- ----------- ----------- -----------
BALANCE, March 31, 1999 (Unaudited)...................... 20,569,772 $205,697 $65,005,023 $(4,250,550) $60,960,170
========== ======== =========== =========== ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-30
57
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
STATEMENTS OF CASH FLOWS
FOR THE FOR THE PERIOD
SIX MONTHS FROM INCEPTION
ENDED (MAY 7, 1998) TO
MARCH 31, SEPTEMBER 30,
1999 1998
------------ ----------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,134,134) $(2,116,416)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities--
Provision for uncollectible accounts................... 7,324 --
Depreciation and amortization.......................... 881,317 480,571
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................. (920,053) --
Inventories.......................................... 61,872 --
Other receivables.................................... 72,173 (72,173)
Interest receivable.................................. 22,134 (22,134)
Other current assets................................. (168,864) --
Other assets......................................... 439,723 (6,437)
Accounts payable..................................... (1,660,812) 183,686
Accrued expenses..................................... 3,628,359 633,620
Other long-term liabilities.......................... 46,758 --
------------ -----------
Net cash (used in) provided by operating
activities...................................... 275,797 (919,283)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,766,794) (44,221)
Advance to company subsequently acquired.................. -- (113,327)
Collection of amounts due from former owners of subsidiary
acquired............................................... 1,300,000 --
Payments for acquisitions, net of cash acquired........... (40,793,927) (1,500,000)
------------ -----------
Net cash used in investing activities............. (41,260,721) (1,657,548)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... 21,118,695 9,285,065
Payment of long-term debt................................. (237,966) --
Payment of commitment fee on credit facility.............. (303,953) (20,000)
Proceeds from credit facility............................. 43,330,000 --
Payment of credit facility................................ (29,080,000) --
------------ -----------
Net cash provided by financing activities......... 34,826,776 9,265,065
------------ -----------
Net increase (decrease) in cash................... (6,158,148) 6,688,234
CASH AND CASH EQUIVALENTS, beginning of period.............. 6,688,234 --
------------ -----------
CASH AND CASH EQUIVALENTS, end of period.................... 530,086 $ 6,688,234
============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Issuance of common stock for acquisitions................. $34,306,957 $ 500,000
============ ===========
Interest paid............................................. $ 24,854 $ --
============ ===========
Income taxes paid......................................... $ 388,259 $ --
============ ===========
The accompanying notes to financial statements are an integral part of these
statements.
F-31
58
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
1. GENERAL
Gerald Stevens, Inc., was formed on May 7, 1998 to become a branded
retailer and consumer marketer of flowers, floral-related merchandise and gifts.
Through September 30, 1998, Gerald Stevens, Inc. was in the development stage,
had no revenue and all of its efforts had been directed to developing a business
strategy, raising capital, and acquiring leading retail flower shops and other
floral related businesses. Gerald Stevens, Inc.'s ability to continue as a going
concern will be largely dependent upon its ability to successfully acquire and
integrate retail and other floral related businesses. Gerald Stevens, Inc. has a
fiscal year-end of September 30. Effective October 1, 1998, Gerald Stevens, Inc.
commenced its operations upon the completion of its acquisition of ten operating
flower businesses and, as a result, emerged from the development stage. There
can be no assurance that Gerald Stevens, Inc. will successfully establish
profitable operations.
On April 30, 1999, Gerald Stevens, Inc. ("Gerald Stevens") completed a
merger with Florafax International, Inc. Under the terms of the merger
agreement, based on an exchange formula, Florafax issued 28.1 million shares of
its common stock for approximately 20.8 million shares of Gerald Stevens common
stock outstanding. Concurrent with the closing of the merger, Florafax's name
was changed to Gerald Stevens, Inc. and Gerald Stevens, Inc.'s name was changed
to Gerald Stevens Retail, Inc. (the "Company"). The merger was accounted for
under the pooling of interest method of accounting. The accompanying
Supplemental Consolidated Financial Statements give retroactive effect to the
merger.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1999, and the results of its operations and cash flows
for the six months ended March 31, 1999. The results of operations and cash
flows for the six months ended March 31, 1999 are not necessarily indicative of
the results of operations or cash flows which may be reported for fiscal year
1999.
SEASONALITY
Sales of floral products have historically been seasonal, concentrated
primarily in the first and second calendar quarters as a result of holidays such
as Valentine's Day and Mother's Day. In particular, a significant portion of
annual revenue is expected to be derived from sales of floral products for
Valentine's Day.
In contrast to the first and second calendar quarters, sales of floral
products are significantly lower in the third and fourth calendar quarters.
These quarters have relatively few flower-giving holidays. We expect to
experience quarterly fluctuations in operating results due to the factors
discussed above and other factors. These factors include additional selling,
general and administrative expenses to acquire and support new business and the
timing and magnitude of capital expenditures.
Accordingly, the results of operations for the six-month period ended March
31, 1999 are not necessarily indicative of the results of operations or cash
flows which may be reported for fiscal 1999.
F-32
59
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of
September 30, 1998 and March 31, 1999, all cash equivalents on hand were
interest-bearing.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The Company records depreciation using the straight-line method over the
following estimated useful lives:
Office equipment, furniture and fixtures................. 5-10 years
Computer hardware and software........................... 4-5 years
INTANGIBLE ASSETS
Intangible assets at September 30, 1998 consist of the fair value allocated
to letters of intent of an acquired business (see Note 6). Intangible assets at
March 31, 1999 consists of goodwill recorded in connection with acquisitions
accounted for under the purchase method of accounting (see Note 6).
Upon completion of the acquisitions, the value assigned to the underlying
letters of intent was included as a component of the purchase price for the
acquired business. The resultant goodwill will be amortized over a period of 40
years which management believes is a reasonable life in light of the
characteristics present in the floral industry such as the significant number of
years that the industry has been in existence, the continued trends by consumers
in purchasing flowers for many different occasions, and the stable nature of the
customer base.
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be evaluated
for possible impairment.
DEFERRED FINANCING COSTS
Included in other long-term assets is deferred financing costs of $20,000
and $303,953 as of September 30, 1998 and March 31, 1999, respectively, related
to amounts incurred in connection with obtaining a credit facility. The Company
began recording amortization in September 1998 on a straight-line basis over the
term of the financing agreement (18 months). Accumulated amortization was $1,111
and $102,429 as of September 30, 1998 and March 31, 1999, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The asset and liability approach prescribed by SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial reporting and the
tax bases of assets and liabilities. As of September 30, 1998 and March 31,
1999, the Company had deferred tax assets of approximately $800,000 and
$1,600,000, respectively, which have been fully offset by a valuation allowance,
consisting primarily of start-up costs capitalized for tax purposes, allowance
for doubtful accounts, and net operating loss carryforwards.
F-33
60
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
The provision for income taxes for the six months ended March 31, 1999 is
comprised of:
Federal provision........................................... $ --
State provision............................................. 57,723
-------
Total............................................. $57,723
=======
The Company's effective federal tax rate is 0% due to the establishment of
a valuation allowance to offset the deferred tax benefit of net operating loss
carryforwards.
EARNINGS PER SHARE
Basic and diluted earnings per share in the accompanying statements of
operations are based upon the weighted average shares actually outstanding
during the period. The impact of common stock equivalents has not been included
for the period ended September 30, 1998, as they are anti-dilutive, in
accordance with provisions of SFAS No. 128, "Earnings Per Share."
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components for fiscal years beginning after
December 15, 1997. Comprehensive income is a measure of all changes in equity of
an enterprise that result from transactions and other economic events in a
period other than transactions with owners. Comprehensive loss is equal to net
loss.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires an entity to disclose certain information regarding its
operating segments for fiscal years beginning after December 15, 1997. The
composition of Gerald Stevens' business is changing. Accordingly, the Company
will evaluate the need for segment disclosures when it implements the new
standard in Fiscal 1999.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. The Company believes that this statement will not have a
material effect on the Company's accounting for computer software development or
acquisition.
SOP 98-5, "Reporting on the Costs of Start-up Activities," requires the
immediate expensing of current start-up costs as well as existing costs
previously capitalized for fiscal years beginning after December 15, 1998. The
Company has no capitalized start-up costs as of September 30, 1998 or March 31,
1999.
F-34
61
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
MARCH 31, 1999 SEPTEMBER 30, 1998
-------------- ------------------
Office equipment, furniture and
fixtures.......................... $ 1,189,585 $ 16,702
Computer hardware and software...... 580,848 27,519
Land, building, and leasehold
improvements...................... 5,371,394 --
Vehicles............................ 616,025 --
----------- --------
7,757,852 44,221
Less -- Accumulated depreciation.... (1,548,564) (711)
----------- --------
$ 6,209,288 $ 43,510
=========== ========
4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
MARCH 31, 1999 SEPTEMBER 30, 1998
-------------- ------------------
Accrued professional fees........... $1,749,346 $501,547
Accrued salaries and benefits....... 1,349,323 95,421
Accrued wire service................ 879,909 --
Accrued other....................... 3,644,867 36,652
---------- --------
7,623,445 $633,620
========== ========
5. STOCKHOLDERS' EQUITY
In August 1998, the Company sold 8,130,233 shares of common stock for an
aggregate purchase price of $7,866,000 or $0.97 per share.
In August 1998, certain of the Company's employees and certain other
investors purchased 1,398,130 shares of stock for an aggregate purchase price of
$1,471,565 or $1.05 per share.
All of the stockholders who were issued shares of the Company's common
stock in August 1998 have entered into stockholders agreements that provide the
Company with a right of first refusal for any sales of common stock governed by
such stockholder agreement in excess of $500,000 by such stockholders until
October 1, 2000.
On September 30, 1998 the stockholders approved an increase in the number
of shares of authorized common stock from 20,000,000 to 40,000,000.
In October 1998, the Company issued 4,581,583 shares of common stock at a
price of $4.75 per share in a private placement. Proceeds totaled approximately
$20,869,000, net of $894,000 of underwriting fees and expenses. Individuals who
purchased shares in the private placement had agreed to give the Company a right
of first refusal, prior to transferring such shares, until the Company became a
public company on April 30, 1999.
F-35
62
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
6. ACQUISITIONS
On July 31, 1998, the Company acquired all of the assets of International
Floral Network, Inc. ("IFN"), a Florida corporation, for $1.5 million in cash
and 475,553 shares of common stock valued at $500,000 or $1.05 per share. IFN's
assets consisted solely of the right to acquire 33 retail floral chains pursuant
to non-binding letters of intent with these chains. The Company allocated the
aggregate consideration of approximately $2 million to the nine letters of
intent it intended to pursue. Prior to yearend, the Company ceased discussions
with one of these entities at which time the unamortized allocated portion of
the consideration of $479,860 was charged to amortization expense. Eight of
these retail floral chains were subsequently acquired by the Company in
transactions accounted for under the purchase method of accounting in October
1998. Intangible assets consist of $1,520,140 related to the IFN transaction.
Included in other assets as of September 30, 1998 is approximately $113,000
which represents a bridge payment to a retail floral chain subsequently
acquired. Upon acquisition, such amount was applied towards the purchase price
of the acquisition.
During the first and second quarter, the Company acquired several
businesses. The acquisitions were accounted for under the purchase method of
accounting and accordingly the post-acquisition results of operations of the
acquired businesses have been included in the Company's results of operations
for the six months ended March 31, 1999.
The following table sets forth businesses acquired during the six months
ended March 31, 1999, and the consideration paid. Consideration for these
acquisitions consisted of cash, stock, and debt paid on behalf of former owners.
The total consideration amounts below reflect certain working capital
adjustments called for in the acquisition agreements. Not included in the total
consideration below are stock options which were granted subsequent to September
30, 1998 in connection with the acquisitions. All of the sellers of the acquired
businesses who received shares of the Company's common stock have entered into
stockholder agreements that contain terms similar to the terms of the
stockholder agreements signed by individuals who became stockholders in August
1998.
