SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Quarterly Period Ended November 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 0-05531
Gerald Stevens, Inc.
--------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 41-0719035
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(State of Incorporation) (IRS Employer Identification No.)
301 East Las Olas Boulevard, Suite 300
Ft. Lauderdale, Florida 33301
----------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 713-5000
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
On January 10, 1999 the registrant had 45,255,769 outstanding shares of
common stock, par value $.01 per share.
GERALD STEVENS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of November 30, 1999
and August 31, 1999 3
Condensed Consolidated Statements of Operations for the Three Months Ended
November 30, 1999 and 1998 4
Condensed Consolidated Statement of Changes in Stockholders' Equity for the Three
Months ended November 30, 1999 5
Condensed Consolidated Statements of Cash Flows for the Three Months ended
November 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I. FINANCIAL INFORMATION
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
November 30, August 31,
1999 1999
-------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,996 $ 4,602
Accounts receivable, net of allowance for doubtful accounts of $1,990 and $1,872
at November 30, 1999 and August 31, 1999, respectively 15,424 10,074
Inventories 11,431 8,454
Prepaid and other current assets 4,799 2,653
-------------- -------------
Total current assets 33,650 25,783
-------------- -------------
PROPERTY AND EQUIPMENT, net 21,636 15,953
-------------- -------------
OTHER ASSETS:
Intangible assets, net 148,488 129,897
Other 1,516 1,390
-------------- -------------
Total other assets 150,004 131,287
-------------- -------------
Total assets $ 205,290 $ 173,023
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 450 $ 2,009
Accounts payable 17,695 12,551
Accrued liabilities 17,291 15,567
Deferred revenue 2,073 2,164
-------------- -------------
Total current liabilities 37,509 32,291
-------------- -------------
LONG-TERM DEBT 26,740 4,340
-------------- -------------
OTHER 762 419
-------------- -------------
Total liabilities 65,011 37,050
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 600,000 shares authorized, none issued - -
Common stock, $0.01 par value, 250,000,000 shares authorized, 44,995,216
and 44,011,401 shares issued and outstanding on November 30, 1999 and
August 31, 1999, respectively 450 440
Additional paid-in capital 163,819 155,224
Accumulated deficit (22,374) (18,075)
Treasury stock, 519,975 shares at cost (1,616) (1,616)
-------------- -------------
Total stockholders' equity 140,279 135,973
-------------- -------------
Total liabilities and stockholders' equity $ 205,290 $ 173,023
============== =============
The accompanying notes are an integral part of these condensed consolidated
statements.
3
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended November 30,
-------------------------------
1999 1998
---------- --------------
REVENUE:
Product sales, net $ 37,457 $ 8,695
Service and other revenue 11,747 4,528
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49,204 13,223
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OPERATING COSTS AND EXPENSES:
Cost of product sales 14,007 3,848
Operating expenses 20,222 4,333
Selling, general and administrative expenses 18,877 5,359
Merger expenses - 85
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53,106 13,625
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Operating loss (3,902) (402)
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OTHER INCOME (EXPENSE):
Interest expense (394) (68)
Interest income 16 107
Other (19) 30
---------- -------------
(397) 69
---------- -------------
Loss before provision (benefit) for income taxes (4,299) (333)
PROVISION (BENEFIT) FOR INCOME TAXES - -
---------- -------------
Net loss $ (4,299) $ (333)
========== =============
BASIC LOSS PER SHARE $ (0.10) $ (0.01)
========== =============
DILUTED LOSS PER SHARE $ (0.10) $ (0.01)
========== =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 44,364 28,753
========== =============
Diluted 44,364 28,753
========== =============
The accompanying notes are an intergral part of these condensed consolidated
statements.
4
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(In thousands)
Common Stock Additional
Par Paid-In Accumulated Treasury
Shares Value Capital Deficit Stock Total
-------- --------- ---------- ------------- --------- ----------
BALANCE, August 31, 1999 44,011 $ 440 $ 155,224 $ (18,075) $ (1,616) $ 135,973
Sale of common stock, net 234 2 662 - - 664
Common stock, options and warrants
issued in acquisitions 750 8 7,933 - - 7,941
Net loss - - - (4,299) - (4,299)
-------- --------- ---------- ------------- -------- ----------
BALANCE, November 30, 1999 44,995 $ 450 $ 163,819 $ (22,374) $ (1,616) $ 140,279
======== ========= ========== ============= ======== ==========
The accompanying notes are an integral part of these condensed consolidated
statements.
