THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON JULY 17, 2000 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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 May 31, 2000
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)
Florida 65-0971499
----------------------- --------------------------------
(State of Incorporation) (IRS Employer Identification No.)
P.O. Box 350526
Ft. Lauderdale, Florida 33335-0526
- --------------------------------------- ----------
(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 July 14, 2000 the registrant had 49,173,751 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 May 31, 2000 and August 31, 1999 1
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended May 31, 2000 and 1999 2
Condensed Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months ended May 31, 2000 3
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
May 31, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 31
PART I. FINANCIAL INFORMATION
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
May 31, August 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 860 $ 4,602
Accounts receivable, net 20,390 10,074
Inventories 13,058 8,454
Prepaid and other current assets 4,587 2,653
--------- ---------
Total current assets 38,895 25,783
--------- ---------
PROPERTY AND EQUIPMENT, net 29,465 15,953
--------- ---------
OTHER ASSETS:
Intangible assets, net 171,469 129,897
Other 2,096 1,390
--------- ---------
Total other assets 173,565 131,287
--------- ---------
Total assets $ 241,925 $ 173,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 524 $ 2,009
Credit facility 26,900 --
Accounts payable 20,542 12,551
Accrued liabilities 19,324 15,567
Deferred revenue 2,745 2,164
--------- ---------
Total current liabilities 70,035 32,291
--------- ---------
LONG-TERM DEBT -- 4,340
--------- ---------
OTHER 669 419
--------- ---------
Total liabilities 70,704 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, 49,173,751
and 44,011,401 shares issued and outstanding on May 31, 2000 and August 31,
1999, respectively 492 440
Additional paid-in capital 192,818 155,224
Accumulated deficit (22,089) (18,075)
Treasury stock, 519,975 shares at cost -- (1,616)
--------- ---------
Total stockholders' equity 171,221 135,973
--------- ---------
Total liabilities and stockholders' equity $ 241,925 $ 173,023
========= =========
The accompanying notes are an integral part of these
condensed consolidated statements.
1
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------- --------------------------
May 31, May 31, May 31, May 31,
2000 1999 2000 1999
--------- --------- --------- ---------
REVENUE:
Product sales, net $ 64,989 $ 25,224 $ 165,632 $ 53,597
Service and other revenue 18,746 11,063 48,886 22,685
--------- --------- --------- ---------
83,735 36,287 214,518 76,282
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of product sales 23,792 10,315 60,344 23,059
Operating expenses 32,290 12,054 79,645 25,410
Selling, general and administrative expenses 29,743 14,119 76,557 28,379
Merger expenses -- 591 -- 4,642
--------- --------- --------- ---------
85,825 37,079 216,546 81,490
--------- --------- --------- ---------
Operating loss (2,090) (792) (2,028) (5,208)
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (774) (319) (1,699) (502)
Interest income 26 44 55 217
Other income 157 38 317 134
--------- --------- --------- ---------
(591) (237) (1,327) (151)
--------- --------- --------- ---------
Loss before provision for income taxes (2,681) (1,029) (3,355) (5,359)
PROVISION FOR INCOME TAXES 314 200 659 2,327
--------- --------- --------- ---------
Net loss $ (2,995) $ (1,229) $ (4,014) $ (7,686)
========= ========= ========= =========
BASIC LOSS PER SHARE $ (0.06) $ (0.03) $ (0.09) $ (0.23)
========= ========= ========= =========
DILUTED LOSS PER SHARE $ (0.06) $ (0.03) $ (0.09) $ (0.23)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 48,398 36,478 45,691 33,305
========= ========= ========= =========
Diluted 48,398 36,478 45,691 33,305
========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated statements.
2
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 3,688 37 23,123 -- -- 23,160
Common stock issued in acquisitions 1,995 20 16,082 -- -- 16,102
Retirement of treasury stock (520) (5) (1,611) -- 1,616 --
Net loss -- -- -- (4,014) -- (4,014)
------ --------- --------- --------- --------- ---------
BALANCE, May 31, 2000 49,174 $ 492 $ 192,818 $ (22,089) $ -- $ 171,221
====== ========= ========= ========= ========= =========
The accompanying notes are an integral part of these
condensed consolidated statements.
3
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended
-------------------------------
May 31, 2000 May 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,014) $ (7,686)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 7,114 2,141
Compensation expense under stock option plan -- 1,373
Provision for doubtful accounts 249 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (8,877) (4,650)
Inventories (2,041) 548
Prepaid, other current assets (1,730) 408
Other assets (985) 1,845
Accounts payable 1,606 2,634
Accrued liabilities (1,036) 2,245
Other long-term liabilities 245 36
--------- ---------
Net cash used in operating activities (9,469) (1,106)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,428) (2,574)
Collection of amounts due from former owners of acquired subsidiary -- 1,300
Advance to subsequently acquired company -- (113)
Payments for acquisitions, net of cash acquired (20,927) (49,095)
--------- ---------
Net cash used in investing activities (36,355) (50,482)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 23,160 21,340
Receipts from stock subscription receivables -- 4,183
Payments on long-term debt (3,708) (2,347)
Payment of commitment fee on credit facility -- (304)
Proceeds from credit facility 109,480 42,820
Repayments of credit facility (86,850) (16,900)
--------- ---------
Net cash provided by financing activities 42,082 48,792
--------- ---------
Net decrease in cash and cash equivalents (3,742) (2,796)
CASH AND CASH EQUIVALENTS, beginning of period 4,602 7,148
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 860 $ 4,352
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,601 $ 264
========= =========
Cash paid during the period for income taxes $ 356 $ 451
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock issued in acquisitions $ 16,102 $ 35,972
========= =========
The accompanying notes are an integral part of these
condensed consolidated statements.
4
GERALD STEVENS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE AND NINE MONTHS ENDED MAY 31, 2000 AND 1999 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 34 markets in the United States and
one market in Canada on May 31, 2000. The Company's strategy is to build a
national brand and transform 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.