PURCHASE PRICE
TOTAL ----------------- NUMBER OF SHARE
NAME OF BUSINESS DATE OF ACQUISITION CONSIDERATION CASH STOCK SHARES PRICE
- ---------------- ------------------------ ------------- ------- ------- --------- -----
(IN THOUSANDS)
Eastern Floral & Gift Shop, Inc........ October 1, 1998 $ 2,924 $ 2,924 $ -- -- N/A
The Norton Group, Inc.................. October 1, 1998 1,566 548 1,018 214 4.75
Arizona Wholesale Floral Company (d/b/a
Cactus Flowers)...................... October 1, 1998 3,000 1,800 1,200 253 4.75
Dr. Delphinium Designs, Inc............ October 1, 1998 3,103 880 2,223 467 4.75
Boesen the Florist, Inc................ October 1, 1998 5,150 2,485 2,665 561 4.75
J.J. Fallon Company, Inc............... October 1, 1998 1,917 1,117 800 168 4.75
Martina's Inc.......................... October 1, 1998 1,948 1,168 780 164 4.75
Flower Franchising, Inc. (d/b/a Royer's
Flower Shops)........................ October 1, 1998 11,158 6,334 4,824 1,016 4.75
A.G.A. Flowers, Inc.................... October 1, 1998 2,935 1,468 1,467 309 4.75
Jennie's Flower Shop, Inc.............. December 7, 1998 3,575 2,000 1,575 263 6.00
Maple Lee Flowers, Inc. and Maple Lee
Farm 'N' Garden Center, Ltd.......... October 1, 1998 4,698 2,539 2,159 455 4.75
National Flora......................... March 3, 1999 19,727 9,952 9,775 1,150 8.50
Phoebe's Floral Shop................... March 31, 1999 2,817 2,195 622 73 8.50
Other Aquisitions...................... Various 13,159 7,960 5,199 867 6.00
------- ------- ------- -----
$77,677 $43,370 $34,307 5,960
======= ======= ======= =====
F-36
63
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
The preliminary purchase price allocation for businesses acquired under the
purchase method of accounting is as follows (in thousands):
Assets...................................................... $19,342
Intangible assets........................................... 70,370
Liabilities................................................. (12,035)
-------
$77,677
=======
As part of the Company's purchase agreement with Arizona Wholesale Floral
Company ("Cactus"), the Company may be required to make an additional payment of
up to $300,000 based upon the performance of four existing stores and a
superstore to be opened by Cactus in the fourth quarter of 1998.
As part of the Company's purchase agreement with Eastern Floral & Gift
Shop, Inc., the Company may be required to make an additional payment of up to
$280,000 based upon an existing agreement with Amway Corporation.
Key employees of each of the acquired companies have agreed to enter into
2-year employment agreements with the Company effective as of the closing date
of each respective acquisition. The annual salaries range from $20,000 to
$150,000. In addition, some of the employment agreements provide for the
employee to receive a bonus beginning in the Company's 1999 calendar year of up
to 20% of the base salary depending on certain performance targets. The
employment agreements can be terminated earlier by either the employee or the
Company. The employment agreements include noncompete clauses of up to two years
after the employment period.
In addition, the former owner of each of the acquired companies have agreed
to noncompete agreements, effective as of the closing of the acquisition,
ranging from 2 to 5 years.
The pro forma results of operations, assuming each of the significant
acquisitions described above was consummated as of the beginning of the period
presented, are as follows:
FOR THE
SIX MONTH
PERIOD ENDED
MARCH 31, 1999
-----------------
Revenue..................................................... $46,240,000
===========
Net income.................................................. $ 652,000
===========
Net income per share --
Basic..................................................... $ 0.03
===========
Diluted................................................... $ 0.03
===========
The Company entered into various letters of intent, subject to certain
customary conditions, to acquire various retail flower shops. To the extent
consummated, these pending acquisitions will be accounted for under the purchase
method of accounting.
7. STOCK OPTION PLAN
The Company approved a stock option plan (the "Plan") on May 20, 1998,
authorizing the issuance of stock options for up to 4,000,000 shares of common
stock. The number of shares of stock issuable pursuant to the options
outstanding (whether vested or not) cannot exceed 10 percent of the outstanding
shares of stock.
F-37
64
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
The purchase price of each share of common stock subject to an option is
determined by the Board of Directors and stated in each option agreement, and
will not be less than 100 percent of the fair market value of a share of the
common stock on the date the option is granted. The options have a term of ten
years from the date of grant and are non-qualified. The options vest in
increments of 25% per year over a four-year period on the yearly anniversary of
the grant date.
Under the Plan, in August 1998, 150,000 options were granted with an
exercise price of the then fair market value of $0.97. From October 1, 1998 to
March 31, 1999, a total of 893,871 options were granted at fair market value
exercise prices of $4.75 or $8.50, with 2,450 of these options subsequently
cancelled during the period. As of September 30, 1998 and March 31, 1999, none
of the options granted were exercisable. The weighted average remaining
contractual life of the options as of September 30, 1998 and March 31, 1999 is
approximately 10 years and 9.50 years, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements.
Pro forma information regarding net income is required by SFAS No. 123,
"Accounting for Stock-Based Compensation," which also requires that the
information be determined as if the Company had accounted for its employee stock
options granted under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model. The following assumptions were used in the valuation:
average expected life 6 years, expected volatility 0.80, risk free interest rate
4.7% and no dividends. The weighted average fair value of options granted during
the year was $0.97.
For purposes of pro forma disclosures of net loss, the estimated fair value
of the options is amortized to expense over the options' vesting period,
resulting in pro forma compensation expense of approximately $3,000 for the
period from May 7, 1998 (inception) to September 30, 1998. The Company's pro
forma net loss for the period from May 7, 1998 (inception) to September 30, 1998
was $2,119,416.
The occurrence of certain events may terminate the unvested options,
including, but not limited to, termination of employment, as defined in the
Plan.
Pursuant to the Plan, in the event of certain defined transactions after
the effective date of the Plan, the number and kinds of shares for the purchase
of which options may be granted under the Plan will be adjusted proportionately
by the Company. In addition, the number and kind of shares for which options are
outstanding shall be adjusted proportionately so that the proportionate interest
of the holder of the option immediately following such event will be the same as
immediately prior to such event.
8. COMMITMENTS AND CONTINGENCIES
A. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers and executives. The agreements expire on dates ranging until 2000 and
also include noncompete provisions. The aggregate minimum annual payments under
these agreements are $2,491,128 and $1,945,012 for the years ended December 31,
1999 and 2000, respectively.
B. SERVICES AGREEMENT
On May 7, 1998, the Company entered into a services agreement with SB
Management Corp. ("SBMC"), a corporation controlled by Mr. Steven R. Berrard,
that provides services to the general partner of
F-38
65
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
New River pursuant to which SBMC agreed to provide certain management services
to and incur certain expenses on behalf of the Company, with the cost of such
items to be reimbursed by the Company to SBMC. The Company is to reimburse SBMC
for a proportionate share of any SBMC officer's salary, bonuses, and
compensation if that employee spends more than 50% of his time rendering
services to the Company, not to exceed $200,000. One hundred percent of all
out-of-pocket costs and fees paid to advisors in connection with services to the
Company are to be reimbursed in an amount not to exceed $500,000 prior to the
initial private placement of capital stock. After the initial private placement
of capital stock, there is no limit on the amount charged to the Company for
out-of-pocket costs and fees paid to advisors. The agreement may be terminated
at any time by the Company or SBMC upon thirty days prior written notice.
As of September 30, 1998, SBMC had incurred approximately $540,000 of
expenses on behalf of the Company which is included in selling, general, and
administrative expenses in the accompanying supplemental consolidated statement
of operations. These expenses included payment of certain of the Company's
employees' salaries and travel expenses. As of September 30, 1998, $506,000 of
this amount had been paid. The remaining $34,000 is included in accrued expenses
in the accompanying balance sheet and was subsequently paid on November 25,
1998.
In addition, SBMC leases office space which is also occupied by certain
employees of the Company. SBMC does not allocate any of the rent expense for
this space to the Company. The approximate annual rent expense to SBMC is
$61,000.
C. DUTIES
As a result of an investigation concerning the alleged dumping of flowers
in the U.S. market by foreign growers, the U.S. Department of Commerce began
assessing importers a duty based on the import value of certain flowers from
certain growers. The Company currently estimates and remits the estimated
assessment based on the most current information available. The final assessment
is subject to determination by the U.S. Department of Commerce and may result in
additional charges or refunds.
D. OPERATING LEASES
On August 1, 1998, the Company entered into a lease agreement for its
office space through August 2002. The total future minimum annual lease payments
under the agreement as of September 30, 1998 are as follows:
1999..................................................... $ 51,000
2000..................................................... 53,000
2001..................................................... 55,000
2002..................................................... 38,000
---------
$ 197,000
=========
The Company incurred rental expense totaling approximately $8,000 and
$25,000 during the periods ended September 30, 1998 and March 31, 1999,
respectively.
E. CONSULTING AGREEMENTS
On October 1, 1998, the Company entered into a two-year consulting
agreement with a former owner of an acquired company to provide various
services. The agreement provides for an annual fee of $50,000.
F-39
66
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
F. SERVICES AGREEMENT
On October 1, 1998, the Company entered into a service agreement with a
Colombian farm (the "Provider") to provide services to A.G.A. Flowers, Inc., an
acquired subsidiary of the Company. The agreement provides for compensation to
the Provider in the amount of $6,000 per month, plus any out-of-pocket costs
incurred by the Provider in providing services to the Company. The agreement was
terminated on March 31, 1999.
G. SUPPLY AGREEMENT
On October 1, 1998, the Company entered into a five-year supply agreement
with flower farms (the "Farms") which are affiliated with two of the Company's
stockholders. The agreement requires that the Farms provide to the Company on a
consignment basis a certain percentage of their flowers. The Farms must produce
and deliver a minimum number of stems for the Company during the growing year
("Growing Year") commencing on October 1, 1998 and running until September 30,
1999. Each July, during the term of the agreement, the parties will meet to
establish the Minimum Stem Obligation for each species for the upcoming Growing
Year.
The Company has no obligation to pay for any flowers it receives from the
Farms unless and until such flowers are sold by the Company.
H. 401(K) PLAN
On December 1, 1998, the Company adopted a 401(k) Plan, effective January
1, 1999. All employees who have met minimum age and length of service
requirements are eligible to participate. Employer matching contributions are
fifty percent of the first three percent of compensation contributed by the
employee to the plan and generally require year-end employment and 1,000 hours
worked during the calendar year. An additional contribution is made at the
discretion of the Company.
9. CREDIT FACILITY
The Company entered into an 18-month senior secured revolving credit
facility (the "Credit Facility") with a bank on September 30, 1998 with
borrowings up to $20 million and which includes a letter of credit facility of
up to $3 million for the issuance of standby letters of credit. This line of
credit is used to finance acquisitions and for other, general corporate
purposes. Cash borrowings bear interest at either the Eurodollar market rate
plus a percentage ranging from 100 basis points to 225 basis points (Eurodollar
at March 31, 1999 was 5%) or, at the Company's option, the greater of the
Federal funds rate plus 50 basis points or the Prime rate ("adjusted base rate
loan"). The Federal funds rate and Prime rate were 4.88% and 7.75%,
respectively, at March 31, 1999. The percentage over the Eurodollar market rate
is based on the Company's financial performance as measured by a total funded
debt ratio (as defined in the Credit Facility).
For Eurodollar-based loans, principal and interest payments are due at the
end of the chosen Eurodollar instrument term, or if the applicable period is
greater than three months, then interest is due at the end of each three-month
interval and at the end of the applicable period. For adjusted base rate loans,
the interest is due quarterly and the principal is due upon demand.
The Credit Facility is secured by all of the assets of the Company,
including a pledge of the stock of each of the Company's subsidiaries. As of
September 30, 1998, no amounts were drawn on the Credit Facility. In addition,
the Credit Facility agreement provides for an unused facility fee ranging from
25 basis points to 50
F-40
67
GERALD STEVENS RETAIL, INC.