5
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended November 30,
-------------------------------
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,299) $ (333)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,914 432
Provision for doubtful accounts 76 -
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,093) (1,200)
Inventories (721) (206)
Prepaid and other current assets (2,024) 542
Other assets (139) 427
Accounts payable 2,017 (195)
Accrued liabilities 598 (37)
Deferred revenue (136) -
Other long-term liabilities 343 (228)
---------- ----------
Net cash used in operating activities (6,464) (798)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,441) (500)
Payments for acquisitions, net of cash acquired (11,465) (20,560)
---------- ----------
Net cash used in investing activities (16,906) (21,060)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (2,150) (1,071)
Proceeds from issuance of common stock, net 664 20,698
Receipts from stock subscription receivables - 4,183
Proceeds from credit facility 46,130 -
Payment of credit facility (23,880) -
---------- ----------
Net cash provided by financing activities 20,764 23,810
---------- ----------
Net (decrease) increase in cash and cash equivalents (2,606) 1,952
CASH AND CASH EQUIVALENTS, beginning of period 4,602 7,148
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,996 $ 9,100
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 193 $ 18
========== ==========
Cash paid for income taxes $ - $ 30
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock, options and warrants issued in acquisitions $ 7,941 $ 17,986
========== ==========
Subscription receivable $ - $ (4,183)
========== ==========
The accompanying notes are an integral part of these condensed consolidated
statements.
6
GERALD STEVENS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998 ARE UNAUDITED)
1. General and Summary of Significant Accounting Policies
Organization and Operations
Gerald Stevens, Inc. ("Gerald Stevens" or the "Company") is a leading
integrated retailer and marketer of flowers, plants and complementary gifts and
decorative accessories. We operate the largest company-owned network of floral
specialty retail stores, with locations in 30 markets in the United States and
Canada as of November 30, 1999. 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 own and operate our own import operation and have relationships with leading
growers around the world. Our national sales and marketing division permits us,
through multiple distribution channels, including the Internet, dial-up numbers
and direct mail, to serve customers who do not visit or phone our retail stores.
Basis of Presentation
The accompanying condensed consolidated financial statements of the
Company have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The information in this report should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 1999, as amended (the "Form 10-K").
The unaudited condensed consolidated financial statements included
herein reflect all material adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. 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 consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Interim
results of operations for the three months ended November 30, 1999 and 1998 are
not necessarily indicative of operating results for the full fiscal years or for
any future periods.
7
Intangible Assets
Intangible assets consisted of the following:
November 30, August 31,
1999 1999
------------- ------------
(In thousands)
Goodwill $ 146,462 $ 126,999
Other 5,002 4,926
--------- ---------
151,464 131,925
Less: Accumulated amortization (2,976) (2,028)
--------- ---------
$ 148,488 $ 129,897
========= =========
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. (See Note 2.) Included in goodwill for both
periods is $2.0 million from an acquisition prior to October 31, 1970 which is
not required to be amortized. Otherwise, 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.
Other intangible assets consist primarily of customer lists, telephone
numbers and contractual rights related to yellow page advertisements that were
acquired by the Company from floral businesses that have discontinued their
operations. Other intangible assets are amortized over periods ranging from 5 to
10 years.
Amortization expense related to goodwill and other intangible assets
was $0.9 million and $0.2 million for the three months ended November 30, 1999
and 1998, respectively.
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, the Company periodically analyzes the carrying
value of its goodwill and other intangible assets to assess recoverability from
future operations using an undiscounted projected cash flow approach.
Impairments are recognized in operating results to the extent that carrying
value exceeds fair value.
Income Taxes
The Company has significant operating loss carryforwards available to
offset future taxable income. Because of the uncertainty of future period
8
income, the Company has provided a full valuation allowance against its related
net deferred tax asset accounts. Accordingly, the Company has recorded no income
tax provision or benefit for the three months ended November 30, 1999 and 1998.
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.
