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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1999 Commission file number 000-05531
GERALD STEVENS, INC.
Incorporated under the Laws of the I.R.S. Employer Identification No.
State of Delaware 41-0719035
301 EAST LAS OLAS BOULEVARD, SUITE 300, FT. LAUDERDALE, FLORIDA 33301
954/713-5000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
(Title of class)
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the Proxy Statement incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. X
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THE AGGREGATE MARKET VALUE OF GERALD STEVENS, INC. VOTING STOCK HELD BY
NONAFFILIATES WAS APPROXIMATELY $362 MILLION ON NOVEMBER 15, 1999.
ON NOVEMBER 15, 1999, 44,734,010 SHARES OF GERALD STEVENS, INC. COMMON
STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders
in connection with the 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III.
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TABLE OF CONTENTS
PAGE
PART I ----
Item 1 Business ................................................................. 1
Item 2 Properties ............................................................... 20
Item 3 Legal Proceedings ........................................................ 20
Item 4 Submission of Matters to a Vote of Security Holders ...................... 20
EXECUTIVE OFFICERS ............................................................. 21
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .... 22
Item 6 Selected Financial Data .................................................. 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations 23
Item 7A Quantitative and Qualitative Disclosures About Market Risk ............... 34
Item 8 Financial Statements and Supplementary Data .............................. 35
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .......................................... 61
PART III
Item 10 Directors and Executive Officers of the Registrant ....................... 61
Item 11 Executive Compensation ................................................... 61
Item 12 Security Ownership of Certain Beneficial Owners and Management .......... 61
Item 13 Certain Relationships and Related Transactions ........................... 61
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......... 61
SIGNATURES ........................................................................... 63
PART I
ITEM 1. BUSINESS.
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GENERAL
We are an 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 in the United States,
with 231 retail locations in 28 markets as of August 31, 1999. We are building a
national brand and transforming the retail floral industry by integrating our
operations throughout the floral supply chain, from product sourcing to
delivery, and by managing every interaction with the customer, from order
generation to order fulfillment. We ultimately intend to provide all of our
retail customers with a unique and enhanced shopping experience under the Gerald
Stevens brand.
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. This division
includes National Flora, the largest yellow page advertiser of floral products,
Calyx & Corolla, the largest direct marketer of flowers, The Flower Club, a
leading corporate affinity marketer, and four primary websites. We currently
promote these websites on leading Internet properties, including Yahoo! and
Lycos. To ensure superior customer service and efficient order processing, we
operate four national call centers. To distribute orders in markets where we do
not have our own stores, we use several flowers-by-wire services and operate
Florafax, the fourth largest U.S. floral wire service, with approximately 5,000
member florists covering all 50 states.
To provide the freshest and highest quality products to our retail
customers, we operate our own sourcing operation. Our leading floral importer
and wholesaler, AGA Flowers, has long-term supply agreements and other
relationships to purchase cut flowers with many of the finest growers in the
United States, Central America and South America. These supply arrangements help
us to eliminate several steps in the floral distribution chain, ensuring a
reliable source of high-quality products at favorable prices. By reducing the
time needed to transport flowers from farms to our retail stores, we extend the
vase life of our flowers, leading to greater customer satisfaction.
We believe our execution of this integrated operating model will make the
Gerald Stevens brand synonymous with superior service, quality and value and
build the most recognized and respected floral and gift brand in the United
States. Once established, we believe the Gerald Stevens brand will drive
increased consumption of all of our products, particularly flowers.
On April 30, 1999, we completed a business combination with Gerald Stevens
Retail, Inc. and changed our business name from Florafax International, Inc. to
Gerald Stevens, Inc. Our principal executive offices are now located at 301 E.
Las Olas Boulevard, Fort Lauderdale, Florida 33301, and our telephone number is
(954) 713-5000.
From September 1, 1999 through November 12, 1999, we acquired a total of 17
floral businesses with stores in 49 retail locations. As of November 12, 1999,
we were in negotiations to acquire additional
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floral businesses with 19 retail locations. The negotiations are in various
stages, and any or all of the acquisitions may not be completed due to failure
to reach definitive agreements, failure to complete satisfactory due diligence
reviews or other reasons.
No material part of our revenues were derived outside of the United States
in the 1999, 1998 and 1997 fiscal years, and during these years, we had no
material assets outside the United States. For additional information concerning
our operations by business segment for the 1999, 1998 and 1997 fiscal years, see
Note 13 to the Notes to Consolidated Financial Statements included in Item 8.
INDUSTRY OVERVIEW
O THE FLORAL INDUSTRY.
Supply Chain. The majority of cut flowers sold at retail in the United
States are grown outside of the United States, principally in Colombia, Mexico,
Ecuador and the Netherlands. Flowers grown outside of the United States are
shipped from the farms to importers in the United States. The majority of
European products arrive in New York while most Central American and South
American products arrive in Miami. After clearing customs and inspections,
floral importers divide the flowers into smaller lot sizes and repack the
flowers for shipment to wholesalers or bouquet companies. Wholesalers then
market the flowers to retail florists, supermarkets, other mass market outlets,
and bouquet companies. Flowers sold to bouquet companies are usually arranged
and packaged for the consumer market and the bouquets are then sold in bulk by
the bouquet companies to supermarkets and mass-market retailers. In aggregate,
the supply chain typically delivers a flower to the retailer approximately 10 to
12 days after the flower is first cut. Moreover, the extensive handling of the
product and the temperature fluctuations to which it is subjected adversely
affect the life of the flower.
Order Generation. Order generators market and advertise in various media to
generate floral orders via dial-up numbers, the Internet or direct mail. As
order generators typically lack fulfillment capabilities, they forward these
orders through a wire service to a retail florist for delivery. Order generators
typically receive a fee equal to 20% of the order for their services. Some order
generators also impose a service charge on the customer for handling the order.
Large order generators typically receive rebates from wire services for sending
orders through their services.
Wire Services. Wire services establish networks of retail florists and
facilitate the transmission and financial settlement of floral orders among the
network members. Wire services publish a membership directory that enables
florists to select which florist will deliver an arrangement outside the sending
florist's own delivery area. Alternatively, florists can allow the wire service
to choose which florist will deliver an arrangement. Some wire services also
supply various hardgoods, including vases and other materials, that florists may
use in the ordinary course of business.
Wire services typically collect a fee of approximately 7% of the value of
an order exchanged via the wire service; however, the fee collected from larger
florists and order generators is often offset by a rebate. Wire services also
typically charge a monthly membership fee to member florists. Since wire
services generally do not own their member florists, they have little control
over the quality of the product and service of the delivering florist.
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Retail. Retailers sell flowers, plants and, in certain cases, complementary
gifts and decorative accessories to customers. Retailers include floral shops,
supermarkets, garden centers, discount warehouses and lawn and garden centers.
Floral shops also receive orders for out-of-town delivery that they forward,
typically through wire services, to other floral shops for fulfillment and local
delivery.
Direct from Farm. The direct-from-farm business consists of certain order
generators, primarily catalogs and websites, that use third-party overnight
shippers like FedEx to distribute products directly from importers or growers to
consumers. This business, while growing, accounts for less than 1% of overall
floral purchases. The majority of direct-from-farm flowers are pre-made
"bunches" of flowers requiring the recipient to arrange them into a bouquet.
O THE FLORAL INDUSTRY'S SIZE AND OPPORTUNITY.
Size. The domestic retail floral industry is a large and growing industry
with attractive business economics. According to industry sources:
o Retail floral industry revenue was approximately $15 billion in 1998.
o When added to the complementary gifts and accessories market, the
combined industry exceeds $60 billion.
o Sales by florists grew by 5.5% in 1998.
o Gross margins for retailers average approximately 60%.
Opportunity to Create a National Network. We believe that the domestic
retail floral industry presents opportunities for innovation, differentiation
and the creation of a national brand due to the following industry
characteristics:
o Highly fragmented, with the top ten floral chains accounting
for less than 5% of total retail sales.
o Absence of a national retail brand.
o Unique customer purchasing characteristics, with 40% of product
orders placed outside of a retail location, approximately 90% of
which are local calls made to local florists.
o Inefficient and decentralized supply chain, with transactions among
growers, importers, wholesalers and retailers creating substantial
incremental costs but providing little additional value to the end
user.
o Lack of integrated order generation and fulfillment companies.
o Under-marketed, with marketing expenditures typically less than 3% of
sales.
o Large, under-marketed customer lists.
Opportunity to Grow the Market. We believe the retail floral industry also
presents opportunities to expand floral consumption as a result of the following
factors:
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o The United States is not among the top ten countries in the world in
per capita consumption of flowers; per capita spending in the United
States is significantly less than that of most western European
countries, according to the Floral Council of Holland.
o Favorable customer demographics and lifestyle trends should generate
additional industry growth.
o Customers value an extended vase life for flowers, which can be
achieved by streamlining the supply chain.
o Retail florists have focused on the gift-giving customer, largely
ignoring the opportunity to increase self-consumption.
o The Internet allows for visual merchandising and targeted marketing
of flowers.
BUSINESS STRATEGY
Our goal is to become the premier specialty floral and gift retailer and
marketer in the United States. We intend to accomplish this by selling a broad
selection of floral and floral-related products, providing superior customer
service and building strong customer loyalty. Because of our management team's
extensive experience in developing nationally branded specialty retailers, we
believe we have the skills and experience necessary to establish Gerald Stevens
as the preeminent brand in the floral industry. Key elements of our strategy
include:
O BUILD A NATIONAL NETWORK OF RETAIL STORES.
Rapidly Expand Our Retail Store Base. We plan to expand our retail
operations in order to increase our market share in existing markets and to open
and/or acquire stores in new markets where the opportunity exists to become the
leading floral retailer. Through August 31, 1999, we have acquired many of the
top floral retailers in the United States, with a total of 231 retail locations
in 28 markets. We believe these initial acquisitions have provided us with a
significant competitive advantage in developing a national brand. Over the next
five years, our strategy is to develop a retail network in the country's largest
100 markets and operate over 1,000 stores.
Enhance the Efficiency of Our Local Order Fulfillment and Distribution
Network. Our retailing network is based on a "hub-and-satellite" system, which
we believe is the most efficient operating structure for the retail floral
industry based upon the success of the leading floral retail chains, several of
which we have acquired. A hub facility serves as a distribution center and
warehouse for surrounding satellite stores within a market. We currently operate
hub facilities in twelve markets. We plan to have at least one hub in each of
the major markets in which we will operate, either through acquisition or
construction. We believe that a hub facility will eliminate cost redundancies
and delivery inefficiencies resulting from the typically decentralized floral
supply chain. Satellite stores are stand-alone or store-in-store retail outlets
in supermarkets and grocery stores. Ideally, our satellite stores will be
located in high-traffic, high-visibility areas to service walk-in business and
promote brand awareness. We plan to connect our satellite stores with their
supporting hub facilities through internal information systems, allowing us to
provide customers with efficient service and a wider product variety.
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Create an Innovative In-Store Experience. We have developed a concept store
that is designed to maximize revenue within the hub-and-satellite network by
catering to the walk-in customer. This store will create a unique and enhanced
shopping experience through an expanded product mix, innovative merchandising
and store design, a knowledgeable staff of professional florists and exceptional
customer service. Over the next two years, our plan is to introduce elements of
this concept store to a number of our acquired stores in order to develop the
Gerald Stevens brand and bring consistency to our national retail network. The
remodeling of our acquired stores will likely coincide with the renaming of
these stores as Gerald Stevens stores.
O BUILD OUR ORDER-GENERATION BUSINESSES.
Capitalize on Our Traditional Order-Generation Businesses. We have acquired
several order-generation businesses to permit us to serve customers who do not
visit or phone our retail stores. In addition, we are compiling a national
customer database that will allow us to target our advertising and promotions.
Through the use of more sophisticated database marketing techniques, our
strategy is to use our order-generation capabilities to increase non-holiday and
advance sales to customers in all channels. Our call centers and sales
organization provide us with a platform to continue to add national corporate
accounts. Where possible, we expect to distribute orders generated by these
businesses through our retail store network, assuring our customers of
high-quality products and superior customer service. Most order generators lack
fulfillment capabilities and transmit their orders through wire services to
independent local florists for production and delivery. We believe our retail
stores will provide us with a significant competitive advantage over order
generators who lack fulfillment capabilities, particularly at holidays and other
peak times.
Develop and Promote E-Commerce Operations. Similar to traditional
order-generation businesses, we believe that online flower order generation must
be coupled with an owned or affiliated local delivery network. This approach
provides the greatest ability to manage all aspects of an order, from order
taking to delivery confirmation, and ensures product quality and customer
service consistency. Our e-commerce strategy is to position Gerald Stevens as a
premier online floral and related gift marketer through a multi-branded strategy
targeted at specific audiences. To promote our websites, we have marketing
contracts with major online portals, including Yahoo! and Lycos. We plan to
continue to make investments in the promotion of our websites. We also intend to
continually upgrade our website offerings in order to provide existing and new
customers with broad product offerings and convenient ordering processes.
O BUILD OUR CONSUMER-DIRECT BUSINESS.
Our Calyx & Corolla subsidiary is the leading direct marketer of floral
products and the largest direct-from-grower floral operation in the United
States. This business arranges for the overnight delivery of products directly
from third-party growers and our own import operation. This business enables us
to offer our customers "farm fresh" flowers and unique floral products, fruit
and gourmet food gift baskets and other gift items that we may not stock at our
retail stores. This business also permits us to promote recurring gifts such as
flower-of-the-month and plant-of-the-month offerings where same-day delivery is
not required. We market these products to our customers primarily through the
use of catalogs and the Internet.
O CREATE SUPPLY CHAIN EFFICIENCIES.
We believe the current floral supply chain is inefficient in that it adds
little incremental value and creates substantial incremental costs. We believe
that a retailer with direct-from-farm relationships can
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reduce inefficiencies in delivery time and cost by minimizing the use of flower
wholesalers. As a result, we expect to cut the time it takes to deliver flowers
from growers to our stores by up to seven days, while at the same time reducing
the cost of the product to us. We believe that improved quality and longer vase
life of flowers will lead to greater customer satisfaction and loyalty.
O DEVELOP OUR INFORMATION SYSTEMS.
Our plan is to develop information systems that will give us a competitive
advantage. To this end, we are integrating our information systems to support
real-time order and inventory processing throughout all of our business units.
This capability will allow us to enhance the customer's overall experience
across our retail network and throughout our order-generation businesses. By
combining enhanced information systems with sophisticated merchandising,
database and supply chain management techniques, we believe these information
systems will improve our profitability.
OPERATIONS
O RETAIL NETWORK.
Our retail stores are among the leading retail floral operations in their
markets, with a total of 231 retail locations in 28 markets across the United
States on August 31, 1999.
We intend to continue to expand our retail network through the acquisition
of additional floral businesses in our current markets and in new markets. From
September 1, 1999 through November 12, 1999, we acquired a total of 17 floral
businesses with stores in 49 retail locations. On November 12, 1999, we were in
negotiations to acquire additional floral businesses, with stores in 19 retail
locations. The negotiations are in various stages, and any or all of the
acquisitions may not be completed due to failure to reach definitive agreements,
failure to complete satisfactory due diligence reviews or other reasons.
In most cases, our initial market entry will be through the acquisition of
key existing retailers followed by the acquisition of smaller retailers. Our
acquisition of key existing retailers will focus on the most respected and
established retailers in a market. We intend to retain the management of
well-run retailers to benefit from their market knowledge, name recognition and
local reputation, and to promote greater levels of customer retention and
loyalty. Smaller stores we acquire may be in non-strategic locations, and
therefore ultimately may be moved to a better location or integrated into a hub
facility. We will keep the telephone numbers of acquired companies to maximize
customer retention. We believe that by acquiring existing stores, we acquire
loyal customers in a cost-efficient manner. Given the results of our recent
acquisitions, we expect to retain a substantial amount of the acquired stores'
customers even when the former locations are relocated to one of our other
facilities.