(FORMERLY GERALD STEVENS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED MARCH 31, 1999 ARE UNAUDITED)
basis points on an annual basis depending on the extent of the Company's ratio
of total funded debt ratio (as defined in the Credit Facility).
Restrictive covenants contained in the Company's Credit Facility may limit
the Company's ability to finance future acquisitions, new locations and other
expansion of operations. These covenants require the Company to achieve specific
financial ratios and may require the Company to obtain bank consent prior to
completing our proposed acquisitions.
In connection with the attainment of the Credit Facility, the Company
agreed to pay a $250,000 underwriting fee, $20,000 of which has been paid as of
September 30, 1998. The remaining balance was paid in October 1998.
In October 1998, the Company borrowed $16,000,000 on its Credit Facility to
fund the cash portion of the purchase price for acquisitions. These amounts were
subsequently repaid in October 1998 with proceeds from the private placement.
In February 1999, the Company and its primary lender amended its Credit
Facility to increase the size of the Credit Facility from $20,000,000 to
$40,000,000. In June 1999, in connection with a planned syndication and further
increase in the size of the Credit Facility, Gerald Stevens and its primary
lender agreed to amend and restate certain Credit Facility terms and conditions,
including among other things, increasing the term of the Credit Facility to 36
months.
Between January and March 1999, the Company borrowed approximately
$27,330,000 on its revolving credit facility. As of March 31, 1999 approximately
$14,350,000 was still outstanding. The net borrowing amount was used primarily
to fund the cash portion of acquisitions.
10. SUBSEQUENT EVENTS
ACQUISITIONS
From April 1, 1999, through April 30, 1999, the Company acquired two retail
florist businesses and one small order generation business.
The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above (in thousands, except share
price):
PURCHASE PRICE
TOTAL ------------------------- NUMBER OF SHARE
COMPANY CONSIDERATION CASH STOCK SHARES PRICE
- ------- ------------- ----------- ----------- ----------- ------
Exotic Gardens, Inc. and Kuhn
Flowers, Inc.................... $ 6,200 $ 5,580 $ 620 37 $17.00
Thrifty Florist................... 5,225 4,180 1,045 174 6.00
Other............................. 159 159 -- -- N/A
----------- ----------- ----------- -----------
Total post March 31, 1999
acquisitions............... $ 11,584 $ 9,919 $ 1,665 211
=========== =========== =========== ===========
STOCK OPTIONS
Subsequent to March 31, 1999, the Company issued options of 24,933 at fair
market value price of $17.00 per share.
F-41
68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Exotic Gardens, Inc. and Kuhn Flowers, Inc.
We have audited the accompanying combined balance sheets of The Exotic
Gardens, Inc. and Kuhn Flowers, Inc. as of September 30, 1998 and 1997, and the
related combined statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Exotic
Gardens, Inc. and Kuhn Flowers, Inc. as of September 30, 1998 and 1997, and the
combined results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
ADAIR, FULLER, WITCHER & MALCOM, P.A.
Ft. Lauderdale, Florida
February 17, 1999, except for notes G and H
as to which the date is April 30, 1999
F-42
69
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED BALANCE SHEETS
SEPTEMBER 30,
MARCH 31, --------------------------
1999 1998 1997
----------- ----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 1,243,657 $ 659,779 $ 154,786
Accounts receivable less allowance for doubtful
accounts of $335,887, $267,431 and
$174,498 -- Note H............................. 484,037 560,567 624,658
Inventories -- Note H............................. 263,151 343,152 336,599
Prepaid and other current assets -- Note H........ 94,333 66,682 32,220
----------- ----------- -----------
TOTAL CURRENT ASSETS...................... 2,085,178 1,630,180 1,148,263
PROPERTY AND EQUIPMENT, NET -- Notes C, H........... 2,217,101 2,259,407 2,497,664
OTHER ASSETS
Intangible assets, net -- Note H.................. 223,538 232,059 219,379
Other assets -- Note H............................ 71,728 71,728 76,777
----------- ----------- -----------
TOTAL OTHER ASSETS........................ 295,266 303,787 296,156
----------- ----------- -----------
TOTAL ASSETS.............................. $ 4,597,545 $ 4,193,374 $ 3,942,083
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable -- Note H........................ $ 612,611 $ 486,101 $ 467,206
Accrued expenses -- Note H........................ 362,595 303,291 286,196
Deferred income................................... 0 0 20,833
Notes payable -- Note D........................... 2,416,671 2,486,671 2,543,099
Current obligations under capital leases.......... 0 10,546 17,075
----------- ----------- -----------
TOTAL CURRENT LIABILITIES................. 3,391,877 3,286,609 3,334,409
LONG-TERM DEBT
Obligations under capital leases.................. 0 0 10,546
----------- ----------- -----------
TOTAL LIABILITIES......................... 3,391,877 3,286,609 3,344,955
COMMITMENTS AND
CONTINGENCIES -- Notes G and H
STOCKHOLDERS' EQUITY
Common stock -- Note F............................ 900 900 900
Additional paid-in capital........................ 5,218,941 5,218,941 5,093,941
Accumulated deficit............................... (4,014,173) (4,313,076) (4,497,713)
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY................ 1,205,668 906,765 597,128
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $ 4,597,545 $ 4,193,374 $ 3,942,083
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-43
70
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
----------------------- -------------------------
1999 1998 1998 1997
---------- ---------- ----------- -----------
(UNAUDITED)
REVENUE
Product sales............................... $4,929,035 $4,771,727 $ 8,919,635 $ 8,798,680
Service and other revenue................... 1,203,043 1,222,929 2,266,914 2,096,283
---------- ---------- ----------- -----------
TOTAL REVENUE....................... 6,132,078 5,994,656 11,186,549 10,894,963
OPERATING COSTS AND EXPENSES
Cost of product sales....................... 2,204,244 2,207,105 4,001,562 3,777,734
Operating expenses.......................... 2,996,193 2,845,926 5,399,964 5,457,685
Selling, general, and administrative
expenses................................. 583,211 833,542 1,482,972 1,531,471
---------- ---------- ----------- -----------
TOTAL OPERATING COST AND EXPENSES... 5,783,648 5,886,573 10,884,498 10,766,890
---------- ---------- ----------- -----------
OPERATING INCOME.................... 348,430 108,083 302,051 128,073
OTHER INCOME (EXPENSE)
Interest expense............................ (86,307) (104,812) (209,027) (261,540)
Interest income............................. 6,364 1,400 2,967 3,955
Other income (expense), net................. 30,416 134,115 213,646 107,970
---------- ---------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE)........ (49,527) 30,703 7,586 (149,615)
---------- ---------- ----------- -----------
NET INCOME (LOSS)................... $ 298,903 $ 138,786 $ 309,637 $ (21,542)
========== ========== =========== ===========
The accompanying notes are an integral part of these statements.
F-44
71
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- ----------- -------------
Balance, September 30, 1996....................... $900 $4,643,941 $(4,026,171) $ 618,670
Net (loss) for the year ended September 30,
1997............................................ 0 0 (21,542) (21,542)
Dividend to Stockholders.......................... 0 0 (450,000) (450,000)
Capital contributed by Stockholders............... 0 450,000 0 450,000
---- ---------- ----------- ----------
Balance, September 30, 1997....................... 900 5,093,941 (4,497,713) 597,128
Net income for the year ended September 30,
1998............................................ 0 0 309,637 309,637
Dividend to Stockholders.......................... 0 0 (125,000) (125,000)
Capital contributed by Stockholders............... 0 125,000 0 125,000
---- ---------- ----------- ----------
Balance, September 30, 1998....................... 900 5,218,941 (4,313,076) 906,765
---- ---------- ----------- ----------
Net income for the six months ended March 31, 1999
(Unaudited)..................................... 0 0 298,903 298,903
---- ---------- ----------- ----------
Balance, March 31, 1999
(Unaudited)..................................... $900 $5,218,941 $(4,014,173) $1,205,668
==== ========== =========== ==========
The accompanying notes are an integral part of these statements.
F-45
72
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEARS ENDED
MARCH 31, SEPTEMBER 30,
--------------------- -------------------
1999 1998 1998 1997
---------- -------- -------- --------
(UNAUDITED)
OPERATING ACTIVITIES
Net Income (loss)......................................... $ 298,903 $138,786 $309,637 $(21,542)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 88,641 90,281 209,553 232,826
(Gain) Loss on disposal of assets....................... 0 (2,550) (2,859) 27,675
Disposal of obsolete assets............................. 0 0 58,400 0
Provision for doubtful accounts......................... 68,456 15,176 92,933 102,559
Changes in operating assets and liabilities:
Accounts receivable................................... 8,074 772 (28,842) (41,295)
Merchandise inventory................................. 80,000 0 (6,553) 121,373
Prepaid expenses and other current assets............. (27,651) (72,167) (34,462) 39,662
Deposits and other assets............................. 0 6,251 (16,618) 16,798
Accounts payable...................................... 126,510 61,136 18,895 (29,878)
Accrued expenses...................................... 59,305 3,392 (3,738) (130,709)
---------- -------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......... 702,238 241,077 596,346 317,469
INVESTING ACTIVITIES
Proceeds from sale of assets.............................. 0 6,743 13,205 701,743
Purchase of property and equipment........................ (37,814) (7,282) (31,055) (41,196)
---------- -------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES....................................... (37,814) (539) (17,850) 660,547
FINANCING ACTIVITIES
Principal payments on notes payable....................... (70,000) (63,373) (56,428) (936,883)
Dividends paid to stockholders............................ 0 0 (125,000) (450,000)
Contributions received from stockholders.................. 0 0 125,000 450,000
Repayment of capital lease obligation..................... (10,546) (8,370) (17,075) (15,887)
Repayment of stockholder loan............................. 0 0 0 (18,608)
---------- -------- -------- --------
NET CASH (USED IN) FINANCING ACTIVITIES............ (80,546) (71,743) (73,503) (971,378)
---------- -------- -------- --------
NET INCREASE IN CASH............................... 583,878 168,795 504,993 6,638
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 583,878 168,795 504,993 6,638
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 659,779 154,786 154,786 148,148
---------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $1,243,657 $323,581 $659,779 $154,786
========== ======== ======== ========
Supplemental Disclosure of Cash Flow Information
Interest Paid............................................. $ 92,260 $104,812 $209,457 $271,674
========== ======== ======== ========
Supplemental Disclosure of Non-Cash Investing and Financing
Activities
Prorata share of losses from an investment in a real
estate limited partnership.............................. $ 0 $ 1,176 $ 2,351 $ 1,310
========== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-46
73
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998 IS
UNAUDITED)
SEPTEMBER 30, 1998
A. NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of The
Exotic Gardens, Inc. ("Exotic") and Kuhn Flowers, Inc. ("Kuhn") both of which
are Florida corporations. Exotic was formed in 1990 to acquire and operate a
retail florist that has been operating in the State of Florida since 1927. The
shareholders of Exotic also own Kuhn, another retail florist that has been
operating in the State of Florida since 1947. Consequently, Exotic and Kuhn are
affiliated by common ownership.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The Companies maintain most of their cash balances at a large national
financial institution located in Jacksonville, Florida. The balances are insured
by the Federal Deposit Insurance Corporation up to $100,000. At March 31, 1999,
and September 30, 1998 and 1997, the Companies had cash balances of
approximately $504,625 and $513,826 and $25,014, respectively, in excess of this
insured amount.
Allowance for Doubtful Accounts
The Companies provide an allowance for doubtful accounts based upon their
estimate of the accounts receivable that may be uncollectible.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful lives of the improvements or the term of the
related leases. The estimated useful lives of property and equipment are as
follows:
Buildings and improvements.................................. 5-39
Machinery and equipment..................................... 5-7
Furniture and fixtures...................................... 5-7
Autos and trucks............................................ 5
Leasehold improvements...................................... 3-5
Capitalized Software........................................ 5
Investments
Other assets include a real estate limited partnership investment of Exotic
that is accounted for on the equity method whereby the initial cost is increased
or decreased by Exotic's prorata share of the partnerships' income or loss,
capital contributions or distributions.