Recent Developements
The Company has incurred net losses in the year ended August 31, 1999
and the nine months ended May 31, 2000, and at May 31,2000 had a net working
capital deficiency.
Based upon various factors, including matters discussed above, its
current capital structure and liquidity position and its current share price,
Gerald Stevens is in the process of finalizing a reassessment of its strategic
objectives. In this connection, Gerald Stevens plans to significantly slow the
pace of expansion of its business during the next 12 to 18 months compared to
previous plans. During this near-term period, the acquisition of new retail
floral businesses, capital expenditures related to the construction of new hub
or satellite stores, remodeling of existing stores and the development of
computer information systems, and spending on further development of the Gerald
Stevens brand name will be either significantly reduced, delayed, or eliminated.
However, to the extent that development of our planned improvements to computer
information systems will be slowed, our ability to obtain more timely and more
detailed operational and financial information to better manage our businesses
will continue to be adversely impacted.
Based upon the planned slowdown in the Company's near-term expansion
and in order to align operating costs with the Company's new plans, Gerald
Stevens is in the process of reducing operating costs at both its corporate
headquarters and at its field operating units (as more fully described in
Results of Operations section of Management's Discussion and Analysis of
Financial Condition and Results of Operations). Additionally, based upon lower
floral industry revenue levels during the seasonally weak summer and fall
periods, we expect to incur operating losses, which could be significant, during
the fourth quarter of fiscal 2000 and first quarter of fiscal 2001.
Gerald Stevens is also in the process of reassessing its strategic
direction. This reassessment will be completed during the fourth quarter of
fiscal 2000 and is expected to result in the sale of certain real estate during
the fourth quarter of fiscal 2000 or the first quarter of fiscal 2001 and may
result in the sale of certain of its business units. Additionally, the Company
will be re-evaluating the realizeability of all long-lived assets and the effect
of changes in the Company's strategy on the value of such assets. It is possible
that certain business units or assets may be sold at prices lower than the
current carrying amount of such business units or that certain long-lived assets
may be deemed to be impaired, thereby requiring losses to be recognized in the
financial statements of future periods.
The outstanding balance on the Company's revolving credit facility at
May 31, 2000 and July 14, 2000 was $26.9 million and $34.5 million,
respectively. Based on operating results for the three months ended May 31,
2000, Gerald Stevens failed to meet required bank credit agreement financial
targets for leverage ratio and fixed charge covenants. On July 14, 2000, the
Company's lending bank waived the Company's obligation to comply with these two
financial covenants until July 31, 2000, and agreed to allow the Company to
borrow up to an aggregate of $36.0 million through July 31, 2000, with advances
exceeding $36.0 million requiring approval of the bank. The Company and its
lending bank are currently negotiating an amendment to the existing bank credit
agreement. There are no assurances, however, that the Company and the bank will
reach agreement on terms of an amendment acceptable to the Company, or at all,
on or prior to July 31, 2000. Failure to reach such agreement would have a
material adverse effect on the Company.
During the seasonally weak cash flow period from June 2000 through
November 2000, the Company will require additional capital to fund its operating
activities. The Company believes that it can generate substantial operating cash
flows during the seasonally strong cash flow period from December 2000 through
May 2001 and in fiscal years thereafter. In the near-term, the Company is
seeking to assure continuing access to capital from its lending bank by amending
its credit agreement, selling real estate, managing working capital, and
evaluating the sale of certain of its business units. The Company has entered
into agreements to sell four parcels of real estate for aggregate net proceeds
of approximately $2.5 million, which it expects to consummate within 45 days.
These agreements contain customary closing conditions. As a result, no assurance
can be given that these transactions will be consummated in accordance with
their terms.
The Company is also exploring capital raising transactions and
strategic alliances. However, there can be no assurances that the Company's
efforts to raise such capital will be successful. The Company's failure to raise
sufficient capital would have a material adverse effect on the Company. For a
more detailed discussion, see the Liquidity and Capital Resources section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 accounting principles generally accepted in the United States 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 accounting principles
generally accepted in the United States 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
5
financial statements and the reported amounts of revenue and expenses during the
reporting period. Significant estimates contained in these condensed
consolidated financial statements include management's estimates of allowance
for uncollectable accounts receivable, inventory obsolescence reserves and
recoverability of long-term assets. Actual results could differ from those
estimates. Interim results of operations for the three and nine months ended May
31, 2000 and 1999 are not necessarily indicative of operating results for the
full fiscal years or for any future periods.
On April 30, 1999, Gerald Stevens and Gerald Stevens Retail, Inc.
("Gerald Stevens Retail") completed a merger accounted for as a pooling of
interests. The accompanying unaudited condensed consolidated financial
statements give retroactive effect to the merger, and should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations. 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.
Intangible Assets
Intangible assets consisted of the following:
May 31, August 31,
2000 1999
--------- ---------
(In thousands)
Goodwill $ 171,999 $ 126,999
Other 5,193 4,926
--------- ---------
177,192 131,925
Less: Accumulated amortization (5,723) (2,028)
--------- ---------
$ 171,469 $ 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 we believe 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.
6
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 $1.5 million and $3.7 million for the three and nine months ended May 31,
2000, respectively, as compared to $0.6 million and $1.0 million for the three
and nine months ended May 31, 1999, 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. As more fully discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the Company is currently in the
process of reassessing its strategic direction. It is possible that once
finalized, such assessment may result in revisions to management's current cash
flow projections.
