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, 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
- ----------------------------------------- ---------------------------------
(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
Florafax International, Inc., 8075 20th Street, Vero Beach, Florida 32966
-------------------------------------------------------------------------------
(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 12, 1999 the registrant had 41,860,633 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, 1999 and August 31, 1998 3
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended May 31, 1999 and 1998 4
Condensed Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months ended May 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the Nine Months ended
May 31, 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 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 34
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, Except Share Data)
May 31, August 31,
1999 1998
----------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,352 $ 7,148
Accounts receivable, net of allowance for
doubtful accounts of $1,387 and $482 at
May 31, 1999 and August 31, 1998,
respectively 12,544 1,792
Inventories 4,524 --
Subscription receivable -- 4,183
Deferred tax asset, net of allowance -- 775
Prepaid and other current assets 1,227 165
-------- -------
Total current assets 22,647 14,063
-------- -------
PROPERTY AND EQUIPMENT, net 8,675 2,046
-------- -------
OTHER ASSETS:
Intangible assets, net 82,793 3,791
Deferred tax asset, net of allowance -- 1,407
Other 1,332 28
-------- -------
Total of other assets 84,125 5,226
-------- -------
Total assets $115,447 $21,335
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 40 $ 80
Accounts payable 16,451 4,336
Accrued expenses 8,901 2,099
-------- -------
Total current liabilities 25,392 6,515
LONG-TERM DEBT, LESS CURRENT MATURITIES 26,058 2,018
OTHER 247 52
-------- -------
Total liabilities 51,697 8,585
-------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 2 and 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 600,000
shares authorized, none issued -- --
Common stock $0.01 par value, 250,000,000 shares
authorized, 36,726,382, and 21,954,483
shares issued and outstanding on May 31, 1999
and August 31, 1998, respectively 367 220
Additional paid-in capital 78,453 19,914
Accumulated deficit (13,454) (5,768)
Tresury stock, at cost, 519,975 shares at
May 31, 1999 and August 31, 1998 (1,616) (1,616)
-------- -------
Total stockholders' equity 63,750 12,750
-------- -------
Total liabilities and stockholders' equity $115,447 $21,335
======== =======
The accompanying notes are an integral part of
these condensed consolidated balance sheets.
3
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, Except Share Data)
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
REVENUE:
Product sales $ 25,224 $ -- $53,597 $ --
Service and other revenues 11,063 4,797 22,685 12,991
-------- ------- ------- -------
36,287 4,797 76,282 12,991
-------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of product sales 10,315 -- 23,059 --
Operating expenses 12,054 -- 25,410 --
Selling, general and administrative expenses 14,119 4,061 28,379 11,194
Contract modification charge -- 3,450 -- 3,450
Merger expenses 591 -- 4,642 --
-------- ------- ------- -------
37,079 7,511 81,490 14,644
-------- ------- ------- -------
Operating loss (792) (2,714) (5,208) (1,653)
-------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense (319) (4) (502) (7)
Interest income 44 45 217 121
Other 38 14 134 22
-------- ------- ------- -------
(237) 55 (151) 136
-------- ------- ------- -------
Loss before income taxes (1,029) (2,659) (5,359) (1,517)
PROVISION (BENEFIT) FOR INCOME TAXES 200 (1,213) 2,327 (789)
-------- ------- ------- -------
Net loss $ (1,229) $(1,446) $(7,686) $ (728)
======== ======= ======= =======
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.18) $ (0.23) $ (0.09)
======== ======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic and Diluted 36,478 7,863 33,305 7,740
======== ======= ======= ======
The accompanying notes are an integral 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, 1998 21,954 $220 $19,914 $ (5,768) $(1,616) $12,750
Sale of common stock, net 6,442 64 21,277 21,341
Common stock issued in acquisitions 8,330 83 35,889 35,972
Compensation expense under stock option plan 1,373 1,373
Net loss (7,686) (7,686)
------ ---- ------- -------- ------- -------
BALANCE, May 31, 1999 36,726 $367 $78,453 $(13,454) $(1,616) $63,750
====== ==== ======= ======== ======= =======
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)
Nine Months Ended
----------------------------
May 31, 1999 May 31, 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,686) $ (728)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 2,141 240
Compensation expense under stock option plan 1,373 --
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (4,650) (2,292)
Inventories 548 --
Prepaid, other current and current deferred tax assets 408 (71)
Other assets and deferred tax assets 1,845 (1,110)
Accounts payable 2,634 6,784
Accrued expenses 2,245 (35)
Other long-term liabilities 36 7
--------- ----------
Net cash (used in) provided by operating activities (1,106) 2,795
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,574) (1,218)
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 (49,095) --
Investment in common stock -- (100)
--------- ----------
Net cash used in investing activities (50,482) (1,318)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 2,500
Proceeds from issuance of common stock, net 21,340 15
Receipts from stock subscription receivables 4,183 --
Purchase of treasury stock -- (178)
Payments on long-term debt (2,347) --
Payment of commitment fee on credit facility (304) --
Proceeds from credit facility 42,820 --
Payment of credit facility (16,900) --
--------- ----------
Net cash provided by financing activities 48,792 2,337
--------- ----------
Net (decrease) increase in cash and cash equivalents (2,796) 3,814
CASH AND CASH EQUIVALENTS, beginning of period 7,148 4,145
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 4,352 7,959
========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 264 $ --
========= ==========
Cash paid during the period for income taxes $ 451 $ 60
========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock issued in acquisitions $ 35,972 $ --
========= ==========
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 AND NINE MONTHS ENDED MAY 31, 1999 AND 1998 ARE UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gerald Stevens, Inc., ("Gerald Stevens" or the "Company") a Delaware
corporation, formerly known as Florafax International, Inc., has historically
been engaged in the flowers-by-wire business of generating floral orders and
providing floral order placement services to retail florists throughout the
United States, as well as providing credit and charge card processing for third
parties.
On April 30, 1999, Gerald Stevens completed a merger with Gerald Stevens
Retail, Inc., ("Gerald Stevens Retail") a Delaware corporation, formerly known
as Gerald Stevens, Inc. The merger was accounted for under the pooling of
interests method of accounting. Gerald Stevens Retail was formed on May 7, 1998,
and through September 30, 1998 was in the development stage, had no revenue and
all of its efforts were directed to developing a business strategy, raising
capital and acquiring leading retail florist shops and other floral-related
businesses. On October 1, 1998, Gerald Stevens Retail commenced its operations
upon the completion of its acquisition of ten operating floral businesses and,
as a result, emerged from the development stage.
In May 1998, the Company entered into a transaction with Marketing
Projects, Inc. ("MPI") that was initially accounted for as a purchase business
combination. The accompanying Consolidated Financial Statements have been
restated for the three and nine-month periods ended May 31, 1998 to account for
the transaction as a contract modification as more fully described in Note 11.
The accompanying Consolidated Financial Statements should be read in conjunction
with Gerald Stevens' supplemental consolidated financial statements which were
included on Gerald Stevens' Current Report on Form 8-K, filed with the
Securities and Exchange Commission on May 17, 1999, as amended.
Gerald Stevens Retail had no operating activities during the period
from its inception (May 7, 1998) to May 31, 1998. Accordingly, other than the
impact of the restatement described above, previously reported operating results
for Gerald Stevens for the three and nine months ended May 31, 1998 are
unchanged.