Intangible Assets
Intangible assets consist principally of goodwill that represents the
excess of the cost over the fair market value of net assets acquired by Kuhn
prior to March 23, 1990, that is being amortized on the straight-line method
over forty (40) years. In August 1998, Kuhn acquired certain intangible assets
valued at $25,000 in connection with the purchase of a store in Jacksonville,
Florida. These assets are being amortized on the
F-47
74
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
straight-line method over five (5) years. In 1995, Kuhn acquired a covenant not
to compete for $10,000 in connection with the acquisition of one of its stores.
The covenant is being amortized on the straight-line method over three (3)
years.
Income Taxes
The Companies and their shareholders have elected for the Companies to be
treated as S Corporations for income tax purposes. Under this election, all
profits and losses are directly attributable to the shareholders with no
resulting tax effect to the corporation, and shareholder distributions are
reductions of retained earnings. Accordingly, there is no income tax provision
recorded in the accompanying financial statements.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed
when incurred. Advertising expense was $356,914 and $427,543 for the six months
ended March 31, 1999, and 1998, respectively, and $633,404 and $983,152 for the
years ended September 30, 1998, and 1997, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
The Companies have reclassified certain 1997 amounts to conform to the 1998
presentation. These reclassifications have no effect on net income.
C. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1999, and September 30, 1998 and
1997, consist of the following:
SEPTEMBER 30,
MARCH 31, -----------------------
1999 1998 1997
------------ ---------- ----------
(UNAUDITED)
Land............................................... $ 598,714 $ 598,714 $ 636,714
Buildings.......................................... 1,995,536 1,995,536 1,997,927
Equipment.......................................... 676,537 638,723 625,100
Autos and trucks................................... 197,740 197,740 248,910
Furniture and fixtures............................. 134,438 134,438 167,138
Leasehold improvements............................. 419,260 419,260 415,803
Capitalized software............................... 10,484 10,484 10,484
---------- ---------- ----------
Total property and equipment....................... 4,032,709 3,994,895 4,102,076
Less accumulated depreciation...................... 1,815,608 1,735,488 1,604,412
---------- ---------- ----------
Property and equipment, net........................ $2,217,101 $2,259,407 $2,497,664
========== ========== ==========
F-48
75
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
D. NOTES PAYABLE
Notes payable as of March 31, 1999, and September 30, 1998 and 1997,
consist of the following:
SEPTEMBER 30,
MARCH 31, -----------------------
1999 1998 1997
----------- ---------- ----------
(UNAUDITED)
Mortgage note payable -- trust, interest at prime rate less
.375% (7.375% and 7.875% and 8.125% at March 31, 1999,
and September 30, 1998 and 1997, respectively) interest
payable quarterly, collateralized by land and building
with a book value of $2,010,132 and guaranteed by the
stockholders. Renewable every year at the option of the
lender................................................... $2,416,671 $2,416,671 $2,416,671
$250,000 line of credit, interest at prime rate (8.25% and
8.50% at September 30, 1998 and 1997, respectively)
payable monthly, collateralized by equipment and other
personal property and guaranteed by the stockholders. The
note is due and payable on demand........................ 0 70,000 126,428
---------- ---------- ----------
Total notes payable -- all current......................... $2,416,671 $2,486,671 $2,543,099
========== ========== ==========
Mortgage note payable -- trust, represents an amount due to the trust that
sold Exotic to the current shareholders. The trust is related but not controlled
by Exotic's stockholders. Exotic incurred interest expense of $86,307, $104,812,
$209,027 and $261,540 during the six months ended March 31, 1999 and 1998, and
the years ended September 30, 1998 and 1997, respectively. The note is renewable
every year at the option of the lender and is therefore reported as a current
liability in the accompanying financial statements.
The agreement with the trust has certain restrictions. The principal
restrictions relate to payment of dividends, not issuing additional stock,
limitation on investments, loans and borrowings, and limitation on salaries of
the stockholders. Management believes that Exotic is in compliance with the
covenants.
E. RELATED PARTY TRANSACTIONS
During the six months ended March 31, 1999 and 1998, and the years ended
September 30, 1998 and 1997, the Companies purchased $105,395, $79,975, $214,008
and $187,444 of insurance, respectively, from a company related by common
ownership. During part of the year ended September 30, 1997, Exotic leased part
of the space of one of its retail florist locations to a company partially owned
by one of the stockholders. The location was sold in May 1997.
F. STOCKHOLDERS' EQUITY
Exotic has 500 authorized shares of $1 par value common stock of which 400
shares are issued and outstanding. Kuhn has 7,500 shares of $1 par value common
stock of which 500 shares are issued and outstanding.
G. COMMITMENTS AND CONTINGENCIES
Operating Leases
Exotic has entered into various operating leases for vehicles, one of its
stores and a warehouse. Kuhn has entered into various operating leases for
vehicles and for its stores in Western Jacksonville, Ponte Vedra and St.
Augustine. The store lease for Exotic expired and is currently being renewed on
a month-to-month basis.
F-49
76
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The warehouse lease grants Exotic the right to renew the lease on the same terms
and conditions for an additional five-year term.
The following is a schedule of noncancelable future minimum lease payments
required under the operating leases that expire in more than twelve months:
1999.............................................. $230,042
2000.............................................. 164,576
2001.............................................. 67,123
2002.............................................. 51,940
2003.............................................. 35,192
--------
$548,873
========
On April 30, 1999, the future minimum lease payment obligations listed
above were assumed by the purchaser in conjunction with the sale by the
Companies of substantially all of the operating assets of the Companies (see
note H).
Rental expense for all operating leases in effect was $212,204 and $152,668
for the six months ended March 31, 1999 and 1998, respectively, and $361,115 and
$332,981 for the years ended September 30, 1998 and 1997, respectively.
Sale of Orlando Store
Kuhn sold its Orlando store in November 1996. The sale included related
receivables, fixtures and furnishings, and inventory, but does not include the
land and building. A gain of $28,983 was recorded on the disposition of the
assets. In connection with the sale, Kuhn agreed not to compete within a
twenty-five mile area of the store for a period of five years. This covenant,
valued at $25,000, has been recorded as deferred income and is being recognized
on a straight-line basis over five years. In connection with the sale, the
acquirer also executed an agreement to pay Kuhn $40,000 plus interest at 7%. The
acquirer has not made any payments and management is currently investigating
what actions should be taken. However, they are confident that the entire
balance will be repaid. The outstanding balance of this loan is $46,047, $44,480
and $42,380 as of March 31, 1999, and September 30, 1998 and 1997, respectively.
Management has separately listed the real estate for sale. Based on the
listing price and management's expected selling price, less related selling
expenses, the carrying amount of the land and building has been reduced by
providing a valuation allowance of $150,000. This allowance was recorded by
charging $50,000 against income from operations in 1998 and $100,000 in 1995.
Litigation
In 1991, the trustee of a trust controlled by previous stockholders of the
old Exotic Gardens, Inc. filed an action against Exotic and its secretary
treasurer alleging various matters regarding Exotic converting certain funds
belonging to the Trust when Exotic exercised collateral assignments in 1990 of
two insurance policies it held on the lives of the settlor of the Trust. Exotic
and the secretary treasurer prevailed at trial in 1995. In 1998 the matter was
settled and Exotic received $140,000. Such amount was offset substantially by
the payment of legal costs and other expenses.
Exotic sued a Massachusetts company, claiming violations by that company of
Exotic's trademark and reputational rights related to the defendant's use of a
confusingly similar name to market similar goods and services in Exotic's
market. The defendant filed counterclaims which were dismissed with prejudice
prior to trial. The case proceeded to trial in March of 1999 and Exotic
prevailed on some, but not all, of its claims. The jury found the trademark to
be valid and worthy of trademark protection and that the defendant had
F-50
77
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
threatened Exotic's reputation and goodwill by using the similar name. Final
judgment has not yet been entered and post trial motions could affect the
outcome, although the validity of Exotic's Trademark is unlikely to be affected.
There is no present likelihood that Exotic will recover a monetary award.
H. SUBSEQUENT EVENT
On April 30, 1999, the Companies sold substantially all of its operating
assets, with the exception of real estate, to Gerald Stevens, Inc. In
conjunction with this sale, liabilities, with the exception of the notes payable
referred to in Note D, were assumed by the purchaser. The Companies will report
a substantial gain in 1999 resulting from this sale.
F-51
78
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Calyx & Corolla, Inc.
We have audited the accompanying balance sheets of Calyx & Corolla, Inc. as
of June 30, 1998 and 1997 and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of Calyx & Corolla, Inc. at June 30, 1998 and
1997, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
August 21, 1998
F-52
79
CALYX & COROLLA, INC.
BALANCE SHEETS, MARCH 31, 1999 (UNAUDITED), JUNE 30, 1998 AND JUNE 30, 1997
MARCH 31, 1999 JUNE 30, 1998 JUNE 30, 1997
-------------- ------------- -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 3,622,705 $ 5,669,778 $ 6,105,991
Accounts receivable...................................... 173,005 271,695 236,339
Inventories.............................................. 1,079,542 842,401 838,965
Prepaid catalog expenses and other....................... 1,656,369 1,183,445 1,176,840
Income taxes receivable.................................. -- -- 15,679
Deferred tax assets...................................... 228,871 228,871 --
----------- ----------- -----------
Total current assets.............................. 6,760,492 8,196,190 8,373,814
PROPERTY AND EQUIPMENT -- Net.............................. 1,310,994 866,916 432,558
PHOTOGRAPHY PORTFOLIO AND OTHER (less accumulated
amortization of $633,741, $473,118 and $508,583)......... 417,903 353,388 266,328
DEPOSITS................................................... 52,750 52,500 60,897
----------- ----------- -----------
TOTAL ASSETS............................................... $ 8,542,139 $ 9,468,994 $ 9,133,597
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 1,773,464 $ 1,382,990 $ 1,261,624
Accrued expenses......................................... 155,556 99,759 112,386
Deferred revenue......................................... 1,950,778 1,719,552 1,372,575
Current portion of note payable.......................... 113,252 113,252 --
Rental Deposits.......................................... 9,955 -- --
Deferred rent............................................ 103,373 61,445 --
Income taxes payable..................................... 21,292 21,292 --
Deferred tax liabilities................................. -- -- 151,021
----------- ----------- -----------
Total current liabilities......................... 4,127,670 3,398,290 2,897,606
NOTE PAYABLE............................................... 238,936 313,163 --
SHAREHOLDERS' EQUITY:
Convertible preferred stock -- Authorized, 1,000,000
shares:
Series A, $25.00 stated value: designated, 78,000
shares; 67,834 shares issued and outstanding........ 1,695,850 1,695,850 1,695,850
Series B1, $31.50 stated value: designated, 22,501
shares; 13,442 shares issued and outstanding........ 423,423 423,423 423,423
Series B2, $31.50 stated value: designated, 12,000
shares; 8,004 shares issued and outstanding......... 252,126 252,126 252,126
Series C, $86.00 stated value: designated 128,140
shares; 109,440 shares issued and outstanding....... 9,369,639 9,369,639 9,369,639
Common stock, $1.20 stated value: authorized, 1,100,000
shares; 110,249, 110,249 and 109,163 shares issued
and outstanding..................................... 132,299 132,299 130,995
Paid in capital.......................................... 68,649 68,649 60,450
Media credits related to Series C preferred stock........ (2,577,290) (2,820,670) (2,820,670)
Accumulated deficit...................................... (5,189,163) (3,363,775) (2,875,822)
----------- ----------- -----------
Total shareholders' equity........................ 4,175,533 5,757,541 6,235,991
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $ 8,542,139 $ 9,468,994 $ 9,133,597
=========== =========== ===========
See notes to financial statements.