Income Taxes
The Company has significant operating loss carryforwards available to
offset future federal taxable income. Because of its current financial position,
the Company has provided a full valuation allowance against its net deferred tax
asset accounts. Accordingly, the Company has recorded no federal income tax
provision or benefit for the three and nine months ended May 31, 2000. However,
the Company currently pays income tax in certain states and as a result,
recorded a provision of $0.3 million and $0.7 million for the three- and
nine-month periods ended May 31, 2000. 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 Christmas, Valentine's Day, Easter and
Mother's Day. Given the importnce of holidays to the floral industry, a change
in the date (in the case of a "floating" holiday such as Easter) or day of the
week on which a holiday falls may also have a substantial impact on our
business. During the summer and fall months, floral retailers tend to experience
a decline in revenue. As a result, Gerald Stevens currently expects the period
from June through November (encompassing its fourth and and first quarters to be
periods of lower revenue and unprofitable operations. In addition, the floral
industry is affected by economic conditions and other factors, including, but
not limited to, competition and weather conditions that impact other retail
businesses.
7
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. The adoption of SFAS No. 133 is not expected to have a
material effect on the financial statements of the Company.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Topic 13: Revenue Recognition," ("SAB 101") to provide guidance
on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 will be effective for the Company during the three months
ended August 31, 2001. Specific items discussed in SAB 101 include bill-and-hold
transactions, long-term service transactions, refundable membership fees,
contingent rental income, up-front fees when the seller has significant
continuing involvement and the amount of revenue recognized when the seller is
acting as a sales agent or in a similar capacity. SAB 101 also provides guidance
on disclosures that should be made for revenue recognition policies and the
impact of events and trends on revenue. The adoption of SAB 101 is not expected
to have a material effect on the financial statements of the Company.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
the quarters beginning after June 30, 2000. The consensus states that the
accounting for specific web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Accordingly, certain
8
web site development costs that are currently expensed as incurred may be
capitalized and amortized. The adoption of EITF Issue No. 00-2 is not expected
to have a material effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives", ("EITF Issue No. 00-14") which
addresses the recognition, measurement, and income statement classification for
sales incentives offered by vendors to customers. The Issue will be effective
for the Company during the three months ended August 31, 2000. Sales incentives
within the scope of this Issue include offers that can be used by a customer to
receive a reduction in the price of a product or service at the point of sale.
The consensus states that the cost of the sales incentive should be recognized
at the latter of the date at which the related revenue is recorded or the date
at which the sales incentive is offered. The consensus also states that when
recognized the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 is not expected to have a material
effect on the financial statements of the Company.
2. Acquisitions
During the nine months ended May 31, 2000, we acquired 88 retail
florist businesses located in existing markets, six new markets in the United
States and one new market in Canada for aggregate consideration of $35.5
million, consisting of $19.4 million in cash and 1,994,557 shares of our common
stock valued at share prices ranging from $5.43 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 nine months ended May 31, 2000, 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 was $0.2
million 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.
Assessments of which retail stores to close or relocate for all acquisitions
consummated prior to August 31, 1999 have been completed. As a result of these
assessments, additional purchase liabilities of approximately $2.9 million for
costs associated with the shut down and consolidation of certain acquired retail
stores (considering existing contractual lease obligations and management's
estimate of future operating lease costs) were recorded and are included in
accrued liabilities. We are in the process of completing an assessment for all
remaining acquisitions consummated after August 31, 1999. We expect to complete
our assessment of retail store closures and relocations for all remaining
acquisitions by August 31, 2000. Once we finalize our assessment of the
remaining retail stores to be closed or relocated, additional purchase
liabilities are expected to be recognized. During the nine months ended May 31,
2000, $244,000 was paid and charged against the established liability.
9
The following table summarizes the closed store liability activity for the nine
months ended May 31, 2000:
(In thousands)
--------------
Balance at August 31, 1999 $ 1,632
Additional purchase liability recorded
during the nine months ended May 31, 2000 1,297
Cash payments for the nine months ended
May 31, 2000 (244)
------------
Balance at May 31, 2000 $ 2,685
============
The preliminary purchase price allocation for businesses acquired
during the nine months ended May 31, 2000 is as follows:
(In thousands)
--------------
Tangible assets (includes cash acquired of $466) $ 7,257
Intangible assets 39,683
Liabilities (11,405)
------------
$ 35,535
============
The Company's pro forma results of operations, assuming each of the
acquisitions described above and each of the fiscal year 1999 acquisitions were
consummated as of the beginning of the periods presented, are as follows:
For the Nine Months Ended
May 31, 2000 May 31, 1999
(In thousands, except per share data)
Revenue $ 239,962 $ 233,881
=========== ============
Net loss $ (1,330) $ (1,738)
=========== ============
Diluted net loss per share $ (0.03) $ (0.04)
=========== ============
10
3. Property and Equipment, Net
Property and equipment consisted of the following:
May 31, August 31,
2000 1999
---- ----
(In thousands)
Land, building and leasehold improvements $ 11,604 $ 8,502
Furniture, fixtures and equipment 6,249 3,497
Computer hardware and software 15,168 6,036
Communication systems 2,372 1,526
Vehicles 1,820 925
-------- --------
37,213 20,486
Less: Accumulated depreciation and amortization (7,748) (4,533)
-------- --------
$ 29,465 $ 15,953
======== ========
4. Accrued Liabilities
Accrued liabilities consisted of the following:
May 31, August 31,
2000 1999
---- ----
(In thousands)
Salaries and benefits $ 4,903 $ 3,787
Wire service 2,959 3,104
Store closure costs 2,685 1,632
Taxes-non payroll/non income 2,106 669
Acquired business consideration 1,205 1,459
Freight & postage 947 --
Insurance 410 448
Financing costs 400 400
Other 3,709 4,068
-------- --------
$ 19,324 $ 15,567
======== ========
5. Debt
Notes Payable
Notes payable at May 31, 2000 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 10.50%. 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's general
practice is to pay these notes in full following the close of acquisitions.
11
Credit Facility
At May 31, 2000, outstanding borrowings under the Company's credit
facility were $26.9 million. The effective Eurodollar borrowing rate and base
rate as of May 31, 2000 were 8.65% and 10.00%, respectively.