Seasonality
The floral industry has historically been seasonal, with higher revenue
generated during holidays such as Thanksgiving, Christmas, Valentine's Day,
Easter 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 weather conditions in key flower-growing
regions.
Comprehensive Income
The Company has no components of comprehensive income. Accordingly, net
loss equals comprehensive net loss for all periods presented.
Impact of Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133. SFAS No. 137
defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001. We believe the adoption of this Statement
will not have a material effect on the earnings and financial position of the
Company.
2. Acquisitions
From September 1, 1999 through November 30, 1999, we acquired 34 retail
florist businesses located in existing markets, plus one new market in the
United States and one new market in Canada for aggregate consideration of $18.9
million, consisting of $11.0 million in cash and 749,993 shares of our common
stock valued at share prices ranging from $9.49 to $11.53 per share. All of the
acquisitions were accounted for as business combinations under the purchase
method of accounting and accordingly, are included in our condensed consolidated
financial statements from the date of acquisition.
During the first quarter of fiscal 2000, we also acquired certain
intangible assets related to floral businesses that discontinued their
9
operations. The acquired intangible assets consisted principally of customer
lists, telephone numbers and yellow page advertising contractual rights.
Aggregate consideration paid for all such intangible asset acquisitions was
$53,000 in cash.
Our strategic plan contemplates the closing or relocation of a number
of our acquired retail stores within each of our targeted market areas. An
assessment of which retail stores to close or relocate for all acquisitions
consummated prior to December 31, 1998 has been completed. As a result of such
assessment, additional purchase liabilities of approximately $1.6 million for
costs associated with the shut down and consolidation of certain acquired retail
stores were recorded (considering existing contractual lease obligations and
management's estimate of future operating lease costs). For acquisitions
consummated after December 31, 1998, management is in the process of completing
such assessement. We expect to complete our assessemnt of retail store closures
and relocations for all acquisitions consummated through August 31, 1999 by
February 2000. Once management finalizes its assessment of the remaining retail
stores to be closed or relocated, additional purchase liabilities are expected
to be recognized. During the three months ended November 30, 1999, $10,000 was
paid and charged against the established liability.
The preliminary purchase price allocation for businesses acquired
during the first quarter of fiscal year 2000 under the purchase method of
accounting is as follows:
November 30, 1999
-----------------
(in thousands)
Tangible assets (includes cash acquired of $328) $ 5,309
Intangible assets 18,702
Liabilities (5,039)
------------
$ 18,972
============
The pro forma results of operations, assuming each of the acquisitions described
above was consummated as of the beginning of the periods presented, and each of
the fiscal year 1999 acquisitions was consummated as of the beginning of the
three month periods ended November 30, 1999 and 1998,respectively are as
follows:
10
For the Three Months Ended November 30,
1999 1998
------------- ---------------
(In thousands, except per share data)
Revenue $ 55,439 $ 55,026
============= ==============
Net income (loss) $ (4,130) $ 66
============= ==============
Diluted net income (loss) per share $ (0.09) $ 0.00
============= ==============
3. Property and Equipment, Net
Property and equipment consisted of the following:
November 30, August 31,
1999 1999
------------ -------------
(In thousands)
Land, building and leasehold improvements $ 9,918 $ 8,502
Furniture, fixtures and equipment 5,293 3,497
Computer hardware and software 8,677 6,036
Communication systems 1,834 1,526
Vehicles 1,334 925
------------ -------------
27,056 20,486
------------ -------------
Less: Accumulated depreciation and amortization (5,420) (4,533)
------------ -------------
$ 21,636 $ 15,953
============ =============
11
4. Accrued Liabilities
Accrued liabilities consisted of the following:
November 30, August 31,
1999 1999
---------- ----------
(In thousands)
Salaries and benefits $ 3,441 $ 3,787
Wire service 2,975 3,104
Store closure costs 1,622 1,632
Acquired business consideration 1,916 1,459
Other 7,337 5,585
---------- ---------
$ 17,291 $ 15,567
========== =========
5. Debt
Notes Payable
Notes payable at November 30, 1999 and August 31, 1999 were $0.5
million and $2.0 million, respectively. The effective interest rates associated
with these notes range from 7.00% to 10.12%. Notes payable for both periods
consist principally of mortgage notes and installment notes for vehicles,
equipment, and leasehold improvements assumed by the Company in connection with
acquisitions completed during the latter part of each fiscal quarter. The
Company pays substantially all these notes in full periodically, following the
close of acquisitions.