Interim Financial Statements
In the opinion of management, the accompanying unaudited interim
consolidated financial statements of Gerald Stevens contain all adjustments
7
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of Gerald Stevens as of May 31, 1999, the results of its
operations for the three and nine months ended May 31, 1999 and 1998 and its
cash flows for the nine months ended May 31, 1999 and 1998. The results of
operations for the three and nine months ended May 31, 1999 and the cash flows
for the nine months ended May 31, 1999 are not necessarily indicative of the
results of operations or cash flows which may be reported for fiscal year 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Earnings Per Share
Basic and diluted earnings per share in the accompanying 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:
Three Months Nine Months
Ended Ended
May 31, May 31,
----------------- ---------------
1999 1998 1999 1998
------ ------ ------ -----
(In thousands)
Basic Average Shares Outstanding 36,478 7,863 33,305 7,740
Common Stock Equivalents -- -- -- --
------ ----- ------ -----
Diluted Average Shares Outstanding 36,478 7,863 33,305 7,740
====== ===== ====== =====
Common stock equivalents not included in the calculation of
diluted earnings per share because their impact is antidilutive 2,562 1,368 2,562 1,368
====== ===== ====== =====
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.
8
Impact of Recently Issued Accounting Standards
Comprehensive Income -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income. The Statement requires that
total comprehensive income and comprehensive income per share be disclosed with
equal prominence as net income and earnings per share. Comprehensive income is
defined as all changes in stockholders' equity exclusive of transactions with
owners such as capital contributions and dividends. The statement was adopted by
Gerald Stevens on September 1, 1998. Comprehensive loss is equal to net loss for
all periods presented.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14.
The Statement uses a management approach to report financial and descriptive
information about a company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ending August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption.
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. Gerald Stevens believes that this statement will not have a
material effect on its accounting for computer software development or
acquisition.
2. BUSINESS COMBINATIONS
During the nine months ended May 31, 1999, Gerald Stevens acquired a
significant number of retail florist and other floral-related businesses. All of
the acquisitions were accounted for under the purchase method of accounting and,
accordingly, the results of operations of the acquired businesses have been
included in Gerald Stevens' results of operations from date of acquisition.
The following table sets forth businesses acquired during the nine months
ended May 31, 1999 and the consideration paid. Consideration for these
acquisitions consisted of cash, stock, and debt paid on behalf of former owners.
The total consideration amounts provided in the table reflect certain working
capital adjustments called for in the acquisition agreements.
9
Purchase Price
Date of Total --------------------- Number of Share
Name of Business Acquisition Consideration Cash Stock Shares Price
- ---------------- ----------- ------------- ------- ------- --------- ------
(In thousands except per share price)
Eastern Floral & Gift Shop, Inc. 10/01/98 $ 2,924 $ 2,924 $ -- -- $ --
The Norton Group, Inc. 10/01/98 1,566 548 1,018 289 3.52
Arizona Wholesale Floral Company,
(d/b/a Cactus Flowers) 10/01/98 3,000 1,800 1,200 341 3.52
Dr. Delphinium Designs, Inc. 10/01/98 3,103 880 2,223 632 3.52
Boesen the Florist, Inc. 10/01/98 5,150 2,485 2,665 757 3.52
J.J. Fallon Company, Inc. 10/01/98 1,917 1,117 800 227 3.52
Martina's Inc. 10/01/98 1,948 1,168 780 222 3.52
Flower Franchising, Inc. (d/b/a Royer's Flower Shops) 10/01/98 11,158 6,334 4,824 1,371 3.52
AGA Flowers, Inc. 10/01/98 2,935 1,468 1,467 417 3.52
Jennie's Flower Shop, Inc. 12/07/98 3,575 2,000 1,575 354 4.44
Maple Lee Flowers, Inc. and
Maple Lee Farm 'n' Garden Center, Ltd. 10/01/98 4,698 2,539 2,159 614 3.52
National Flora, Inc. 03/01/99 19,727 9,952 9,775 1,553 6.30
Phoebe's 03/31/99 2,817 2,195 622 99 6.30
The Exotic Gardens, Inc. and Kuhn Flowers, Inc. 04/30/99 6,200 5,580 620 49 12.59
Other Acquisitions Various 17,230 10,986 6,244 1,405
-------------------------------------------------
$87,948 $51,976 $35,972 8,330
=================================================
The preliminary purchase price allocation for businesses acquired under the
purchase method of accounting is as follows:
(In thousands)
Tangible Assets............................................. $21,654
Intangible assets........................................... 80,245
Liabilities................................................. (13,951)
-------
$87,948
=======
Gerald Stevens may be required to make additional payments to the sellers
of four of the businesses acquired of up to $2.0 million. 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, 1999.
The pro forma results of operations, assuming each of the significant
acquisitions described above was consummated as of the beginning of the period
presented are as follows:
10
For the For the
Three Month Nine Month
Period Ended Period Ended
May 31, 1999 May 31, 1999
------------ ------------
(In thousands except share data)
Revenue $28,254 $96,467
======= =======
Net loss $ (373) $ (292)
======= =======
Basic and diluted net loss per share $ (0.01) $ (0.01)
======= =======
Gerald Stevens is a party to letters of intent and agreements, subject to
customary conditions, to acquire various retail flower shops and other floral
businesses. To the extent consummated, we expect that these pending acquisitions
will be accounted for under the purchase method of accounting.
3. INTANGIBLE ASSETS
Intangible assets, net consists of the following:
May 31, August 31,
1999 1998
------- ----------
(In thousands)
Goodwill $83,760 $1,995
Letters of intent -- 1,520
Other 250 616
------- ------
84,010 4,131
Less: Accumulated amortization
(1,217) (340)
======= ======
$82,793 $3,791
======= ======
Goodwill consists of the excess of purchase price over the fair value of
assets and liabilities acquired in acquisitions accounted for under the purchase
method of accounting. Included in goodwill for all periods is $2.0 million from
an acquisition prior to October 31, 1970 which is not required to be amortized.
Amortizable goodwill is amortized over periods ranging from 20 to 40 years,
which management believes is a reasonable life in light of the characteristics
present in the floral industry such as the significant number of years that the
industry has been in existence, the continued trends by consumers in purchasing
flowers for many different occasions, and the stable nature of the customer
base. Amortization of goodwill for the three and nine months ended May 31, 1999
is $.6 million and $1.0 million, respectively. There was no goodwill
amortization in prior periods presented.
11
Letters of intent represent the fair value allocated to letters of intent
of an acquired business. Upon completion of the acquisitions underlying the
letters of intent, the value assigned to the letters of intent was reallocated
as a component of the purchase price for the acquired business.
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of, Gerald Stevens
periodically analyzes the carrying value of its goodwill and other long-lived
assets for indicators of impairment, using an undiscounted projected cash flow
approach. If such cash flows indicate an impairment is present, Gerald Stevens
makes adjustments to the carrying value of long-lived assets based upon
appraisals, discounted cash flows, or otherwise as Gerald Stevens considers
appropriate. After reviewing the results and considering other qualitative
factors, management is of the opinion that the carrying amount of goodwill has
not been impaired.
4. LONG-TERM DEBT
At August 31, 1998, long-term debt included approximately $2.0 million of
borrowings under a $5.0 million line of credit. The line of credit was
collateralized by substantially all assets of the former Florafax International
Inc., with interest payable monthly at the prime rate of the lending
institution.