F-53
80
CALYX & COROLLA, INC.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
AND THE YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997
FOR THE NINE MONTHS
ENDED MARCH 31, FOR THE YEAR ENDED JUNE 30,
------------------------- -----------------------------
1999 1998 1998 1997
----------- ----------- ------------- -------------
(UNAUDITED)
NET SALES (see Note 2)...................... $13,159,400 $12,641,916 $20,065,121 $17,836,599
COST OF SALES............................... 4,075,112 3,846,167 6,033,614 5,357,616
----------- ----------- ----------- -----------
GROSS PROFIT................................ 9,084,288 8,795,749 14,031,507 12,478,983
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 11,151,613 9,804,464 15,160,108 12,549,238
----------- ----------- ----------- -----------
OPERATING LOSS.............................. (2,067,325) (1,008,715) (1,128,601) (70,255)
INTEREST AND OTHER INCOME, NET.............. 272,935 224,083 284,582 239,251
INTEREST EXPENSE............................ (30,198) (12,366) (23,826) --
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES.................. (1,824,588) (796,998) (867,845) 168,996
INCOME TAX (BENEFIT) EXPENSE................ 800 (265,689) (379,892) 29,205
----------- ----------- ----------- -----------
NET INCOME (LOSS)........................... $(1,825,388) $ (531,309) $ (487,953) $ 139,791
=========== =========== =========== ===========
See notes to financial statements.
F-54
81
CALYX & COROLLA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1998
AND NINE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED PREFERRED PREFERRED
SERIES A SERIES B1 SERIES B2 SERIES C COMMON
------------------- ----------------- ----------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ---------- ------ -------- ------ -------- ------- ---------- ------- --------
BALANCE AT
JUNE 30, 1996....... 67,834 $1,695,850 13,442 $423,423 8,004 $252,126 109,440 $9,369,639 109,163 $130,995
TAX BENEFIT FROM
DISQUALIFIED
DISPOSITION OF STOCK
OPTIONS.............
USE OF MEDIA
CREDITS.............
NET INCOME............
------ ---------- ------ -------- ----- -------- ------- ---------- ------- --------
BALANCE AT
JUNE 30, 1997....... 67,834 1,695,850 13,442 423,423 8,004 252,126 109,440 9,369,639 109,163 130,995
EXERCISE OF STOCK
OPTIONS............. 1,086 1,304
NET LOSS..............
------ ---------- ------ -------- ----- -------- ------- ---------- ------- --------
BALANCE AT
JUNE 30, 1998....... 67,834 1,695,850 13,442 423,423 8,004 252,126 109,440 9,369,639 110,249 132,299
USE OF MEDIA CREDITS
(UNAUDITED).........
NET LOSS
(UNAUDITED).........
------ ---------- ------ -------- ----- -------- ------- ---------- ------- --------
BALANCE AT MARCH 31,
1999 (UNAUDITED).... 67,834 $1,695,850 13,442 $423,423 8,004 $252,126 109,440 $9,369,639 110,249 $132,299
====== ========== ====== ======== ===== ======== ======= ========== ======= ========
MEDIA
CREDITS
RELATED TO
SERIES C TOTAL
PAID IN PREFERRED ACCUMULATED SHAREHOLDERS'
CAPITAL STOCK DEFICIT EQUITY
------- ----------- ----------- -------------
BALANCE AT
JUNE 30, 1996....... $ -- $(2,952,926) $(3,015,613) $5,903,494
TAX BENEFIT FROM
DISQUALIFIED
DISPOSITION OF STOCK
OPTIONS............. 60,450 60,450
USE OF MEDIA
CREDITS............. 132,256 132,256
NET INCOME............ 139,791 139,791
------- ----------- ----------- ----------
BALANCE AT
JUNE 30, 1997....... 60,450 (2,820,670) (2,875,822) 6,235,991
EXERCISE OF STOCK
OPTIONS............. 8,199 9,503
NET LOSS.............. (487,953) (487,953)
------- ----------- ----------- ----------
BALANCE AT
JUNE 30, 1998....... 68,649 (2,820,670) (3,363,775) 5,757,541
USE OF MEDIA CREDITS
(UNAUDITED)......... 243,380 243,380
NET LOSS
(UNAUDITED)......... (1,825,388) (1,825,388)
------- ----------- ----------- ----------
BALANCE AT MARCH 31,
1999 (UNAUDITED).... $68,649 $(2,577,290) $(5,189,163) $4,175,533
======= =========== =========== ==========
See notes to financial statements.
F-55
82
CALYX & COROLLA, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
AND YEARS ENDED JUNE 30, 1998 AND 1997
FOR THE NINE MONTHS FOR THE YEAR
ENDED MARCH 31 ENDED JUNE 30,
------------------------- -----------------------------
1999 1998 1998 1997
----------- ----------- ------------- -------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................ $(1,825,388) $ (531,309) $ (487,953) $ 139,791
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 353,558 221,196 354,574 301,223
Use of media credits....................... 243,380 -- -- 132,256
Tax benefit from disqualified disposition
of stock options........................ 60,450
Deferred income taxes...................... -- (265,689) (379,892) 5,784
Loss on equipment disposition.............. 1,626 -- 27,179 70,576
Deferred rent.............................. 41,928 38,403 61,445 --
Changes in assets and liabilities:
Accounts receivable..................... 98,690 (101,970) (35,356) 215,946
Inventories............................. (237,140) 58,842 (3,436) (250,426)
Prepaid catalog expenses and other...... (472,925) (669,695) (6,605) (364,703)
Deposits................................ 9,705 -- 8,397 (52,500)
Accounts payable and accrued expenses... 484,846 498,473 108,739 413,493
Deferred revenue........................ 192,652 545,460 346,977 241,571
Income taxes............................ 27,771 36,971 (79,828)
----------- ----------- ---------- ----------
Net cash provided by (used in)
operating activities............. (1,109,068) (178,518) 31,040 833,633
----------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (638,639) (541,540) (629,613) (362,445)
Purchases of photography portfolio and
other................................... (225,139) (253,525) (280,158) (196,467)
Proceeds from dispositions of equipment.... -- -- 6,600 --
----------- ----------- ---------- ----------
Net cash used in investing
activities....................... (863,778) (795,065) (903,171) (558,912)
----------- ----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable................. -- 461,700 500,000 --
Principal payments on note payable......... (74,227) -- (73,585) --
Exercise of common stock for stock
options................................. -- -- 9,503 --
----------- ----------- ---------- ----------
Net cash provided by (used in)
financing activities............. (74,227) 461,700 435,918 --
----------- ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (2,047,073) (511,883) (436,213) 274,721
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD..................................... 5,669,778 6,105,991 6,105,991 5,831,270
----------- ----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 3,622,705 $ 5,594,108 $5,669,778 $6,105,991
=========== =========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest..................... $ 30,200 $ 12,366 $ 23,826 $ --
=========== =========== ========== ==========
Cash paid for taxes........................ $ 800 $ -- $ -- $ 42,800
=========== =========== ========== ==========
See notes to financial statements
F-56
83
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General -- The Company is a specialty retailer of fresh and preserved
flowers and accessories, which are marketed via mail order catalogs, advertising
and the internet throughout the United States.
Interim Financial Statements (unaudited) -- In the opinion of management,
the accompanying unaudited interim financial statements of the Company contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of March 31, 1999, and
the results of its operations and its cash flows for the nine months ended March
31, 1999 and 1998. Traditionally, a significant portion of the Company's sales
are realized during the period from April through June. Therefore, the results
of operations and cash flows for the nine months ended March 31, 1999 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the year ended June 30, 1999.
Cash Equivalents includes certificates of deposit and money market accounts
with original maturities of three months or less.
Prepaid Catalog Expenses and Other -- The Company capitalizes the cost of
producing and distributing its mail order catalogs. Capitalized catalog costs
are amortized over the expected period in which sales are generated from a given
catalog, beginning at the time the catalog is mailed. Catalog costs relating to
deferred revenues are expensed as the revenues are earned. Prepaid catalog costs
at March 31, 1999 and June 30, 1998 and 1997 were $1,407,037 (unaudited),
$1,054,950, and $808,450, respectively. For the fiscal years ended June 30, 1998
and 1997 advertising expense was $827,449 and $1,092,022, respectively; there
was no advertising expense for the nine months ended March 31, 1999 and $754,313
(unaudited) for the nine months ended March 31, 1998.
Inventories are stated at the lower of cost (weighted moving average cost)
or market.
Property and Equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of the related asset.
The Company reviews its assets for impairment whenever events or changes
indicate that the carrying value of an asset may not be recoverable. Asset
impairment charges of $63,000 and $28,000 were recorded in the fiscal 1998 and
1997, respectively.
Photography Portfolio costs consist of certain costs associated with
various catalog photographs which are expected to be used in future catalogs.
These costs are amortized using the straight-line method over a period of three
years.
Media Credits were acquired through shareholder investment by Capital
Cities Capital, Inc., ("CCC, Inc.") whereby CCC, Inc. agreed to pay for time and
space charges associated with media advertising by the Company on media
properties owned by CCC, Inc.'s parent, Capital Cities/ABC, Inc., its
subsidiaries and affiliated entities, in accordance with and subject to the
terms and conditions of the agreement. Media credits have no expiration date and
are amortized based upon the Company's usage and such amortization is recorded
as selling, general, and administrative expenses. The Company utilized $243,380
(unaudited) of media credits for the nine months ended March 31, 1999 and $0 and
$132,256 of media credits in the fiscal years ended June 30, 1998 and 1997. At
March 31, 1999 (unaudited) and at June 30, 1998 and 1997 available media credits
are shown as a contra-equity account in the accompanying balance sheet.
Revenue is recognized upon shipment of product. Deferred revenue consists
of payments received for flowers to be shipped during the next fiscal period.
Income Taxes -- The Company accounts for income taxes under the asset and
liability method in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes. Deferred income taxes arise from
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements.
Reclassifications have been made to fiscal 1997 amounts to conform to the
fiscal 1998 presentation.
F-57
84
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make certain assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation.
Recent Accounting Pronouncements
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. The Company believes that this statement will not have a
material effect on the Company's accounting for computer software development or
acquisition.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires the
immediate expensing of current start-up costs as well as existing costs
previously capitalized for fiscal years beginning after December 15, 1998. The
Company believes that this statement will not have a material effect on the
Company's reporting on the costs of start-up activities.
2. TOTAL SALES AND DEFERRED SALES
FOR THE NINE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED JUNE 30,
------------------------- ---------------------------
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Net sales recognized in current fiscal
period.................................. $13,159,400 $12,641,916 $20,065,121 $17,836,599
Deferred sales to be recognized in the
next fiscal period...................... 1,950,778 1,918,034 1,719,552 1,372,575
----------- ----------- ----------- -----------
Total........................... $15,110,178 $14,559,950 $21,784,673 $19,209,174
=========== =========== =========== ===========
3. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1999 (unaudited) and June 30, 1998 and
1997 consist of the following:
MARCH 31, 1999 JUNE 30, 1998 JUNE 30, 1997
-------------- ------------- -------------
(UNAUDITED)
Computer equipment................................... $1,253,218 $ 642,407 $ 599,421
Office equipment..................................... 57,212 57,987 54,774
Furniture and fixtures............................... 8,302 4,906 25,330
Leasehold improvements............................... 492,378 492,378 17,936
---------- ---------- ----------
Total...................................... 1,811,110 1,197,678 697,461
Less accumulated depreciation........................ (500,116) (330,762) (264,903)
---------- ---------- ----------
Property and Equipment -- Net........................ $1,310,994 $ 866,916 $ 432,558
========== ========== ==========
F-58
85
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. BORROWINGS
The Company has a $1,000,000 bank revolving line of credit which expires
November 1, 1999. Management believes it will be able to renew or replace the
line of credit with the existing bank or another financial institution with
substantially similar terms. Under the terms of the agreement, borrowings bear
interest at a rate per annum equal to the bank's reference rate plus .75
percentage points. The agreement requires maintenance of certain financial loan
covenants, including current ratio, liquidity, limitation of losses,
restrictions on other debt, liens, and capital expenditures and prohibits
payment of cash dividends. At March 31, 1999 (unaudited) and June 30, 1998,
there were no borrowings under the line of credit.