Long-Term Debt
At November 30, 1999, outstanding borrowings under the Company's $40
million credit facility were $26.7 million and the Company was in compliance
with all debt covenants. The effective Eurodollar borrowing rate and base rate
as of November 30, 1999 were 8.38% and 9.5%, respectively.
6. Stockholders' Equity
From September 1, 1999 to November 30, 1999, the Company issued 749,993
shares of its common stock with an aggregate value of $7.9 million to fund the
non-cash portion of the total consideration for acquisitions completed during
the period. Additionally, a total of 233,822 shares of common stock were issued
for total consideration of $0.7 million in connection with stock options and
warrants exercised during this same period.
12
7. Earnings Per Share
Basic and diluted earnings per share in the accompanying condensed
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 the loss periods presented as they are anti-dilutive.
The components of basic and diluted earnings per share are as follows:
For the Three Months
Ended November 30,
1999 1998
--------- --------
(In thousands)
Basic Average Shares Outstanding 44,364 28,753
Common Stock Equivalents - -
--------- --------
Diluted Average Shares Outstanding 44,364 28,753
========= ========
Common stock equivalents not included in the calculation of
diluted earnings per share because their impact is antidilutive 2,177 2,005
========= ========
8. Commitments and Contingencies
Supply Agreement
On October 1, 1998, the Company entered into a five-year supply
agreement with certain flower farms (the "Farms"). The agreement requires that
the Farms provide to the Company a certain percentage of their flowers on a
consignment basis. The Farms must produce and deliver a minimum number of stems
for the Company during the growing year commencing on October 1, and ending on
September 30. Each July, during the term of the agreement, the parties will meet
to establish the minimum stem obligation for each flower type 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.
Business Combinations
The Company may be required to make additional payments of up to
$1.1 million to the sellers of three of the businesses that it acquired. Because
the outcome of the contingencies underlying these payments are not yet
determinable, the payments have not been recorded as a component of the cost of
these acquisitions at November 30, 1999.
13
Litigation
There are various claims, lawsuits, and pending actions against Gerald
Stevens incident to the operations of its businesses. It is the opinion of
management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
9. Business Segments
Gerald Stevens operates in two principal business segments: retail and
order generation. The Company's reportable segments are strategic business units
that offer different products and services. The Company evaluates the
performance of its segments based on revenue and operating income. The Company's
retail segment consists of the retail florists acquired as well as its import
business. The Company's order generation business consists primarily of
Florafax, National Flora, Calyx & Corolla and on-line businesses. There is no
material intersegment revenue.
The following table presents financial information regarding the
Company's different business segments as of and for the three months ended
November 30:
1999 1998
--------- --------
(In thousands)
Net revenue:
Retail $ 39,137 $ 9,467
Order generation 10,067 3,756
-------- -------
$ 49,204 $13,223
======== =======
Operating income (loss):
Retail $ 1,208 $ 539
Order generation (266) 734
Corporate (4,844) (1,675)
-------- -------
$ (3,902) $ (402)
======== =======
Identifiable assets:
Retail $179,848 $48,158
Order generation 16,513 11,259
Corporate 8,929 5,680
-------- -------
$205,290 $65,097
======== =======
14
10. SUBSEQUENT EVENTS
Business Combinations
From December 1, 1999 through January 10, 2000, we acquired 15 retail
florist businesses for total consideration of $3.6 million, consisting of $2.0
million in cash and 195,139 shares of our common stock valued at prices
ranging from $7.44 to $10.35 per share.
15
Item 2. Management's Discussion And Analysis
------------------------------------
Of Financial Condition And Results Of Operations
------------------------------------------------
General
Gerald Stevens, Inc. ("Gerald Stevens," or the "Company"), formerly
known as Florafax International, Inc., is a leading integrated retailer and
marketer of flowers, plants, and complementary gifts and decorative accessories.