In September 1998, Gerald Stevens Retail entered into an 18 month senior
secured revolving credit facility (the "Credit Facility") with a bank in which
the bank agreed to loan Gerald Stevens Retail up to $20.0 million. In February
1999, the credit agreement was amended to increase the line of credit to $40.0
million. Cash borrowings bear interest at either the Eurodollar market rate plus
a percentage ranging from 100 basis points to 225 basis points (Eurodollar at
May 31, 1999 was 4.81%) or, at Gerald Stevens Retail's option, the greater of
the Federal funds rate plus 50 basis points or the prime rate ("adjusted base
rate loan"). The federal funds rate and prime rate were 4.61% and 7.75%,
respectively, at May 31, 1999. The percentage over the Eurodollar market rate is
based on Gerald Stevens Retail's financial performance as measured by a total
funded debt ratio (as defined in the Credit Facility). At May 31, 1999, Gerald
Stevens Retail had outstanding borrowings under this credit facility of $26.1
million.
In June 1999, Gerald Stevens Retail and its primary lender amended and
restated their existing $40.0 million revolving credit agreement. Gerald
Stevens, the parent of Gerald Stevens Retail, agreed to guarantee payment of all
obligations under the amended and restated agreement and terminated the existing
$5.0 million line of credit agreement at the same time.
The amended and restated credit agreement provides for borrowings over a
term of 36 months which will bear interest at either the Eurodollar market rate
plus a percentage ranging from 125 to 250 basis points, depending on the
consolidated leverage ratio for the previous quarter, or at Gerald Stevens
option, at a base rate equal to the sum of the higher of the federal funds rate
plus 0.5% or the prime rate plus a percentage ranging from 0 to 100 basis points
depending on the consolidated leverage ratio for the previous quarter. The line
of credit will be used to finance business acquisitions and
12
capital expenditures and to provide working capital for general corporate
purposes. Gerald Stevens Retail's effective Eurodollar borrowing rate and its
base rate as of July 9, 1999 are 6.56% and 8.00%, respectively.
Borrowings under the amended and restated credit agreement are secured by
all Gerald Stevens' current and future assets, including a pledge of the stock
of each business that is acquired by Gerald Stevens. The credit agreement
contains covenants requiring bank approval of certain business acquisitions, and
the maintenance of agreed upon financial ratios, as more specifically described
in the following paragraphs.
In the event that Gerald Stevens' consolidated leverage ratio is greater
than 2.0 to 1.0, and the cash portion of the cost of a business acquisition
exceeds $3.0 million, certain acquisition specific covenants are applicable.
These covenants include, among other things, the requirement that at least 35.0%
of the cost of an acquisition be paid for in the form of common stock, that the
proceeds of loans used to pay the cost of an acquisition cannot exceed three
times the acquired company's earnings before interest, taxes, depreciation and
amortization, and that the lender be provided certain financial information and
give consent to the acquisition.
The amended and restated credit agreement also requires Gerald Stevens to
maintain financial ratios which limit total debt and capital expenditures.
Consolidated debt cannot exceed earnings before interest, taxes, depreciation
and amortization by a ratio of 2.75 to 1.00 (3.00 to 1.00 on or prior to August
31, 1999) or exceed consolidated stockholders' equity. In addition, the ratio of
earnings before interest and taxes ("EBIT") plus lease payments, to the sum of
interest expense, current maturities of debt, cash income taxes and lease
payments must not be less than 1.10 to 1.00 prior to December 31, 2000 and 1.25
to 1.00 thereafter. Capital expenditures in any fiscal year cannot exceed $22.0
million for the fiscal year ending 1999, $42.0 million for the fiscal year
ending 2000, $50.0 million for the fiscal year ending 2001 and $52.0 million for
the fiscal year ending 2002.
Gerald Stevens is currently in discussions with a number of financial
institutions regarding their participation in a proposed syndication of its bank
credit facility. Gerald Stevens anticipates that, assuming there are no material
adverse changes or material disruption of conditions in the financial, banking
or capital markets, the borrowing limits under its credit facility can be
increased from $40.0 million to approximately $50.0 to $75.0 million. However,
there can be no assurances that the company will be successful in increasing the
maximum borrowing amount under the credit facility.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
13
May 31, August 31,
1999 1998
----------- -----------
(In thousands)
Land, building and leasehold improvements $ 6,718 $ 1,282
Furniture, fixtures and equipment 2,696 1,621
Computer hardware and software 1,598 1,015
Communication systems 1,436 1,121
Vehicles 495 --
---------- ----------
12,943 5,039
Less: Accumulated amortization (4,268) (2,993)
---------- ----------
$ 8,675 $ 2,046
========== ==========
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
May 31, August 31,
1999 1998
----------- -----------
(In thousands)
Salaries and benefits $ 2,198 $ 144
Professional fees 1,669 330
Wire service 1,461 --
Other 3,573 1,625
---------- ----------
$ 8,901 $ 2,099
========== ==========
7. STOCKHOLDERS' EQUITY
During the nine months ended May 31, 1999, Gerald Stevens issued 6,217,537
shares of its common stock in private placement transactions for total
consideration of $21.1 million, net of placement fees and expenses.
Additionally, a total of 224,000 shares of common stock were issued for total
consideration of $275 thousand in connection with the exercise of stock options
and warrants during this same period.
From September 1, 1999 to May 31, 1999, Gerald Stevens issued 8,330,054
shares of its common stock with an aggregate value of $36.0 million to fund the
non-cash portion of the total consideration for acquisitions completed during
the period.
As a result of the merger with Gerald Stevens Retail, Gerald Stevens
recorded compensation expense and additional paid-in-capital of approximately
$1.4 million in connection with the vesting of certain non-plan options.
14
8. INCOME TAXES
The components of the income tax provision (benefit) consist of the
following:
Three Months Nine Months
Ended May 31, Ended May 31,
------------------ -----------------
1999 1998 1999 1998
---- ------- ------ -----
(In thousands)
Current income taxes $ 50 $ -- $ 145 $ 60
Deferred income taxes 150 (1,213) 2,182 (849)
---- ------- ------ -----
Income tax provision (benefit) $200 $(1,213) $2,327 $(789)
==== ======= ====== =====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Gerald Stevens' net deferred income taxes as of May 31, 1999 and August 31, 1998
are as follows:
May 31, 1999 August 31, 1998
------------ ---------------
(In thousands)
Allowances for bad debts $ 522 $ 182
Accrued liabilities and other 974 110
Depreciation and amortization 256 180
Net operating losses 347 1,070
General business credits 232 232
Basis difference in intangible assets 1,232 1,432
------- -------
3,563 3,206
Valuation allowance (3,563) (1,024)
------- -------
Total deferred taxes $ -- $ 2,182
======= =======
SFAS No. 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized. At
May 31, 1999, the valuation allowance of $3.6 million consists of deferred tax
assets in the amount of $3.4 million that do not meet the requirements for
recognition as an asset, as well as tax credits in the amount of $.2 million
that are not expected to be realized. This represents a change in the valuation
allowance for the current year of $2.5 million as compared to change of $.5
million in the prior year.