In July 1997, the Company, in satisfaction of terms included within the May
1997 facilities lease (see Note 5), obtained a standby letter of credit in the
amount of $750,000. The standby letter of credit adjusts in annual decrements of
$250,000 and expires on July 28, 2000.
In November 1997, the Company entered into a $500,000 term loan to fund
tenant improvements in the new corporate offices. The note bears interest at a
fixed rate of 10.12% and is payable in 48 monthly installments of $12,604 and is
secured by a lien on the existing order processing computer system. Future
minimum principal payments on the term loan are:
FISCAL YEAR
ENDING JUNE 30:
- ---------------
1999........................................................ $113,252
2000........................................................ 124,750
2001........................................................ 136,846
2002........................................................ 51,567
--------
Total....................................................... $426,415
========
5. LEASES
In May 1997, the Company entered into a ten year lease for new corporate
facilities. The lease includes a predetermined fixed escalation of the minimum
rental during its initial term. The Company has recognized the related rental
expense on a straight-line basis and has recorded the difference between the
expense charged to income and the amount payable under the lease as deferred
rent.
The Company also leases telephone equipment and office furnishings under
operating leases which expire December 2002.
Future minimum payments under operating leases for office space and
equipment are as follows:
FISCAL YEAR
ENDING JUNE 30:
- ---------------
1999........................................................ $1,047,349
2000........................................................ 1,047,349
2001........................................................ 1,047,349
2002........................................................ 1,047,349
2003........................................................ 958,517
Thereafter.................................................. 3,768,630
----------
Total....................................................... $8,916,543
==========
Rental expense for the nine months ended March 31, 1999 and 1998 was
$600,587 (unaudited) and $421,471 (unaudited), respectively and for the fiscal
years ended June 30, 1998 and 1997 was $639,028 and $109,967.
F-59
86
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED:
On September 23, 1998 the Company surrendered some unused space within its
corporate facilities to the lessor, reducing future minimum payments by
approximately $120,000 annually which is not reflected in the future minimum
payments above.
Beginning October 1, 1998 the Company entered into an agreement to sublease
a portion of its unoccupied space. The lease includes a predetermined fixed
escalation of the minimum rental during its initial term of four years. Net
income attributed to the sublease for the period ending March 31, 1999 was
$18,469 (unaudited) which is not reflected in the future minimum payments above.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
FOR THE NINE MONTHS ENDED
MARCH 31, FOR THE YEAR ENDED JUNE 30,
------------------------- ---------------------------
1999 1998 1998 1997
----------- ----------- ------------ ------------
(UNAUDITED)
Current:
Federal............................ $ -- $ -- $ -- $ 47,751
State.............................. 800 -- -- (24,330)
--------- --------- --------- ---------
Total......................... 800 -- -- 23,421
Deferred................................ -- (265,689) (379,892) 5,784
--------- --------- --------- ---------
Total................................... $ 800 $(265,689) $(379,892) $ 29,205
========= ========= ========= =========
The components of the net deferred tax assets (liabilities) at March 31,
1999 and 1998 (unaudited) and June 30, 1998 and 1997 are as follows:
MARCH 31, JUNE 30,
---------------------- -------------------------
1999 1998 1998 1997
---------- --------- ----------- -----------
(UNAUDITED)
Deferred tax assets:
Federal and state net operating losses.... $1,432,253 $ 773,384 $ 616,179 $ 176,457
State tax benefit......................... 64,866 20,795 43,747 42,038
Other..................................... 76,555 61,972 69,610 73,600
---------- --------- ---------- ---------
Total deferred tax assets............ 1,573,674 856,151 729,536 292,095
Deferred tax liabilities:
Deferred catalog and advertising costs.... (691,216) (725,563) (456,793) (443,116)
Depreciation and amortization............. (35,710) (15,920) (17,266) --
Deferred rent............................. -- -- (26,606) --
---------- --------- ---------- ---------
Total deferred tax liabilities....... (726,926) (741,483) (500,665) (443,116)
---------- --------- ---------- ---------
Valuation allowance............................ (617,877) -- -- --
---------- --------- ---------- ---------
Total net deferred taxes....................... $ 228,871 $ 114,668 $ 228,871 $(151,021)
========== ========= ========== =========
A valuation allowance is provided when it is more likely than not that some
portion of a deferred tax asset will not be realized. The Company has
established a valuation allowance at March 31, 1999 due to the uncertainty of
realizing future tax benefits from its net operating loss carryforwards and
other deferred tax assets.
F-60
87
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $1,459,925 and net operating loss
carryforwards for state tax purposes of approximately $1,288,291 which will
expire at various dates from 2006 to 2013. Certain provisions of the 1996 Tax
Reform Act may limit the use of the Company's net operating loss carryforward
under the change in ownership provisions of Section 382 of the Internal Revenue
Code.
7. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK:
Each Series A, B1, B2 and C preferred share is convertible at the option of
the holder into one share of common stock (subject to adjustments for events of
dilution). Shares will automatically be converted upon a public offering of
common stock meeting specified criteria. Preferred shareholders are entitled to
one vote per share.
In the event of liquidation, dissolution or winding up of the Company, the
preferred shareholders of the following shares shall receive, prior and in
preference to the holders of the common stock, the following amounts:
PREFERENCE
NAME OF SHARES AMOUNT
- -------------- ----------
Series A................................................ $1,695,850
Series B1............................................... 423,423
Series B2............................................... 252,126
Series C................................................ 9,411,840
Additionally, the aforementioned preferred shareholders are entitled to
receive an amount per share equal to 8% of the original issue price for each
twelve months that has passed since the date of the first issuance of the
preferred stock calculated daily. In the event that the distributions to the
aforementioned preferred shareholders are insufficient to satisfy the
preferential amounts, all of the assets and funds of the Company legally
available for distribution shall be distributed ratably among the holders of
Series A, B1, B2 and C preferred stock in proportion to the aggregate
liquidation preferences of such stock owned by each such holder.
WARRANTS:
Warrants to purchase an additional 4,501 shares of Series B1 preferred
stock were issued in fiscal 1991 at the rate of one warrant for every four
shares of Series B1 issued. The warrants entitle the owner to purchase
additional shares at an exercise price of $31.50 per share through July 16,
2000. Sixty warrants were exercised in fiscal 1996. The Company has reserved
4,441 shares of Series B1 preferred stock for exercise of the remaining warrants
as of June 30, 1998.
A common stock purchase warrant was issued in fiscal 1995 which entitles
the holder to purchase 15,000 shares of the Company's common stock at an
exercise price of $94.60 per share through September 12, 1999. No warrants have
been exercised as of June 30, 1998 (see Note 9.)
F-61
88
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK:
At June 30, 1998, the Company has reserved shares of common stock for
conversion of the following:
PREFERENCE
NAME OF SHARES AMOUNT
- -------------- ----------
Series A................................................ 78,000
Series B1............................................... 22,501
Series B2............................................... 12,000
Series C................................................ 128,140
Warrants................................................ 19,441
The proceeds from investors' $3.75 million purchase of the Company's Series
C preferred stock during fiscal 1995 was used to repurchase 42,475 shares from
Series A and Series B preferred and common shareholders. The shares repurchased
were retired by the Company and resulted in a $3,206,274 increase in the
accumulated deficit during fiscal 1996.
8. STOCK OPTION PLAN
The Company's 1988 Stock Option Plan ("the Plan"), as amended in the
Restated Articles of Incorporation, provides for the granting of common stock
incentive and nonstatutory options to key employees, nonemployee members of the
Board of Directors and consultants or independent contractors. During fiscal
1997, the Company amended the Plan to increase the number of shares of its
common stock reserved for the issuance of additional stock options by 25,000. At
June 30, 1998, the Company had reserved 87,500 shares under the Plan.
Options granted to employees who own up to 10% of the Company's outstanding
stock may be exercised at not less than 85% of the fair market value of the
stock, as determined by the Board of Directors at the date of grant. Options
granted to employees who own more than 10% of the outstanding stock may be
exercised at 110% of the fair market value of the stock as determined by the
Board of Directors at the date of grant. Options under the Plan vest over a
five-year period unless accelerated by the Board of Directors and expire within
ten years from the grant date.
The 1988 Plan expired January 25, 1999, and a replacement plan was being
drafted at March 31, 1999.
Option activity under the Plan is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
Outstanding, June 30, 1996 (13,491 exercisable at a weighted
average exercise price of $2.71).......................... 34,887 $5.46
Granted (weighted average fair value of $2.32).............. 14,066 8.75
--------
Outstanding, June 30, 1997 (19,871 exercisable at a weighted
average exercise price of $3.67).......................... 48,953 6.41
Granted (weighted average fair value of $2.24).............. 2,050 8.75
Exercised................................................... (1,087) 8.75
Cancelled................................................... (11,614) 8.75
--------
Outstanding, June 30, 1998 (26,103 exercisable at a weighted
average exercise price of $4.68).......................... 38,302 5.94
========
F-62
89
CALYX & COROLLA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Additional information regarding options outstanding as of June 30, 1998 is
as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------ ----------------------------
WEIGHTED AVG. WEIGHTED
NUMBER REMAINING WEIGHTED NUMBER AVERAGE
OF SHARES CONTRACTUAL AVERAGE OF SHARES EXERCISABLE
EXERCISE PRICE OUTSTANDING LIFE (YRS.) EXERCISE PRICE EXERCISABLE PRICE
- -------------- ----------- ------------- -------------- ----------- --------------
$ 1.20 11,174 3.4 $1.20 11,174 $1.20
3.25 3,993 5.3 3.25 3,993 3.25
8.75 23,135 6.9 8.75 10,938 8.75
------ ------
$1.20-$8.75 38,302 5.7 $5.94 26,105 $4.68
====== ======
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, Accounting for Stock Issued to Employees,
and its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS 123 requires the disclosure of pro forma net income had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 60 months; average risk free interest rates, 6.0% in fiscal 1998 and
fiscal 1997; and no dividends during the expected term.
The Company's calculations are based on a single option valuation approach
and forfeitures are recognized as they occur. If the computed fair values of the
fiscal 1998 and 1997 awards had been amortized to expense over the vesting
period of the awards, pro forma net income (loss) would have been ($500,972) in
fiscal 1998, and $129,389 in fiscal 1997. However, the impact of outstanding
non-vested stock options granted prior to fiscal 1996 has been excluded from the
pro forma calculation; accordingly, fiscal 1998 and fiscal 1997 pro forma
adjustments are not indicative of future period pro forma adjustments, when the
calculation will apply to all future applicable stock options.
9. INTERIM INFORMATION (UNAUDITED)
On May 11, 1999, the Company entered into an Agreement and Plan of Merger
with Gerald Stevens, Inc. for total consideration of approximately $14.3
million, consisting of approximately 934,000 shares of Gerald Stevens common
stock and approximately 160,000 options to purchase Gerald Stevens common stock.
On May 7, 1999 an agreement was signed wherein Capital Cities Capital, Inc
("CCC, Inc.") forfeited its right to exercise the 15,000 warrants acquired in
connection with the stock purchase agreement of September 12, 1994.
Additionally, CCC, Inc. shall return to the Company, on the consummation of the
aforementioned sale transaction, a total of 29,213 Series C preferred shares to
redeem unused media credits (see Note 1).
F-63
90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
J.J. Fallon Company, Inc.
We have audited the accompanying balance sheet of J.J. Fallon Company, Inc.
d/b/a Fallon's Creative Flowers (a North Carolina corporation) as of June 30,
1998, and the related statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J.J. Fallon Company, Inc. d/b/a
Fallon's Creative Flowers as of June 30, 1998, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
January 22, 1999.
F-64
91
J.J. FALLON COMPANY, INC.
BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
1998 1998
-------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $180,049 $ 28,318
Accounts receivable, net of allowance for doubtful
accounts of $14,000.................................... 153,434 187,767
Inventories............................................... 234,868 252,065
Deferred tax benefit...................................... -- 28,813
Prepaid and other current assets.......................... 11,685 16,214
-------- --------
Total current assets.............................. 580,036 513,177
-------- --------
Property and equipment --
Furniture and fixtures................................. 116,478 116,478
Equipment and machinery................................ 245,842 251,001
Vehicles............................................... 122,442 124,192
Leasehold improvements................................. 310,961 313,961
-------- --------
795,723 805,632
Less -- Accumulated depreciation.......................... (674,323) (693,223)
-------- --------
121,400 112,409
-------- --------
Intangible assets, net of accumulated amortization of
$19,900................................................... 43,427 42,476
Deferred tax benefit........................................ 27,310 27,310
-------- --------
Total assets...................................... $772,173 $695,372
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $456,341 $413,144
Accounts payable.......................................... 43,229 90,034
Accrued expenses.......................................... 33,629 45,048
Income taxes payable...................................... 35,782 --
-------- --------
Total current liabilities......................... 568,981 548,226
-------- --------
Long-term debt.............................................. 2,535 --
-------- --------
Total liabilities................................. 571,516 548,226
-------- --------
Stockholders' equity:
Preferred stock, $1 par; 400,000 shares authorized,
300,000 shares
issued and outstanding................................. 300,000 300,000
Common stock, $1 par value; 400,000 shares authorized, 78
shares
issued and outstanding................................. 78 78
Accumulated deficit....................................... (99,421) (152,932)
-------- --------
Total stockholders' equity........................ 200,657 147,146
-------- --------
$772,173 $695,372
======== ========
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-65
92
J.J. FALLON COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1998 1998 1997
------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
Revenue:
Product sales.................................. $2,489,406 $ 530,260 $ 540,126
Service and other revenue...................... 551,180 114,836 122,668
---------- ---------- ----------
3,040,586 645,096 662,794
---------- ---------- ----------
Operating costs and expenses:
Cost of product sales.......................... 1,109,288 254,037 225,735
Operating expenses............................. 1,018,755 264,597 249,056
General and administrative expenses............ 613,773 202,426 133,085
---------- ---------- ----------
Operating expenses..................... 2,741,816 721,060 607,876
---------- ---------- ----------
Operating income (loss).......................... 298,770 (75,964) 54,918
Interest and other expenses...................... (45,775) (6,360) (8,869)
Other income..................................... 806 -- --
---------- ---------- ----------
Income (loss) before income taxes................ 253,801 (82,324) 46,049
Income taxes..................................... 88,745 (28,813) 14,572
---------- ---------- ----------
Net income (loss)...................... $ 165,056 $ (53,511) $ 31,477
========== ========== ==========
The accompanying notes to financial statements are an integral part of these
statements.
F-66
93
J.J. FALLON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
ACCUMULATED
COMMON STOCK PREFERRED STOCK DEFICIT TOTAL
------------ --------------- ----------- --------
Balance, June 30, 1997........................ $78 $300,000 $(264,477) $ 35,601
Net income............................... 0 0 165,056 165,056
--- -------- --------- --------
Balance, June 30, 1998........................ 78 300,000 (99,421) 200,657
Net loss (unaudited)..................... 0 0 (53,511) (53,511)
--- -------- --------- --------
Balance, September 30, 1998 (unaudited)....... $78 $300,000 $(152,932) $147,146
=== ======== ========= ========
The accompanying notes to financial statements are an integral part of these
statements.
F-67
94
J.J. FALLON COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1998 1998 1997
------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income..................................... $165,056 $(53,511) $ 31,477
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization............... 48,006 19,852 18,901
(Benefit) provisions for deferred taxes..... 50,798 (28,813) 14,572
(Increase) decrease in:
Accounts receivable, net.................. 9,554 (34,333) (281)
Inventories............................... (53,368) (17,198) (30,535)
Prepaid and other current assets.......... (1,487) (4,529) (3,224)
Increase (decrease) in:
Accounts payable.......................... (102,836) 46,805 2,065
Accrued expenses.......................... 8,803 (24,393) (67,273)
Income taxes payable...................... 24,520 -- --
-------- -------- --------
Net cash provided by (used in)
operating activities............ 149,046 (96,120) (34,298)
-------- -------- --------
Cash flows from investing activities -- Purchases
of property and equipment...................... (19,216) (9,880) (10,511)
-------- -------- --------
Cash flows from financing activities -- Principal
payments on long-term debt..................... (74,931) (45,731) (13,927)
-------- -------- --------
Net increase in cash............................. 54,899 (151,731) (58,736)
Cash, beginning of period........................ 125,150 180,049 125,151
-------- -------- --------
Cash, end of period.............................. $180,049 $ 28,318 $ 66,415
======== ======== ========
Supplemental disclosures of cash information:
Cash payments for interest..................... $ 43,689 $ 6,360 $ 8,869
======== ======== ========
Cash payments for taxes........................ $ 13,427 $ 41,835 $ --
======== ======== ========
The accompanying notes to financial statements are an integral part of these
statements.
F-68
95
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 ARE UNAUDITED)
1. BACKGROUND:
NATURE OF BUSINESS
J.J. Fallon Company, Inc. (the Company) is a C Corporation incorporated in
the state of North Carolina. The Company is engaged in the retail sale of
flowers, flower arrangements, and gifts, operating four locations in the Raleigh
area under the name Fallon's Creative Flowers. The Company grants credit to
corporate and personal customers in the normal course of business, substantially
all of whom are located in North Carolina.
ACQUISITION OF COMPANY
In October, 1998, the stockholders of the Company sold all the Company's
outstanding shares to Gerald Stevens, Inc. for approximately $1.9 million less
debt of approximately $448,000 and redemption of preferred stock of $300,000.
Gerald Stevens, Inc. is a holding company of several retail floral companies
located throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998, and the statements of its operations and cash
flows for the three months ended September 30, 1998. The results of operations
and cash flows for the three months ended September 30, 1998 are not necessarily
indicative of the results of operations or cash flows which may be reported for
fiscal year 1999.
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
Service and other revenue includes rebates and commissions received for
orders placed through FTD and AFS, delivery services and rental charges. Revenue
is recognized at the time the related sale or service occurs.
INVENTORIES
The Company values inventories, which consist of merchandise held for
resale, on an average cost basis. Cost is determined by utilizing the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance and repairs are
charged against income as incurred. Expenditures for major renewals,
replacements and betterments, which extend the assets' useful life, are
capitalized.
F-69
96
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
Furniture and Fixtures...................................... 5 to 7 years
Equipment and Machinery..................................... 5 to 7 years
Vehicles.................................................... 3 to 5 years
Leasehold Improvements...................................... 5 to 10 years
Depreciation of office equipment is recorded as general and administrative
expense. All other depreciation is recorded as operating expense.
INTANGIBLE ASSETS
Goodwill is included in the accompanying balance sheet as other assets and
is amortized on a straight-line basis over 17 years.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended June 30, 1998 was $118,982.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade and other receivables. No single
customer comprises more than 10% of revenues. The Company has not experienced
significant losses with respect to its receivables.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain fiscal year 1998 balances have been reclassified to conform with
the fiscal year 1999 presentation.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
(SFAS No. 130) which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
F-70
97
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following at June 30, 1998:
Note payable to preferred stockholder, payable in 111
monthly
installments of $2,500 plus 7% fixed interest............. $262,147
Notes payable to a bank, payable in monthly installments of
$4,500 with renewal provisions at two year increments and
variable
interest at prime plus 2%. This note is collateralized by
the Company's assets...................................... 186,485
Vehicle loans with a bank with interest payable at varying
rates.
Remaining payment terms are between one and two years..... 10,244
--------
Total long-term debt........................................ 458,876
Current portion of long-term debt........................... 456,341
--------
Non-current portion of long-term debt....................... $ 2,535
========
The current portion of long-term debt includes all balances
paid in full in connection with the subsequent acquisition
by Gerald Stevens, Inc. (Note 1)
5. STOCKHOLDERS' EQUITY:
Preferred stock is convertible upon demand to common stock at a ratio of
one preferred share to one common share.
6. LEASE COMMITMENTS:
The Company leases its retail stores and warehouses under operating leases.
Future minimum lease payments under these leases are as follows for the years
ending June 30:
1999........................................................ $ 93,334
2000........................................................ 87,155
2001........................................................ 62,950
2002........................................................ 24,000
2003........................................................ 18,000
--------
$285,439
========
Rental expense for the year ended June 30, 1998 was $119,901.
7. INCOME TAXES:
The provision for income taxes includes amounts for deferred income taxes,
resulting primarily from utilization of a net operating loss carryforward and
fixed asset depreciation reported for income tax purposes in a period different
from that for financial statement purposes.
The provision for income taxes consists of the following for the year ended
June 30, 1998:
CURRENT DEFERRED TOTAL
------- -------- -------
State............................................. $14,810 $ 3,595 $18,405
Federal........................................... 23,137 47,203 70,340
------- ------- -------
$37,947 $50,798 $88,745
======= ======= =======
F-71
98
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a reconciliation of federal income taxes at the
United States statutory rate with the effective rate as follows for the year
ended June 30, 1998:
Provision for income taxes at federal statutory rate........ $86,292
Impact of net operating loss carryforward................... (11,747)
Deduction for state tax expense............................. (6,258)
Other....................................................... 2,053
-------
$70,340
=======
8. SUBSEQUENT EVENTS:
In December, 1998, the Company entered into a purchase agreement to acquire
a florist in Durham, North Carolina under the name Flowers in Woodcroft. In
accordance with the terms of the agreement, the Company purchased the assets and
tradename Flowers in Woodcroft for $210,000.
F-72
99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoebe Floral, Inc.:
We have audited the accompanying balance sheet of Phoebe Floral, Inc. (a
Pennsylvania Corporation) as of September 30, 1998, and the related statements
of income, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoebe Floral, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Lancaster, Pa.,
February 26, 1999.
F-73
100
PHOEBE FLORAL, INC.
BALANCE SHEETS
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 355,161 $ 541,771
Trade receivables, less allowance for doubtful accounts of
$19,000................................................. 470,603 240,386
Inventories............................................... 180,000 226,846
Note receivable from shareholder.......................... 85,000 --
Other current assets...................................... 27,096 28,422
---------- ----------
Total current assets............................... 1,117,860 1,037,425
---------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 286,561 271,301
Furniture and fixtures.................................... 244,483 236,890
Leasehold improvements.................................... 495,552 487,167
---------- ----------
1,026,596 995,358
Less -- Accumulated depreciation.......................... (838,904) (826,253)
---------- ----------
Net property and equipment.............................. 187,692 169,105
---------- ----------
OTHER ASSETS................................................ 25,526 25,503
---------- ----------
Total assets............................................ $1,331,078 $1,232,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 63,965 $ 13,149
Accounts payable and accrued expenses..................... 388,440 138,295
Accrued payroll and payroll taxes......................... 49,846 122,446
Accrued corporate taxes................................... 41,265 24,017
Customer deposits......................................... 22,500 16,855
Dividends payable......................................... -- 55,000
Other current liabilities................................. 11,626 9,294
---------- ----------
Total current liabilities............................... 577,642 379,056
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities................... 17,300 73,477
Deferred gain on sale of assets........................... 6,317 6,695
---------- ----------
Total long-term liabilities............................. 23,617 80,172
---------- ----------
Total liabilities....................................... 601,259 459,228
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, voting $10 par value; authorized 10,000
shares; 8,200 shares issued and 2,930 shares
outstanding............................................. 82,000 82,000
Common stock, nonvoting, $1 par value; authorized 10,000
shares; issued 600 shares and outstanding 0 and 600
shares, respectively.................................... 600 600
Additional paid-in capital................................ 59,712 59,712
Retained earnings......................................... 955,067 778,053
---------- ----------
1,097,379 920,365
Less cost of common stock held in treasury, 5,870 and
5,270 shares, respectively................................ (367,560) (147,560)
---------- ----------
Total stockholders' equity.............................. 729,819 772,805
---------- ----------
Total liabilities and stockholders' equity.............. $1,331,078 $1,232,033
========== ==========
The accompanying notes are an integral part of these financial statements.