Based on third quarter operating results, Gerald Stevens failed to meet
required bank credit agreement financial covenants for leverage ratio and fixed
charges. On July 14, 2000, the Company's lending bank waived the Company's
obligation to comply with these two financial covenants until July 31, 2000, and
agreed to allow the Company to borrow up to $36.0 million through July 31, 2000,
with advances exceeding $36.0 million requiring approval of the bank. The
Company and its lending bank are currently negotiating an amendment to the
credit agreement. (See Liquidity and Capital Resources section of Management's
Discussion and Analysis of Financial Condition and Results of Operations for
further details.)
Based upon uncertainties related primarily to the terms of the
aforementioned amendment to its credit agreement, the Company has classified its
credit facility loan balance at May 31, 2000 as a current liability. Upon
completion of a satisfactory amendment to the credit agreement and its
review of other business factors, the Company will reevaluate the appropriate
classification of the credit facility loan balance in future periods.
6. Stockholders' Equity
During the nine months ended May 31, 2000, the Company issued 1,994,557
shares of its common stock with an aggregate value of $16.1 million to fund the
non-cash portion of the total consideration for acquisitions completed during
the period. Additionally, a total of 430,766 shares of common stock were issued
for total consideration of $1.2 million in connection with stock options and
warrants exercised during this same period. In March, 2000, the Company issued
3,257,000 shares of its common stock in a private placement transaction for
total consideration of $22.0 million net of fees and expenses and retired
519,975 shares of its treasury stock, which had a book value of $1.6 million at
that time.
7. Loss Per Share
Basic and diluted loss 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
12
has not been included for the loss periods presented as they are anti-dilutive.
The components of basic and diluted loss per share are as follows:
For the Three Months
Ended Ended
May 31, May 31,
------------------ -------------------
2000 1999 2000 1999
---- ---- ---- ----
(In thousands) (In thousands)
Basic Average Shares Outstanding 48,398 36,478 45,691 33,305
Common Stock Equivalents -- -- -- --
------ ------ ------ ------
Diluted Average Shares Outstanding 48,398 36,478 45,691 33,305
====== ====== ====== ======
Common stock equivalents not included in the calculation of
diluted loss per share because their impact is antidilutive 3,040 2,562 3,040 2,562
====== ====== ====== ======
8. Commitments and Contingencies
Business Combinations
The Company may be required to make additional payments of up to $1.9
million to the sellers of four 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 May 31, 2000.
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 inter-segment revenue.
The following table presents financial information regarding the
Company's different business segments as of and on the dates set forth below:
13
Nine Months Ended Year Ended
May 31, August 31,
2000 1999 1999
---- ---- ----
(In thousands)
Revenue:
Retail $ 167,502 $ 58,878 $ 83,971
Order generation 47,016 17,404 26,625
--------- --------- ---------
$ 214,518 $ 76,282 $ 110,596
========= ========= =========
Operating income (loss):
Retail $ 10,467 $ 5,279 $ 5,102
Order generation 2,552 2,214 2,579
Corporate (15,047) (12,701) (17,101)
--------- --------- ---------
$ (2,028) $ (5,208) $ (9,420)
========= ========= =========
Identifiable assets:
Retail $ 177,445 $ 99,471 $ 117,177
Order generation 54,179 13,285 50,664
Corporate 10,301 1,969 5,182
--------- --------- ---------
$ 241,925 $ 114,725 $ 173,023
========= ========= =========
14
Item 2.
Management's Discussion And Analysis
------------------------------------
Of Financial Condition And Results Of Operations
------------------------------------------------
General
Gerald Stevens, Inc. ("Gerald Stevens," the "Company" or "We"),
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 34 markets in the United States and
one market in Canada on May 31, 2000. The Company's strategy is to build a
national brand and transform 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
Annual Report on Form 10-K for the fiscal year ended August 31, 1999, as
amended, and the following:
15
o Our ability to integrate acquired businesses.
o Our ability to create and implement a revised business plan that will
generate positive cash flow.
o Our need to improve our information systems.
o Unexpected liabilities incurred in our acquisitions.
o Our dependence on additional capital for any future growth.
o A decline in customer discretionary spending.
o Fluctuations in our revenue due to weather, consumer demand and
seasonality.
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 1998, we entered the retail distribution segment of the
floral industry. From October 1, 1998 through August 31, 1999 we acquired 69
retail florist businesses located in 28 markets throughout the United States for
total aggregate consideration of $98.7 million, consisting of $66.8 million in
cash and 7,060,934 shares of our common stock valued at share prices ranging
from $3.52 to $15.30 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 aggregate 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.
16
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for total aggregate
consideration of $11.6 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 share exercise prices ranging
from $0.36 to $9.44 per share.
During the nine-month period ended May 31, 2000, we acquired an
additional 88 retail florist businesses located in existing markets and seven
new markets for total aggregate consideration of $35.5 million, consisting of
$19.4 million in cash and 1,994,557 shares of our common stock valued at share
prices ranging from $5.43 to $11.53 per share.
All of the acquisitions discussed in the preceding paragraphs were
accounted for as business combinations under the purchase method of accounting
and have been included in our consolidated financial statements from the date of
acquisition.
During the year ended August 31, 1999 and the nine months ended May 31,
2000, 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 nine months ended May 31, 2000 was $0.2 million 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.
Retail segment results for the three and nine months ended May 31, 2000
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 88 retail florist businesses acquired during the nine
months ended May 31, 2000. Retail segment results for the three and nine months
ended May 31, 1999 include only post-acquisition operating results of the
initial 23 retail florist businesses and one import business acquired by the
Company from October 1, 1998 to May 31, 1999.
17
Order Generation segment results for the three and nine months ended
May 31, 2000 include the operating results of the Company's Internet, wire
service, credit and charge card processing and The Flower Club business units,
National Flora and Calyx & Corolla for the entire periods presented. Order
Generation segment results for the three and nine months ended May 31, 1999
include the operating results of the Company's Internet, wire service, credit
and charge card processing and The Flower Club business units for the entire
periods presented, and the operating results of National Flora from its March 1,
1999 date of acquisition.