The Company operates the largest company-owned network of floral specialty
retail stores with locations in 30 markets in the United States and Canada as of
November 30, 1999. 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. The Company owns and
operates its own import operation and has relationships with leading growers
around the world. Our national sales and marketing division permits us, through
multiple distribution channels including the Internet, dial-up numbers and
direct mail, to serve customers who do not visit or phone our retail stores.
On April 30, 1999, Gerald Stevens and Gerald Stevens Retail, Inc.
("Gerald Stevens Retail"), 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 should be read
in conjunction with our accompanying unaudited condensed consolidated financial
statements. In the merger, we issued approximately 28.1 million shares of our
common stock to the stockholders of Gerald Stevens Retail, resulting in the
former Gerald Stevens Retail stockholders owning approximately 77.5% of the
shares of our common stock immediately following the merger.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, as well as our other reports filed
with the SEC and our press releases and other communications, contain
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. Forward-looking statements
include all statements regarding our expected financial position, results of
operations, cash flows, dividends, financing plans, strategy, budgets, capital
and other expenditures, competitive positions, growth opportunities, benefits
from new technology, plans and objectives of management, and markets for stock.
In addition to general economic, business and market conditions, we are subject
to risks and uncertainties that could cause such forward-looking statements to
prove incorrect, including those stated in the "Risk Factors" section of the
Form 10-K and the following:
o Our ability to accomplish our anticipated growth strategies and to
integrate acquired businesses.
o Our need to improve our information systems.
16
o Unexpected liabilities incurred in our acquisitions.
o Our dependence on additional capital for growth.
o A decline in customer discretionary spending.
o Weather, governmental regulations, transportation problems or other
factors that could prevent us from obtaining sufficient products when
needed.
o Our ability to maintain business relationships within the industry,
including relationships with wire services, wholesalers, growers,
importers and other florist shops.
o Our ability to develop relationships with supermarkets, mass merchants,
department stores and other businesses to expand our store-in-store
operations.
o Our ability to develop a profitable Internet business.
Acquisitions
In October and November, 1998, we entered the retail distribution
segment of the floral industry by acquiring 10 retail florist businesses located
in 9 markets throughout the United States for aggregate consideration of $37.2
million, consisting of $20.8 in cash and 4,644,514 shares of our common stock
valued at prices ranging from $3.52 to $4.44 per share. During the period from
December 1, 1998 to August 31, 1999 we acquired an additional 59 retail florist
businesses located in existing markets and 19 new markets throughout the United
States for aggregate consideration of $61.5 million, consisting of $46.1 million
in cash and 2,416,420 shares of our common stock valued at prices ranging from
$4.94 to $15.30 per share.
During the three-month period ended November 30, 1999, we acquired an
additional 34 retail florist businesses located in existing markets and two new
markets for total consideration of $18.9 million, consisting of $11.0 million in
cash and 749,993 shares of our common stock valued at prices ranging from $9.49
to $11.53 per share.
Additionally, in October 1998, we acquired AGA Flowers, Inc., a floral
import business, for total consideration of $2.9 million, consisting of $1.5
million in cash and 417,078 shares of our common stock valued at $3.52 per
share.
In March 1999, we acquired National Flora, a floral order generation
business, for total consideration of $19.7 million, consisting of $10.0 million
in cash and 1,552,500 shares of our common stock valued at $6.30 per share.
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for total consideration of $11.6
17
million, consisting of approximately $.1 million in cash, 934,435 shares of our
common stock valued at $10.80 per share, and the assumption of stock option and
warrant obligations which converted into rights to acquire 152,081 shares of our
common stock at exercise prices ranging from $0.36 to $9.44 per share.
All of the acquisitions discussed in the preceding paragraphs were
accounted for as business combinations under the purchase method of accounting
and accordingly, have been included in the consolidated financial statements
from the date of acquisition.
During the year ended August 31, 1999 and the three months ended
November 30, 1999, we also acquired certain intangible assets related to floral
businesses that discontinued their operations. The acquired intangible assets
consisted principally of customer lists, telephone numbers and yellow page
advertising contractual rights. Aggregate consideration paid for all such
intangible asset acquisitions during the year ended August 31, 1999 was $4.5
million, consisting of $2.8 million in cash and 159,823 shares of our common
stock at a price of $10.14 per share. Aggregate consideration paid for
intangible asset acquisitions during the three months ended November 30, 1999
was $53,000 in cash.
Results of Operations
Upon consummation of our merger with Gerald Stevens Retail, we
redefined the manner in which we evaluate and report the operating results of
our newly combined business for internal purposes. In this regard, we have
chosen to break down our component businesses into two segments: (1) Retail and
(2) Order Generation. The Retail segment consists of all retail and import
businesses and operations while the Order Generation segment consists of all
non-retail order generation and fulfillment businesses and operations. The
tables below present the results of operations through operating income (loss)
of Gerald Stevens' Retail and Order Generation segments and Corporate for the
three months ended November 30, 1999 and 1998.
The Retail segment 1999 results include the operating results of the 69
retail florist businesses and one import business acquired during the year ended
August 31, 1999 and the post-acquisition operating results of the 34 retail
florist businesses acquired during the three months ended November 30, 1999. The
Retail segment 1998 results include only the post-acquisition operating results
of the initial 10 retail florist businesses and one import business acquired by
the Company during October and November 1998.
The Order Generation segment 1999 and 1998 results include the
operating results of the Company's wire service, credit and charge card
processing and The Flower Club business units. The Order Generation segment 1999
results additionally include the operating results of National Flora and Calyx &
Corolla and the operating results of Gerald Stevens' recently formed
Internet-based order generation businesses.
Prior to the acquisition of its initial retail florist and import
businesses on October 1, 1998, the Company operated only in the Order Generation
segment. Results in the three-month period ended November 30, 1999, compared to
the three-month period ended November 30, 1998, were significantly impacted by
(i) a full three months of operations in the 1999 period of the businesses
acquired on October 1, 1998 and (ii) acquisitions of businesses after November
30, 1998.
18
The tables below present the results of operations through operating
income (loss) of the Company's Retail and Order Generation segments and
Corporate for the three months ended November 30, 1999 and 1998, respectively.
Three Months Ended November 30, 1999
---------------------------------------------------------
(In thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 35,184 $ 2,273 $ $ - $ 37,457
Service and other revenue 3,953 7,794 - 11,747
---------------------------------------------------------
39,137 10,067 - 49,204
Operating Costs and Expenses:
Cost of product sales 13,174 833 - 14,007
Operating expenses 20,222 - - 20,222
Selling, general and administrative expenses 4,533 9,500 4,844 18,877
---------------------------------------------------------
37,929 10,333 4,844 53,106
---------------------------------------------------------
Operating income (loss) $ 1,208 $ (266) $ (4,844) $(3,902)
=========================================================
Three Months Ended November 30, 1998
---------------------------------------------------------
(In thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 8,695 $ - $ - $ 8,695
Service and other revenue 772 3,756 - 4,528
---------------------------------------------------------
9,467 3,756 - 13,223
Operating Costs and Expenses:
Cost of product sales 3,848 - - 3,848
Operating expenses 4,333 - - 4,333
Selling, general and administrative expenses 747 3,022 1,590 5,359
Merger expenses - - 85 85
---------------------------------------------------------
8,928 3,022 1,675 13,625
---------------------------------------------------------
Operating income (loss) $ 539 $ 734 $ (1,675) $ (402)
=========================================================
Retail Segment. Product sales within the Retail segment include sales of floral
and gift products at retail businesses and sales of floral product by the
Company's import business. Service and other revenue within the Retail segment
is generated at the Company's retail businesses and consists of delivery and
other service fees charged to customers and commissions on orders transmitted to
and fulfilled by other retail florists. Total Retail segment revenue for the
three months ended November 30, 1999 increased by $29.7 million to $39.1
million, compared to the same period in the prior year due principally to
revenue generated at newly acquired businesses.
19
Cost of product sales within the Retail segment includes the cost of
products sold at retail businesses and at the Company's import business. Cost
of product sales for the three months ended November 30, 1999 increased by $9.3
million to $13.2 million compared to the same period in the prior year due
principally to cost of goods sold incurred by newly acquired businesses.
Retail segment gross margins as a percentage of total revenue for the
three months ended November 30, 1999 increased by 6.9% to 66.3% compared to the
same period in the prior year. The majority of the gross margin percentage
increase is related to a period-to-period change in mix between revenue at
the Company's retail stores and revenue at its import business. As a result of
acquisitions, higher margin retail store revenue has increased significantly
more than lower margin import revenue over the past year. To a lesser extent,
gross margins have improved due to the recent implementation of various national
product purchasing programs at the Company's retail stores, including the
sourcing of floral product from the Company's import business.