15
As of May 31, 1999, Gerald Stevens has available net operating loss
carryforwards of $.9 million which expire as follows:
Expiration Date Amount
--------------- ------
(In thousands)
2009 443
2018 480
---
923
===
9. RELATED PARTY TRANSACTIONS
On May 7, 1998, Gerald Stevens Retail entered into a services agreement
with SB Management Corp. ("SBMC"), a corporation controlled by a member of
Gerald Stevens board of directors. SBMC agreed to provide certain management
services to Gerald Stevens Retail and incur certain expenses on behalf of Gerald
Stevens Retail, with the cost of such items reimbursed by Gerald Stevens to
SBMC. Through May 31, 1999, Gerald Stevens Retail paid a total of $.9 million to
SBMC for all such services provided through that date, which is included in
selling, general, and administrative expenses in the accompanying consolidated
statement of operations. The parties mutually agreed to terminate the services
agreement on May 31, 1999.
In addition, SBMC leases office space which is also occupied by certain
employees of Gerald Stevens. SBMC does not allocate any of the rent expense for
this space to Gerald Stevens. The approximate annual rent expense to SBMC is $61
thousand.
10. COMMITMENTS AND CONTINGENCIES
Employment Agreements
Gerald Stevens has entered into employment agreements with certain of its
officers and executives. The agreements expire on various dates through until
2001 and also include non-compete provisions. The aggregate minimum annual
payments under these agreements are $2.5 million and $1.9 million for the years
ended December 31, 1999 and 2000, respectively.
Key employees of each of the acquired companies have agreed to enter into
2-year employment agreements with Gerald Stevens effective as of the closing
date of each respective acquisition. The annual salaries range from $20 to $150
thousand. In addition, some of the employment agreements provide for the
employee to receive a bonus beginning in Gerald Stevens' 1999 calendar year of
up to 20% of base salary depending on certain performance targets. The
employment agreements include non-compete clauses of up to two years after the
employment period.
16
Duties
As a result of an investigation concerning the alleged dumping of flowers
in the U.S. market by foreign growers, the U.S. Department of Commerce began
assessing importers a duty based on the import value of certain flowers from
certain growers. Gerald Stevens currently estimates and remits the estimated
assessment based on the most current information available. The final assessment
is subject to determination by the U.S. Department of Commerce and may result in
additional charges or refunds. The Company does not believe that such assessment
will materially affect its financial condition or results of operations.
Supply Agreement
On October 1, 1998, Gerald Stevens entered into a five-year supply
agreement with flower farms (the "Farms") which are affiliated with two of
Gerald Stevens' stockholders. The agreement requires that the Farms provide to
Gerald Stevens on a consignment basis a certain percentage of their flowers. The
Farms must produce and deliver a minimum number of stems for Gerald Stevens
during the growing year commencing on October 1, 1998 and ending on September
30, 1999. Each July, during the term of the agreement, the parties will meet to
establish the minimum stem obligation for each species for the upcoming growing
year. Gerald Stevens has no obligation to pay for any flowers it receives from
the Farms unless and until such flowers are sold by Gerald Stevens.
11. MPI AGREEMENT
Effective May 1, 1998, the Company entered into an agreement with
Marketing Projects, Inc. that (1) modified the rights and obligations of both
parties under the marketing servicing agreement and (2) provided for the
acquisition of MPI's proprietary marketing systems by the Company. Also on May
1, 1998, the Company entered into a non-compete and non-disclosure agreement
with MPI and the principal employees of MPI. Total consideration of $3.7 million
was paid to MPI at the time of closing and the Company is further obligated to
pay up to $125 thousand in cash in each of the following eight fiscal quarters,
contingent upon the attainment of certain quarterly revenue targets. Of total
consideration paid, $3.5 million has been recorded as a contract modification
charge, $150 thousand has been allocated to the purchase of MPI's proprietary
marketing systems and $100 thousand has been allocated to the non-compete
agreement, with amortization provided over 1 and 2 years, respectively. Since
the quarterly contingent payments are based upon the attainment of future
revenue targets, Gerald Stevens will record such payments as sales commissions
to the extent and at the time they become earned.
17
12. SUBSEQUENT EVENTS
Business Combinations
From June 1, 1999 through July 12, 1999, Gerald Stevens acquired 9 retail
florist businesses for total consideration of $3.7 million, consisting of $3.2
million in cash and 30,001 shares of its common stock.
Public Equity Offering
In July 1999, Gerald Stevens completed a public equity offering in which
5,000,000 shares of its common stock were sold at $12.00 per share. Proceeds
received from the offering, net of underwriting discounts and estimated
expenses, were approximately $55.4 million. Upon receipt of such proceeds,
Gerald Stevens repaid all of its then existing borrowings totaling $31.9
million.
Stock Options
Subsequent to May 31, 1999, 104,250 options were exercised at a weighted
average price of $3.17 per share.
18
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 an integrated retailer and marketer of flowers,
plants, and complementary gifts and decorative accessories. Gerald Stevens
currently operates the largest company-owned network of floral specialty retail
stores in the United States, with 141 locations as of June 30, 1999. Gerald
Stevens is building a national brand and transforming the retail floral industry
by integrating its 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. Gerald Stevens ultimately intends to
provide all of its retail customers with a unique and enhanced shopping
experience under the Gerald Stevens brand.
On April 30, 1999, Gerald Stevens and Gerald Stevens Retail, Inc. ("Gerald
Stevens Retail"), formerly known as Gerald Stevens, Inc., completed a merger
accounted for as a pooling of interests. This Management's Discussion and
Analysis of Financial Condition and Results of Operations gives retroactive
effect to the merger, and should be read in conjunction with the accompanying
unaudited Consolidated Financial Statements of the Company. In the merger,
Gerald Stevens issued 1.35 shares of its common stock for each share of Gerald
Stevens Retail common stock outstanding at the effective time of the merger. In
total, Gerald Stevens issued 28.1 million shares of its common stock to the
stockholders of Gerald Stevens Retail, resulting in the stockholders of Gerald
Stevens Retail holding approximately 77.5% of the shares of Gerald Stevens'
common stock then outstanding.
FORWARD-LOOKING STATEMENTS
The following discussion includes projections and/or other
"forward-looking" information. Gerald Stevens is subject to risks and other
uncertainties that could cause its actual results to differ materially from any
such projections or that could cause other forward-looking information to prove
incorrect. For a discussion of such risks and uncertainties, see
"Forward-Looking Statements" and "Risk Factors" in Gerald Stevens' Prospectus
included in Amendment No. 3 to a Registration Statement on Form S-3 filed with
the Securities and Exchange Commission on June 29, 1999.
BUSINESS COMBINATIONS
From October 1, 1998 through May 31, 1999, Gerald Stevens acquired 23
retail florist businesses, 3 order generation businesses, and a floral import
business for total consideration of $87.9 million, consisting of $52.0 million
in cash and 8,330,054 shares of its common stock.
The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above. All of the acquisitions were
19
accounted for under the purchase method of accounting, with results of
operations included in Gerald Stevens' results from date of acquisition.
Purchase Price
Date of Total --------------------- Number of Share
Name of Business Acquisition Consideration Cash Stock Shares Price
- ---------------- ----------- ------------- ------- ------- --------- ------
(In thousands except per share price)
Eastern Floral & Gift Shop, Inc. 10/01/98 $ 2,924 $ 2,924 $ -- -- $ --
The Norton Group, Inc. 10/01/98 1,566 548 1,018 289 3.52
Arizona Wholesale Floral Company,
(d/b/a Cactus Flowers) 10/01/98 3,000 1,800 1,200 341 3.52
Dr. Delphinium Designs, Inc. 10/01/98 3,103 880 2,223 632 3.52
Boesen the Florist, Inc. 10/01/98 5,150 2,485 2,665 757 3.52
J.J. Fallon Company, Inc. 10/01/98 1,917 1,117 800 227 3.52
Martina's Inc. 10/01/98 1,948 1,168 780 222 3.52
Flower Franchising, Inc. (d/b/a Royer's Flower Shops) 10/01/98 11,158 6,334 4,824 1,371 3.52
AGA Flowers, Inc. 10/01/98 2,935 1,468 1,467 417 3.52
Jennie's Flower Shop, Inc. 12/07/98 3,575 2,000 1,575 354 4.44
Maple Lee Flowers, Inc. and
Maple Lee Farm 'n' Garden Center, Ltd. 10/01/98 4,698 2,539 2,159 614 3.52
National Flora, Inc. 03/01/99 19,727 9,952 9,775 1,553 6.30
Phoebe's 03/31/99 2,817 2,195 622 99 6.30
The Exotic Gardens, Inc. and Kuhn Flowers, Inc. 04/30/99 6,200 5,580 620 49 12.59
Other Acquisitions Various 17,230 10,986 6,244 1,405
-------------------------------------------------
$87,948 $51,976 $35,972 8,330
=================================================
In May 1999, Gerald Stevens entered into an agreement to acquire Calyx &
Corolla, Inc., a floral catalog and Internet business, for total consideration
of approximately $14.3 million, consisting of approximately 934,000 shares of
common stock. Gerald Stevens will also assume options that will convert into the
rights to acquire approximately 160,000 shares of common stock with exercise
prices ranging from $.36 per share to $9.44 per share. The acquisition is
expected to be consummated in the fourth quarter of fiscal 1999. Subsequent to
May 31, 1999, Gerald Stevens acquired 9 retail florist businesses for total
consideration of $3.7 million, consisting of $3.2 million in cash and 30,001
shares of its common stock.
Total net goodwill related to acquired businesses at May 31, 1999 was
approximately $82.8 million, which represents approximately 71.8% of total
assets and approximately 129.8% of total stockholders equity at that date. The
$82.8 million of goodwill will result in future annual amortization expense of
approximately $2.6 million, based upon the amortization of goodwill related to
the acquisition of retail floral businesses over useful lives of 40 years, and
the amortization of goodwill related to the acquisition of order generation
businesses over useful lives of 20 years. Goodwill and related amortization are
expected to increase principally as a result of future retail floral business
acquisitions, and the amortization of goodwill and other intangible assets could
adversely affect financial condition and results of operations. Gerald Stevens
has considered various factors, including projected future cash flows, in
determining the purchase prices of acquired retail floral businesses, and does
not believe that any material portion of the goodwill related to any of these
acquisitions will dissipate over a period shorter than 40 years. However,
earnings in future years could be significantly adversely affected if management
later
20
determines either that the remaining balance of goodwill is impaired or that a
shorter amortization period is applicable.
RESULTS OF OPERATIONS
Upon consummation of its merger with Gerald Stevens Retail, management
redefined the manner in which it evaluates and reports the operating results of
its newly combined business for internal purposes. In this regard, management
has chosen to break down its component businesses into two segments: (1) the
Retail Segment and (2) the Order Generation Segment. The Retail Segment will
consist of all retail and import businesses and operations while the Order
Generation Segment will consist 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
Overhead for the three and nine month periods ended May 31, 1999 and 1998. The
Retail Segment 1999 results include the post-acquisition operating results of
the 23 retail florist businesses and one import business acquired by the Company
during the nine-month period ended May 31, 1999. The Order Generation Segment
1999 and 1998 results include the operating results of the Company's former wire
service, credit and charge card processing and The Flower Club business units.
The 1999 results additionally include the operating results of Gerald Stevens'
newly formed Internet-based order generation business unit and the
post-acquisition operating results of the 3 order generation businesses acquired
by the Company during the nine month period ended May 31, 1999. Prior to the
acquisition of its initial retail florist and import businesses on October 1,
1998, Gerald Stevens operated in only the Order Generation Segment.
21
GERALD STEVENS, INC.
SEGMENT INFORMATION
FOR THE THREE & NINE MONTHS ENDED MAY 31, 1999 AND 1998
Three Months Ended May 31,
------------------------------------------------
1999
(dollars in thousands)
Order Corporate
Retail Generation Overhead Total
------------------------------------------------
REVENUE:
Product sales $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 administrative expenses 2,511 7,838 3,770 14,119
Contract modification charge -- -- -- --
Merger expenses -- -- 591 591
-----------------------------------------------
24,880 7,838 4,361 37,079
------------------------------------------------
Operating income (loss) $ 2,889 $ 680 $(4,361) $ (792)
================================================
Three Months Ended May 31,
--------------------------------------------------
1998
(dollars in thousands)
Order Corporate
Retail Generation Overhead Total
--------------------------------------------------
REVENUE:
Product sales $ -- $ -- $ -- $ --
Service and other revenue -- 4,797 -- 4,797
--------------------------------------------------
4,797 -- 4,797
OPERATING COSTS AND EXPENSES:
Cost of product sales -- -- -- --
Operating expenses -- -- -- --
Selling, general and administrative expenses -- 3,931 130 4,061
Contract modification charge -- 3,450 -- 3,450
Merger expenses -- -- -- --
-------------------------------------------------
-- 7,381 130 7,511
--------------------------------------------------
Operating income (loss) $ -- $(2,584) $(130) $(2,714)
==================================================
Nine Months Ended May 31,
-----------------------------------------------
1999
(dollars in thousands)
Order Corporate
Retail Generation Overhead Total
-----------------------------------------------
REVENUE:
Product sales $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 administrative expenses 5,130 15,190 8,059 28,379
Contract modification charge -- -- -- --
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)
===============================================
Nine Months Ended May 31,
--------------------------------------------------
1998
(dollars in thousands)
Order Corporate
Retail Generation Overhead Total
--------------------------------------------------
REVENUE:
Product sales $ -- $ -- $ -- $ --
Service and other revenue -- 12,991 -- 12,991
--------------------------------------------------
-- 12,991 -- 12,991
OPERATING COSTS AND EXPENSES:
Cost of product sales -- -- -- --
Operating expenses -- -- -- --
Selling, general and administrative expenses -- 10,761 433 11,194
Contract modification charge -- 3,450 -- 3,450
Merger expenses -- -- -- --
--------------------------------------------------
-- 14,211 433 14,644
--------------------------------------------------
Operating income (loss) $ -- $(1,220) $(433) $(1,653)
==================================================
Retail Segment. Product sales for the three and nine months ended May 31,
1999 include sales of floral and gift products at retail businesses of $22.3
million and $45.7 million, respectively, and sales of floral product by Gerald
Stevens' import business of $2.9 million and $7.9 million, respectively. 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.
Cost of product sales for the three and nine months ended May 31, 1999
include cost of products sold at retail businesses of $8.1 million and $17.1
million, respectively, and cost of products sold at Gerald Stevens' import
business of $2.2 million and $6.0 million, respectively. Gross margins as a
percentage of total revenue for the three and nine months ended May 31, 1999
averaged 67.5% and 66.5% at retail businesses and 24.1% and 24.1% at Gerald
Stevens' import business, respectively.
Retail segment operating expenses for the three and nine months ended May
31, 1999 include expenses at retail businesses of $11.7 million and $24.4
million, respectively, and expenses at Gerald Stevens' import business of
$.4 million and $1.0 million, respectively. Operating expenses are comprised
22
primarily of salaries and benefit expenses, and to a lesser extent include
occupancy, vehicle, depreciation and amortization expenses.
Retail segment selling, general and administrative expenses for the three
and nine months ended May 31, 1999 include expenses at retail businesses of $2.4
million and $4.8 million, respectively, and expenses at Gerald Stevens' import
business of $.1 million and $.3 million, respectively. Selling, general and
administrative expenses consist primarily of advertising expense, commissions
paid on orders transmitted from third parties, and legal and accounting
expenses.
Order Generation Segment. 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 revenue for the three and nine months ended May 31, 1999
increased by $3.7 million, or 77.6%, to $8.5 million and by $4.4 million, or
34.0%, to $17.4 million, respectively, compared to the same periods in the prior
year. The significant increases in revenue in both the three and nine month
periods this year is due primarily to the acquisition of National Flora by the
Company in March 1999. National Flora, a floral order generation business,
generated $2.8 million in revenue from date of acquisition to May 31, 1999.
Additionally, continued increases in The Flower Club revenue and revenue from
the Company's newly formed Internet-based order generation business unit also
contributed to the current year revenue increases.
Total order generation segment selling, general and administrative expenses
for the three and nine months ended May 31, 1999 increased by $3.9 million, or
99.4%, to $7.8 million and by $4.4 million, or 41.2%, to $15.2 million,
respectively, compared to the same periods in the prior year. Selling, general
and administrative expenses incurred by National Flora from date of acquisition
to May 31, 1999 totaled $2.2 million and represent a significant portion of the
expense increases in the 1999 periods. Additionally, start up costs incurred in
connection with the Company's newly formed Internet-based order generation
business unit during the three and nine months ended May 31, 1999 of $1.0
million and $1.2 million, respectively, also caused current year expenses to be
higher. To a lesser extent, expense increases related to the expansion of The
Flower Club business unit also contributed to the higher 1999 expense levels.
During the three month period ended May 31, 1998, the Company recorded an
expense of $3.5 million related to the modification of a servicing agreement
with MPI. Prior to modifying this servicing agreement, MPI acted as an agent
that interfaced with The Flower Club's corporate customers. By modifying the
servicing agreement, Gerald Stevens began interfacing with the corporate
customers directly, thereby strengthening these relationships. See "MPI
Agreement."
Corporate Overhead. Total Corporate Overhead selling, general and
administrative expenses for the three months ended May 31, 1999 increased to
$3.8 million from $.1 million in the same period in the prior year due to
expenses incurred at Gerald Stevens' new corporate headquarters in Ft.
Lauderdale, Florida and related to the significant expansion of the Company into
retail and other related segments of the floral industry. Total Corporate
Overhead selling, general and administrative expenses for the nine
23
months ended May 31, 1999 increased to $8.1 million from $.4 million in the same
period in the prior year due primarily to expenses incurred at Gerald Stevens
new corporate headquarters in Ft. Lauderdale, Florida but also to non-cash
compensation expense of $1.4 million recorded in connection with the vesting of
certain non-plan stock options. The non-plan stock options are fully vested and
will cause no further compensation expense to be recorded in future periods.
Gerald Stevens plans to expand its business over the next several years,
largely through the acquisition of retail florist businesses. Gerald Stevens
expects Corporate Overhead expenses to increase significantly over this time
period, due principally to integration costs planned to be incurred in
connection with the development and implementation of centralized operational
and financial systems and the establishment of the Gerald Stevens brand name.
See "Liquidity and Capital Resources."
During the three and nine months ended May 31, 1999, Gerald Stevens
incurred a total of $.6 million and $4.6 million, respectively, in investment
banking, accounting and legal costs in connection with its merger with Gerald
Stevens Retail. In accordance with the accounting rules governing business
combinations accounted for as a pooling of interests, all merger-related costs
were recognized as an expense during the period in which they were incurred.
Interest Expense. Interest expense for the three and nine months ended May
31, 1999 was $.3 million and $.5 million, respectively, compared to interest
expense of $4 thousand and $7 thousand in the same periods of the prior year.
The increase in interest expense during the 1999 periods is due to increased
borrowing under the Company's revolving credit facilities to finance the
expansion of its business activities.
Income Taxes. The provision for income taxes for the three and nine months
ended May 31, 1999 was $.2 million and $2.3 million, respectively compared to an
income tax benefit of $1.2 million and $.8 million in the same periods of the
prior year. The current period year-to-date expense is due principally to (i)
the establishment of a deferred tax asset valuation allowance of $1.4 million
which, because of the expected future combined operating results of the merged
company, is now required, (ii) the amortization of a deferred tax asset related
to the utilization of net operating loss carryforwards of $.8 million and (iii)
state income tax provisions of $.1 million. The Company recorded an income tax
benefit during the same periods of the prior year primarily as a result of the
contract modification expense recorded in connection with the MPI Agreement.
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
Cash and cash equivalents decreased by $2.8 million during the nine months
ended May 31, 1999 as compared to a $3.8 million increase in the same period of
the prior year. The major components of these changes are discussed below.
24
Cash used in operating activities was $1.1 million during the nine months
ended May 31, 1999, inclusive of the unfavorable impact of $4.6 million in
investment banking, accounting and legal costs paid in connection with the
Company's merger with Gerald Stevens. Cash provided by operating activities was
$2.8 million during the nine months ended May 31, 1998, inclusive of the
unfavorable impact of $3.5 million paid to MPI under the terms of a contract
modification agreement.
The cash portion of the purchase prices for all acquisitions completed by
the Company during the nine months ended May 31, 1999, net of cash acquired,
aggregated $49.1 million, as more fully described in the preceding section
entitled "Business Combinations." Capital expenditures during the nine months
ended May 31, 1999 totalled $2.6 million compared to capital expenditures of
$1.2 million in the same period in the prior year. Capital expenditures during
fiscal 1999 include the costs of building one new retail hub store as well as
computer and equipment purchases. Capital expenditures during fiscal 1998 relate
principally to the purchase of the land and building that were previously leased
as the Company's former corporate headquarters, and other facility and equipment
expansion costs.
During the nine months ended May 31, 1999, Gerald Stevens issued 6,217,537
shares of its common stock in private placement transactions for total
consideration of $21.1 million, net of underwriting fees and expenses.
Additionally, a total of 224,000 shares of common stock were issued for total
consideration of $275 thousand in connection with the exercise of stock options
and warrants during this same period. Payments totaling $4.2 million for stock
subscribed for and issued to Gerald Stevens Retail's two founders in fiscal 1998
were also received at the beginning of the 1999 period. Gerald Stevens borrowed
a net amount of $23.6 million on its revolving credit facilities during the nine
months ended May 31, 1999, principally to fund the cash portion of its business
acquisition costs. During the nine months ended May 31, 1998, the Company
borrowed $2.5 million to finance a portion of the MPI contract modification
costs (see "MPI Agreement" in following section).
In September 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank in which the bank agreed to loan Gerald Stevens Retail up
to $20.0 million for a term of 18 months. In February 1999, the credit agreement
was amended to increase the line of credit to $40.0 million. At May 31, 1999,
Gerald Stevens had outstanding borrowings under this credit facility of $26.1
million.
In June 1999, Gerald Stevens Retail and its primary lender amended and
restated their existing $40.0 million revolving credit agreement. Gerald
Stevens, the parent of Gerald Stevens Retail, agreed to guarantee payment of all
obligations under the amended and restated agreement and has terminated an
existing $5.0 million line of credit.
The amended and restated credit agreement provides for borrowings over a
term of 36 months which will bear interest at either the Eurodollar market rate
plus a percentage ranging from 125 to 250 basis points, depending on the
consolidated leverage ratio for the previous quarter, or at Gerald Stevens
option, at a base rate equal to the sum of the higher of the federal funds rate
plus 0.5% or the prime rate plus a percentage ranging from 0 to 100 basis points
depending on the consolidated leverage ratio for the previous
25
quarter. The line of credit will be used to finance business acquisitions and
capital expenditures and to provide working capital for general corporate
purposes. Gerald Stevens' effective Eurodollar borrowing rate and its base rate
as of July 9, 1999 are 6.56% and 8.00%, respectively.
Borrowings under the amended and restated credit agreement are secured by
all Gerald Stevens' current and future assets, including a pledge of the stock
of each business that is acquired by Gerald Stevens. The credit agreement
contains covenants requiring bank approval of certain business acquisitions, and
the maintenance of agreed upon financial ratios, as more specifically described
in the following paragraphs.
In the event that Gerald Stevens' consolidated leverage ratio is greater
than 2.0 to 1.0, and the cash portion of the cost of a business acquisition
exceeds $3.0 million, certain acquisition specific covenants are applicable.
These covenants include, among other things, the requirement that at least 35.0%
of the cost of an acquisition be paid for in the form of common stock, that the
proceeds of loans used to pay the cost of an acquisition cannot exceed three
times the acquired company's earnings before interest, taxes, depreciation and
amortization, and that the lender be provided certain financial information and
give consent to the acquisition.
The amended and restated credit agreement also requires Gerald Stevens to
maintain financial ratios which limit total debt and capital expenditures.
Consolidated debt cannot exceed earnings before interest, taxes, depreciation
and amortization by a ratio of 2.75 to 1.00 (3.00 to 1.00 on or prior to August
31, 1999) or exceed consolidated stockholders' equity. In addition, the ratio of
EBIT plus lease payments, to the sum of interest expense, current maturities of
debt, cash income taxes and lease payments must not be less than 1.10 to 1.00
prior to December 31, 2000 and 1.25 to 1.00 thereafter. Capital expenditures in
any fiscal year cannot exceed $22.0 million for the fiscal year ending 1999,
$42.0 million for the fiscal year ending 2000, $50.0 million for the fiscal year
ending 2001 and $52.0 million for the fiscal year ending 2002.
Gerald Stevens is currently in discussions with a number of financial
institutions regarding their participation in a proposed syndication of its bank
credit facility. Gerald Stevens anticipates that, assuming there are no material
adverse changes or material disruption of conditions in the financial, banking
or capital markets, the borrowing limits under its credit facility can be
increased from $40.0 million to approximately $50.0 to $75.0 million. However,
there can be no assurances that the company will be successful in increasing the
maximum borrowing amount under the credit facility.
In July 1999, Gerald Stevens completed a public equity offering in which
5,000,000 shares of its common stock were sold at $12.00 per share. Proceeds
received from the offering, net of underwriting discounts and estimated
expenses, were approximately $55.4 million.
Gerald Stevens intends to implement its business strategy largely by the
acquisition of retail florist and other florist related businesses throughout
the country. Following acquisition, Gerald Stevens expects to incur significant
expenditures to remodel and retrofit some of its acquired stores to be
consistent with the Gerald Stevens store format. Additionally,
26
Gerald Stevens plans to fill out regional markets by constructing a number of
new hub or satellite stores. To facilitate its high rate of planned growth and
to effectively integrate business activities and processes, Gerald Stevens
expects to incur substantial computer and communication costs in the future.
Over the next two to three years, we expect to spend approximately $10.0 million
for remodeling and retrofitting acquired stores, $50.0 million for construction
of new stores and $15.0 million on information systems.
Gerald Stevens also expects to incur significant expenditures over the next
several years, in connection with the development and marketing of its newly
formed Internet-based order generation business unit and the establishment of
the Gerald Stevens brand name. In this regard, Gerald Stevens plans to incur
approximately $20.0 million of advertising costs during the remainder of fiscal
1999 and fiscal 2000. The Internet-based floral order generation industry is
highly competitive and there can be no assurance that Gerald Stevens' new
Internet-based business unit will be successful in achieving sufficient market
share to enable it to operate on a profitable basis.
Gerald Stevens intends to finance the costs of its business acquisitions
and capital expenditures with a combination of debt and equity capital,
including the net proceeds received from the aforementioned sale of 5,000,000
shares of common stock in its recently completed public offering, as well as
cash generated from internal operations. Specifically, it expects to finance the
cost of future business acquisitions by paying cash and issuing shares of common
stock to the sellers of these businesses in reasonably equal values. In addition
to increasing its line of credit, Gerald Stevens also may offer to sell, in
either private placements or public offerings, shares of its common stock as
circumstances and market conditions dictate.
Gerald Stevens believes that the net proceeds received from its recently
completed public equity offering in addition to its existing credit facilities,
will provide adequate capital to meet its ongoing cash requirements over the
next 12 months. Gerald Stevens also believes that it will be successful in
raising additional debt and equity capital in the future. However, Gerald
Stevens cannot provide assurance that temporary or long-term adverse changes in
global capital markets will not interrupt or curtail its growth plans.
MPI AGREEMENT
Effective May 1, 1998, the Company entered into an agreement with Marketing
Projects, Inc. that (1) modified the rights and obligations of both parties
under the marketing servicing agreement and (2) provided for the acquisition of
MPI's proprietary marketing systems by the Company. Also on May 1, 1998, the
Company entered into a non-compete and non-disclosure agreement with MPI and the
principal employees of MPI. Total consideration of $3.7 million was paid to MPI
at the time of closing and the Company is further obligated to pay up to $125
thousand in cash in each of the following eight fiscal quarters, contingent upon
the attainment of certain quarterly revenue targets. Of total consideration
paid, $3.5 million has been recorded as a contract modification charge, $150
thousand has been allocated to the purchase of MPI's proprietary marketing
systems and $100 thousand has been
27
allocated to the non-compete agreement, with amortization provided over 1 and
2 years, respectively.
The MPI transaction was initially accounted for as a purchase business
combination. However, as the result of subsequent evaluations, Company
management determined that the contract modification accounting treatment
discussed above better reflected the substance of the transaction. As a result,
the accompanying Consolidated Financial Statements for the three and nine month
periods ended May 31, 1998 have been restated for this change.
YEAR 2000 ISSUE
Gerald Stevens is currently executing its plan to resolve Year 2000 issues.
The Company has dedicated management and professionals replacing non-compliant
hardware, software and telecommunications equipment in all company-owned
locations. The company is currently 80% complete in its remediation and
hardware/software upgrade efforts. Gerald Stevens has also used independent
third parties to review, assess, and comment on its Year 2000 efforts.
Due to continual acquisitions, the Company's base of potential Year 2000
issues continues to grow. Year 2000 readiness of potential acquisitions is
assessed prior to purchase. Only companies that are either compliant, or can be
made compliant with minimal cost and effort, are purchased. The relative low
level of technology employed in the floral industry minimizes this issue.
At this time, all acquisitions made by the company prior to July 1, 1999
are expected to be fully compliant by the end of third quarter, 1999. All
acquisitions made in the third quarter are expected to be fully compliant prior
to January 1, 2000. All acquisitions made in the fourth quarter will have their
critical systems compliant by January 1, 2000, with specific contingencies and
work-arounds designated for any systems that cannot be made fully compliant. The
Company expects these to be minor and not material to its operations or
financial condition.
The Company has received certification from its vendors regarding Year 2000
readiness. Since the company uses several commercially available software
packages, it is reliant on those software vendors to supply Year 2000 compliant
versions of their software. All new software packages, hardware, and
communications equipment implemented or developed during 1999 have been fully
certified as Year 2000 compliant. Additionally, Gerald Stevens has developed a
contingency plan which includes the replacement of any non-compliant technology
with fully compliant technology that is being used today by any of Gerald
Stevens' businesses.
Gerald Stevens has conducted a review of significant third parties that
support any critical aspect of its business. Gerald Stevens has received
confirmation from its critical third-party trading partners, support
organizations, and suppliers that they are, or plan to be, Year 2000 compliant.
28
The current estimate for expenditures related to investigating and
resolving Year 2000 issues within Gerald Stevens is $1.5 million. Based on its
assessment of Gerald Stevens' Year 2000 issues and considering its primary and
contingency plans, Gerald Stevens' management does not expect Year 2000 issues
to have a material impact on its business, operations, or its financial
condition or results of operations.
INFLATION
Gerald Stevens anticipates that its business will be affected by general
economic trends. Because some of Gerald Stevens' inventory is grown in countries
other than the United States, economic conditions in those countries could
affect the cost of product purchases. During the past year, Gerald Stevens has
not experienced noticeable effects of inflation and believes that cost increases
due to inflation should be able to be passed on to its customers.
SEASONALITY
The floral industry 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 climate in key flower-growing regions.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income -- In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. The Statement requires that total comprehensive
income and comprehensive income per share be disclosed with equal prominence as
net income and earnings per share. Comprehensive income is defined as all
changes in stockholders' equity exclusive of transactions with owners such as
capital contributions and dividends. The statement was adopted by Gerald Stevens
on September 1, 1998. Comprehensive loss is equal to net loss for all periods
presented.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS No. 14.
The Statement uses a management approach to report financial and descriptive
information about a company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ended August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption.
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, requires an entity to expense
all software development costs incurred in the preliminary project
29
stage, training costs and data conversion costs for fiscal years beginning after
December 15, 1998. Gerald Stevens believes that this statement will not have a
material effect on its accounting for computer software development or
acquisition.
30
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On April 23, 1999, Gerald Stevens, Inc. held a special meeting of
stockholders. At the special meeting, stockholders voted on:
(a) The issuance of common stock to Gerald Stevens Retail stockholders
in the merger and the associated change of control of Gerald Stevens.
(b) An amendment to the certificate of incorporation changing the name
of the corporation from "Florafax International, Inc." to "Gerald Stevens,
Inc." and increasing the number of authorized shares of common stock from
70,000,000 to 250,000,000.
(c) The election of five directors to serve from the date the merger
is completed until the next annual meeting.
The following sets forth the results of voting at the special meeting:
Votes*
-----------------------------------------------------
Matter For Against Abstentions
- ------ --------- ------- -----------
Issuance of Stock 4,776,142 192 1
Amendment to
Certificate
of Incorporation 4,776,146 188 1
Election of Directors:
Steven R. Berrard 4,776,146 2
Thomas C. Byrne 4,776,146 2
Gerald R. Geddis 4,776,146 2
Kenneth R. Royer 4,776,146 2
Andrew W. Williams 4,776,146 2
- -----------------
* There were no broker non-votes on any matter.
31
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits. The following are being filed as exhibits to this Report:
---------
-- Restated Certificate of Incorporation of the
registrant (incorporated by reference to Exhibit 3.2
to the registrant's Current Report on Form 8-K, dated
May 17, 1999)
-- Bylaws of the registrant (incorporated by reference to
Exhibit 3.2 to Amendment No. 1 to the registrant's
Registration Statement on Form S-3 filed June 4, 1999)
-- Amended and Restated Credit Agreement dated as of
June 4, 1999 by and among Gerald Stevens Retail,
Inc., Gerald Stevens, Inc., NationsBank, N.A. and
other lender parties (incorporated by reference to
Exhibit 4.1 to Amendment No. 3 to the registrant's
Registration Statement on Form S-3 filed
June 29, 1999)
-- Employment Agreement with Gerald R. Geddis (incorporated
by reference to Exhibit 10.1 to Amendment No. 3 to the
registrant's Registration Statement on Form S-3 filed
June 29, 1999)
-- Employment Agreement with Albert J. Detz. (incorporated
by reference to Exhibit 10.2 to Amendment No. 3 to the
registrant's Registration Statement on Form S-3 filed
June 29, 1999)
-- Employment Agreement with Adam D. Phillips (incorporated
by reference to Exhibit 10.3 to Amendment No. 3 to the
registrant's Registration Statement on Form S-3 filed
June 29, 1999)
-- Employment Agreement with Steven J. Nevill (incorporated
by reference to Exhibit 10.4 to Amendment No. 3 to the
registrant's Registration Statement on Form S-3 filed
June 29, 1999)
-- Financial Data Schedule
(b) Reports on Form 8-K.
--------------------
The following Reports on Form 8-K were filed during the quarter
ended May 31, 1999 and to date in the quarter ending August 31, 1999:
Date of Filing Disclosure(s)
- -------------- -------------
May 3, 1999 Announcement of change in corporate name and change in ticker
symbol.
32
May 17, 1999 Announcement of the closing of the merger transaction with
Gerald Stevens Retail; announcement of a change in certifying
accountant; announcement of filing of amendment to certificate
of incorporation; announcement of entering into agreement and
plan of merger with Calyx & Corolla, Inc.
June 4, 1999 Amendment to Item 7 of May 17, 1999 Form 8-K filing.
33
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 14, 1999 By /s/ Albert J. Detz
---------------------------------
Albert J. Detz
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
34
Gerald Stevens, Inc.
Quarterly Report on Form 10-Q
for the quarter ended May 31, 1999
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the registrant
(incorporated by reference to Exhibit 3.2 to the registrant's Current
Report on Form 8-K, dated May 17, 1999)
3.2 Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to
Amendment No. 1 to the registrant's Registration Statement on
Form S-3 filed June 4, 1999)
4.1 Amended and Restated Credit Agreement dated as of June 4, 1999 by
and among Gerald Stevens Retail, Inc., Gerald Stevens, Inc.,
NationsBank, N.A. and other lender parties (incorporated by reference
to Exhibit 4.1 to Amendment No. 3 to the registrant's Registration
Statement on Form S-3 filed June 29, 1999)
10.1 Employment Agreement with Gerald R. Geddis (incorporated by reference
to Exhibit 10.1 to Amendment No. 3 to the registrant's Registration
Statement on Form S-3 filed June 29, 1999)
10.2 Employment Agreement with Albert J. Detz. (incorporated by reference
to Exhibit 10.2 to Amendment No. 3 to the registrant's Registration
Statement on Form S-3 filed June 29, 1999)
10.3 Employment Agreement with Adam D. Phillips (incorporated by reference
to Exhibit 10.3 to Amendment No. 3 to the registrant's Registration
Statement on Form S-3 filed June 29, 1999)
10.4 Employment Agreement with Steven J. Nevill (incorporated by reference
to Exhibit 10.4 to Amendment No. 3 to the registrant's Registration
Statement on Form S-3 filed June 29, 1999)
27 Financial Data Schedule
35