The tables below present the results of operations of the Company's
Retail and Order Generation segments and Corporate for the three- and nine-month
periods ended May 31, 2000 and May 31, 1999, respectively.
Unaudited
Three Months Ended May 31, 2000
-------------------------------
(dollars in thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 57,785 $ 7,204 $ - $ 64,989
Service and other revenue 7,247 11,499 - 18,746
----- ------ ----- ------
65,032 18,703 - 83,735
Operating costs and expenses:
Cost of product sales 21,357 2,435 - 23,792
Operating expenses 32,290 - - 32,290
Selling, general and admin expenses 9,594 14,750 5,399 29,743
Merger expenses - - - -
------ ------ ----- ------
63,241 17,185 5,399 85,825
------ ------ ----- ------
Operating income (loss) $ 1,791 $ 1,518 $ (5,399) $ (2,090)
======= ======= ======== ========
[RESTUBBED]
Unaudited
Three Months Ended May 31, 1999
-------------------------------
(dollars in thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 25,224 $ - $ - $ 25,224
Service and other revenue 2,545 8,518 - 11,063
----- ----- ----- ------
27,769 8,518 - 36,287
Operating costs and expenses:
Cost of product sales 10,315 - - 10,315
Operating expenses 12,054 - - 12,054
Selling, general and admin expenses 2,511 7,838 3,770 14,119
Merger expenses - - 591 591
------ ----- ----- ------
24,880 7,838 4,361 37,079
------ ----- ----- ------
Operating income (loss) $ 2,889 $ 680 $ (4,361) $ (792)
======= ===== ======== ======
Unaudited
Nine Months Ended May 31, 2000
(dollars in thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 149,318 $ 16,314 $ - $ 165,632
Service and other revenue 18,184 30,702 - 48,886
------ ------ -------- ------
167,502 47,016 - 214,518
Operating costs and expenses:
Cost of product sales 54,800 5,544 - 60,344
Operating expenses 79,645 - - 79,645
Selling, general and admin expenses 22,590 38,920 15,047 76,557
Merger expenses - - - -
------ ------ -------- ------
157,035 44,464 15,047 216,546
------ ------ -------- ------
Operating income (loss) $ 10,467 $ 2,552 $ (15,047) $ (2,028)
======= ====== ======== ======
[RESTUBBED]
Unaudited
Nine Months Ended May 31, 2000
(dollars in thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 53,597 $ - $ - $ 53,597
Service and other revenue 5,281 17,404 - 22,685
------ ------ ------- ------
58,878 17,404 - 76,282
Operating costs and expenses:
Cost of product sales 23,059 - - 23,059
Operating expenses 25,410 - - 25,410
Selling, general and admin expenses 5,130 15,190 8,059 28,379
Merger expenses - - 4,642 4,642
------ ------ ------ ------
53,599 15,190 12,701 81,490
------ ------ ------ ------
Operating income (loss) $ 5,279 $ 2,214 $ (12,701) $ (5,208)
======= ====== ====== ======
18
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 and nine months ended May 31, 2000 increased by $37.3
million to $65.0 million and by $108.6 million to $167.5 million, respectively,
compared to the same periods in the prior year due principally to significant
increases in the number of stores operated in the current versus prior year
periods.
Total revenue at Gerald Stevens' retail businesses for the three months
ended May 31, 2000 was significantly below expected levels. Management believes
that a number of external factors contributed to this result, including revenue
weakness within the retail floral industry due in part to the lateness of the
Easter holiday and poor weather during March in the Northeast and the Midwest
and over the Mother's Day holiday in the Midwest. After our evaluation of third
quarter results, management believes the weakness in revenue was also caused by
certain internal factors including the implementation of new national
advertising programs that were less effective than anticipated and, in certain
markets, by the closure of retail stores where the increase in revenue at other
nearby Company outlets was below expectations. The weakness in revenue from the
Company's retail outlets had a significant adverse effect on Gerald Stevens'
profitability for the three- and nine-month periods ended May 31, 2000. The
Company has implemented revised procedures with respect to stores to be closed
in the future and is seeking to improve the effectiveness of national and local
advertising programs during its upcoming fiscal year.
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 and nine months ended May 31, 2000 increased by
$11.0 million to $21.4 million and by $31.7 million to $54.8 million,
respectively, compared to the same periods in the prior year due principally to
significant increases in the number of stores operated in the current versus
prior year periods.
Retail segment gross margins as a percentage of total revenue for the
three and nine months ended May 31, 2000 increased by 4.3% to 67.2% and by 6.5%
to 67.3%, respectively, compared to the same periods in the prior year. The
majority of the gross margin percentage increases are related to changes in the
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 prior
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 and nine months ended
May 31, 2000 increased by $20.2 million to $32.3 million and by $54.2 million to
$79.6 million, respectively, compared to the same periods in the prior year, due
principally to significant increases in the number of stores operated in the
current versus prior year periods. Retail segment operating expenses as a
percentage of total revenue for the three and nine months ended May 31, 2000
increased by 6.3% to 49.7% and by 4.3% to 47.5%, respectively, compared to the
same periods in the prior year.
19
The majority of the operating expense percentage increase in the three
months ended May 31, 2000 compared to the same period in the prior year is due
to higher labor expenses incurred at the Company's retail outlets this quarter.
Labor hours scheduled were significantly in excess of requirements, particularly
in light of the lower than expected revenue levels. The disproportionate
relationship between retail labor costs and retail revenue for the current
quarter adversely impacted Gerald Stevens profitability for the three and nine
months ended May 31, 2000. Additionally, the period-to-period change in mix
between the Company's retail store and import businesses described above, 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, also
contributed to the higher operating expense percentage in the current quarter.
The majority of the operating expense percentage increase in the nine months
ended May 31, 2000 compared to the same period in the prior year is due to the
retail store and import business mix and to a lesser extent to higher labor
expenses incurred at retail outlets in the nine-month period.