F-74
101
PHOEBE FLORAL, INC.
STATEMENTS OF INCOME
FOR THE THREE FOR THE THREE
MONTHS MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
REVENUE:
Product sales (net of discounts of $44,049
(unaudited), $45,195 (unaudited) and $158,451 for
the three-months ended December 31, 1998 and 1997
and the year ended September 30, 1998,
respectively)...................................... $1,022,072 $1,076,076 $3,749,791
Service and other revenue............................. 181,288 160,793 427,183
---------- ---------- ----------
Total revenue...................................... 1,203,360 1,236,869 4,176,974
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of product sales................................. 626,758 622,842 2,422,482
Operating expenses.................................... 326,344 330,843 1,279,552
Selling, general and administrative................... 78,567 80,145 290,791
---------- ---------- ----------
Total operating expenses........................... 1,031,669 1,033,830 3,992,825
---------- ---------- ----------
Operating income...................................... 171,691 203,039 184,149
---------- ---------- ----------
Interest income....................................... 6,293 5,376 25,936
Interest expense...................................... (2,013) (2,047) (8,770)
Other income.......................................... 1,043 -- 40,652
---------- ---------- ----------
Net income......................................... $ 177,014 $ 206,368 $ 241,967
========== ========== ==========
PRO FORMA:
Net income............................................ $ 177,014 $ 206,368 $ 241,967
Pro forma income tax provision (Note 10).............. 71,691 83,579 97,997
---------- ---------- ----------
Pro forma net income.................................. $ 105,323 $ 122,789 $ 143,970
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-75
102
PHOEBE FLORAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------- TREASURY ADDITIONAL RETAINED
VOTING NONVOTING STOCK PAID-IN CAPITAL EARNINGS TOTAL
------- --------- --------- --------------- -------- --------
Balance at October 1, 1997...... $88,000 $ -- $(147,560) $54,312 $656,086 $650,838
Exchange of 600 shares of voting
shares into nonvoting
shares........................ (6,000) 600 -- 5,400 -- --
Net income...................... -- -- -- -- 241,967 241,967
Distribution to stockholders.... -- -- -- -- (120,000) (120,000)
------- ---- --------- ------- -------- --------
Balance at September 30, 1998... 82,000 600 (147,560) 59,712 778,053 772,805
Net income (Unaudited).......... -- -- -- -- 177,014 177,014
Treasury stock acquired......... -- -- (220,000) -- -- (220,000)
------- ---- --------- ------- -------- --------
Balance at December 31, 1998
(Unaudited)................... $82,000 $600 $(367,560) $59,712 $955,067 $729,819
======= ==== ========= ======= ======== ========
The accompanying notes are an integral part of these financial statements.
F-76
103
PHOEBE FLORAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE FOR THE THREE
MONTHS MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $177,014 $206,368 $241,967
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation....................................... 12,651 22,464 72,882
Gain on sale of property and equipment............. -- -- (32,828)
Amortization of deferred gain on sale of property
and equipment.................................... (378) -- (880)
(Increase) decrease in --
Trade receivables................................ (230,217) (270,076) (37,136)
Inventories...................................... 46,846 50,836 (6,010)
Notes receivable to officer...................... (85,000) -- --
Other assets..................................... 1,303 -- (9,914)
Increase (decrease) in --
Accounts payable and accrued expenses............ (25,207) 8,413 (42,997)
Customer deposits................................ 5,645 (3,056) (8,701)
Other current liabilities........................ 2,332 (7,825) 1,185
-------- -------- --------
Net cash provided by operating activities..... (95,011) 7,124 177,568
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment....... -- -- 105,509
Purchases of property and equipment................ (31,238) (2,715) (10,433)
-------- -------- --------
Net cash provided by investing activities..... (31,238) (2,715) 95,076
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt............... (5,361) (7,312) (25,158)
Dividends to stockholders.......................... (55,000) -- (65,000)
-------- -------- --------
Net cash used in financing activities......... (60,361) (7,312) (90,158)
-------- -------- --------
NET INCREASE IN CASH.................................... (186,610) (2,903) 182,486
CASH, BEGINNING OF PERIOD............................... 541,771 359,285 359,285
-------- -------- --------
CASH, END OF PERIOD..................................... $355,161 $356,382 $541,771
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest......................... $ 2,013 $ 2,047 $ 7,870
======== ======== ========
Treasury stock acquired, not yet paid for.......... $220,000 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-77
104
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BACKGROUND:
NATURE OF BUSINESS
Phoebe Floral, Inc. (the "Company") is engaged in the retail sale of
flowers and flower arrangements. The Company operates one location in Allentown,
Pennsylvania. The Company grants credit to customers, substantially all of whom
are Lehigh Valley area residents and businesses. The Company is a closely-held
subchapter "S" corporation, the stock of which is held by three individuals.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
the Company as of December 31, 1998, and the results of its operations and
cash flows for the three months ended December 31, 1998 and 1997. The results
of operations and cash flows for the three months ended December 31, 1998 are
not necessarily indicative of the results of operations or cash flows which
may be reported for fiscal year 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES
Inventories are stated generally on an average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated
principally on a straight-line basis over the estimated useful lives of the
assets which generally range from 10 to 15 years for leasehold improvements and
3 to 10 years for machinery and equipment and 5 to 7 years for furniture and
fixtures. Maintenance and repairs are charged to expense as incurred.
Depreciation expense was $72,882 for the fiscal year ended September 30, 1998.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended September 30, 1998 was $94,433.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. The Company maintains cash balances at two financial
institutions located in Allentown, Pennsylvania. These accounts are insured by
the Federal Depository Insurance Corporation up to $100,000. At September 30,
1998, the Company's uninsured cash balances are $335,201. The Company believes
no significant concentration of credit risk exists with respect to these cash
balances. In addition, historically, the Company has not experienced significant
losses with respect to its receivables.
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
F-78
105
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SERVICE AND OTHER REVENUE
Service and other revenue includes rebates and commissions received for
orders placed through AFS, FTD and TeleFlora, delivery services and telephone
charges.
INCOME TAXES
Since October 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed under sections of federal and Pennsylvania income tax law,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata share of the Company's items of income,
deduction, loss and credits. Therefore, these statements do not include any
provision for corporate income taxes.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
3. OTHER ASSETS:
Other assets at September 30, 1998 was comprised of the following:
1998
-------
Security deposit............................................ $10,000
Fiscal year tax deposit..................................... 12,391
Investment in limited partnership........................... 1,600
Other investments........................................... 1,512
-------
$25,503
=======
The Company owns 50 units of a limited partnership, which has an adjusted
market value of $1,600.
4. LONG-TERM DEBT:
Long-term debt at September 30, 1998 was comprised of the following:
Note payable, other -- 10%; payable in monthly installments
of $500, including interest through September 1999. A
final payment of principal of $56,778 with interest is due
October 1999.............................................. $57,084
Note Payable, Bank -- 7.0%; payable in monthly installments
of $833, plus interest through February 1999. This note is
collateralized by a first lien on accounts receivable,
inventory, furniture, fixtures and equipment.............. 3,333
Notes payable, other -- weighted average interest rate of
8.51%, payable in monthly installments through November
2001. Certain automobiles are pledged as collateral for
these notes............................................... 26,209
-------
Total long-term debt.............................. 86,626
Less -- Current portion..................................... (13,149)
-------
Long-term portion........................................... $73,477
=======
F-79
106
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt are as follows:
1999........................................................ $13,149
2000........................................................ 66,445
2001........................................................ 6,436
2002........................................................ 596
-------
$86,626
=======
The Company has a revolving line of credit available in the amount of
$100,000. There were no outstanding borrowings at September 30, 1998. This line
of credit matures annually on January 30th. Interest under this line of credit
is to be charged monthly at the national (floating) prime rate (8.5% at
September 30, 1998). This line of credit is collateralized by a first lien on
the accounts receivable, inventory, furniture, fixtures and equipment.
5. RETIREMENT PLAN:
The Company amended its profit sharing plan on May 26, 1994 in order to
convert the plan to a 401(k) plan. The plan covers substantially all employees
with more than one year of service. Contributions to the plan are based on a 50%
match of the employee's contributions, up to 6% of the employee's compensation.
It is the Company's policy to match the employee's contributions each month. The
Company recorded expense under this plan of $20,368 for the fiscal year ended
September 30, 1998.
6. TREASURY STOCK:
The Company has 5,270 shares of treasury stock as of September 30, 1998.
During the quarter ended December 31, 1998 the Company also acquired 600 shares
of nonvoting common stock for $220,000. Treasury stock is recorded at cost.
7. PROPERTY DISPOSITION:
During the fiscal year ended September 30, 1998, the Company entered into
a sale-leaseback transaction of land and buildings to an unaffiliated third
party. The total selling price was $105,509 resulting in a gain of $33,708 and
a deferred gain of $7,575. The lease has a term of five years with an aggregate
annual rental of $1,800. The recognized gain is included in other income in the
accompanying statement of income. The deferred gain will be amortized straight
line over the lease term.
8. LEASE COMMITMENTS:
The Company leases certain facilities and autos from related parties and
from unrelated lessors. All leases are operating leases. Total rent paid to
related parties for the fiscal year ended September 30, 1998 was $126,600.
During the fiscal year ended September 30, 1998 rent expense under all lease
obligations was $145,183. The related party lease provides for escalations above
required minimum lease payments based upon the movement of the consumer price
index.
F-80
107
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease payments under these lease obligations at September 30, 1998
are as follows:
UNRELATED RELATED
PARTY PARTY TOTAL
--------- -------- --------
1999............................................ $16,468 $128,420 $144,888
2000............................................ 6,352 128,420 134,772
2001............................................ 1,800 -- 1,800
2002............................................ 1,800 -- 1,800
2003............................................ 450 -- 450
------- -------- --------
$26,870 $256,840 $283,710
======= ======== ========
9. RELATED PARTY TRANSACTIONS:
During the fiscal year ended September 30, 1998, a former division of the
Company was incorporated. The newly incorporated entity, Treehouse Wholesale,
Inc. ("Treehouse"), purchases flowers and gifts from vendors and resells them to
Phoebe Floral, Inc. The Company and Treehouse have 83% common ownership.
Purchases from Treehouse for the fiscal year ended September 30, 1998 were
$158,253. The Company has a payable of $1,893 due to Treehouse as of September
30, 1998, which is included in accounts payable and accrued expenses in the
accompanying balance sheet.
10. SUBSEQUENT EVENT:
On January 5, 1999, the stockholders of the Company (the "Stockholders")
entered into a letter of intent to sell the business to an unrelated third party
(the "Purchaser"). In consideration for the sale, the Stockholders will receive
a combination of cash and stock of the Purchaser.
Since the Purchaser is a C Corporation for Federal and state income tax
purposes, the operations of the Company will also become taxable as a C
Corporation effective at the date of purchase. Accordingly, the accompanying
statement of income for the fiscal year ended September 30, 1998 presents an
unaudited pro forma income tax provision and pro forma net income as they would
have been reported had the Company been subject to Federal and state income
taxes. The pro forma effective income tax rate of 40.5% exceeds the Federal
statutory rate due to the impact of state income taxes.
11. NOTE RECEIVABLE FROM SHAREHOLDER (UNAUDITED)
As of December 31, 1998, a note receivable with an interest rate of 8% was
due from a shareholder of the Company. This note was paid off January 29, 1999.
F-81
108
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
99.2 Letter from Ernst & Young LLP to the
Commission regarding the dismissal of such
firm as the independent auditors of the
Registrant.