Hub Facilities. Hub facilities in a typical market are up to 40,000 square
foot facilities that provide centralized call-in order taking, floral arranging
and delivery. A typical major market will have one or two hub facilities. Hub
facilities eliminate cost redundancies inherent in the typical decentralized
floral market, such as duplicative labor functions, inventory spoilage and
delivery inefficiencies, and allow us to control product quality and
consistency. Hub facilities also produce standard floral arrangements for our
retail stores. Depending on the location within its market, a hub facility may
also serve as a retail location.
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Satellite Stores. Our retail stores are either stand-alone or
store-in-store outlets located in high-traffic, high-visibility areas to service
walk-in business. We believe that introducing attractive, well-merchandised
retail stores in high-traffic areas will help promote growth in the walk-in
segment of the floral and gift industry and promote awareness of the Gerald
Stevens brand. Because we can vary our store size and format while maintaining a
consistent Gerald Stevens look and feel, our retail stores will be located in a
variety of settings, including downtown and suburban retail centers, office
buildings, supermarkets and university campuses. These retail locations will be
connected to supporting hub facilities through internal information systems,
allowing us to provide the customer with efficient service and increased product
variety. Each store will vary its product mix depending upon the size of the
store, its location and customer preferences. We expect that our satellite
stores will differentiate themselves from our competitors by offering an
enhanced customer experience within the floral shop through improved marketing,
merchandising and service.
Our store-in-store locations provide the supermarkets, grocery stores and
department stores in which they are located a one-stop solution for quality
floral products and services. These locations benefit from the high traffic and
brand appeal of the store in which they are located. Where possible, each of
these store-in-store locations will be operated by a Gerald Stevens employee to
ensure quality and consistency of product and service, as well as to promote our
brand.
Customer Experience. Our Gerald Stevens concept retail store will create a
unique and enhanced shopping experience for our customers. Our stores will
feature specially designed fixtures, be divided into easy-to-shop categories and
feature professionals demonstrating the art of flower arranging. The store
design is intended to give customers a warm, inviting place to browse and learn
about our products.
In our stores, customers will find fresh-cut flowers and bouquets displayed
creatively and in abundance, with informational tags and signage to guide the
customer through the store. The traffic pattern of the Gerald Stevens store will
draw customers through the store in a logical progression, exposing the customer
to the breadth of available floral products and gift items. In addition to
flowers and plants, our stores will carry a number of complementary gifts and
decorative accessories, including greeting cards, stationery and other paper
products, gourmet confections, gift baskets, decorative accessories,
collectibles and seasonal/holiday decorations. We believe that expanding the
product mix of our stores to include these products is a natural extension of
our floral product offerings since these products, like flowers, are commonly
used as gifts to communicate personal expressions to others and for
self-consumption to create a warm and friendly home environment. We believe that
offering gifts and decorative accessories will not only enable us to meet the
needs of our existing customers who currently purchase these products at
competing specialty retailers, but will also allow us to attract new customers
who do not normally purchase flowers or plants.
In addition to providing our customers with a unique and enhanced in-store
experience and a broader array of merchandise, we are committed to providing
superior customer service. We intend to provide same-day delivery on a national
scale from all distribution points, and expanded hours through our call centers,
which offer customers the opportunity to place orders 24 hours a day, 7 days a
week.
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O ORDER GENERATION.
As a complement to our retail network, we operate several order-generation
businesses, including National Flora and The Flower Club. These businesses focus
on generating floral orders through channels that include mailing inserts,
yellow page advertisements and corporate affinity programs.
Through National Flora, we are the largest yellow page advertiser of floral
products. We generate orders through a variety of additional advertising
efforts, including Internet websites, affinity partnerships, corporate programs
and direct mail marketing. We forward these orders primarily to National Flora's
preferred network of stores and to our stores.
Through The Flower Club, we have relationships with major corporate
partners. We engage in joint marketing campaigns with these corporate partners
throughout the year in an effort to provide member florists with orders during
slower periods of the year. Orders generated by The Flower Club are transmitted
by our Florafax wire service business to member florists. Our corporate partners
include many nationally recognized companies, including airlines, credit card
issuers, retailers and other businesses. We market directly to the customers of
these companies by inserting marketing materials into their customers' periodic
statements.
Our order-generation businesses are currently supported by four call
centers with a total of approximately 350 call stations in three time zones. Our
call centers are located in Vero Beach, Florida; Tulsa, Oklahoma; San Francisco,
California; and Medford, Oregon. These call centers service our order-generation
businesses 24 hours a day, 7 days a week, and provide after-hours phone
answering for our retail stores enabling our local customers to place an order
through a Gerald Stevens representative at any time.
O E-COMMERCE.
We intend to become a premier floral and gift marketer on the Internet. We
believe the Internet will enhance our ability to develop customer relationships
and to introduce new products more quickly and with less financial risk than
otherwise possible.
Currently, we operate a number of websites. We acquired many of these
websites in connection with our purchases of local florists. We also developed a
number of websites internally. Going forward, we anticipate concentrating on the
GeraldStevens.com and calyxandcorolla.com websites, which we will continuously
enhance and promote.
We intend for each of these websites to appeal to a different customer
segment and offer users targeted content and products. The content will be
designed to educate and inform customers, as well as to encourage additional
consumption. Product selection will be targeted by customer segment and will
encompass all distribution channels that we currently offer.
We are committed to marketing and promoting these operations in our stores,
through traditional advertising mediums and via relationships with strategic or
high-traffic websites. We have entered into agreements with a number of
companies, including Yahoo! and Lycos. We also intend to pursue a number of
online direct-marketing strategies including the development of an affiliate
network and the implementation of outbound e-mail marketing programs.
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In addition, through FlowerLink, we provide an opportunity for florists to
participate in the growth of the Internet by developing and hosting customized
websites for them. In exchange for providing free order processing and customer
service, we collect a transaction fee for each order placed through one of these
websites. Approximately 900 florists are members of FlowerLink.
O DIRECT MARKETING
On July 30, 1999, we acquired Calyx & Corolla, Inc., the largest direct
marketer of flowers with over $20.0 million in annual sales. The Calyx & Corolla
acquisition strengthens our position as the largest floral and gift retailer in
the country and enhances our reputation with the well-known and highly trusted
Calyx & Corolla brand. Additionally, this acquisition will serve as a platform
for our direct-marketing efforts and expands our customer database by over 1.5
million floral customers.
In 1988, Calyx & Corolla pioneered the limited inventory/direct-from-source
model that is being so vigorously pursued by Internet retailers today. Over the
past 11 years, Calyx & Corolla has developed partnerships with more than 30
high-quality flower and plant growers who package and ship flowers and vases to
customers via overnight delivery upon receipt of an order. This "just-in-time"
product procurement process allows Calyx & Corolla to eliminate its inventory
risk while at the same time giving its customers fresh, just-cut flowers. It
also allows Calyx & Corolla's customers to customize their floral orders.
We plan to capture same-day delivery sales that Calyx & Corolla currently
foregoes through our network of retail stores. Additionally, we plan to leverage
Calyx & Corolla's expertise and infrastructure to provide unique and
hard-to-find direct-from-grower offerings to customers of our retail stores, our
Internet sites and our call centers and to make in-store gift catalogs available
to our customers.
Given the strength of the Calyx & Corolla brand, we intend to expand the
marketing of the calyxandcorolla.com website, which has experienced significant
revenue gains over last year.
O FLOWERS-BY-WIRE.
We operate Florafax, a flowers-by-wire business that enables member
florists to send and deliver floral orders throughout the United States. We act
as an intermediary among florists, and we send their orders primarily by
telephone or fax.
Our order-allocation system has the ability to distribute orders ratably to
our member florists. Based on our experience in the flowers-by-wire business and
observation of other wire services, we believe that most other wire services
typically do not select florists to receive orders in an equitable manner, but
simply require the florist that originates the order to select the shop that
will fill that order. On our system, once an order is taken, the system analyzes
the area to ascertain which member florists deliver to that location. The system
then determines which florist should receive that order based on distribution
criteria and then sends the order via facsimile or telephone. We believe that
our order-allocation system is presently the only system in the industry that
distributes orders in an equitable manner to member florists.
We list our member florists and their advertisements in the Florafax
Directory, which is published and distributed several times a year. We produce
the Florafax Directory, brochures and sales and promotional materials for use by
us and our member florists.
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O CHARGE AND CREDIT CARD SERVICES.
We offer an electronic credit card and charge card processing system. This
system allows merchants to accept credit cards and charge cards by automatically
providing authorization codes for each transaction and capturing all the
transaction data electronically. This system allows florists and non-floral
merchants to receive frequent, automatic deposits directly to their bank
accounts. We sell and lease system terminals and optional printers at
competitive rates.
SUPPLIERS
AGA Flowers, our leading Miami-based importer, primarily imports cut
flowers, principally from Colombia and Ecuador. We purchase cut flowers, plants
and greens grown in the United States, principally from California. Although we
do not generally enter into long-term contracts with our suppliers, through AGA
Flowers we actively manage relationships with more than 40 growers in South
America and Central America which allow us to obtain high-quality flowers in
large quantities and when needed. In addition, we enter into standing order
arrangements with other importers and wholesalers that provide us fixed-quantity
purchases on a fixed-price basis throughout the year, with higher quantities at
those prices during peak demand periods to ensure an adequate supply of flowers.
We believe that we have good relationships with our suppliers and that the
larger number of current and potential suppliers should continue to make
perishable floral products available to us as needed.
AGA Flowers also supplies fresh-cut flowers and bouquets to wholesalers,
distributors and large retailers, including supermarkets. Over 60% of the floral
products imported by AGA Flowers are sold to these third parties. We expect this
percentage to decrease as we acquire more florist shops, AGA fulfills more of
our shops' floral product needs, and AGA's sales to third parties remain
relatively constant.
INFORMATION SYSTEMS
In the 1999 fiscal year we spent approximately $5.5 million, and over the
next two to three years we intend to invest approximately an additional $15.0
million, to develop our information systems. We believe these investments will
enhance our competitive advantage over other flower retailers and marketers. Our
systems will include leading retail applications designed to support large-chain
specialty retailers. Our systems will also allow us to use historical customer
data to further enhance the execution, service, and identification of new
markets and marketing opportunities.
COMPETITION
We face competition throughout the retail floral industry. Our retail
stores compete with traditional floral shops, supermarkets, garden centers,
vendors and other retailers based upon price, credit terms, breadth of product
offering, product quality, customer service and location. We also compete with
gift and other specialty retailers with our non-floral products. Both our
traditional and our Internet order-generation businesses face significant
competition from others providing similar services. In particular, dial-up
numbers and websites in the retail floral industry have become significantly
more competitive in recent years. We compete by buying large yellow pages
advertisements with priority placement, by marketing our numbers and websites in
various media, and by offering call center service 24 hours a day, 7 days a
week. Our floral wire service business is one of five national wire services in
the country, and the three larger wire services have substantial market share.
To the extent we are unable to compete successfully against our existing and
future competitors, our business, operating results and financial condition may
be materially
-10-
adversely affected. While we believe that we compete effectively within each
segment in the retail floral industry, additional competitors with greater
resources may enter the industry and compete effectively against us.
SERVICE MARKS, TRADEMARKS AND TRADE NAMES
We have registered or are in the process of registering a variety of
service marks, trademarks and trade names for use in our business, including:
o Gerald Stevens SM
o National Flora TM
o The Flower Club TM
o Calyx & Corolla TM
We regard our intellectual property as being an important factor in the
marketing of our company and our brand. We are not aware of any facts that would
negatively impact our continuing use of any of our service marks, trademarks or
trade names.
EMPLOYEES
On August 31, 1999, we employed approximately 2,150 full-time and 1,625
part-time employees. We also employ approximately 970 additional employees
during peak seasons. Of our non-seasonal employees, approximately 75 are
corporate personnel. None of our employees are represented by unions. We
consider our employee relations to be good.
REGULATION
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to online content, Internet privacy, Internet
taxation, access charges, liability for information retrieved from or
transmitted over the Internet, domain names, database protection, unsolicited
commercial e-mail messages and jurisdiction. New regulations may increase our
costs of compliance and doing business, decrease the growth in Internet use,
decrease the demand for our services or otherwise have a material adverse effect
on our business.
We are also subject to federal, state and local environmental, health and
safety laws and regulations. Under environmental laws, we may be responsible for
investigating and remediating environmental conditions relating to conditions at
the numerous real properties at which we operate. These obligations could arise
whether we own or lease the property. We are not aware of any pending federal
environmental legislation that we expect to have a material adverse impact on
our company.
Our import operations are generally subject to United States federal
regulations governing international trade and the importation of products into
the United States. Imports into the United States are subject to various tariffs
and customs duties imposed by the federal government. Such tariffs and duties
are subject to change. In addition, when a particular foreign country limits the
amount of a particular product that may be exported from the United States to
such country, the United States government from time to time may retaliate by
imposing a new or additional tariff on other products that the country exports
into the United States. These retaliatory tariffs could be material. In
addition, the United States from time
-11-
to time imposes anti-dumping duties on imports into the United States. Dumping
is the practice whereby importers sell products in the United States at prices
below the products' home market value. Anti-dumping duties generally are paid by
the importer.
RISK FACTORS
Our business, financial condition, results of operations and prospects, and the
prevailing market price and performance of our common stock, may be adversely
affected by a number of factors, including the matters discussed below.
Our Potential Inability to Implement Our Growth Strategy. Our business
strategy will focus on growing our revenue and operations internally by opening
new retail locations and expanding sales through other order-generation
businesses, including our websites on the Internet, as well as by making
acquisitions of floral and gift businesses. The success of our growth strategy
will depend on a number of factors including our ability to:
o assess the value, strengths and weaknesses of acquisition candidates;
o evaluate the costs and projected returns of expanding our operations;
o expand our customer base;
o market our products and services effectively over the Internet
and in traditional media;
o lease desirable store locations on suitable terms and complete
construction on a timely basis;
o promptly and successfully integrate acquired businesses and new
retail locations with existing operations; and
o obtain financing to support this growth.
We may not be able to identify suitable acquisition candidates or locations
for new stores. If we are not able to identify suitable acquisition candidates
or if acquisitions of suitable candidates are prohibitively expensive, we may be
forced to alter our growth strategy. Our growth strategy may affect short-term
cash flow and net income as we increase our indebtedness and incur additional
expenses. As a result, our operating results may fluctuate and our growth
strategy may not result in improving our profitability. If we fail to implement
our growth strategy successfully, the market price of our common stock may
decline. In addition, we may not be able to retain a sufficient portion of the
customers of the retail stores that we acquire.
We may expand our operations not only within our current lines of business,
but also into other related and complementary businesses. Our entry into any new
lines of business may not be successful, as we may lack the understanding and
experience to operate profitably in new lines of business.
Demands on Our Resources Due to Growth. Our anticipated growth could place
significant demands on our management and our operational, financial and
marketing resources. These demands are due to our plans to:
-12-
o acquire and integrate numerous floral and gift retailers;
o open new locations;
o increase the number of our employees;
o expand the scope of our operating and financial systems;
o broaden the geographic area of our operations;
o increase the complexity of our operations;
o increase the level of responsibility of management personnel; and
o continue to train and manage our employee base.
Our management and resources, now and in the future, may not be adequate to
meet the demands resulting from our expected growth.