In order to better align labor and other operating costs with revised
near-term revenue projections, Gerald Stevens is in the process of implementing
a plan to reduce operating costs at all field operating units. The
implementation of this plan, which began shortly after the spring holiday
season, is expected to be completed during the fourth quarter of fiscal year
2000. The Company believes the implementation of the plan will result in annual
field cost reductions of approximately $5.0 million. The Company also has just
completed the implementation of improved labor hour scheduling processes at all
retail operating units. Additionally, Gerald Stevens has recently hired
executives with significant multi-store retail experience and reorganized its
field operations into four divisional units to be overseen by these new
executives.
Retail segment selling, general and administrative expenses for the
three and nine months ended May 31, 2000 increased by $7.1 million to $9.6
million and by $17.5 million to $22.6 million, respectively, compared to the
same periods in the prior year due principally to significant increases in the
number of acquired stores operated in the current versus the prior year periods.
Retail segment selling, general and administrative expenses as a percentage of
total revenue for the three and nine months ended May 31, 2000 increased by 5.8%
to 14.8% and by 4.8% to 13.5%, respectively, compared to the same periods in the
prior year due principally to increases in advertising and wire commission
expenses. The level of advertising and wire commission expenses incurred during
the current quarter were disproportionately high compared to revenue generated
at the Company's retail outlets during the period, which adversely affected
Gerald Stevens' profitability during the three and nine months ended May 31,
2000. The higher advertising expenses were due mainly to the implementation of
new national direct-mail programs. The higher wire commission expenses relate
principally to increased in-bound wire orders from national order generation and
retail florist businesses, for which the Company pays customary commission and
wire service fees. To a lesser extent, higher insurance and other general and
administrative expenses also contributed to the selling, general and
administrative percentage increases in the current year versus prior year
periods.
20
Order Generation Segment. Product sales within the Order Generation
segment for the three and nine months ended May 31, 2000 reflect $7.2 million
and $16.3 million, respectively, of sales made by Calyx & Corolla, which was
acquired in July, 1999. Calyx and Corolla product sales for the three months
ended May 31, 2000 were significantly below expectations which adversely
impacted our profitability for the three and nine months ended May 31, 2000. We
believe that this result was due, in part, to increased competition in the
direct-from-grower segment of the industry, particularly on the Internet.
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 and nine months ended May 31, 2000 increased by $3.0
million to $11.5 million and by $13.3 million to $30.7 million, respectively,
compared to the same periods in the prior year. The service and other revenue
increase in the current quarter compared to last year is due primarily to a $1.4
million revenue increase at National Flora related mainly to certain
acquisitions made and merged into National Flora during the latter part of
fiscal 1999 and to revenue of $1.1 million at Calyx & Corolla. The service and
other revenue increase for the current nine-month period compared to last year
is due primarily to incremental revenue of $8.3 million from National Flora,
which was acquired in March, 1999 and to revenue of $2.4 million at Calyx &
Corolla. To a lesser extent, continued increases in The Flower Club revenue and
revenue from our Internet-based order generation business unit also contributed
to current versus prior year period increases.
Cost of goods sold within the Order Generation segment for the three
and nine months ended May 31, 2000 reflect $2.4 million and $5.5 million,
respectively, of costs incurred at Calyx & Corolla. Calyx & Corolla gross
margins as a percentage of product sales revenue for the three and nine months
ended May 31, 2000 were 66.2% and 66.0%, respectively.
Total Order Generation segment selling, general and administrative
expenses for the three and nine months ended May 31, 2000 increased by $6.9
million to $14.8 million and by $23.7 million to $38.9 million, respectively,
compared to the same periods in the prior year. Selling, general and
administrative expenses incurred by Calyx & Corolla during the three months
ended May 31, 2000 were $6.7 million and represented almost all of the current
quarter expense increases. For the nine months ended May 31, 2000, selling,
general and administrative expenses of $14.9 million at Calyx & Corolla,
incremental current year expenses of $4.7 million at National Flora and $3.1
million at our Internet-based order generation business unit represented almost
all of the current nine month period increase. To a lesser extent, expense
increases related to the expansion of The Flower Club business unit also
contributed to the higher current period expense increases.
Corporate. Total Corporate selling, general and administrative expenses
for the three and nine months ended May 31, 2000 increased by $1.6 million to
$5.4 million and by $7.0 million to $15.0 million, respectively, compared to the
same periods in the prior year, excluding $.6 million and $4.6 million in merger
21
expenses incurred during the three and nine months ended May 31, 1999,
respectively. These increases were due primarily to expenses incurred to expand
Gerald Stevens' corporate infrastructure in Fort Lauderdale, Florida and to
support the Company's expanded business units and anticipated future
acquisitions.
Based upon capital constraints and strategic reasons (see Liquidity and
Capital Resources section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations), Gerald Stevens chose not to
initiate a number of previously planned retail acquisitions during the three
months ended May 31, 2000 and has further decided to significantly reduce or
eliminate planned expansion activities in the short-term. Based upon the
expansion slowdown, Gerald Stevens is in the process of significantly reducing
personnel, technology, and other related general and administrative costs at its
Fort Lauderdale, Florida corporate headquarters in order to align its
organizational and cost structure with the size and scope of the business it
currently owns and operates. A significant portion of the personnel downsizing
was completed in June, 2000 and remaining cost reduction programs are expected
to be completed during the remainder of the fourth quarter of fiscal 2000, with
expected total annual corporate expense reductions of approximately $7.5
million.
Interest. Interest expense for the three and nine months ended May 31,
2000 increased by $0.5 million to $0.8 million and by $1.2 million to $1.7
million, respectively, compared to the same periods in the prior year. The
increase in interest expense during the current periods is due primarily to
increased borrowings under the Company's revolving credit facility to finance
the expansion of its business activities and, to a lesser extent, increases in
interest rates.