Retail segment operating expenses for the three months ended November
30, 1999 increased by $15.9 million to $20.2 million compared to the same period
in the prior year due principally to operating expenses incurred by newly
acquired businesses. Retail segment operating expenses as a percentage of total
revenue for the three months ended November 30, 1999 increased by 5.9% to 51.7%
compared to the same period in the prior year. The majority of the percentage
increase is related to the aforementioned period-to-period change in mix between
the Company's retail store and import businesses and the fact that operating
expenses as a percentage of revenue are significantly higher at the Company's
retail stores compared to its import business.
Retail segment selling, general and administrative expenses for the
three months ended November 30, 1999 increased by $3.8 million to $4.5 million
compared to the same period in the prior year due principally to expenses
incurred by newly acquired businesses. Retail segment selling, general and
administrative expenses as a percentage of total revenue for the three months
ended November 30, 1999 increased by 3.7% to 11.6% compared to the same period
in the prior year due principally to increases in wire commission, advertising
and insurance expenses.
Order Generation Segment. Product sales within the Order Generation
segment for the three months ended November 30, 1999 reflect $2.3 million of
sales made by Calyx & Corolla. Service and other revenue within the Order
Generation segment consists of order generation commissions and processing fees,
wire service dues and fees, and credit card processing fees. Total Order
Generation segment service and other revenue for the three months ended November
30, 1999 increased by $4.0 million to $7.8 million compared to the same period
in the prior year. This significant increase in revenue is due primarily to our
acquisition of National Flora, which generated $3.0 million in revenue during
the current period. Additionally, continued increases in The Flower Club
revenue, revenue from the Company's recently formed Internet-based order
generation business unit, and other revenue generated at Calyx & Corolla also
contributed to the current period's service and other revenue increase.
Cost of goods sold within the Order Generation segment for the three
months ended November 30, 1999 reflect $.8 million of costs incurred at Calyx &
Corolla. Calyx & Corolla gross margins as a percentage of total revenue was
64.4% during the current period.
20
Total Order Generation segment selling, general and administrative
expenses for the three months ended November 30, 1999 increased by $6.5 million
to $9.5 million compared to the same period in the prior year. Selling, general
and administrative expenses incurred by National Flora and Calyx & Corolla
during the current period totaled $4.6 million and represent a significant
portion of the current period expense increase. Additionally, start up costs of
approximately $1.4 million were incurred in connection with the Company's
recently formed Internet-based order generation business unit resulting in
higher current period expenses. To a lesser extent, expense increases related to
the expansion of The Flower Club business unit and expenses related to our
acquired Flowerlink website also contributed to the higher current period
expense levels.
Corporate. Total Corporate selling, general and administrative expenses
for the three months ended November 30, 1999 increased by $3.3 million to $4.8
million compared to the same period in the prior year due primarily to expenses
incurred at Gerald Stevens' expanded corporate headquarters in Ft. Lauderdale,
Florida and to the significant expansion of the Company into retail and other
related segments of the floral industry. We plan to significantly expand our
business over the next several years, largely through the acquisition of retail
florist businesses. We also expect Corporate expenses to increase 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.
Interest. Interest expense for the three months ended November 30, 1999
was $.4 million compared to interest expense of $68,000 in the same period of
the prior year. The increase in interest expense during the current period is
due to increased borrowings under the Company's revolving credit facilities to
finance the expansion of its business activities.
Income Taxes. The Company has significant operating loss carryforwards
available to offset future taxable income. Because of the uncertainty of future
period income, the Company has provided a full valuation allowance against its
related net deferred tax asset accounts. Accordingly, the Company has recorded
no income tax provision or benefit for the three months ended November 30, 1999
and 1998. 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.
Liquidity and Capital Resources
We had cash and cash equivalents of $2.0 million and $4.6 million as of
November 30, 1999 and August 31, 1999, respectively. Cash and cash equivalents
decreased by $2.6 million during the three months ended November 30, 1999 and
increased by $2.0 million during the three months ended November 30, 1998. The
major components of these changes are discussed below.
Cash used in operating activities for the three months ended November
30, 1999 was $6.5 million compared to $.8 million for the same period last year.
Cash usage increased during the current period as the result of higher net
losses related to the Company's expansion into the retail distribution and
Internet segments of the floral industry and increased seasonal working capital
needs.
21
The cash portion of the purchase prices for all acquisitions completed
by the Company, net of cash acquired, during the three months ended November 30,
1999 and 1998 aggregated $11.5 million and $20.6 million, respectively, as more
fully described in the preceding section entitled "Acquisitions." Capital
expenditures during the three months ended November 30, 1999 totaled $5.4
million compared to capital expenditures of $.5 million in the same period of
the prior year. Capital expenditures primarily include computer hardware,
software and communication system expenditures related to the expansion of our
retail and order generation businesses.
During the three months ended November 30, 1999, the Company issued a
total of 233,822 shares of its common stock for total consideration of $.7
million in connection with the exercise of stock options and warrants. During
the three months ended November 30, 1998, we issued 6,185,137 shares of our
common stock in private placement transactions for total consideration of $20.6
million, net of placement fees and expenses, and also collected a $4.2 million
stock subscription receivable balance related to the initial capitalization of
Gerald Stevens Retail.
During the three months ended November 30, 1999, the Company borrowed a
net amount of $22.3 million on its existing revolving credit facility and repaid
$2.1 million of debt incurred in connection with certain retail florist
acquisitions. A total of $1.1 million of debt related to a prior revolving
credit facility, which was terminated in June 1999, was repaid during the three
months ended November 30, 1998.
The outstanding balance on the Company's revolving credit facility at
November 30, 1999 was $26.7 million. We are currently in discussions with a
number of financial institutions regarding their participation in a proposed
syndication of our bank credit facility. In this regard, we intend to increase
the borrowing limits under our credit facility from $40.0 million to
approximately $50.0 to $75.0 million. However, there can be no assurance that we
will be successful in increasing such borrowing limits, or that any such
increase can be made on terms comparable to our current credit facility.
We believe that cash flows from operating activities, in addition to
borrowings from our current credit facilities, will provide adequate funds to
meet the ongoing cash requirements of our existing business over the next 12
months. However, failure to increase our current bank borrowing limits or
otherwise raise additional capital could limit our ability to acquire new
businesses or otherwise expand our existing business in accordance with our
current operating plan. Further, we cannot provide assurance that the occurrence
of unplanned events, including temporary or long-term adverse changes in global
capital markets, will not interrupt or curtail our short-term or long-term
growth plans.
Year 2000 Issue
The Company had successfully completed all Year 2000 remediation,
replacement, and testing prior to January 1, 2000. Through January 10, 2000, the
Company has experienced no Year 2000 problems that affected business operations.
The Company's business partners have reported no Year 2000 problems. At this
22
time, the Company does not expect any future problems related to Year 2000 to
materialize. However, the Company will continue to monitor the systems for
potential issues over the next six months through normal operational and support
processes.
Impact of Recently Issued Accounting Standards
In June 1999, The Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133. Statement No.
137 defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
Statement No. 133 will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. The Company will adopt SFAS No. 133 as required for
its first quarterly filing of fiscal year 2001. We believe the adoption of this
Statement will not have a material effect on the earnings and financial position
of the Company.
23
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits. The following are being filed as exhibits to this
Report:
-- Non-plan Option Agreement, dated October 15, 1999,
between Gerald Stevens, Inc. and Robert L. Johnson
-- financial data schedule
(b) Reports on Form 8-K. We filed no Reports on Form 8-K during
the quarter ended November 30, 1999 and to date in the
following quarter.
24
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 thereunto duly authorized.
GERALD STEVENS, INC.
--------------------
(Registrant)
Date: January 14, 2000 By /s/ Albert J. Detz
--------------------------------
Albert J. Detz
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
25
Gerald Stevens, Inc.
Quarterly Report on Form 10-Q
for the quarter ended November 30, 1999
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Non-plan Option Agreement, dated October 15, 1999, between Gerald
Stevens, Inc. and Robert L. Johnson
27 Financial Data Schedule
26