Continued Net Losses Could Hinder Our Growth Strategy. We have experienced
losses during our most recent fiscal year. Our net loss for fiscal 1999 was
$12.3 million, which includes merger expense of $4.1 million and a non-cash
compensation expense of $1.4 million related to non-plan stock options during
the fiscal year. We acquired most of our retail operations in an April 1999
merger with Gerald Stevens Retail, which was established in May 1998 and
commenced operations in October 1998 upon completion of its acquisition of ten
floral businesses. For the period from its inception to September 30, 1998,
Gerald Stevens Retail was a development stage company with no revenue and
generated a net loss of $2.1 million. If we incur net losses in future periods,
we may not be able to implement our growth strategy in accordance with our
present plans and our stock price may decline.
Our Financial Results May Not Be Indicative of Future Results. The
financial statements included in this report cover periods when Gerald Stevens
and some of our acquired businesses were not under common control or management.
These financial statements may not be indicative of our future financial
condition, operating results, growth trends or prospects.
You must evaluate our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in the early stages of a new
growth strategy. Our strategy of building a nationally branded floral and gift
retailer and marketer may not lead to growth, profitability or increased market
prices for our common stock.
We Need to Improve Our Information Systems. We need to make improvements to
and integrate our information systems. Although we spent approximately $5.5
million in the 1999 fiscal year, and over the next two to three years we intend
to invest approximately an additional $15.0 million for our information systems,
this budget may not be sufficient. We also need to hire more accounting and
information systems personnel. We may experience delays, disruptions and
unanticipated expenses in implementing, integrating and operating our
information systems. Failure to fully integrate and enhance our information
systems or hire additional personnel could have a material adverse effect on our
business, financial condition, results of operations and growth prospects.
-13-
We May Have Difficulties Integrating Acquired Businesses with Our Company.
Until we complete and install our information systems, we will use and depend
upon the information and operating systems of our acquired entities. We may not
be able to efficiently combine our operations with those of the businesses we
have acquired without encountering difficulties. These difficulties could result
from having different and potentially incompatible operating practices,
computers or other information systems. By consolidating personnel with
different business backgrounds and corporate cultures into one company, we may
experience additional difficulties. As a result, we may not achieve anticipated
cost savings and operating efficiencies and we may have difficulties managing,
operating and integrating our businesses.
We May Incur Unexpected Liabilities When We Acquire Businesses. During the
acquisition process, we may not discover some of the liabilities of businesses
we acquire. These liabilities may result from a prior owner's non-compliance
with applicable federal, state or local laws. For example, we may be liable
after an acquisition of a business for the prior owner's failure to pay taxes or
comply with environmental regulations. Environmental liabilities could arise
regardless of whether we own or lease our properties. While we will try to
minimize our potential exposure by conducting investigations during the
acquisition process, we will not be able to identify all existing or potential
liabilities. We also generally will require each seller of an acquired business
to indemnify us against undisclosed liabilities. In most cases, this
indemnification obligation will be supported by deferring payment of a portion
of the purchase price or other appropriate security. However, this
indemnification may not be adequate to fully offset any undisclosed liabilities
associated with the business acquired.
Goodwill Resulting from Acquisitions May Adversely Affect Our Results.
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 our financial
condition and results of operations. We have considered various factors,
including projected future cash flows, in determining the purchase prices of our
acquired retail floral businesses, and we do 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, our earnings in future years could be
significantly adversely affected if management later determines either that the
remaining balance of goodwill is impaired or that a shorter amortization period
is applicable.
We Will Depend on Additional Capital for Our Growth. Our ability to remain
competitive, sustain our expected growth and expand our operations largely
depends on our access to capital. We anticipate making numerous acquisitions of
floral businesses, which will require ongoing capital expenditures. We also
expect to make expenditures to continue integrating the acquired floral
businesses with our existing businesses. To date, we have financed capital
expenditures and acquisitions primarily through private equity and our revolving
bank credit facility. We have a $40 million revolving credit facility under
which we have outstanding borrowings of approximately $24.2 million on November
15, 1999. We are in discussions with a number of financial institutions in an
effort to increase the revolving credit facility to between $50 and $75 million.
We may not be successful in obtaining an increased credit facility. In addition,
to execute our growth strategy and meet our capital needs, we plan to issue
additional equity securities as part of the purchase price of future
acquisitions, which may have a dilutive effect on the interests of our
stockholders. However, additional capital may not be available on terms
acceptable to us. Our failure to obtain sufficient additional capital could
curtail or alter our growth strategy or delay capital expenditures.
Debt Covenants May Restrict Our Growth. Restrictive covenants contained in
our credit facility may limit our ability to finance future acquisitions, new
locations and other expansion of our operations. Credit
-14-
facilities obtained in the future likely will contain similar restrictive
covenants. These covenants may also require us to achieve specific financial
ratios.
With regard to acquisitions, our credit facility requires that, in the
event that our 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 the
requirement that at least 35% of the cost of an acquisition be paid 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.
Our credit facility also requires us to maintain financial ratios that
limit total debt and capital expenditures. Consolidated debt in the future
cannot exceed earnings before interest, taxes, depreciation and amortization by
a ratio of 2.75 to 1.00 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 cannot exceed $42 million for the 2000 fiscal year, $50
million for the 2001 fiscal year and $52 million for the 2002 fiscal year.
Any of these covenants could become more restrictive over time. Our ability
to respond to changing business and economic conditions and to secure additional
financing for operating and capital needs may be significantly restricted by
these covenants. Furthermore, we may be prevented from engaging in transactions
including acquisitions that are important to our growth strategy. Any breach of
these covenants could cause a default under our debt obligations and result in
our debt becoming immediately due and payable. We are not certain whether we
would have, or would be able to obtain, sufficient funds to make these
accelerated payments.
Our Quarterly Operating Results Will Fluctuate Due to Seasonality. Unit
sales of floral products have historically been seasonal, concentrated primarily
in the second and third fiscal quarters as a result of holidays such as
Valentine's Day, Easter and Mother's Day. In contrast to the second and third
fiscal quarters, the first and fourth fiscal quarters have relatively few
flower-giving holidays. Negative fluctuations have been particularly pronounced
and net losses have been incurred in these quarters. In the past, we have
experienced, and we expect to continue to experience, quarterly variations in
revenue and cash flows. Other factors that could cause quarterly variations
include additional selling, general and administrative expenses to acquire and
support new business and the timing and magnitude of capital expenditures. We
intend to plan our operating expenditures based on revenue forecasts. Any
revenue shortfall below these forecasts in any quarter would likely decrease our
operating results for that quarter.
Customers May Reduce Discretionary Purchases of Flowers and Gifts. We
believe that the floral and gift industry is influenced by general economic
conditions and particularly by the level of personal discretionary spending by
customers. As a result, the floral and gift industry could experience periods of
decline and recession during economic downturns. The industry may experience
sustained periods of decline in sales in the future. Any material decline in
personal discretionary spending could have a negative effect on our business,
financial condition, results of operations or prospects.
Competition May Adversely Impact Our Performance. The floral and gift
industry is highly competitive. Competition exists in each segment of the
industry. We expect competition from:
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o flower growers, importers, wholesalers and bouquet companies,
including Dole Food Company, Inc. and USA Floral Products, Inc.;
o floral wire services, including FTD, Teleflora and AFS;
o retailers including traditional floral and gift shops, supermarkets,
mass merchandisers and garden centers; and
o traditional and online order generators of floral and gift products,
including 1-800-FLOWERS.
In many of our markets, our competitors are larger and have greater
financial resources than we do. The Gerald Stevens brand is new, and may not be
marketed effectively by us. We may not be able to compete successfully against
our existing competitors and any future competitors.
We May Incur Anti-dumping Liability. The majority of flowers sold in the
United States are grown in other countries. Flower-importing companies are
subject to anti-dumping duties. Generally, if the United States Department of
Commerce determines that a foreign grower sold flowers to an importer in the
United States for a price less than the home market price or constructed value
of the flowers, then the Commerce Department may impose an anti-dumping duty
upon the importer. The precise amount of duty is calculated after a review of
sales over a twelve-month period and a comparison of the prices of the United
States sales with the prices of home market sales or constructed value. If we
are required to pay a duty as a result of a Commerce Department anti-dumping
review, it may have a material adverse effect on our business, financial
condition, results of operations or prospects.
Political and Economic Events in Foreign Countries May Limit Supply of
Flowers. Flowers are imported principally from countries in South America and
Central America. The political and economic climate in several of these
countries from time to time has been volatile. In some of these countries, this
volatility has adversely affected many aspects of the economy, including flower
production. At times, this volatility has also impacted trade relations with the
United States. As a result, future political and economic events in these
flower-growing countries may reduce the production or export of flowers. Any
adverse changes in the production or export of flowers from flower-producing
countries could have a material impact on our business, financial condition,
results of operations or prospects.
Potential Adverse Effects of Bad Weather in Flower-Growing Regions. The
supply of perishable floral products depends significantly on weather conditions
where the products are grown. Severe weather, including unexpected cold weather,
may have an adverse effect on the available supply of flowers, especially at
times of peak demand. For example, in order for a sufficient supply of roses to
be available for sale on Valentine's Day, rose-growing regions must not suffer a
freeze or other harsh conditions in the weeks leading up to the holiday. Any
shortages or disruptions in the supply of fresh flowers, or any inability on our
part to procure our flower supply from alternate sources at acceptable prices in
a timely manner, could lead to the inability to fulfill orders during periods of
high demand, and the loss of customers.
We May Have Difficulties Transporting Flowers. The perishable nature of
flowers requires the floral industry to have a transportation network that can
move products quickly from the farm to the retailer. Flowers grown in South
America and Central America are typically transported via charter flights to the
United States, principally to Miami. After flowers arrive in Miami or other
ports of entry, they are distributed throughout the United States primarily via
refrigerated trucks. There may be disruptions in
-16-
service at Miami International Airport, fuel shortages, work stoppages in the
air charter or trucking industries or other problems encountered in transporting
flowers.
Problems with Order-Transmission Networks and the Compatibility of Our
Systems. A large percentage of floral industry revenue is dependent upon the
ability of the party taking an order from a customer to transmit the order to a
delivering florist outside the immediate geographic market. Over the past
several years, this process has increasingly relied on electronic communications
and computers to create networks that serve as the transmission medium for
orders. We believe that a substantial number of floral industry participants use
one or more of these networks, particularly FTD's Mercury network. In the event
that one or more of these networks were to become disabled, or our systems were
unable to communicate with the network or any other transmission medium, or one
or more of our businesses were not permitted to use such network or medium, we
may not be able to use our normal computer-based methods for communicating
orders. In this event, we would either need to route orders via alternative wire
services, requiring reconfiguration of the existing wire interfaces and
programming logic, or be required to make individual telephone calls or send
faxes to florists. Conducting business primarily through telephone and fax
orders would cause us to operate in a slower and more costly manner. Any of
these situations could have a negative impact on our business, financial
condition, results of operations or prospects.
Relationships with Floral Wire Service Businesses May Deteriorate. The
retail floral industry has traditionally relied upon floral wire services,
including FTD, Teleflora, AFS and our Florafax wire service business, to act as
intermediaries to effectively manage, among other things, financial settlement
among florists and serve as a clearinghouse for orders. To our knowledge, these
intermediaries do not currently operate retail stores but do engage in other
marketing and floral order-generation activities. One or more of these wire
services may seek to prohibit our order-generation business or our retail
operations from settling orders through their wire services, or using their
technology to transmit orders. These actions may have a short-term material
adverse impact on our business, financial condition, results of operations or
prospects.
Wire service intermediaries also provide financial rebates or incentives to
those florists, order generators and other parties that transmit and/or
financially settle a large number of orders through their system. These rebates
and incentives provide a significant portion of our operating profit. Any change
in the industry's rebate or incentive structure may have a short-term material
impact on our business, financial condition, results of operations or prospects.
Relationships with Member Florists of Our Wire Service Business May
Deteriorate. Some of the member florists of our floral wire service business may
not want to continue as members if they perceive that we are in competition with
them through our retail stores. This risk may be heightened when we acquire or
open retail operations in markets where our member florists are located. Loss of
member florists could have a negative impact on our business, financial
condition, results of operations or prospects.
Uncertainty of Internet Use and its Impact on Our Business. We believe that
the Internet and electronic commerce will play an increasingly important role in
floral and gift-related merchandising and order taking over the coming years. As
such, we intend to devote significant financial resources to our Internet
operations. However, the use of the Internet and e-commerce by customers to
purchase flowers and gifts may not increase as rapidly as we expect, and other
purchasing mediums may replace the Internet. Additionally, there are few
barriers to entry on the Internet. Our competitors may be better funded or have
other proprietary technologies or approaches to e-commerce that may make it
difficult for us to compete on
-17-
the Internet. In any of these instances, our business, financial condition,
results of operations or prospects may be materially adversely impacted.
In addition, if the use of the Internet for direct-from-grower sales does
rapidly increase and such sales replace locally delivered floral arrangements,
then the revenue we plan to generate by owning and operating numerous retail
stores may be materially adversely affected. Also, as e-commerce becomes more
prevalent and the use of Internet phone directories increases, the value we
receive from advertisements in traditional phone books may decrease.
We May Face Increased Government Regulation of the Internet. There are an
increasing number of federal, state, local and foreign laws and regulations
pertaining to the Internet. In addition, a number of federal, state, local and
foreign legislative and regulatory proposals are under consideration. Laws or
regulations may be adopted with respect to the Internet relating to liability
for information retrieved from or transmitted over the Internet, online content,
user privacy and quality of services. Changes in tax laws relating to electronic
commerce could adversely affect our business. The applicability to the Internet
of existing laws covering issues such as intellectual property, libel, personal
privacy and other areas is uncertain and developing. New legislation or
regulations could decrease growth in the use of the Internet, impose additional
burdens on e-commerce or alter how we do business. This could decrease demand
for our online product offerings, increase our cost of doing business, increase
the costs of products sold on the Internet or otherwise have an adverse effect
on our business, financial condition, results of operations and prospects.
Year 2000 Issue May Adversely Affect Our Computer Systems and Operations.
Businesses we acquire may not have taken appropriate steps to address their Year
2000 issues. Critical issues these companies must address include Year 2000
readiness of their telephone switches, voicemail systems, store server hardware
and operating systems, and the business software installed on their store
systems. Any acquired businesses that have not adequately addressed these issues
pose immediate operational and financial risks. We may incur significant costs
to replace or upgrade equipment and software to ensure Year 2000 compliance.
These costs could have a negative impact on our business, financial condition,
results of operations or prospects.
Additionally, we may experience significant Year 2000-related operating
problems. These problems may include our inability to:
o input floral orders into the system;
o communicate electronically with our retail stores;
o communicate with vendors;
o conduct accounting and banking functions; and
o manage the business effectively due to lack of information.
We may be materially adversely affected by any of these problems.
Our Directors and Executive Officers Have Limited Industry Experience.
Other than Ruth Owades, Kenneth Royer and Andrew Williams, none of our directors
and executive officers have significant experience in the floral and gift
industry. Our directors and executive officers may not ultimately be
-18-
successful in the floral and gift industry. In addition, we believe that our
success will depend to a significant extent upon the efforts and abilities of
the management of companies that we acquire.
We Depend Heavily on Our Senior Management. We believe that our success
will depend to a significant extent upon the efforts and abilities of our
Chairman, Steven Berrard, our President and Chief Executive Officer, Gerald
Geddis, our other executive officers and the senior management of the companies
that we acquire. While we have entered into employment agreements with our
executive officers and the senior management of some companies we have acquired,
these individuals may not remain with us throughout the term of the agreements
or thereafter. Our employment agreements with Mr. Geddis, Albert Detz and Adam
Phillips terminate on December 31, 2000, our employment agreement with Steven
Nevill terminates on February 2, 2001, and our employment agreement with Eleanor
Callison terminates on September 27, 2001. We do not have "key person" life
insurance policies covering any of our employees. We will likely also depend on
the senior management of any significant business that we acquire in the future.
If we lose the services of one or more of these key employees before we are able
to attract qualified replacement personnel, our business could be adversely
affected.
Our Significant Stockholders Are Able to Influence Corporate Action. As a
result of its stock ownership and board representation, New River Capital
Partners will be in a position to influence our corporate actions such as
mergers or takeover attempts in a manner that could conflict with the interests
of our other stockholders. New River Capital Partners owns 7,977,104 shares, or
17.8%, of our common stock. In addition, two of the nine members of our board of
directors, including the Chairman, are representatives of New River Capital
Partners. In addition, our executive officers own 4,326,880 shares of our common
stock, or approximately 9.7%. Although there are no agreements or understandings
between New River Capital Partners and our executive officers as to voting, if
such parties voted in concert they would exert significant influence over us.
Our Stock Price May Be Volatile. The market price for our common stock has
been volatile and may be affected by a number of factors, including the
announcement of acquisitions or other developments by us or our competitors,
quarterly variations in our or other industry participants' results of
operations, changes in earnings estimates or recommendations by securities
analysts, developments in the floral and gift industry, sales of a substantial
number of shares of our common stock in the public market, general market
conditions, general economic conditions and other factors. Some of these factors
may be beyond our control or may be unrelated to our results of operations or
financial condition. Such factors may lead to further volatility in the market
price of our common stock.
Possible Depressing Effect of Shares Eligible for Future Sale. We have
issued a substantial number of shares of our common stock pursuant to our
acquisition program, and we expect to issue additional shares of common stock as
part of the purchase price for future acquisitions. The shares of common stock
issued pursuant to our acquisition program will be registered with the SEC
periodically, making them immediately available for resale. We have issued to
our employees, officers and directors options to purchase shares of our common
stock. The shares issuable upon exercise of the options have been registered
with the SEC. Any actual sales or any perception that sales of a substantial
number of shares may occur could adversely affect the market price of our common
stock and could impair our ability to raise capital through an offering of
equity securities.
Possible Dilution in Value of Common Stock and Voting Power. If we issue
additional shares of common stock, including shares that may be issued pursuant
to option grants, earn-out arrangements and future acquisitions, purchasers of
common stock may experience dilution in the net tangible book values per
-19-
share of the common stock. In addition, because our stockholders do not have any
preemptive right to purchase additional shares in the future, their voting power
will be diluted by any issuance of shares.
ITEM 2. PROPERTIES.
----------
Our corporate headquarters are located in leased premises at 301 East Las
Olas Blvd., Suite 300, Ft. Lauderdale, FL 33301. On August 31, 1999, we owned
two hub locations and four satellite locations, leased or licensed space inside
37 supermarkets and department stores, and leased our other hub facilities and
satellite stores. None of these individual locations are material to us. We
consider each of these stores to be in good operating condition and suitable for
their current use.
The following table lists our other principal non-retail properties, of
which the Vero Beach property is owned and the others are leased:
LOCATION USE
-------- ---
2055 Cardinal Avenue, Medford, Oregon 97504 Call Center for National Flora
8075 20th Street, Vero Beach, Florida 32961 Call Center and Headquarters for Florafax
6925 East 14th Street, Tulsa, Oklahoma 74112 Call Center for Florafax
185 Berry Street, San Francisco, California 94107 Call Center and Headquarters for Calyx & Corolla
1800 Eller Dr., Ft. Lauderdale, FL 33316 Corporate Administrative Facility
8416 N.W. 17th Street, Miami, Florida 33126 Import Facility
We expect to make significant capital expenditures to provide consistent
features and signage for our retail stores. We expect to make significant
capital expenditures to develop hub locations. We believe that all of our
facilities are sufficient for our current needs.
ITEM 3 LEGAL PROCEEDINGS.
-----------------
We are party to pending legal proceedings arising in the ordinary course of
business. While we cannot predict the results of these proceedings with
certainty, we do not believe that any of these matters are material to our
financial condition or results of operations.
On February 8, 1999, we were named as a defendant in a civil lawsuit
entitled Harvey Seslowsky v. Gerald Stevens, Inc., Eric Lambert, Steven Berrard,
Thomas Byrne, Thomas Aucamp, Gerald Geddis, and Michael van der Kieft, in the
Circuit Court for Broward County, Florida. The plaintiff alleges that the
defendants used his idea and business plan when they formed Gerald Stevens. The
lawsuit seeks unspecified monetary damages. We believe the claims against us are
without merit, and we are vigorously defending against the claims.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
This Item is inapplicable, as no matters were submitted to a vote of our
security holders during the quarter ended August 31, 1999.
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EXECUTIVE OFFICERS
Our executive officers are as follows:
NAME AGE POSITION
---- --- --------
Gerald R. Geddis 49 Chief Executive Officer, President
and Director
Eleanor Marcus Callison 45 Senior Vice President and Chief
Marketing Officer
Albert J. Detz 51 Senior Vice President and Chief
Financial Officer
Steven J. Nevill 34 Senior Vice President and Chief
Information Officer
Adam D. Phillips 36 Senior Vice President, Chief
Administrative Officer, General
Counsel and Secretary
GERALD R. GEDDIS, a member of our board of directors since April 30,
1999, has served as our Chief Executive Officer and President since April 30,
1999. He co-founded Gerald Stevens Retail with Mr. Berrard in May 1998 and
served as its Chief Executive Officer and President until its merger with us on
April 30, 1999. From 1988 to 1996, Mr. Geddis served in various executive
positions at Blockbuster Entertainment Group, a division of Viacom Inc. He
served Blockbuster as President from 1995 to 1996, and as Chief Operating
Officer in 1996. During his tenure at Blockbuster, Mr. Geddis was involved in
all facets of the company's operations, including worldwide store operations,
merchandising, marketing and training. For the 17 years prior to 1988, Mr.
Geddis served in various positions with Tandy Corporation.
ELEANOR MARCUS CALLISON has served as our Senior Vice President and Chief
Marketing Officer since September 27, 1999. From September 1997 until joining
Gerald Stevens, she was Vice President - Advertising for Hallmark Cards, Inc.,
where she was responsible for the planning, development, and execution of all
Hallmark consumer communications, brand advertising, database marketing and
consumer affairs. In the 16 years before she joined Hallmark, Ms. Callison held
various positions, most recently senior vice president, at Leo Burnett
Advertising USA, where she had responsibility for numerous large retail
accounts, including McDonald's, Disney and Kraft Foods.
ALBERT J. DETZ has served as our Senior Vice President and Chief Financial
Officer since April 30, 1999. Prior to joining Gerald Stevens Retail in July
1998 as its Senior Vice President and Chief Financial Officer, Mr. Detz worked
at Blockbuster from 1991 to 1997, having most recently served as Senior Vice
President and Chief Financial Officer from October 1994 to June 1997. Prior to
Blockbuster, Mr. Detz served in various finance-related positions, including
Vice President, Corporate Controller, for 11 years within the Computer Systems
Division of Gould Electronics, Inc., and at Encore Computer Corporation. Prior
to these experiences, Mr. Detz worked in the audit department of Coopers &
Lybrand. Additionally, Mr. Detz is Vice President, Chief Financial Officer of
Data Core Software Corporation, a development stage business for which his
services are primarily of a consulting nature.
STEVEN J. NEVILL has served as our Senior Vice President and Chief
Information Officer since April 30, 1999. From 1996 until joining Gerald Stevens
Retail as Senior Vice President in February 1999, Mr. Nevill was a principal at
Kurt Salmon Associates where he was responsible for a wide variety of projects,
including information systems strategy, systems development, logistics
assessment and re-engineering. From 1991 to 1995, Mr. Nevill was Director of
Strategic Services for the American Retail Group where he
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was involved in the creation of strategic plans, development and implementation
of new systems and technology platforms for all functions, and a variety of
special systems initiatives.
ADAM D. PHILLIPS, a member of our board of directors since October 18,
1999, has served as our Senior Vice President, Chief Administrative Officer,
General Counsel and Secretary since April 30, 1999. From January 1998 until
joining Gerald Stevens Retail as Senior Vice President in July 1998, Mr.
Phillips was a shareholder of the law firm of Akerman, Senterfitt & Eidson, P.A.
in Fort Lauderdale, Florida. From 1993 through 1997, Mr. Phillips served in
various capacities at Blockbuster, having most recently served as Executive Vice
President, Chief Administrative Officer and General Counsel in 1996 and 1997.
While at Blockbuster, Mr. Phillips was responsible for the company's legal,
human resources and communications departments. Prior to joining Blockbuster,
Mr. Phillips was associated with the law firm of Kirkland & Ellis in Chicago,
Illinois.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
---------------------------------------------------------------------
Our common stock began trading on the Nasdaq National Market under the
symbol "GIFT" on May 3, 1999. Prior to that date, our common stock traded on the
Nasdaq SmallCap Market under the symbol "FIIF" beginning on May 30, 1997. Prior
to that date, our common stock traded in the "Over the Counter" or "Pink Sheet"
market. The number of registered stockholders of our common stock on November
15, 1999 was 1,482 based on information furnished by our transfer agent.
The table below sets forth by quarter, for the fiscal years ended August
31, 1998 and 1999, the high and low intra-day sale prices for our common stock
as reported by Nasdaq.
SALE PRICES
-----------------------------
HIGH LOW
1998:
First quarter $ 6 1/8 $ 3 1/4
Second quarter 6 3/8 5 1/16
Third quarter 6 1/4 5
Fourth quarter 6 4 5/16
1999:
First quarter $ 7 1/4 $ 4
Second quarter 21 7/8 6 7/16
Third quarter 18 3/4 10 3/8
Fourth quarter 16 9 1/8
On November 15, 1999, the closing price of our common stock on the
Nasdaq National Market was $12.25 per share. We urge you to obtain current
market quotations for shares of our common stock.
We have never paid dividends on our common stock and we do not anticipate
paying cash dividends in the foreseeable future. We intend to retain future
earnings to fund the development and growth of our business. Any payment of
dividends in the future will be at the discretion of our board of directors and
will
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be dependent upon our earnings, financial condition, capital requirements and
other factors deemed relevant by our board of directors. Our credit facility
also restricts our ability to pay dividends.
SALES OF UNREGISTERED SECURITIES DURING THE 1999 FISCAL FOURTH QUARTER
During our 1999 fiscal fourth quarter, we issued 860,276 shares of our
common stock in connection with our acquisition of all of the assets or stock of
companies acquired during such quarter, 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 such quarter, we also issued 934,455 shares of our common stock
to the former shareholders of Calyx & Corolla, Inc. in connection with a merger
transaction with such company. We issued such shares in reliance on Section
3(a)(10) of the Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
Years ended August 31, 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net revenue $ 110,596 $ 16,221 $ 13,911 $ 11,955 $ 9,560
Operating income (loss) (9,420) (3,076) 1,918 1,562 952
Net income (loss) (12,307) (2,268) 3,433 2,262 707
Earnings (loss) per share:
Basic $ (0.35) $ (0.26) $ 0.43 $ 0.38 $ 0.12
Diluted $ (0.35) $ (0.26) $ 0.39 $ 0.35 $ 0.12
Weighted-average common and common
equivalent shares outstanding:
Basic 35,145 8,581 8,076 5,988 5,701
Diluted 35,145 8,581 8,715 6,375 5,872
- ------------------------------------------------------------------------------------------------------------------------------------
At Year-end
- ------------------------------------------------------------------------------------------------------------------------------------
Working capital (deficiency) $ (6,508) $ 7,548 $ 1,116 $ 488 $ (1,398)
Intangible assets 129,897 3,791 2,090 2,256 2,366
Total assets 173,023 21,335 10,594 8,822 6,468
Long-term debt 4,340 2,018 80 334 3,034
Total liabilities 37,050 8,585 5,341 5,585 8,224
Stockholders' equity (deficit) 135,973 12,750 5,253 3,237 (1,756)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
GENERAL
Gerald Stevens, Inc. ("Gerald Stevens," or the "Company"), formerly known
as Florafax International, Inc., is a leading integrated retailer and marketer
of flowers, plants, and complementary gifts and decorative accessories. The
Company operates the largest company-owned network of floral specialty
-23-
retail stores in the United States, with 231 locations in 28 markets as of
August 31, 1999. We are building a national brand and transforming the retail
floral industry by integrating our operations throughout the floral supply
chain, from product sourcing to delivery, and by managing every interaction with
the customer, from order generation to order fulfillment. The Company owns and
operates its own import operation and has relationships with leading growers
around the world. Our national sales and marketing division permits us, through
multiple distribution channels including the Internet, dial-up numbers and
direct mail, to serve customers who do not visit or phone our retail stores.
On April 30, 1999, Gerald Stevens and Gerald Stevens Retail, Inc. ("Gerald
Stevens Retail"), 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 our accompanying
Consolidated Financial Statements. In the merger, we issued 1.35 shares of our
common stock for each share of Gerald Stevens Retail common stock outstanding at
the effective time of the merger. In total, 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.
ACQUISITIONS
From October 1, 1998 through August 31, 1999 we acquired 69 retail florist
businesses with 231 stores 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 per share to $15.30 per share. Previously, in July 1998, the Company
had purchased letter of intent rights totaling $1.5 million related to 8 of
these retail florist businesses. These costs were subsequently allocated as an
additional component of the cost of acquiring these businesses. Additionally, in
October 1998, we acquired AGA Flowers, Inc., a floral import business located in
Miami, Florida 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, Inc., a floral order generation
business, for total consideration of $19.7 million, consisting of $10.0 million
in cash and 1,552,500 shares of our common stock valued at $6.30 per share.
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for total consideration of $11.6
million, consisting of approximately $.1 million in cash, 934,455 shares of our
common stock valued at $10.80 per share, and our assumption of stock option and
warrant obligations which converted into rights to acquire 152,081 shares of our
common stock at exercise prices ranging from $.36 per share to $9.44 per share.
All of the acquisitions discussed in the preceding paragraphs were
accounted for as business combinations under the purchase method of accounting
and are included in our consolidated financial statements from the date of
acquisition.
During the third and fourth quarters of fiscal 1999, we also acquired
certain intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets related principally to customer
lists, telephone numbers and yellow page advertising contractual rights. Total
aggregate
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consideration paid for all such intangible asset acquisitions was $4.5 million,
consisting of $2.8 million in cash and 159,823 shares of our common stock.
The net book value of goodwill and other specifically identifiable
intangible assets at August 31, 1999 totaled $129.9 million, which represents
75.1% of total assets and 95.5% of total stockholders equity at that date. The
amortization of this $129.9 million balance will result in future annual
amortization expense of approximately $4.1 million, based principally upon the
amortization of goodwill related to the acquisition of retail floral businesses
over useful lives of 40 years, the amortization of goodwill related to the
acquisition of order generation businesses over useful lives of 20 to 40 years
and the amortization of other intangible assets over useful lives of 5 to 10
years. Goodwill, other intangible assets, 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. The Company has
considered various factors, including projected future cash flows, in
determining the purchase prices of its business and other intangible asset
acquisitions and does not believe that any material portion of the assigned
intangible asset costs of these acquisitions will dissipate over a period
shorter than their respective assigned useful lives. However, earnings in future
years could be materially adversely affected if management later determines
either that the remaining goodwill or other intangible asset balance is impaired
or that a shorter amortization period is applicable.
Gerald Stevens' strategic plan contemplates the closing or relocation of a
number of its acquired retail stores within each of its targeted market areas.
These store closures or relocations are expected to occur mainly during the
projected two-year market development period following our initial entry into a
market. The decision to close or relocate a particular store will be made after
completion of that area's market development plan and will be based upon various
factors including quality of real estate location, expected growth and
demographic trends, and store profit contributions. A store's proximity to the
market's hub distribution facility and our ability to transfer call center,
floral design and customer delivery functions from that store to the hub
facility will significantly impact the decision to close or relocate a
particular store.
We have completed our assessment of which retail stores to close or
relocate for all acquisitions consummated prior to December 31, 1998. For
acquisitions consummated after December 31, 1998, management is in the process
of completing such assessment. We expect to complete our assessment of retail
store closures and relocations for all acquisitions consummated through August
31, 1999 by February 2000. Additional purchase liabilities recorded relative to
acquisitions consummated prior to December 31, 1998 were approximately $1.6
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). Once management
finalizes its assessment of the remaining retail stores to be closed or
relocated, additional purchase liabilities are expected to be recognized. During
the year ended August 31, 1999 no exit costs were paid and charged against the
established liability.
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.
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The tables below present the results of operations through operating income
(loss) of Gerald Stevens' Retail and Order Generation segments and Corporate for
the years ended August 31, 1999, 1998 and 1997. The Retail segment 1999 results
include the post-acquisition operating results of the 69 retail florist
businesses and one import business acquired by the Company during the year ended
August 31, 1999. The Order Generation segment 1999, 1998 and 1997 results
include the operating results of the Company's former wire service, credit and
charge card processing and The Flower Club business units. The Order Generation
segment 1999 results additionally include the post-acquisition operating results
of National Flora and Calyx & Corolla and the operating results of Gerald
Stevens' newly formed Internet-based order generation business unit. Prior to
the acquisition of our initial retail florist and import businesses on October
1, 1998, we operated only in the Order Generation segment.
Year Ended August 31, 1999
----------------------------------------------------------------
(dollars in thousands)
Order
Retail Generation Corporate Total
------ ---------- --------- -----
Revenue:
Product sales, net $ 76,047 $ 1,412 $ - $ 77,459
Service and other revenue 7,924 25,213 - 33,137
-----------------------------------------------------------------
83,971 26,625 - 110,596
Operating Costs and Expenses:
Cost of product sales 31,937 396 - 32,333
Operating expenses 38,962 - - 38,962
Selling, general and administrative expenses 7,970 23,650 12,459 44,079
Merger expenses - - 4,642 4,642
----------------------------------------------------------------
78,869 24,046 17,101 120,016
----------------------------------------------------------------
Operating income (loss) $ 5,102 $ 2,579 (17,101) (9,420)
================================================================
Years Ended August 31,
--------------------------------------------------------------------------------
1998 1997
---- ----
(dollars in thousands)
Order Order
Generation Corporate Total Generation Corporate Total
---------- --------- ----- ---------- --------- -----
Revenue:
Service and other revenue $ 16,221 $ - $ 16,221 $ 13,911 $ - $ 13,911
Operating Costs and Expenses:
Selling, general and
administrative expenses 13,599 2,203 15,802 11,573 420 11,993
Contract modification charge
3,495 - 3,495 - - -
---------------------------------------------------------------------------------
17,094 2,203 19,297 11,573 420 11,993
---------------------------------------------------------------------------------
Operating income (loss) $ (873) $ (2,203) $ (3,076) $ 2,338 $ (420) $ 1,918
========== ========= ========== =========== ========= ========
Year Ended August 31, 1999 Compared to Year Ended August 31, 1998
-26-
Retail Segment. Product sales within the Retail segment for the year ended
August 31, 1999 include sales of floral and gift products at retail businesses
of $66.6 million and sales of floral product by Gerald Stevens' import business
of $9.4 million. 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 within the Retail segment for the year ended August
31, 1999 include cost of products sold at retail businesses of $24.9 million and
cost of products sold at Gerald Stevens' import business of $7.0 million. Gross
margins as a percentage of total revenue for the year ended August 31, 1999
averaged 66.6% at retail businesses and 25.5% at Gerald Stevens' import
business.
Retail segment operating expenses for the year ended August 31, 1999
include expenses at retail businesses of $37.5 million and expenses at Gerald
Stevens' import business of $1.5 million. Operating expenses are comprised
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 year
ended August 31, 1999 include expenses at retail businesses of $7.8 million and
expenses at Gerald Stevens' import business of $.2 million. 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. Product sales within the Order Generation segment
for the year ended August 31, 1999 reflect $1.4 million of sales made by Calyx &
Corolla from date of acquisition. 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 year ended August 31, 1999
increased by $9.0 million, or 55.4% to $25.2 million compared to the same period
in the prior year. This significant increase in revenue is due primarily to our
acquisition of National Flora, which generated $5.4 million in revenue this year
from date of acquisition. Additionally, continued increases in The Flower Club
revenue, revenue from the Company's newly formed Internet-based order generation
business unit, and other revenue generated at Calyx & Corolla from date of
acquisition also contributed to the current year's service and other revenue
increase.
Cost of goods sold within the Order Generation segment for the year ended
August 31, 1999 reflect $.4 million of costs incurred at Calyx & Corolla from
date of acquisition. Calyx & Corolla gross margins as a percentage of total
revenue averaged 76.0% from date of acquisition.
Total Order Generation segment selling, general and administrative expenses
for the year ended August 31, 1999 increased by $10.1 million or 73.9%, to $23.7
million compared to the same period in the prior year. Selling, general and
administrative expenses incurred by National Flora and Calyx & Corolla this year
from date of acquisition totaled $5.9 million and represent a significant
portion of the expense increase in the current year. Additionally, start-up
costs incurred in connection with the Company's newly formed Internet-based
order generation business unit this year of approximately $2.3 million also
caused current year expenses to be higher. To a lesser extent, expense increases
related to the expansion of The Flower Club business unit and expenses related
to our acquired Flowerlink website also contributed to the higher fiscal 1999
expense levels.
During the year ended August 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
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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. Total Corporate selling, general and administrative expenses for
the year ended August 31, 1999 increased to $12.5 million from $2.2 million in
the same period in the prior year due primarily to expenses incurred at Gerald
Stevens' new, larger 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. Additionally, non-cash compensation
expense of $1.4 million recorded in connection with the vesting of certain
non-plan stock options also contributed to the current year expense increase.
The non-plan stock options are fully vested and will cause no further
compensation expense to be recorded in future periods.
We plan to significantly expand our business over the next several years,
largely through the acquisition of retail florist businesses. We also expect
Corporate expenses to increase 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 year ended August 31, 1999, we incurred a total of $4.6 million
in investment banking, accounting and legal costs in connection with our 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. Interest expense for the year ended August 31, 1999 was $.8
million compared to interest expense of $82,000 in the same period of the prior
year. The increase in interest expense during fiscal 1999 is due to increased
borrowings under the Company's revolving credit facilities to finance the
expansion of its business activities. Interest income for the year ended August
31, 1999 was $.4 million compared to interest income of $.2 million in the same
period of the prior year. The increase in interest income this year is related
primarily to earnings from the short-term investment of proceeds received in
connection with common stock sold during fiscal 1999.
Income Taxes. The provision for income taxes for the year ended August 31,
1999 was $2.3 million compared to an income tax benefit of $.7 million in the
same period of the prior year. The current period 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 carryfowards of $.8 million and
(iii) state income tax provisions of $.1 million. The Company recorded an income
tax benefit of $.7 million from the utilization of net operating loss
carryforwards during the same period of the prior year.
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.
Year Ended August 31, 1998 Compared to Year Ended August 31, 1997
-28-
Order Generation Segment. Total revenue for the year ended August 31, 1998
increased by $2.3 million, or 16.6%, to $16.2 million compared to the same
period in the prior year. Order generation commissions and processing fees
continued to grow during fiscal 1998 and represented approximately $1.5 million
of the year-to-year increase. The increase in commissions and processing fees
was due primarily to orders generated by The Flower Club. To a lesser extent,
growth in wire service dues and fees and credit card processing fees also
contributed to the fiscal 1998 revenue increase.
Total Order Generation segment selling, general and administrative expenses
for the year ended August 31, 1998 increased by $2.0 million, or 17.5%, to $13.6
million compared to the same period in the prior year. Increases in selling,
advertising and promotion expenses related to the expansion of The Flower Club
business accounted for the majority of the fiscal 1998 expense increase.
Corporate. Total Corporate selling, general and administrative expenses for
the year ended August 31, 1998 increased by $1.8 million to $2.2 million
compared to the same period in the prior year. This significant increase is due
primarily to start-up expenses of approximately $1.6 million incurred during the
latter part of fiscal 1998 in connection with Gerald Stevens' expansion into the
retail distribution segment of the floral industry. These start-up expenses
consist principally of legal, audit, consulting and compensation costs.
Other Income (Expense). Other income (expense) for the year ended August
31, 1997 totaled $.8 million and consisted of a gain, net of related legal fees,
of $1.0 million recognized in connection with the resolution of a 1990 lawsuit,
offset by charges of $.2 million related to consulting agreement and contingency
reserve write-offs.
Income Taxes. During the year ended August 31, 1998, the Company recognized
an income tax benefit of $.7 million compared to an income tax benefit of $.5
million in the same period of the prior year. The income tax benefits recognized
during both the 1998 and 1997 fiscal years were due primarily to the utilization
of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES.
We had cash and cash equivalents of $4.6 million and $7.1 million, as of
August 31, 1999 and 1998, respectively. Cash and cash equivalents decreased by
$2.5 million during the year ended August 31, 1999 and increased by $2.9 million
and $.5 million during the years ended August 31, 1998 and 1997, respectively.
The major components of these changes are discussed below.
Cash used in operating activities during the year ended August 31, 1999 was
$5.0 million, inclusive of the unfavorable impact of $4.6 million in banking,
accounting and legal costs paid in connection with our merger with Gerald
Stevens Retail. Cash used in operating activities during the year ended August
31, 1998 was $1.1 million, inclusive of the unfavorable impact of $3.5 million
paid to MPI under the terms of a contract modification agreement. Operating
activities provided $3.1 million in cash during the year ended August 31, 1997
due principally to improvements in net income related to The Flower Club's
business.
The cash portion of the purchase prices for all acquisitions completed
by the Company during the year ended August 31, 1999, net of cash acquired,
aggregated $74.9 million, as more fully described in the preceding section
entitled "Acquisitions." Capital expenditures during the year ended August 31,
1999 totaled $6.8 million compared to capital expenditures of $1.4 million and
$.8 million during the years ended
-29-
August 31, 1998 and 1997, respectively. Capital expenditures during fiscal 1999
primarily include computer hardware, software, and communication system
expenditures related to the planned expansion of our retail and order generation
businesses. Capital expenditures during fiscal 1998 and 1997 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.
In July 1999, we completed a public equity offering in which 5,000,000
shares of our common stock were sold. Proceeds received from the offering, net
of underwriting discounts and expenses, were approximately $55.2 million.
Additionally, during the year ended August 31, 1999, we issued 6,219,537 shares
of our common stock in private placement transactions for total consideration of
$21.1 million, net of placement fees and expenses. A total of 712,305 shares of
common stock were also issued for total consideration of $1.6 million in
connection with the exercise of stock options and warrants during fiscal 1999.
The Company borrowed a net amount of $4.3 million on its revolving credit
facilities during the year ended August 31, 1999.
In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 12,863,290 shares of common stock were issued to
various founding stockholders for total consideration of $9.3 million, with
proceeds totaling $5.1 million received in fiscal 1998 and the $4.2 million
stock subscription balance received at the beginning of fiscal 1999. In August
1998, we also paid $1.5 million in cash and issued 641,997 shares of our common
stock in connection with the acquisition of International Floral Network, Inc.,
a business whose acquired assets consisted solely of rights to acquire 33 retail
florist businesses under non-binding letters of intent with the owners of those
businesses. A total of 196,000 shares of common stock were issued for total
consideration of $29,000 in connection with the exercise of stock options and
warrants during fiscal 1998.
In May 1998, the Company borrowed $2.5 million to finance a portion of the
MPI contract modification costs. During the fourth quarter of fiscal 1998, $.5
million of the loan was repaid, with the balance of $2.0 million repaid during
fiscal 1999. During fiscal 1998 and 1997, the Company also repurchased 519,975
shares of treasury stock at a total cost of $1.6 million.
In September, 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank whereby such 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. In June 1999,
Gerald Stevens Retail and its primary lender amended and restated their existing
$40.0 million revolving credit agreement and Gerald Stevens, the parent of
Gerald Stevens Retail, agreed to guarantee payment of all obligations under the
amended and restated agreement and terminated their 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 our consolidated leverage ratio for the previous quarter. The line
of credit will be used to finance business acquisitions and capital expenditures
and to provide working capital for general corporate purposes. Outstanding
borrowings under the credit facility at August 31, 1999 and November 15, 1999
were $4.3 million and $24.2 million, respectively. Gerald Stevens' effective
Eurodollar borrowing rate and its base rate as of November 15, 1999 are 7.96%
and 9.25%, respectively.
-30-
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 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 cannot exceed $22.0 million for the 1999 fiscal
year, $42.0 million for the 2000 fiscal year, $50.0 million for the 2001 fiscal
year and $52.0 million for the 2002 fiscal year. At August 31, 1999, the Company
was in compliance with all debt covenants.
We are currently in discussions with a number of financial institutions
regarding their participation in a proposed syndication of our bank credit
facility. In this regard, we intend to increase the borrowing limits under our
credit facility from $40.0 million to approximately $50.0 to $75.0 million.
However, there can be no assurance that we will be successful in increasing such
borrowing limits.
We intend to implement our business strategy largely by the acquisition of
retail florists and other floral related businesses throughout the country.
Following acquisition, we expect to incur significant expenditures to remodel
and retrofit some of our acquired stores to be consistent with the Gerald
Stevens store format or to close or relocate certain other acquired stores.
Additionally, we plan to fill out regional markets by constructing a number of
new hub or satellite stores. To facilitate our high rate of planned growth and
to effectively integrate business activities and processes, we expect 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.
We also expect to incur significant expenditures over the next several
years in connection with the development and marketing of our newly formed
Internet-based order generation business unit and the establishment of the
Gerald Stevens brand name. 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.
We intend to finance the costs of our business acquisitions and capital
expenditures with a combination of debt and equity capital, as well as cash
generated from internal operations. Specifically, we expect to finance the cost
of future business acquisitions by paying cash and issuing shares of common
stock
-31-
to the sellers of these businesses in approximately equal values. In addition to
increasing our line of credit, we also may offer to sell, in either private
placements or public offerings, shares of our common stock as circumstances and
market conditions dictate.
We believe that cash flows from operating activities, in addition to
borrowings from our current credit facilities, will provide adequate funds to
meet the ongoing cash requirements of our existing business over the next 12
months. However, failure to increase our current bank borrowing limits or
otherwise raise additional capital could limit the planned expansion of our
existing business in the short-term. We believe that we will be successful in
raising additional debt and equity capital in the future. However, we cannot
provide assurance that the occurrence of unplanned events, including temporary
or long-term adverse changes in global capital markets, will not interrupt or
curtail our short-term or long-term growth plans.
MPI AGREEMENT
Effective May 1, 1998, we entered into an agreement with Marketing
Projects, Inc. that (1) modified the rights and obligations of both parties
under an existing marketing servicing agreement and (2) provided for our
acquisition of MPI's proprietary marketing systems. Also on May 1, 1998, we
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 we are further obligated to pay up to $125,000 in
cash in each of eight subsequent 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, $150,000 has been allocated
to the purchase of MPI's proprietary marketing systems and $100,000 has been
allocated to the non-compete agreement, with amortization provided over 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,
our originally filed Consolidated Financial Statements for the year ended August
31, 1998 have been restated for this change.
YEAR 2000 ISSUE
We are currently performing the final steps of resolving Year 2000 issues.
We have successfully completed final Year 2000 testing at our major import, call
center, corporate, and retail sites. For secondary sites, we are currently
approximately 95% complete in remediation and hardware/software upgrade efforts.
Dedicated management and technical personnel have been assigned to complete
replacement/upgrade efforts at remaining secondary sites. We have also used
independent third parties to review, assess, and comment on our Year 2000
efforts.
We will continue to acquire florists who may have outstanding Year 2000
issues. Year 2000 readiness of potential acquisitions usually is assessed prior
to purchase. Only companies who are either compliant, or who 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. All
acquisitions 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. We expect these to be minor and not material to our
operations or financial condition.
-32-
We have received certification from our primary vendors regarding Year 2000
readiness. We have received and implemented Year 2000 compliant versions of all
existing commercially available software packages that we are reliant on. All
new software packages, hardware, and communications equipment implemented or
developed during 1999 have been fully certified as Year 2000 compliant.
Additionally, we have developed a contingency plan which includes the
replacement of any non-compliant technology with fully compliant technology that
is being used today by one of Gerald Stevens' businesses.
We have conducted a review of significant third parties that support any
critical aspect of our business. We have received confirmation from all critical
third-party trading partners, support organizations, and suppliers that they
are, or plan to be, Year 2000 compliant.
We expect to spend approximately $100,000 to address remaining Year 2000
issues through the end of calendar 1999. Based on our assessment of our Year
2000 issues and considering our primary and contingency plans, we do not expect
Year 2000 issues to have a material impact on our business, operations, or our
financial condition or results of operations.
INFLATION
Our business will be affected by general economic trends. Because some of
our 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, we have not experienced noticeable effects of inflation and
believe that cost increases due to inflation should be able to be passed on to
our customers.
SEASONALITY
The floral industry has historically been seasonal with higher revenue and
profits 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 and profits. 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB Statement No. 133. SFAS No. 137 defers for one
year the effective date of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 will now apply to all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. The Company will adopt SFAS No. 133 as required for its first quarterly
filing of fiscal year 2001. We believe the adoption of this Statement will not
have a material effect on the earnings and financial position of the Company.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, 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
-33-
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. Like any other business, we are subject to risks and
other uncertainties that could cause such forward-looking statements to prove
incorrect. In addition to general economic, business and market conditions, we
are subject to risks and uncertainties that could cause such forward-looking
statements to prove incorrect, including those stated in the "Risk Factors"
section of the Form 10-K and the following:
o Our ability to accomplish our anticipated growth strategies and to
integrate acquired businesses.
o Our need to improve our information systems.
o Unexpected liabilities incurred in our acquisitions.
o Our dependence on additional capital for growth.
o A decline in customer discretionary spending.
o Weather, governmental regulations, transportation problems or other factors
that could prevent us from obtaining sufficient products when needed.
o Our ability to maintain business relationships within the industry,
including relationships with wire services, wholesalers, growers, importers
and other florist shops.
o Our ability to develop relationships with supermarkets, mass merchants,
department stores and other businesses to expand our store-in-store
operations.
o Our ability to develop a profitable Internet business.
o An inability to pursue potential transactions as a result of certain
restrictions imposed on us to protect the pooling-of-interests accounting
treatment of our April 30, 1999 merger with Gerald Stevens Retail.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
Our exposure to market risk is limited primarily to the fluctuating
interest rates associated with our variable rate indebtedness. Our variable
interest rates are subject to interest rate changes in the United States and
Eurodollar market. We do not currently use, nor have we historically used,
derivative financial instruments to manage or reduce market risk. At August 31,
1999, we had $5.1 million of variable rate indebtedness, representing
approximately 81% of our total debt outstanding, at an average interest rate of
9.25%.
-34-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
---------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Certified Public Accountants ............................................ 36
Consolidated Balance Sheets as of August 31, 1999 and August 31, 1998 .......................... 38
Consolidated Statements of Operations for the Years Ended August 31, 1999, 1998 and 1997 ....... 39
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended August 31, 1999,
1998 and 1997 ................................................................. 40
Consolidated Statements of Cash Flows for the Years Ended August 31, 1999, 1998 and 1997 ....... 41
Notes to Consolidated Financial Statements ..................................................... 42
-35-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors and Stockholders of
Gerald Stevens, Inc.:
We have audited the accompanying consolidated balance sheets of Gerald Stevens,
Inc. (a Delaware corporation) and subsidiaries as of August 31, 1999 and 1998,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gerald Stevens,
Inc. and subsidiaries, as of August 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
November 3, 1999.
-36-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Gerald Stevens, Inc.
We have audited the consolidated statements of operations, changes in
stockholders' equity, and cash flows of Gerald Stevens, Inc. for the year ended
August 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Gerald Stevens, Inc. for the year ended August 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
October 8, 1998
-37-
GERALD STEVENS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, Except Share Data)
August 31,
----------
1999 1998
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,602 $ 7,148
Accounts receivable, net of allowance for doubtful accounts of $1,872 and $482
at August 31, 1999 and 1998, respectively 10,074 1,792
Inventories 8,454 --
Subscription receivable -- 4,183
Deferred tax asset, net of allowance -- 775
Prepaid and other current assets 2,653 165
--------- ---------
Total current assets 25,783 14,063
--------- ---------
PROPERTY AND EQUIPMENT, net 15,953 2,046
--------- ---------
OTHER ASSETS:
Intangible assets, net 129,897 3,791
Deferred tax asset, net of allowance -- 1,407
Other 1,390 28
--------- ---------
Total other assets 131,287 5,226
--------- ---------
Total assets $ 173,023 $ 21,335
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 2,009 $ 80
Accounts payable 12,551 4,336
Accrued liabilities 15,567 2,099
Deferred revenue 2,164 --
--------- ---------
Total current liabilities 32,291 6,515
LONG-TERM DEBT 4,340 2,018
OTHER 419 52
--------- ---------
Total liabilities 37,050 8,585
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 600,000 shares authorized, none issued -- --
Common stock $0.01 par value, 250,000,000 shares authorized, 44,011,401
and 21,954,483 shares issued and outstanding on August 31, 1999 and
1998, respectively 440 220
Additional paid-in capital 155,224 19,914
Accumulated deficit (18,075) (5,768)
Treasury stock, at cost, 519,975 shares at August 31, 1999 and 1998, respectively, (1,616) (1,616)
--------- ---------
Total stockholders' equity 135,973 12,750
--------- ---------
Total liabilities and stockholders' equity $ 173,023 $ 21,335
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
-38-
GERALD STEVENS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, Except Per Share Data)
Year Ended August 31,
---------------------
1999 1998 1997
---- ---- ----
REVENUE:
Product sales, net $ 77,459 $ - $ -
Service and other revenue 33,137 16,221 13,911
---------- -------- --------
110,596 16,221 13,911
---------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of product sales 32,333 - -
Operating expenses 38,962 - -
Selling, general and administrative expenses 44,079 15,802 11,993
Contract modification charge - 3,495 -
Merger expenses 4,642 - -
---------- -------- --------
120,016 19,297 11,993
---------- -------- --------
Operating income (loss) (9,420) (3,076) 1,918
---------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (849) (82) (6)
Interest income 369 165 183
Other (80) 43 819
---------- -------- --------
(560) 126 996
---------- -------- --------
Income (loss) before provision (benefit) for income taxes (9,980) (2,950) 2,914
PROVISION (BENEFIT) FOR INCOME TAXES 2,327 (682) (519)
---------- -------- --------
Net income (loss) $ (12,307) $ (2,268) $ 3,433
========== ======== ========
BASIC INCOME (LOSS) PER SHARE $ (0.35) $ (0.26) $ 0.43
========== ======== ========
DILUTED INCOME (LOSS) PER SHARE $ (0.35) $ (0.26) $ 0.39
========== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 35,145 8,581 8,076
========== ======== ========
Diluted 35,145 8,581 8,715
========== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-39-
GERALD STEVENS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Common Stock Additional
Par Paid-In Accumulated Treasury
Shares Value Capital Deficit Stock Total
------ ----- ------- ------- ----- -----
BALANCE, August 31, 1996 8,233 $ 83 $ 10,087 $ (6,933) $ -- $ 3,237
Sale of common stock, net 20 -- 21 -- -- 21
Purchase of treasury stock -- -- -- -- (1,438) (1,438)
Net income -- -- -- 3,433 -- 3,433
--------- --------- --------- --------- --------- ---------
BALANCE, August 31, 1997 8,253 83 10,108 (3,500) (1,438) 5,253
Sale of common stock, net 13,059 131 9,236 -- -- 9,367
Common stock issued in acquisitions 642 6 494 -- -- 500
Purchase of treasury stock -- -- -- -- (178) (178)
Compensation expense under stock option plan -- -- 76 -- -- 76
Net loss -- -- -- (2,268) -- (2,268)
--------- --------- --------- --------- --------- ---------
BALANCE, August 31, 1998 21,954 220 19,914 (5,768) (1,616) 12,750
Sale of common stock, net 11,932 119 77,827 -- -- 77,946
Common stock, options and warrants
issued in acquisitions 10,125 101 56,110 -- -- 56,211
Compensation expense under stock option plan -- -- 1,373 -- -- 1,373
Net loss -- -- -- (12,307) -- (12,307)
--------- --------- --------- --------- --------- ---------
BALANCE, August 31, 1999 44,011 $ 440 $ 155,224 $ (18,075) $ (1,616) $ 135,973
========= ========= ========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-40-
GERALD STEVENS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended August 31,
---------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(12,307) $ (2,268) $ 3,433
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Deferred income tax(benefit) expense 2,182 (682) (637)
Depreciation and amortization 3,602 882 261
Compensation expense under stock option plan 1,373 76 --
Provision for doubtful accounts 191 127 170
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (1,714) (115) (323)
Inventories (102) -- --
Prepaid and other current assets 855 (649) 14
Other assets 52 262 84
Accounts payable (2,892) 582 (159)
Accrued liabilities 4,853 644 249
Deferred revenue (388) -- --
Other long-term liabilities (705) -- (1)
-------- -------- --------
Net cash (used in) provided by operating activities (5,000) (1,141) 3,091
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,830) (1,382) (844)
Collection of amounts due from former owners of acquired subsidiary 1,300 -- --
Payments for acquisitions, net of cash acquired (74,933) (1,500) --
Investment in common stock -- (100) --
-------- -------- --------
Net cash used in investing activities (80,463) (2,982) (844)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt -- 2,500 --
Payments on long-term debt (2,798) (482) (333)
Proceeds from issuance of common stock, net 77,946 5,184 21
Receipts from stock subscription receivables 4,183 -- --
Purchase of treasury stock -- (178) (1,438)
Payment of credit facility commitment fees (704) (20) --
Proceeds from credit facility 52,780 -- --
Payment of credit facility (48,490) -- --
-------- -------- --------
Net cash provided by (used in) financing activities 82,917 7,004 (1,750)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,546) 2,881 497
CASH AND CASH EQUIVALENTS, beginning of period 7,148 4,267 3,770
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 4,602 $ 7,148 $ 4,267
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 574 $ 53 $ 1
======== ======== ========
Cash paid for income taxes $ 451 $ 82 $ 52
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock, options and warrants issued in acquisitions $ 56,211 $ 500 $ --
======== ======== ========
Subscription receivable $ -- $ (4,183) $ --
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
-41-
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gerald Stevens, Inc. ("Gerald Stevens," or the "Company"), formerly known
as Florafax International, Inc., is a leading integrated retailer and marketer
of flowers, plants and complementary gifts and decorative accessories. The
Company operates the largest company-owned network of floral specialty retail
stores in the United States, with 231 locations in 28 markets as of August 31,
1999. We are building a national brand and transforming the retail floral
industry by integrating our operations throughout the floral supply chain, from
product sourcing to delivery, and by managing every interaction with the
customer, from order generation to order fulfillment. The Company owns and
operates its own import operation and has relationships with leading growers
around the world. Our national sales and marketing division permits us, through
multiple distribution channels, including the Internet, dial-up numbers and
direct mail, to serve customers who do not visit or phone our retail stores.
Principles of Consolidation
The consolidated financial statements include the accounts of Gerald
Stevens and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Basis of Presentation
Previously reported amounts have been reclassified to make them consistent
with the current presentation.
Cash and Cash Equivalents
Gerald Stevens considers all highly liquid instruments purchased with
an original maturity of three months or less to be cash equivalents. As of
August 31, 1999 and 1998, cash and cash
-42-
equivalents included $4.2 million and $6.9 million, respectively, of interest
bearing cash. Also included in cash and cash equivalents as of August 31, 1999
and 1998, are $224,000 and $106,000, respectively, of restricted cash relating
to Gerald Stevens' credit card processing agreement with its sponsoring bank.
Fair Values of Financial Instruments
The carrying amounts for the Company's cash and cash equivalents,
accounts receivable, notes payable, accounts payable, accrued liabilities and
long-term debt are reflected in the consolidated financial statements at cost,
which approximates fair value.
Inventory
Inventory is stated at lower of cost or market, with cost determined
principally by the first-in, first-out (FIFO) basis using the retail method. The
Company believes that the FIFO retail method provides improved information for
the operation of its business in a manner consistent with the method used widely
in the retail industry.
Concentration of Credit Risk
Financial instruments that potentially subject Gerald Stevens to a
concentration of credit risk consist primarily of accounts receivable.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the Company's large number of repeat customers throughout the
United States. A portion of receivables are related to balances owed by major
credit card companies. The timing of the related cash realization and fees
accrued are determined based upon agreements with these companies. Allowances
relating to accounts receivable have been recorded based upon previous
experience and other relevant factors, in addition to management's periodic
evaluation.
Property and Equipment
Property and equipment are stated at cost. Major renewals and
improvements are capitalized; maintenance and repairs are charged to expense as
incurred. Gain or loss on disposition of property and equipment is recorded at
the time of disposition. On September 1, 1998, Gerald Stevens adopted the
provisions of Statement of Position ("SOP") 98-1, Accounting For The Costs of
Computer Software Developed or Obtained For Internal Use, which requires the
capitalization of costs incurred in connection with developing or obtaining
software for internal use.
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets, generally 30 years for
buildings, 3 to 10 years for furniture, fixtures, and equipment, and 3 to 5
years for vehicles, computer hardware, software and communication systems.
Leasehold improvements are depreciated over the lesser of useful lives or lease
terms including available option periods.
-43-
Intangible Assets
Intangible assets consisted of the following:
August 31,
1999 1998
---- ----
(In thousands)
Goodwill $ 126,999 $ 3,515
Other 4,926 616
--------- ---------
131,925 4,131
Less: Accumulated amortization (2,028) (340)
--------- ---------
$ 129,897 $ 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. (See Note 2.) Included in goodwill for both
periods is $2.0 million from an acquisition prior to October 31, 1970 which is
not required to be amortized. Otherwise, goodwill is amortized over periods
ranging from 20 to 40 years, which management believes is a reasonable life in
light of the characteristics present in the floral industry, such as the
significant number of years that the industry has been in existence, the
continued trends by consumers in purchasing flowers for many different occasions
and the stable nature of the customer base.
Other intangible assets represent primarily contractual rights related
to customer lists, telephone numbers and 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 $2.0 million, $63,000 and $ 0 for the years ended August 31, 1999, 1998 and
1997, 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, Gerald Stevens 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.
Deferred Financing Costs
Deferred financing costs, net of accumulated amortization, were
$657,000 and $20,000, at August 31, 1999 and 1998, respectively. These costs are
included in other assets and relate to amounts incurred in connection with
securing various bank credit facilities. Amortization is recorded on a
straight-line basis over the term of the financing agreement.
-44-
Revenue Recognition and Deferred Revenue
Revenue from sales of products, delivery fees, and order generation
commissions and fees are recognized at the time of product delivery. Revenue
from wire service and credit card processing dues and fees are recognized at the
time that services are provided. Payments received from customers in advance of
product delivery are recorded as deferred revenue, which is classified within
the current liabilities section of the balance sheets.
Stock-Based Compensation
As allowed by SFAS No. 123, Accounting for Stock-Based Compensation,
Gerald Stevens accounts for stock-based compensation to employees in accordance
with Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees, and, in cases where fixed plan exercise prices equal or exceed fair
market value, recognizes no compensation expense for the stock option grants. In
cases where exercise prices are less than fair value, compensation is recognized
over the period of performance or the vesting period. In the case of variable
plans, compensation expense is recognized at the time when both exercise price
and the number of shares exercisable are determinable.
Advertising Costs
Yellow page advertising costs are expensed on a straight-line basis
over the life of the directory, which is generally one year. Internet portal
advertising costs are expensed on a straight-line basis over the term of the
portal agreement. The costs of producing and distributing mail order catalogs
are capitalized and amortized proportionately over the period that catalog sales
are expected to be generated. All other advertising costs are expensed at the
time the advertisement is first shown. Prepaid catalog costs at August 31, 1999
and 1998 were $351,000 and $0, respectively. Advertising expense totaled $11.7
million, $1.4 million and $.9 million in the years ended August 31, 1999, 1998
and 1997, respectively.
Income Taxes
Gerald Stevens accounts for income taxes under the provisions of SFAS
No.109, Accounting for Income Taxes. SFAS No. 109 requires the asset and
liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recorded in income in the
period that includes the enactment date.
Seasonality
The floral industry has historically been seasonal, with higher
revenue and profits 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 and profits. In
addition,
-45-
economic conditions and other factors, including floral promotions, competition
and the weather conditions in key flower-growing regions, in general may affect
the floral industry.
Segments
Gerald Stevens has adopted SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, for the year ended August 31, 1999. 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 company management. See Note 13.
Comprehensive Income
Gerald Stevens has adopted SFAS No. 130, Reporting Comprehensive
Income, for the year ended August 31, 1999. 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. Comprehensive income (loss) is
equal to net income (loss) for all periods presented.
Impact of Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date of FASB Statement No. 133. SFAS No. 137
defers for one year the effective date of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 will now apply to
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 will require the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001. We believe the adoption of this Statement
will not have a material effect on the earnings and financial position of the
Company.
2. ACQUISITIONS
On April 30, 1999, Gerald Stevens, formerly Florafax International,
Inc., completed a merger with Gerald Stevens Retail, Inc. ("Gerald Stevens
Retail") which was formerly known as Gerald Stevens, Inc. Gerald Stevens Retail
was formed on May 7, 1998 and through September 30, 1998 was in the development
stage, had no revenue and all of its efforts were directed to developing a
business strategy, raising capital and acquiring leading retail flower shops and
other floral related businesses. On October 1, 1998, Gerald Stevens Retail
commenced its operations upon the completion of its acquisition of ten operating
flower businesses and, as a result, emerged from the development stage. Under
the terms of the merger agreement, based on an exchange formula, Gerald Stevens
issued 28.1 million shares of its common stock for all of Gerald Stevens
Retail's common stock outstanding. The merger was accounted for under the
pooling of interests method of accounting. Accordingly, our consolidated
financial statements give retroactive effect to the merger.
-46-
Details of the separate results of operations of Gerald Stevens and Gerald
Stevens Retail prior to the merger are as follows:
Eight Months Year Ended
Ended April 30, August 31,
1999 1998
--------------- ----------
Revenue:
Gerald Stevens, as previously reported $ 11,638 $ 16,221
Gerald Stevens Retail 48,860 -
----------- ---------
$ 60,498 $ 16,221
=========== =========
Net loss:
Gerald Stevens, as previously reported $ (4,257) $ (623)
Gerald Stevens Retail (3,014) (1,645)
=========== =========
$ (7,271) $ (2,268)
=========== =========
From October 1, 1998 through August 31, 1999, we acquired 69 retail
florist businesses with 231 stores 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 per share to $15.30 per share. Previously, in July 1998, the
Company had purchased letter of intent rights totaling $1.5 million related to 8
of these retail florist businesses. These costs were subsequently allocated as
an additional component of the cost of acquiring these businesses. Additionally,
in October 1998, we acquired AGA Flowers, Inc., a floral import business located
in Miami, Florida 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, Inc., a floral order
generation business, for total consideration of $19.7 million, consisting of
$10.0 million in cash and 1,552,500 shares of our common stock valued at $6.30
per share.
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for total consideration of $11.6
million, consisting of approximately $.1 million in cash, 934,455 shares of our
common stock valued at $10.80 per share, and our assumption of stock option and
warrant obligations which converted into rights to acquire 152,081 shares of our
common stock at exercise prices ranging from $.36 per share to $9.44 per share.
All of the acquisitions discussed in the preceding three paragraphs
were accounted for as business combinations under the purchase method of
accounting and are included in our consolidated financial statements from the
date of acquisition.
During the third and fourth quarters of fiscal 1999, we also acquired
certain intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets related principally to customer
lists, telephone numbers and yellow page advertising contractual rights. Total
aggregate
-47-
consideration paid for all such intangible asset acquisitions was $4.5 million,
consisting of $2.8 million in cash and 159,823 shares of our common stock.
Gerald Stevens' strategic plan contemplates the closing or relocation
of a number of its acquired retail stores within each of its targeted market
areas. We have completed our assessment of which retail stores to close or
relocate for all acquisitions consummated prior to December 31, 1998. For
acquisitions consummated after December 31, 1998, management is in the process
of completing such assessment. We expect to complete our assessment of retail
store closures and relocations for all acquisitions consummated through August
31, 1999 by February 2000. Additional purchase liabilities recorded relative to
acquisitions consummated prior to December 31, 1998 were approximately $1.6
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). Once management
finalizes its assessment of the remaining retail stores to be closed or
relocated, additional purchase liabilities are expected to be recognized. During
the year ended August 31, 1999, no exit costs were paid and charged against the
established liability.
The preliminary purchase price allocation for businesses acquired under
the purchase method of accounting is as follows:
August 31, 1999
---------------
(in thousands)
Tangible assets (includes cash acquired of $6,339) $ 35,516
Intangible assets 129,516
Liabilities (26,105)
---------
$ 138,927
=========
The pro forma results of operations, assuming each of the acquisitions
described above was consummated as of the beginning of the periods presented,
are as follows:
1999 1998
---- ----
(In thousands except per share data)
Revenue $ 221,484 $ 216,383
========= =========
Net income (loss) $ (2,781) $ 4,440
========= =========
Diluted net income (loss) per share $ (0.06) $ 0.10
========= =========
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.
-48-
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
August 31,
1999 1998
---- ----
(In thousands)
Land, building and leasehold improvements $ 8,502 $ 1,282
Furniture, fixtures and equipment 3,497 1,621
Computer hardware and software 6,036 1,015
Communication systems 1,526 1,121
Vehicles 925 --
-------- --------
20,486 5,039
Less: Accumulated depreciation and amortization (4,533) (2,993)
-------- --------
$ 15,953 $ 2,046
======== ========
Property and equipment includes $2.8 million and $.1 million of
computer software costs that were capitalized during the years ended August 31,
1999 and 1998, respectively. Depreciation and amortization expense related to
property and equipment was $1.6 million, $0.8 million, and $0.3 million for the
years ended August 31, 1999, 1998 and 1997, respectively.
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
August 31,
1999 1998
---- ----
(In thousands)
Salaries and benefits $ 3,787 $ 144
Wire service 3,104 -
Store closure costs 1,632 -
Acquired business consideration 1,459 -
Other 5,585 1,955
----- -----
$ 15,567 $2,099
========= ======
-49-
5. DEBT
Notes Payable
Notes payable at August 31, 1999 and 1998 were $2.0 million and
$80,000, respectively. The effective interest rates associated with these notes
range from 7.00% to 10.12%. Notes payable at August 31, 1999 consists
principally of mortgage notes and vehicle, equipment, and leasehold improvement
installment notes assumed by the Company in connection with acquisitions
completed during the latter part of the fiscal year. These notes are expected to
be substantially paid off in full during the first quarter of fiscal 2000.
Long-Term Debt
At August 31, 1998, long-term debt included approximately $2.0 million
of borrowings under Gerald Stevens' $5.0 million line of credit. The line of
credit was collateralized by substantially all of the Company's assets, with
interest payable monthly at the prime rate of the lending institution.
In September 1998, Gerald Stevens Retail entered into a revolving
credit agreement with a bank whereby such 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. In June
1999, Gerald Stevens Retail and its primary lender amended and restated their
existing $40.0 million revolving credit agreement and Gerald Stevens, the parent
of Gerald Stevens Retail, agreed to guarantee payment of all obligations under
the amended and restated agreement and terminated their 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 our consolidated leverage ratio for the previous quarter. The line
of credit will be used to finance business acquisitions and capital expenditures
and to provide working capital for general corporate purposes. Outstanding
borrowings under the credit facility at August 31, 1999 were $4.3 million.
Gerald Stevens' effective Eurodollar borrowing rate and its base rate as of
August 31, 1999 are 7.75% and 9.25%, 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.
-50-
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 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 cannot exceed $22.0 million for the 1999 fiscal
year, $42.0 million for the 2000 fiscal year, $50.0 million for the 2001 fiscal
year and $52.0 million for the 2002 fiscal year. At August 31, 1999, the Company
was in compliance with all debt covenants.
We are currently in discussions with a number of financial institutions
regarding their participation in a proposed syndication of our bank credit
facility. In this regard, we intend to increase the borrowing limits under our
credit facility from $40.0 million to approximately $50.0 to $75.0 million.
However, there can be no assurance that we will be successful in increasing such
borrowing limits.
6. INCOME TAXES
The provision (benefit) for income taxes for the years ended August 31,
1999, 1998 and 1997 consist of the following:
1999 1998 1997
---- ---- ----
(In thousands)
Current:
Federal $ -- $ -- $ 39
State
145 -- 79
------- ------- -------
145 -- 118
------- ------- -------
Deferred:
Federal 1,971 (616) (575)
State 211 (66) (62)
------- ------- -------
2,182 (682) (637)
------- ------- -------
Income tax provision (benefit) $ 2,327 $ (682) $ (519)
======= ======= =======
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The reconciliation of the US federal statutory tax rate to Gerald
Stevens effective tax rate is as follows:
1999 1998 1997
---- ---- ----
(In thousands)
Income tax provision (benefit) at statutory rate $(3,393) $(1,067) $ 991
Non-deductible goodwill 312 3 2
Non-deductible merger costs 1,497 -- --
Provision for valuation allowance 1,588 478 (1,606)
Utilization of net operating losses 2,182 -- --
State income taxes, net of federal tax benefit 145 (47) 106
Other (4) (49) (12)
------- ------- -------
TOTAL PROVISION $ 2,327 $ (682) $ (519)
======= ======= =======
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' deferred income tax asset are as follows:
August 31, August 31,
1999 1998
---- ----
(In thousands)
Reserves $ 805 $ 182
Accrued liabilities and other 610 110
Depreciation and amortization 162 180
Net operating losses 4,502 1,070
General business credits 101 232
Basis difference in intangible assets 804 1,432
------ -------
6,984 3,206
Valuation allowance (6,984) (1,024)
------ -------
Net deferred income tax asset $ -- $ 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
August 31, 1999, the valuation allowance of $7.0 million is necessary as
management believes that the net deferred tax asset will not be realized. This
represents a change in the valuation allowance for the current year of $6.0
million.
As of August 31, 1999, Gerald Stevens has available net operating loss
carryforwards of $12.0 million which expire at various dates beginning from 2004
through 2019.
-52-
7. STOCKHOLDERS' EQUITY
On January 28, 1997, the Company's stockholders approved an increase in
the number of shares of authorized common stock from 18,000,000 to 70,000,000.
On April 30, 1999, the Company's stockholders approved an increase in the number
of shares of authorized common stock from 70,000,000 to 250,000,000.
In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 12,863,290 shares of common stock were issued to
various founding shareholders for total consideration of $9.3 million, with
proceeds totaling $5.1 million received in fiscal 1998 and $4.2 million in stock
subscription balances received at the beginning of fiscal 1999. In August 1998,
we also issued 641,997 shares of our common stock valued at $0.5 million in
connection with the acquisition of International Floral Network, Inc., a
business whose acquired assets consisted solely of rights to acquire 33 retail
florist businesses under non-binding letters of intent with the owners of those
businesses. Additionally, during the year ended August 31, 1998, the Company
issued a total of 196,000 shares of common stock for total consideration of
$29,000 in connection with the exercise of stock options and warrants.
During the year ended August 31, 1999, Gerald Stevens issued 6,219,537
shares of its common stock in private placement transactions for total
consideration of $21.1 million, net of placement fees and expenses. In July
1999, the Company sold 5,000,000 shares of its common stock in a public equity
offering for total consideration of $55.2 million, net of underwriting discounts
and expenses. Additionally, a total of 712,305 shares of common stock were
issued for total consideration of approximately $1.6 million in connection with
the exercise of stock options and warrants during this same period.
From October 1, 1998 to August 31, 1999, Gerald Stevens issued
10,124,770 shares of its common stock with an aggregate value of $54.8 million
to fund the non-cash portion of the total consideration for acquisitions
completed during the period. Options and warrants issued in connection with the
acquisition of Calyx & Corolla, Inc. resulted in additional consideration of
$1.4 million based on the fair market value of such options and warrants at the
closing date.
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.
8. STOCK OPTIONS AND WARRANTS
The Company has a 1996 Nonemployee Directors' Stock Option Plan
("Director Plan") and a Management Incentive Stock Plan ("Management Plan"),
which were adopted by the Board of Directors in 1995 and approved by the
shareholders in 1996. In 1998, the Company approved an additional non-qualified
stock option plan ("1998 Plan"). The Director Plan, Management Plan and 1998
Plan are collectively referred to as the "Plans." Under the Plans, the Company
has granted non-qualified options to certain directors, officers and key
employees to purchase shares of the Company's common stock at a price equal to
the fair market value of the common stock at the date of the grant. Generally,
options have a term of ten years and vest (i) under the Director Plan, 100%, six
months after issuance, (ii) under the Management Plan, 25% upon issuance with
additional vesting of 25% after each year of continuous employment, or, in
increments of 25% per year over a four-year period on the anniversary of the
grant date and (iii) under the 1998 Plan, in increments of 25% per year over a
four-year period on the anniversary of the grant date.
-53-
On June 25, 1997, the Board of Directors granted options for the
purchase of 305,000 shares of common stock at fair market value to officers and
key employees of Gerald Stevens at an exercise price of $4.00 per share. These
options vest in 25% increments when the market price of Gerald Stevens' common
stock reaches $5.00, $7.50, $10.00 and $12.50 per share, respectively, for
twenty consecutive trading days. As of August 31, 1999, all options had vested
and were exercisable. As a result, compensation expense of $1.4 million and
$76,000 was recorded for the years ended August 31, 1999 and 1998, respectively.
In connection with the acquisition of Calyx & Corolla, Inc. the
Company assumed Calyx & Corolla options that converted into rights to purchase
Gerald Stevens common stock. Subsequent to the acquisition, no additional
options may be issued under the Calyx & Corolla plans.
Subsequent to April 30, 1999, the effective date of the merger between
Gerald Stevens and Gerald Stevens Retail, stock options are expected to be
granted only under the Management Plan with vesting in increments of 25% per
year over a four-year period on the anniversary of the grant date, with no
additional options expected to be granted under the Director Plan and 1998 Plan.
A summary of the status of the Company's stock-based compensation
plans as of the end of the 1999, 1998 and 1997 fiscal years, and changes during
the fiscal years then ended is presented below:
For the Years Ended August 31,
------------------------------
1999 1998 1997
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding, beginning
of year 1,159,000 $ 2.71 888,000 $ 2.85 221,000 $ 1.48
Granted 1,315,275 5.52 282,500 2.22 668,000 3.30
Assumed in the acquisition
of Calyx and Corolla, Inc. 137,265 1.97 -- -- -- --
Exercised (549,250) 2.83 (11,000) 1.82 (1,000) 1.41
Forfeited (15,807) 2.84 (500) 1.41 -- --
--------- --------- -------
Outstanding, end of year 2,046,483 $ 4.42 1,159,000 $ 2.71 888,000 $ 2.85
========= ========= =======
Options exercisable 522,891 560,000 311,000
========= ========= =======
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The following table summarizes information about stock options
outstanding under the Plans at August 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices August 31, 1999 Life Price August 31, 1999 Price
- --------------- --------------- ---- ----- --------------- -----
(Years)
$ 0.36 to $ 1.56 305,345 7.66 $ 0.86 153,470 $ 1.00
2.62 to 4.00 876,163 8.32 3.40 309,421 3.36
4.44 to 6.30 756,426 9.27 5.98 60,000 5.88
9.75 to 13.44 108,549 9.81 11.97 - -
--------------- ---------------
$ 0.36 to $13.44 2,046,483 8.65 $ 4.42 522,891 $ 2.96
=============== ===============
In October 1995, the FASB issued SFAS No. 123, defined in Note 1,
which encourages but does not require companies to recognize compensation
expense for stock awards based on their fair value at the date of grant. SFAS
No. 123 requires pro forma information regarding net income and earnings per
share to be presented as if Gerald Stevens had accounted for its employee stock
options granted subsequent to December 31, 1994 under the fair value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1999, 1998 and 1997: risk-free interest rates from 4.2% to 7.5%;
dividend yield of zero; volatility factors of 50% prior to 1998, 60% for 1998
and 70% for 1999; and weighted-average expected lives of the options from five
to six years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options expected term to exercise.
Gerald Stevens' pro forma information required under SFAS No. 123 is as follows:
1999 1998 1997
---- ---- ----
(In thousands except per share data)
Net income (loss):
As reported (12,307) (2,268) 3,433
Pro forma (13,047) (2,623) 3,264
Diluted earnings (loss)
per share:
As reported (0.35) (0.26) 0.39
Pro forma (0.37) (0.31) 0.37
On February 28, 1996, in connection with the issuance of a secured
convertible note, Gerald Stevens issued warrants to purchase 650,000 shares of
common stock of Gerald Stevens at an exercise price of $1.00 per share. In
connection with the acquisition of Calyx & Corolla, Inc., the Company assumed
Calyx & Corolla warrants that converted into rights to acquire 14,815 shares of
Gerald Stevens common stock at an exercise price of $9.44 per share. During
fiscal year 1997, 19,000 warrants were exercised for total proceeds of $19,000.
During fiscal year 1998, 219,000 warrants were exercised in a cashless exercise,
as allowed in
-55-
the warrant agreement for 176,000 shares of common stock. Additionally, 9,000
warrants were exercised for total proceeds of $9,000. During fiscal year 1999,
163,055 warrants were exercised for total proceeds of $163,000. At August 31,
1999 and 1998, Gerald Stevens had 254,678 and 402,918 warrants outstanding,
respectively, all of which are currently exercisable. Warrants assumed in the
Calyx & Corolla acquisition expire on July 16, 2000. All remaining warrants
expire on January 1, 2001.
9. EARNING PER SHARE
The components of basic and diluted earnings per share are as follows:
For the Years Ended August 31,
1999 1998 1997
---- ---- ----
(In thousands)
Basic Average Shares Outstanding 35,145 8,581 8,076
Common Stock Equivalents -- -- 639
------ ------ ------
Diluted Average Shares Outstanding 35,145 8,581 8,715
====== ====== ======
Common stock equivalents not included in the calculation of
diluted earnings per share because their impact is antidilutive 2,301 1,563 305
====== ====== ======
10. RELATED PARTY TRANSACTIONS
During fiscal 1998, Gerald Stevens purchased the land and buildings used
for its Vero Beach operations for approximately $0.7 million. The transaction
was financed with cash from operations. The property was previously leased from
a trust administered by a relative of the then current Chairman of the Board.
On May 7, 1998, the Company entered into a services agreement with a
corporation controlled by a member of Gerald Stevens' board of directors. This
corporation provided certain management services to the Company and incurred
certain expenses on behalf of the Company, with the cost of such items
reimbursed by the Company. Through May 31, 1999, a total of $.9 million was paid
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.
The Company also has a supply agreement with flower farms affiliated
with two of Gerald Stevens' stockholders as more fully described in Note 11.
-56-
11. COMMITMENTS AND CONTINGENCIES
Leases
Noncancellable lease obligations of Gerald Stevens at August 31, 1999
call for minimum annual lease payments under various operating leases for
buildings, vehicles and equipment as follows:
2000......................... $ 9,483
2001......................... 8,402
2002......................... 7,471
2003......................... 6,447
2004......................... 4,255
Thereafter................... 9,227
--------
$ 45,285
========
Total rent expense for fiscal years 1999, 1998 and 1997 was $4.0
million, $261,000 and $245,000, respectively.
Supply Agreement
On October 1, 1998, Gerald Stevens entered into a five-year supply
agreement with certain flower farms (the "Farms"). The agreement requires that
the Farms provide to Gerald Stevens a certain percentage of their flowers on a
consignment basis. The Farms must produce and deliver a minimum number of stems
for Gerald Stevens during the growing year commencing on October 1, and ending
on September 30. Each July, during the term of the agreement, the parties will
meet to establish the minimum stem obligation for each flower type for the
upcoming growing year. 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.
Business Combinations
Gerald Stevens may be required to make additional payments of up to
$1.1 million to the sellers of three of the businesses that it acquired. Because
the outcome of the contingencies underlying these payments are not yet
determinable, the payments have not been recorded as a component of the cost of
these acquisitions at August 31, 1999.
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.
-57-
12. RETIREMENT PLAN
During the 1998 and 1997 fiscal years, Gerald Stevens sponsored a 401(k)
retirement plan covering all full-time employees who had completed one year of
service. Eligible employees could elect quarterly to contribute up to 15% of
their compensation, up to the maximum contribution allowed by law. Gerald
Stevens matched contributions up to a maximum of 3% of compensation. This plan
was terminated in 1999.
On December 1, 1998, Gerald Stevens adopted a new 401(k) Plan, effective
January 1, 1999. No employee participated in both plans simultaneously. All
employees who have met minimum age and length of service requirements are
eligible to participate. Employer matching contributions are fifty percent of
the first 3% of compensation contributed by the employee to the plan and
generally require year-end employment and 1,000 hours worked during the calendar
year. An additional contribution may be made at the discretion of Gerald
Stevens. In connection with the matching contribution, Gerald Stevens'
contribution in the 1999, 1998 and 1997 fiscal years was $232,000, $41,000 and
$30,000, respectively.
13. 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 69 retail florists acquired during the year as
well as its import business. The Company's order generation business consists
primarily of Florafax, National Flora, Calyx & Corolla and on-line businesses.
There is no material intersegment revenue.
The following table presents financial information regarding the
Company's different business segments as of and for the years ended August 31:
-58-
1999 1998 1997
---- ---- ----
(In thousands)
Net revenues:
Retail $ 83,971 $ -- $ --
Order generation 26,625 16,221 13,911
--------- --------- ---------
$ 110,596 $ 16,221 $ 13,911
========= ========= =========
Operating income (loss):
Retail $ 5,102 $ -- $ --
Order generation 2,579 (873) 2,338
Corporate (17,101) (a) (2,203) (420)
--------- --------- ---------
$ (9,420) $ (3,076) $ 1,918
========= ========= =========
Identifiable assets:
Retail $ 117,177 $ -- $ --
Order generation 50,664 21,335 10,594
Corporate 5,182 -- --
--------- --------- ---------
$ 173,023 $ 21,335 $ 10,594
========= ========= =========
Depreciation and
amortization expense:
Retail $ 2,151 $ -- $ --
Order generation 1,245 403 261
Corporate 206 479 --
--------- --------- ---------
$ 3,602 $ 882 $ 261
========= ========= =========
Capital expenditures:
Retail $ 1,705 $ -- $ --
Order generation 1,235 1,382 844
Corporate 3,890 -- --
--------- --------- ---------
$ 6,830 $ 1,382 $ 844
========= ========= =========
(a) Includes merger expenses of $4,642.
14. 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 a 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 $125,000 in cash in each of the following eight fiscal quarters,
contingent upon the attainment of certain quarterly revenue targets. Of the
total consideration paid, $3.5 million has been recorded as a contract
modification charge, $150,000 has been allocated to the purchase of MPI's
proprietary marketing systems and $100,000 has been allocated to the non-compete
agreement, with amortization provided over 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.
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15. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands except per share data)
Net revenue:
1999 $ 13,223 $ 26,772 $ 36,287 $ 34,314
1998 3,260 4,935 4,797 3,229
1997 2,212 3,295 3,507 4,897
Operating income (loss)
1999 $ (402) $ (4,014) $ (792) $ (4,212)
1998 493 568 (2,714) (1,423)
1997 287 512 698 421
Net income (loss)
1999 $ (333) $ (6,124) $ (1,229) $ (4,621)
1998 338 380 (1,446) (1,540)
1997 345 1,438 755 895
Diluted income (loss)
per share:
1999 $ (0.01) $ (0.18) $ (0.03) $ (0.11)
1998 0.04 0.04 (0.18) (0.14)
1997 0.04 0.16 0.09 0.10
16. SUBSEQUENT EVENTS (UNAUDITED)
Business Combinations
From September 1, 1999 through November 12, 1999, Gerald Stevens
acquired 17 retail florist businesses for total consideration of $12.8 million,
consisting of $7.4 million in cash and 507,370 shares of its common stock valued
at share prices ranging from $9.68 to $11.53 per share.
-60-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
This item is inapplicable, as no such changes or disagreements have
occurred.
PART III
Except for biographical information regarding our executive officers
beginning on page 21, the information required by Items 10, 11, 12 and 13 of
Part III of Form 10-K will be set forth in our Proxy Statement for our 2000
Annual Meeting of Stockholders, and is hereby incorporated by reference into
this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
Financial Statements and Schedules. Reference is made to Index set
forth on page 35 of this Annual Report on Form 10-K.
Reports of Independent Certified Public Accountants on schedules ...........S-1
Schedule II--Valuation of Qualifying Accounts ..............................S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are not applicable and therefore,
have been omitted.
Reports on Form 8-K. We filed the following Reports on Form 8-K during
the fourth quarter of our 1999 fiscal year.
- --------------------------------------------- ----------------------------------------------------------------------
Date of Filing Disclosure(s)
- --------------------------------------------- ----------------------------------------------------------------------
June 4, 1999 Filing of financial statements relating to the merger transaction
between the Registrant and Gerald Stevens Retail, Inc., amending the
Report on Form 8-K filed on May 17, 1999.
- --------------------------------------------- ----------------------------------------------------------------------
August 16, 1999 Announcement concerning the closing of the acquisition of Calyx &
Corolla, Inc.
- --------------------------------------------- ----------------------------------------------------------------------
Exhibits. The exhibits to this Report are listed below. Other than
exhibits that are filed herewith, all exhibits listed below are incorporated
herein by reference. Exhibits indicated by an asterisk (*) are the
-61-
management contracts and compensatory plans, contracts or arrangements required
to be filed as exhibits to this Report.
- -------------------------------------------------------------------- -----------------------------------------------
Exhibit Where Located
- -------------------------------------------------------------------- -----------------------------------------------
Restated Certificate of Incorporation of the registrant Exhibit 3.2 to the registrant's
Current Report on Form 8-K, filed May
17, 1999
- -------------------------------------------------------------------- -----------------------------------------------
Bylaws of the registrant Filed herewith
- -------------------------------------------------------------------- -----------------------------------------------
Amended and Restated Credit Agreement dated as of June 4, 1999 by Exhibit 4.1 to the registrant's
and among Gerald Stevens Retail, Inc., Gerald Stevens, Inc., Registration Statement on Form S-3/A
NationsBank, N.A. and other lender parties filed June 29, 1999
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Gerald R. Geddis Exhibit 10.1 to the registrant's
Registration Statement on Form S-3/A
filed June 29, 1999*
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Albert J. Detz Exhibit 10.2 to the registrant's
Registration Statement on Form S-3/A
filed June 29, 1999*
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Adam D. Phillips Exhibit 10.3 to the registrant's
Registration Statement on Form S-3/A
filed June 29, 1999*
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Steven J. Nevill Exhibit 10.4 to the registrant's
Registration Statement on Form S-3/A
filed June 29, 1999*
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Ruth Owades Filed herewith*
- -------------------------------------------------------------------- -----------------------------------------------
Employment Agreement with Eleanor Marcus Callison Filed herewith*
- -------------------------------------------------------------------- -----------------------------------------------
Noncompetition Agreement with Ruth Owades Filed herewith*
- -------------------------------------------------------------------- -----------------------------------------------
Management Incentive Stock Plan Exhibit B to Definitive Proxy Statement
on Schedule 14A filed January 8, 1996*
- -------------------------------------------------------------------- -----------------------------------------------
List of Subsidiaries of Gerald Stevens, Inc. Filed herewith
- -------------------------------------------------------------------- -----------------------------------------------
Consent of Independent Certified Public Accountants Filed herewith
- Arthur Andersen LLP
- -------------------------------------------------------------------- -----------------------------------------------
Consent of Independent Certified Public Accountants Filed herewith
- Ernst & Young LLP
- -------------------------------------------------------------------- -----------------------------------------------
Powers of Attorney Filed herewith
- -------------------------------------------------------------------- -----------------------------------------------
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ A. Detz
----------------------------
A. Detz
(Senior Vice President and
Chief Financial Officer)
Date: November 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on November 24, 1999.
Signature Title
/s/ G. Geddis President and Director
(Principal Executive Officer)
S. Berrard* }
T. Byrne* }
R. Johnson* }
R. Owades* }
/s/ A. Phillips } Directors
K. Puttick* }
K. Royer* }
A. Williams* }
/s/ A. Detz Senior Vice President
- -------------------- (Principal Financial Officer)
(A. Detz)
/s/ E. Baker Vice President and Controller
- -------------------- (Principal Accounting Officer)
(E. Baker)
- -------
* By signing his name hereto, Albert J. Detz is signing this document on
behalf of each of the persons indicated above pursuant to powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ A. Detz
----------------------------
A. Detz
(Attorney-in-Fact)
-63-
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gerald Stevens, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements as of August 31, 1999 and 1998 and the years
then ended included in this Form 10-K and have issued our report thereon dated
November 3, 1999. Our audits were made for the purpose of forming an opinion on
those statements taken as a whole. The information listed under Schedule II of
this Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
November 3, 1999.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Gerald Stevens, Inc.
We have audited the consolidated financial statements of Gerald Stevens, Inc.
for the year then ended August 31, 1997 and issued our report thereon dated
October 8, 1998. Our audit also included the financial statement schedule listed
under Schedule II of this Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
October 8, 1998
S-1
GERALD STEVENS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions (B) Period
------ -------- -------- -------------- ------
Allowance for Doubtful Accounts:
Year ended August 31, 1999 $ 482.4 $ 191.3 $ 1,362.3 (A) $ (164.2) $ 1,871.8
Year ended August 31, 1998 508.7 126.6 -- (152.9) 482.4
Year ended August 31, 1997 532.0 170.2 -- (193.5) 508.7
Notes:
(A) Includes amounts charged to goodwill as part of the determination of the
fair value of net assets acquired.
(B) Includes amounts written off, net of recoveries.
S-2