Income Taxes. The Company has significant operating loss carryforwards
available to offset future federal taxable income. Because of its current
financial position, the Company has provided a full valuation allowance against
its related net deferred tax asset accounts. Accordingly, the Company has
recorded no federal income tax provision or benefit for the three and nine
months ended May 31, 2000. However, the Company currently pays income tax in
certain states and as a result, recorded a provision of $0.3 million and $0.7
million for the three- and nine-month periods ended May 31, 2000, respectively.
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 $0.9 million and $4.6 million as of
May 31, 2000 and August 31, 1999, respectively. Cash and cash equivalents
decreased by $3.7 million and $2.8 million during the nine months ended May 31,
2000 and May 31, 1999, respectively. The major components of these changes are
discussed below.
22
Cash used in operating activities for the nine months ended May 31,
2000 was $9.5 million compared to $1.1 million for the same period last year.
Cash used in operating activities increased during the current period primarily
as the result of higher working capital investments offset to a lesser extent by
increased operating cash flows compared to the prior year period.
The cash portion of the purchase prices for all acquisitions completed
by the Company, net of cash acquired, during the nine months ended May 31, 2000
and May 31, 1999 aggregated $20.9 million and $49.1 million, respectively, as
more fully described in the preceding section entitled "Acquisitions." Capital
expenditures during the nine months ended May 31, 2000 totaled $15.4 million
compared to capital expenditures of $2.6 million in the same period of the prior
year. Capital expenditures primarily include computer hardware, software and
communication system expenditures, and to a lesser extent, new store/facility
construction and equipment costs, related to the expansion of our retail and
order generation businesses.
During the nine months ended May 31, 2000, the Company issued a total
of 3,257,000 shares of its common stock in private placement transactions for
total consideration of $22.0 million, net of placement fees and expenses, and
additionally issued a total of 430,766 shares of common stock for total
consideration of $1.2 million in connection with the exercise of stock options
and warrants. The Company also retired 519,975 shares of treasury stock during
the nine months ended May 31, 2000. During the nine months ended May 31, 1999 we
issued 6,217,537 shares of common stock in private placement transactions for
total consideration of $21.1 million, net of placement fees and expenses,
224,000 shares of common stock for total consideration of $0.3 million in
connection with the exercise of stock options and warrants, and we also
collected a $4.2 million stock subscription receivable balance related to the
initial capitalization of Gerald Stevens Retail.
During the nine months ended May 31, 2000, the Company borrowed a net
amount of $22.6 million on its revolving credit facility and repaid $3.7 million
of debt incurred in connection with certain retail florist acquisitions. During
the nine months ended May 31, 1999, the Company borrowed a net amount of $25.9
million on its revolving credit facility and also repaid a total of $2.3 million
of debt related primarily to a prior revolving credit facility, which was
terminated in June, 1999.
Based upon various factors, including the recent trend of operating
results, its current capital structure and liquidity position and its current
share price, Gerald Stevens is in the process of finalizing a reassessment of
its strategic objectives. In this connection, Gerald Stevens plans to
significantly slow the pace of expansion of its business during the next 12 to
18 months compared to previous plans. During this near-term period, the
acquisition of new retail floral businesses, capital expenditures related to the
construction of new hub or satellite stores, remodeling of existing stores and
the development of computer information systems, and spending on further
development of the Gerald Stevens brand name will be either significantly
reduced, delayed, or eliminated. Gerald Stevens believes that limiting the
23
expansion of its business during the next 12 to 18 months is prudent and expects
that this will allow Company management to focus on integrating businesses
acquired to date and implementing improved business processes and control
procedures within such acquired businesses. However, to the extent that
development of our planned improvements to computer information systems will be
slowed, our ability to obtain more timely and more detailed operational and
financial information to better manage our businesses will continue to be
adversely impacted.
Based upon the planned slowdown in the Company's near-term expansion
and in order to align operating costs with the Company's new plans, Gerald
Stevens is in the process of reducing operating costs at both its corporate
headquarters and at its field operating units (as more fully described in
Results of Operations section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations). Due to the timing of the
implementation of its cost reduction programs over the summer months, including
the impact of customary severance payments, Gerald Stevens does not expect to
see any significant profitability/cash flow benefits from the implementation of
these programs until fiscal year 2001. Additionally, based upon lower floral
industry revenue levels during the seasonally weak summer and fall periods, we
expect to incur operating losses, which could be significant, during the fourth
quarter of fiscal 2000 and first quarter of fiscal 2001.
Gerald Stevens is also in the process of reassessing its strategic
direction . This reassessment will be completed during the fourth quarter of
fiscal 2000 and is expected to result in the sale of certain real estate during
the fourth quarter of fiscal 2000 or the first quarter of fiscal 2001 and may
result in the sale of certain of its business units. Additionally, the Company
will be re-evaluating the realizeability of all long-lived assets and the effect
of changes in the Company's strategy on the value of such assets. It is possible
that certain business units or assets may be sold at prices lower than the
current carrying amount of such business units or that certain long-lived assets
may be deemed to be impaired, thereby requiring losses to be recognized in the
financial statements of future periods.
The outstanding balance on the Company's revolving credit facility at
May 31, 2000 and July 14, 2000 was $26.9 million and $34.5 million,
respectively. Based on operating results for the three months ended May 31,
2000, Gerald Stevens failed to meet required bank credit agreement financial
targets for leverage ratio and fixed charge covenants. On July 14, 2000, the
Company's lending bank waived the Company's obligation to comply with these two
financial covenants until July 31, 2000, and agreed to allow the Company to
borrow up to an aggregate of $36.0 million through July 31, 2000, with advances
exceeding $36.0 million requiring approval of the bank. The Company and its
lending bank are currently negotiating an amendment to the existing bank credit
agreement. There are no assurances, however, that the Company and the bank will
reach agreement on terms of an amendment acceptable to the Company, or at all,
on or prior to July 31, 2000. Failure to reach such agreement would have a
material adverse effect on the Company.
24
During the seasonally weak cash flow period from June 2000 through
November 2000, the Company will require additional capital to fund its operating
activities. The Company believes that it can generate substantial operating cash
flows during the seasonally strong cash flow period from December 2000 through
May 2001 and in fiscal years thereafter. In the near-term, the Company is
seeking to assure continuing access to capital from its lending bank by amending
its credit agreement, selling real estate, managing working capital, and
evaluating the sale of certain of its business units. The Company has entered
into agreements to sell four parcels of real estate for aggregate net proceeds
of approximately $2.5 million which it expects to consummate within 45 days.
These agreements contain customary closing conditions. As a result, no assurance
can be given that these transactions will be consummated in accordance with
their terms.
The Company is also exploring capital raising transactions and
strategic alliances. Assuming that the Company and the bank enter into an
amendment to the credit agreement on or prior to July 31, 2000, on terms
acceptable to the Company, management currently believes that it will be
successful in obtaining the required capital to fund its operations through the
weak seasonal period and thereafter. However, there can be no assurances that
the Company's efforts to raise such capital will be successful. The Company's
failure to raise sufficient capital would have a material adverse effect on the
Company.
On July 5, 2000, the Company received notification from the Nasdaq
Stock Market that its common stock has failed to maintain the minimum bid price
of $5.00 as required for continued listing on the Nasdaq National Market. If the
bid price of Gerald Stevens common stock does not equal or exceed $5.00 for a
minimum of 10 consecutive trading days prior to October 3, 2000, Gerald Stevens
common stock will be delisted from the Nasdaq National Market. The Company
currently plans to submit an application to list its common stock on the Nasdaq
SmallCap Market. As of July 14, 2000, the Company believes that its common stock
meets the continued listing requirement of the Nasdaq SmallCap Market. There is
no assurance that the Company's common stock will be eligible for listing on the
Nasdaq National Market as of October 3, 2000, or that the Company's common stock
will be accepted for listing on the Nasdaq SmallCap Market. Failure to maintain
listing on an organized market may have a material adverse effect on the
liquidity of the Company's common stock or the Company's ability to consummate
acquisitions and strategic alliances or raise capital in the future.
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
25
filing of fiscal year 2001. The adoption of SFAS No. 133is not expected to have
a material effect on the financial statements of the Company.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Topic 13: Revenue Recognition," ("SAB 101") to provide guidance
on the recognition, presentation and disclosure of revenue in financial
statements. SAB 101 will be effective for the Company during the three months
ended August 31, 2001. Specific items discussed in SAB 101 include bill-and-hold
transactions, long-term service transactions, refundable membership fees,
contingent rental income, up-front fees when the seller has significant
continuing involvement and the amount of revenue recognized when the seller is
acting as a sales agent or in a similar capacity. SAB 101 also provides guidance
on disclosures that should be made for revenue recognition policies and the
impact of events and trends on revenue. The adoption of SAB 101 is not expected
to have a material effect on the financial statements of the Company.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
the quarters beginning after June 30, 2000. The consensus states that the
accounting for specific web site development costs should be based on a model
consistent with AICPA Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. Accordingly, certain
web site development costs that are currently expensed as incurred may be
capitalized and amortized. The adoption of EITF Issue No. 00-2 is not expected
to have a material effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives", ("EITF Issue No. 00-14") which
addresses the recognition, measurement, and income statement classification for
sales incentives offered by vendors to customers. The Issue will be effective
for the Company during the three months ended August 31, 2000. Sales incentives
within the scope of this Issue include offers that can be used by a customer to
receive a reduction in the price of a product or service at the point of sale.
The consensus states that the cost of the sales incentive should be recognized
at the latter of the date at which the related revenue is recorded or the date
at which the sales incentive is offered. The consensus also states that when
recognized the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 is not expected to have a material
effect on the financial statements of the Company.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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On June 27, 2000, USA Floral Products, Inc. filed a civil lawsuit in
the United States District Court for the Southern District of Florida entitled
USA Floral Products, Inc. v. Gerald Stevens, Inc. The plaintiff alleges that we
interfered with noncompetition agreements between plaintiff and its former
employees, that we interfered with plaintiff's business relationships and that
we misappropriated plaintiff's trade secrets. Plaintiff seeks injunctive relief
and unspecified monetary damages, including punitive damages. We believe the
claims are without merit, and we are vigorously defending against the claims.
Item 2. Changes in Securities and Use of Proceeds.
--------------------------------------------------
During the first three fiscal quarters of our 2000 fiscal year, we
issued 1,994,557 shares of our common stock in connection with our acquisition
of all of the assets or stock of companies acquired during such quarters, or in
connection with a merger transaction between one of our subsidiaries and an
acquired company. We made all such issuances in reliance upon Section 4(2) of
the Securities Act of 1933, as amended.
During the quarter ended May 31, 2000, we also issued 3,257,000 shares
of our common stock in a private placement under Section 4(2) of the Securities
Act of 1933, as amended, for aggregate consideration of approximately $22.8
million. We paid aggregate placement fees of approximately $814,000 in
connection with such private placement.
Item 6. Exhibits and Reports on Form 8-K.
- ------------------------------------------
(a) Exhibits. The following are being filed as exhibits to this Report:
--------
financial data schedule
(b) Reports on Form 8-K. We filed the following Reports on Form 8-K
during the quarter ended May 31, 2000 and to date in the following
quarter:
Date of Filing Disclosure(s)
- -------------- -------------
April 6, 2000 Item 5. Announcement of private placement.
May 24, 2000 Item 5. Announcement of outlook for quarter ending
May 31, 2000.
27
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: July 17, 2000 By /s/ Albert J. Detz
------------------
Albert J. Detz
Senior Vice President and
Chief Financial Officer
28
Gerald Stevens, Inc.
Quarterly Report on Form 10-Q
For the quarter ended May 31, 2000
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule