SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Quarterly Period Ended November 30, 2000
or
|_| Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the Transition Period from _________ to ___________
Commission File Number: 0-05531
Gerald Stevens, Inc.
--------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Florida 65-0971499
- ----------------------------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification No.)
1800 Eller Drive
Ft. Lauderdale, Florida 33316
- ----------------------------------------- ----------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (954) 627-1000
P.O. Box 350526, Ft. Lauderdale, Florida 33335-0526
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
On January 10, 2000 the registrant had 9,836,466 outstanding shares of
common stock, par value $.01 per share.
GERALD STEVENS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of November 30, 2000
and August 31, 2000 1
Condensed Consolidated Statements of Operations for the Three Months Ended
November 30, 2000 and 1999 2
Condensed Consolidated Statement of Stockholders' Equity for the Three
Months ended November 30, 2000 3
Condensed Consolidated Statements of Cash Flows for the Three Months ended
November 30, 2000 and 1999 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 6. Exhibits and Reports on Form 8-K 26
Signature 27
PART I. FINANCIAL INFORMATION
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
November 30, August 31,
2000 2000
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 362 $ 1,427
Accounts receivable, net of allowance for doubtful accounts of $2,085 and $2,109,
at November 30, 2000 and August 31, 2000, respectively 12,570 12,039
Inventories, net 15,042 13,675
Prepaid and other current assets 4,967 5,797
--------- ---------
Total current assets 32,941 32,938
--------- ---------
PROPERTY AND EQUIPMENT, net 15,259 17,855
--------- ---------
OTHER ASSETS:
Intangible assets, net 150,668 152,143
Other, net 3,584 2,894
--------- ---------
Total other assets 154,252 155,037
--------- ---------
Total assets $ 202,452 $ 205,830
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 1,254 $ 303
Accounts payable 19,194 14,864
Accrued liabilities 14,697 18,886
Deferred revenue 1,898 2,033
--------- ---------
Total current liabilities 37,043 36,086
LONG-TERM DEBT 35,837 35,975
OTHER 1,106 1,100
--------- ---------
Total liabilities 73,986 73,161
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 120,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 50,000,000 shares authorized, 9,836,466
shares issued and outstanding on November 30, 2000 and August 31, 2000 98 98
Additional paid-in capital 194,203 193,218
Accumulated deficit (65,835) (60,647)
--------- ---------
Total stockholders' equity 128,466 132,669
--------- ---------
Total liabilities and stockholders' equity $ 202,452 $ 205,830
========= =========
The accompanying notes are an integral part of these condensed
consolidated statements.
1
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended November 30,
-------------------------------
2000 1999
-------- --------
REVENUE:
Product sales, net $ 44,576 $ 37,457
Service and other revenue 13,251 11,747
-------- --------
57,827 49,204
-------- --------
OPERATING COSTS AND EXPENSES:
Cost of product sales 16,597 14,007
Operating expenses 26,131 18,559
Selling, general and administrative expenses 17,360 18,626
Depreciation and amortization 2,276 1,914
-------- --------
62,364 53,106
-------- --------
Operating loss (4,537) (3,902)
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,360) (394)
Interest income 27 16
Other 803 (19)
-------- --------
(530) (397)
-------- --------
Loss before provision for income taxes (5,067) (4,299)
PROVISION FOR INCOME TAXES 121 --
-------- --------
Net loss $ (5,188) $ (4,299)
======== ========
BASIC AND DILUTED LOSS PER SHARE $ (0.53) $ (0.48)
======== ========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic and Diluted 9,836 8,873
======== ========
The accompanying notes are an integral part of these condensed
consolidated statements.
2
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
(In thousands)
Common Stock
-------------- Additional
Par Paid-In Accumulated
Shares Value Capital Deficit Total
--------- --------- --------- --------- ---------
BALANCE, August 31, 2000 9,836 $ 98 $ 193,218 $ (60,647) $ 132,669
Non-cash issuance of common stock warrants
pursuant to amended credit agreement -- -- 985 -- 985
Net loss -- -- -- (5,188) (5,188)
--------- --------- --------- --------- ---------
BALANCE, November 30, 2000 9,836 $ 98 $ 194,203 $ (65,835) $ 128,466
========= ========= ========= ========= =========
3
GERALD STEVENS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended November 30,
-------------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,188) $ (4,299)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,276 1,914
Gain on sale of businesses, property and equipment (781) --
Provision for doubtful accounts 253 76
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (716) (4,093)
Inventories (1,934) (721)
Prepaid and other current assets 825 (2,024)
Other assets 274 (139)
Accounts payable 4,330 2,017
Accrued liabilities (3,262) 598
Deferred revenue (135) (136)
Other long-term liabilities 6 343
-------- --------
Net cash used in operating activities (4,052) (6,464)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (196) (5,441)
Net proceeds from sale of property and equipment 3,345 --
Payments for acquisitions, net of cash acquired -- (11,465)
-------- --------
Net cash provided by (used in) investing activities 3,149 (16,906)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from credit facility 22,119 46,130
Payment of credit facility (22,257) (23,880)
Payments on notes payable (24) --
Payments on long-term debt -- (2,150)
Proceeds from issuance of common stock, net -- 664
-------- --------
Net cash (used in) provided by financing activities (162) 20,764
-------- --------
Net decrease in cash and cash equivalents (1,065) (2,606)
CASH AND CASH EQUIVALENTS, beginning of period 1,427 4,602
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 362 $ 1,996
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 937 $ 193
======== ========
Cash paid for income taxes $ 5 $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock, options and warrants issued in acquisitions $ -- $ 7,941
======== ========
Warrants issued pursuant to amended credit agreement $ 985 $ --
======== ========
The accompanying notes are an integral part of these condensed consolidated
statements.
4
GERALD STEVENS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED NOVEMBER 30, 2000 AND 1999 ARE UNAUDITED)
1. General and Summary of Significant Accounting Policies
Organization and Operations
Gerald Stevens, Inc. ("Gerald Stevens", the "Company", or "We") is an
integrated retailer and marketer of flowers, plants, and complementary gifts and
decorative accessories. We currently operate the largest company-owned network
of floral specialty retail stores in the United States, with over 300 retail
locations across the country.
Operating Losses and Recent Developments
We have experienced recurring net losses and required net cash to fund
our operations. As of August 31, 2000, we had a working capital deficiency of
approximately $3.1 million ($4.1 million as of November 30, 2000) and had no
availability on our revolving credit facility.
On November 6, 2000, we amended our revolving credit agreement with our
primary lender. As further discussed in Note 5, the amendment provided us with a
new $7.0 million working capital line of credit through February 28, 2001 to
fund seasonal cash requirements. Repayment of borrowings under the new line is
required by February 28, 2001. The amendment also eliminates $16 million in
scheduled reductions, which were previously to occur in the second and third
quarters of fiscal 2001, until June 30, 2002, the termination date for the
facility. Borrowings under the amended agreement are secured by all of our
current and future assets, including a pledge of the stock of each subsidiary.
As of November 30, 2000, we had $3.7 million in borrowings against our
new $7.0 million working capital line and had availability on our revolving
credit and working capital line totaling $6.3 million. As of January 11, 2001 we
had $3.5 million in total availability on our credit lines, excluding
outstanding checks of approximately $2.4 million. We expect to draw the
remainder of the availability to position ourselves for increased business
expected for Valentine's Day.
Our recurring losses from operations during fiscal 2000 were primarily
due to lower than expected revenue and higher than expected labor costs. In
order to improve revenue, we have implemented sales incentives and training
programs designed to increase our average sale. We have shifted responsibility
for retail advertising from a centralized group at our corporate headquarters to
individual markets and believe that we will improve revenue as a result of this
locally focused advertising. Additionally, we believe the date of Easter and the
day of the week on which Valentine's Day falls in fiscal 2001 are more favorable
as compared to fiscal 2000. We have reduced retail headcount and implemented a
labor scheduling process in our retail operations to help insure that labor
costs are in proportion with revenue.
5
We believe that our new retail management team will be able to focus on
the implementation of each initiative to improve market profitability as new
acquisitions have been suspended in the near-term. Additionally, we have
significantly reduced personnel, technology and other general and administrative
costs at our corporate headquarters in order to align our organization and cost
structure with the size and scope of the business we currently own and operate.
We believe that the working capital line of credit will allow us to
meet our expected obligations through the beginning of our strong seasonal
period. We believe that, by implementing our near-term strategy to improve the
profitability of each of our markets through the initiatives described above, we
will generate sufficient cash flows from operating activities to meet the
ongoing cash requirements of our existing business over the next 12 months.
Specifically, we believe that funds generated from operations during the second
quarter of fiscal 2001 will be sufficient to repay amounts then outstanding on
our $7.0 million working capital line by February 28, 2001 as well as provide
the necessary working capital to position ourselves for the expected increased
business during the third quarter of fiscal 2001 associated with Easter,
Secretary's Day and Mother's Day. Moreover, we expect to generate sufficient
positive net cash from operations in the third quarter of fiscal 2001 to fund
our expected net operating cash requirements during the fourth quarter of fiscal
2001, which is traditionally a slow quarter in the retail floral business.
However, these initiatives may not be successful in generating the required cash
flows.
Other than our existing credit facility, we have no current
arrangements for additional financing. In the event that we cannot generate
sufficient cash flows from operating activities, we would be required to obtain
additional bank financing or sell assets. We may not be able to negotiate
additional bank financing on terms acceptable to us. Additionally, it is
possible that assets may be sold at prices lower than their current carrying
amount, or that certain long-lived assets may be deemed to be impaired, thereby
requiring losses to be recognized in the financial statements of future periods.
On December 4, 2000, our common stock was delisted from the Nasdaq
Stock Market because it did not meet their listing requirements. Our common
stock now trades on the Over-the-Counter Bulletin Board under the symbol GIFT.
On November 14, 2000, we effected a 1-for-5 reverse split of the
outstanding shares of our common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect this reverse stock split.
Basis of Presentation
The accompanying condensed consolidated financial statements of the
Company have been prepared, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission (the "SEC"). Certain information and
footnote disclosures normally included in financial statements in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. The information in
this report should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended August 31,
2000.
6
The unaudited condensed consolidated financial statements included
herein reflect all material adjustments (consisting only of normal, recurring
adjustments) which are, in the opinion of the Company's management, necessary
for a fair presentation of the information for the periods presented. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Significant estimates contained in these condensed
consolidated financial statements include management's estimates of allowance
for uncollectable accounts receivable, inventory obsolescence reserves and
recoverability of long-term assets. Actual results could differ from those
estimates. Interim results of operations for the three months ended November 30,
2000 and 1999 are not necessarily indicative of operating results for the full
fiscal years or for any future periods.
Intangible Assets
Intangible assets consisted of the following:
November 30, August 31,
2000 2000
--------- ---------
(In thousands)
Goodwill $ 153,337 $ 153,653
Other 5,194 5,194
--------- ---------
158,531 158,847
Less: Accumulated amortization (7,863) (6,704)
--------- ---------
$ 150,668 $ 152,143
========= =========
Goodwill consists of the excess of purchase price over the fair value
of assets and liabilities acquired in acquisitions accounted for under the
purchase method of accounting. (See Note 2.) Included in goodwill for both
periods is $2.0 million from an acquisition prior to October 31, 1970 which is
not required to be amortized. Otherwise, goodwill is amortized over periods
ranging from 20 to 40 years, which management believes is a reasonable life in
light of the characteristics present in the floral industry, such as the
significant number of years that the industry has been in existence, the
continued trends by consumers in purchasing flowers for many different occasions
and the stable nature of the customer base.
Other intangible assets consist primarily of customer lists, telephone
numbers and contractual rights related to yellow page advertisements that were
acquired by the Company from floral businesses that have discontinued their
operations. Other intangible assets are amortized over periods ranging from 5 to
10 years.
7
Amortization expense related to goodwill and other intangible assets
was $1.2 million and $0.9 million for the three months ended November 30, 2000
and 1999, respectively.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of, the Company periodically analyzes the carrying value
of its goodwill and other intangible assets to assess recoverability from future
operations using an undiscounted projected cash flow approach. Impairments are
recognized in operating results to the extent that carrying value exceeds fair
value. During the three months ended November 30, 2000 we sold non-core business
units including associated goodwill of $0.3 million.
Income Taxes
We have significant operating loss carryforwards available to offset
future federal taxable income. Because of our current financial position, we
have provided a full valuation allowance against our net deferred tax asset
accounts. Accordingly, we have recorded no federal income tax provision or
benefit for the three months ended November 30, 2000. However, we currently pay
income tax in certain states and as a result, have recorded a provision of $0.1
million for the three-month period ended November 30, 2000. Our future effective
tax rate will depend on various factors, including the mix between state taxable
income or losses, amounts of nondeductible goodwill, and the timing of
adjustments to the valuation allowance on our net deferred tax assets.
Seasonality
The floral industry has historically been seasonal, with higher revenue
generated during holidays such as Christmas, Valentine's Day, Easter and
Mother's Day. Given the importance of holidays to the floral industry, a change
in the date (in the case of a "floating" holiday such as Easter) or day of the
week on which a holiday falls may have a substantial impact on our business.
During the summer and fall months, floral retailers tend to experience a decline
in revenue. As a result, we currently expect the period from June through
November (encompassing our fourth and first quarters) to be periods of lower
revenue and unprofitable operations. In addition, the floral industry is
affected by economic conditions and other factors, including, but not limited
to, competition, consumer discretionary spending and weather conditions that
impact other retail businesses.
Comprehensive Income
The Company has no components of comprehensive income. Accordingly, net
loss equals comprehensive net loss for all periods presented.
8
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. As a result, SFAS No. 133 applies
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133, as amended by SFAS No. 138, requires 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 adopted SFAS No. 133
during the three months ended November 30, 2000. Because the Company has no
derivatives, there was no effect on the Company's financial statements.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
Company adopted SAB 101 during the three months ended November 30, 2000.
Specific items discussed in SAB 101 include bill-and-hold transactions,
long-term service transactions, refundable membership fees, contingent rental
income, up-front fees when the seller has significant continuing involvement and
the amount of revenue recognized when the seller is acting as a sales agent or
in a similar capacity. SAB 101 also provides guidance on disclosures that should
be made for revenue recognition policies and the impact of events and trends on
revenue. The adoption of SAB 101 did not have a material effect on the financial
statements of the Company, as our revenue recognition policies are in conformity
with SAB 101.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
quarters beginning after June 30, 2000. The consensus states that the accounting
for specific web site development costs should be based on a model consistent
with AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Accordingly, certain web site
development costs that are currently expensed as incurred may be capitalized and
amortized. The Company adopted EITF Issue No. 00-2 during the three months ended
November 30, 2000. The adoption of EITF Issue No. 00-2 did not have a material
effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives," ("EITF Issue No. 00-14") which
addresses the recognition, measurement, and income statement classification for
sales incentives offered by vendors to customers. The Company adopted EITF Issue
No. 00-14 during the three months ended August 31, 2000. Sales incentives within
the scope of this Issue include offers that can be used by a customer to receive
a reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized, the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 did not have a material effect on
our financial statements.
9
2. Acquisitions
During the three-month period ended November 30, 2000, we did not
acquire any businesses. During the three-month period ended November 30, 1999,
we acquired 34 retail florist businesses located in existing markets, plus one
new market in the United States and one new market in Canada. Aggregate
consideration paid for these acquisitions was $18.9 million, consisting of $11.0
million in cash and 149,999 shares of our common stock valued at share prices
ranging from $47.45 to $57.65 per share. All of the acquisitions were accounted
for as business combinations under the purchase method of accounting and,
accordingly, are included in our condensed consolidated financial statements
from the date of acquisition.
During the three-month period ended November 30, 1999, we also acquired
certain intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets consisted principally of customer
lists, telephone numbers and yellow page advertising contractual rights.
Aggregate consideration paid for all such intangible asset acquisitions was
$53,000 in cash.
During fiscal 2000, we acquired 88 retail florist businesses. We also
acquired certain intangible assets related to floral businesses that
discontinued their operations. The Company's pro forma results of operations for
the three-month period ended November 30, 1999, assuming each of the
acquisitions described above were consummated as of the beginning of the period,
are as follows:
For the Three Months Ended November 30,
1999
---------------------------------------
(In thousands, except per share data)
Revenue $ 64,690
========
Net loss $ (3,353)
========
Diluted net loss per share $ (0.37)
========
We have closed or relocated a number of our acquired retail stores
within each of our targeted market areas. As a result, we recorded additional
purchase liabilities and goodwill for costs associated with the shut down and
consolidation of certain acquired retail stores (considering existing
contractual lease obligations), which are included in accrued liabilities.
During the three months ended November 30, 2000, $138,000 was paid and charged
against the established liability. The following table summarizes the closed
store liability activity for the three months ended November 30, 2000:
10
(In thousands)
--------------
Balance at August 31, 2000 $ 1,053
Additional purchase liability recorded during
the three months ended November 30, 2000 76
Cash payments for the three months ended
November 30, 2000 (138)
-------
Balance at November 30, 2000 $ 991
=======
3. Property and Equipment, Net
Property and equipment consisted of the following:
November 30, August 31,
2000 2000
-------- --------
(In thousands)
Land, building and leasehold improvements $ 5,327 $ 7,077
Furniture, fixtures and equipment 8,153 8,167
Computer hardware and software 8,404 8,401
Communication systems 1,529 1,526
Vehicles 941 960
-------- --------
24,354 26,131
Less: Accumulated depreciation and amortization (9,095) (8,276)
-------- --------
$ 15,259 $ 17,855
======== ========
During the three months ended November 30, 2000, we sold non-core
business units and real estate with a carrying value of $1.7 million for
aggregate consideration of $3.5 million.
11
4. Accrued Liabilities
Accrued liabilities consisted of the following:
November 30, August 31,
2000 2000
------- -------
(In thousands)
Salaries and benefits $ 3,835 $ 3,673
Wire service -- 2,750
Advertising 2,000 2,000
Store closure costs 991 1,053
Taxes-non payroll/non income 1,370 1,292
Acquired business consideration 542 1,895
Insurance 831 872
Financing costs 1,680 1,680
Other 3,448 3,671
------- -------
$14,697 $18,886
======= =======
5. Debt
Notes Payable
Notes payable at November 30, 2000 and August 31, 2000 were $1.3
million and $0.3 million, respectively. Notes payable at November 30, 2000
includes a $1.0 million note relating to the cash portion of a fiscal year 2000
acquisition. The note is payable on February 21, 2001 and accrues interest at a
rate of 11.5% annually. Notes payable on August 31, 2000 consists principally of
mortgage notes and installment notes for vehicles, equipment, and leasehold
improvements assumed by the Company in connection with acquisitions.
Credit Facility
In September 1998, Gerald Stevens Retail entered into a revolving
credit agreement with a bank for a loan to Gerald Stevens Retail of 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 its existing $5.0 million line of credit.
Additionally, the term was extended to June 3, 2002. On July 31, 2000, we
entered into Amendment Agreement No. 2 to Amended and Restated Credit Agreement
with our primary lender. The amendment reduced the line of credit to $36.0
million, increased the interest rates, and amended the financial covenants.
Outstanding borrowings were $36.0 million at August 31, 2000.
12
On November 6, 2000, we entered into Amendment Agreement No. 3 to
Amended and Restated Credit Agreement with our primary lender. The amendment
provides a new $7.0 million working capital line of credit through February 28,
2001 to fund seasonal cash requirements, at which date repayment is required.
The amendment also eliminates $16.0 million in scheduled reductions to our $36.0
million revolving credit facility, which were previously to occur in the second
and third quarters of fiscal 2001, until June 30, 2002, the new termination date
for the facility, and relaxes certain financial covenants. Borrowings under the
amended and restated credit agreement are secured by all of our current and
future assets, including a pledge of the stock of each subsidiary.
All new borrowings under the amended and restated credit agreement bear
interest at a base rate of prime, plus 2%, payable monthly in arrears. At
November 30, 2000, outstanding borrowings under the revolving credit facility
were $32.1 million, including $7.1 million in base rate borrowings at prime plus
2% and $25.0 million in three Libor notes bearing interest at a weighted average
rate of 10.14%. Each Libor note terminates in December 2000, when they will
convert to base rate borrowings in accordance with Amendment No. 3.
The amended and restated agreement also requires mandatory prepayments
in the event of asset sales or equity offerings subsequent to November 6, 2000.
Mandatory prepayments are required at 100% of the first $10.0 million of net
proceeds from asset sales; 0% of the next $5.0 million; 100% of the next $13.0
million and 80% thereafter; and 75% of the net proceeds from any equity
offering. These prepayments will first permanently reduce the working capital
line of credit, then the revolving credit facility. Through November 30, 2000,
we made mandatory prepayments of $0.9 million from net proceeds received from
asset sales, reducing the commitment on the working capital line of credit to
$6.1 million.
The amended and restated agreement also requires us to meet minimum
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) thresholds. We must generate consolidated EBITDA of $7.2 million in the
three months ending February 28, 2001; $14.0 million in the six months ending
May 31, 2001; $13.2 million in the nine months ending August 31, 2001; and $13.8
million in any four-quarter period ending on or after November 30, 2001.
Additionally, our capital expenditures cannot exceed $0.5 million in any fiscal
quarter, provided that we may spend up to $3.8 million for the acquisition and
implementation of a standardized point-of-sale and management information
system. All other prior financial covenants have been eliminated.
In connection with Amendment Agreement No. 3, we issued three-year
warrants to purchase an amount of common stock equal to 10% of our then
outstanding common stock on a diluted basis at an exercise price of $.01 per
share. If we repay all borrowings under the credit agreement prior to June 30,
2001, 75% of the warrants will terminate, and if we repay all borrowings prior
to December 31, 2001, 50% of the warrants will terminate. Three members of
management were required to participate in $1.0 million of the $7.0 million
working capital line and received a proportionate share of the warrants. The
fair market value of the warrants, estimated using a Black-Scholes option
pricing model, is amortized to interest expense over the term of the facility
beginning in November 2000.
13
As of November 30, 2000, we had $3.7 million in borrowings against our
new $7.0 million working capital line and had availability on our revolving
credit and working capital line totaling $6.3 million. As of January 11, 2001 we
had $3.5 million in total availability on our credit lines, excluding
outstanding checks of approximately $2.4 million. We expect to draw the
remainder of the availability to position ourselves for increased business
expected for Valentine's Day.
6. Stockholders' Equity
In connection with Amendment Agreement No. 3, we issued three-year
warrants to purchase an amount of common stock equal to 10% of our then
outstanding common stock on a diluted basis at an exercise price of $.01 per
share. If we repay all borrowings under the credit agreement prior to June 30,
2001, 75% of the warrants will terminate, and if we repay all borrowings prior
to December 31, 2001, 50% of the warrants will terminate. Accordingly, 25% of
the fair market value of these warrants, estimated using a Black-Scholes option
pricing model, was recorded as additional paid-in-capital and is amortized to
interest expense over the term of the facility beginning in November 2000.
7. Loss Per Share
Basic and diluted loss per share in the accompanying condensed
consolidated statements of operations are based upon the weighted average shares
outstanding during the applicable period. The impact of common stock equivalents
has not been included for the loss periods presented as they are anti-dilutive.
The components of basic and diluted loss per share are as follows:
For the Three Months
Ended November 30,
-------------------
2000 1999
----- -----
(In thousands)
Basic Average Shares Outstanding 9,836 8,873
Common Stock Equivalents -- --
----- -----
Diluted Average Shares Outstanding 9,836 8,873
===== =====
Common stock equivalents not included in the calculation of
diluted loss per share because their impact is antidilutive 793 436
===== =====
14
8. Commitments and Contingencies
Business Combinations
The Company may be required to make additional payments of up to $0.8
million to the sellers of three businesses that it acquired. Because the outcome
of the contingencies underlying these payments are not yet determinable, the
payments have not been recorded as a component of the cost of these acquisitions
at November 30, 2000.
Litigation
There are various claims, lawsuits, and pending actions against Gerald
Stevens incident to the operations of its businesses. It is the opinion of
management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
9. Business Segments
Gerald Stevens operates in two principal business segments: retail and
order generation. The Company's reportable segments are strategic business units
that offer different products and services. The Company evaluates the
performance of its segments based on revenue and operating income. The Company's
retail segment consists of the retail florists acquired as well as its import
business. The Company's order generation business consists primarily of
Florafax, National Flora, Calyx & Corolla and on-line businesses. Inter-segment
revenue is eliminated in consolidation.
The following table presents financial information regarding the
Company's different business segments as of and on the dates set forth below:
Three Months Ended
November 30,
----------------------------
2000 1999
--------- ---------
(In thousands)
Revenue:
Retail $ 47,460 $ 39,137
Order generation 10,367 10,067
--------- ---------
$ 57,827 $ 49,204
========= =========
Operating income (loss):
Retail $ (2,051) $ 1,205
Order generation 1,348 (268)
Corporate (3,834) (4,839)
--------- ---------
$ (4,537) $ (3,902)
========= =========
Identifiable assets:
Retail $ 159,603 $ 179,848
Order generation 32,397 16,513
Corporate 10,452 8,929
--------- ---------
$ 202,452 $ 205,290
========= =========
15
10. RELATED PARTY TRANSACTIONS
In September 2000, we sold four properties to a company controlled by
our Chairman of the Board for aggregate consideration of $2.0 million. We
simultaneously leased back one of such properties for a ten-year term at
$115,000 per year plus annual adjustments based on the consumer price index. We
believe the terms of these transactions are no less favorable than we could have
obtained from third parties for comparable retail space in the same market. We
also assigned to the purchaser company contracts with a third party to purchase
three of the properties, and we agreed to continue to market the fourth
property. We will receive any gain, and pay for any loss, resulting from any
sale of the properties to a third party pursuant to any contract signed prior to
December 31, 2000 (including the contracts assigned to the purchaser company).
In connection with Amendment No. 3 to Amended and Restated Credit
Agreement with our primary lender, we issued three-year warrants to purchase an
amount of common stock equal to 10% of our then outstanding common stock on a
diluted basis at an exercise price of $.01 per share. If we repay all borrowings
under the credit agreement prior to June 30, 2001, 75% of the warrants will
terminate, and if we repay all borrowings prior to December 31, 2001, 50% of the
warrants will terminate. Three members of management were required to
participate in $1.0 million of the $7.0 million working capital line provided by
the Amendment and received a proportionate share of the warrants.
16
Item 2. Management's Discussion And Analysis
------------------------------------
Of Financial Condition And Results Of Operations
------------------------------------------------
General
We are an integrated retailer and marketer of flowers, plants, and
complementary gifts and decorative accessories. We currently operate the largest
company-owned network of floral specialty retail stores in the United States,
with over 300 retail locations across the country. We believe we are
transforming the retail floral industry by integrating our operations throughout
the floral supply chain, from product sourcing to delivery, and by managing
every interaction with the customer, from order generation to order fulfillment.
We own and operate our own import operation and have relationships with leading
growers around the world. Our national sales and marketing division permits us,
through multiple distribution channels including the Internet, dial-up numbers
and direct mail, to serve customers who do not visit or phone our retail stores.
On April 30, 1999, we completed a merger with Gerald Stevens Retail,
Inc. ("Gerald Stevens Retail") 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 approximately 5.6 million shares of our common stock to the
stockholders of Gerald Stevens Retail, resulting in the former Gerald Stevens
Retail stockholders owning approximately 77.5% of the shares of our common stock
immediately following the merger.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, as well as our other reports filed
with the SEC and our press releases and other communications, contain
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. Forward-looking statements
include all statements regarding our expected financial position, results of
operations, cash flows, dividends, financing plans, strategy, budgets, capital
and other expenditures, competitive positions, growth opportunities, benefits
from new technology, plans and objectives of management, and markets for stock.
In addition to general economic, business and market conditions, we are subject
to risks and uncertainties that could cause such forward-looking statements to
prove incorrect, including those stated in the "Risk Factors" section of the
Annual Report on Form 10-K for the fiscal year ended August 31, 2000, and the
following:
o Our ability to integrate acquired businesses.
o Our ability to create and implement a revised business plan that will
generate positive cash flows.
17
o Our ability to satisfy restrictions in our credit agreement.
o Our need to improve our information systems.
o Unexpected liabilities incurred in our acquisitions.
o Our dependence on additional capital for any future growth.
o A decline in customer discretionary spending.
o Fluctuations in our revenue due to weather, consumer demand and
seasonality.
o Weather, governmental regulations, transportation problems or other factors
that could prevent us from obtaining sufficient products when needed.
o Our ability to maintain business relationships within the industry,
including relationships with wire services, wholesalers, growers, importers
and other florist shops.
o Our ability to develop relationships with supermarkets, mass merchants,
department stores and other businesses to expand our store-in-store
operations.
o Our ability to develop a profitable Internet business.
Acquisitions
From October 1, 1998 through August 31, 1999 we acquired 69 retail
florist businesses and an import business. During the three-month period ended
November 30, 1999, we acquired 34 retail florist businesses. We also acquired
certain intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets consisted principally of customer
lists, telephone numbers and yellow page advertising contractual rights.
During fiscal 1999, we also acquired National Flora, a floral order
generation business, and Calyx & Corolla, Inc., a catalog and Internet-based
floral order generation business.
During fiscal 2000, we acquired 88 retail florist businesses. We also
acquired certain intangible assets related to floral businesses that
discontinued their operations.
During the three-month period ended November 30, 2000, we did not
acquire any businesses.
18
Results of Operations
We have two segments, Retail and Order Generation. The Retail segment
consists of all retail and import businesses and operations while the Order
Generation segment consists of all non-retail order generation and fulfillment
businesses and operations.
Retail segment results for the three months ended November 30, 2000
include the operating results of the 157 retail florist businesses and one
import business acquired throughout fiscal years 1999 and 2000. Retail segment
results for the three months ended November 30, 1999 include the operating
results of the 69 retail florist businesses and one import business acquired in
fiscal 1999, as well as the post-acquisition operating results of the 34 retail
florist businesses acquired by the Company from September 1, 1999 to November
30, 1999.
Order Generation segment results for the three-month periods ended
November 30, 2000 and 1999 include the operating results of our Internet, wire
service and The Flower Club business units, National Flora and Calyx & Corolla.
Order Generation segment results for the three months ended November 30, 1999
also include the operating results of our credit and charge card processing
business unit, which was sold in the fourth quarter of fiscal 2000.
The tables below present the results of operations of the Company's
Retail and Order Generation segments and Corporate for the three-month periods
ended November 30, 2000 and 1999, respectively.
Three Months Ended November 30, 2000 Three Months Ended November 30, 1999
------------------------------------------- -------------------------------------------
(dollars in thousands)
Order Corporate Order Corporate
Retail Generation Overhead Total Retail Generation Overhead Total
-------- -------- -------- -------- -------- -------- -------- --------
Revenue:
Product sales, net $ 42,126 $ 2,450 $ -- $ 44,576 $ 35,184 $ 2,273 $ -- $ 37,457
Service and other revenue 5,334 7,917 -- 13,251 3,953 7,794 -- 11,747
-------- -------- -------- -------- -------- -------- -------- --------
47,460 10,367 -- 57,827 39,137 10,067 -- 49,204
Operating costs and expenses:
Cost of product sales 15,758 839 -- 16,597 13,174 833 -- 14,007
Operating expenses 26,131 -- -- 26,131 18,559 -- -- 18,559
Selling, general and administrative 6,187 7,673 3,500 17,360 5,119 8,876 4,631 18,626
Depreciation and amortization 1,435 507 334 2,276 1,080 626 208 1,914
-------- -------- -------- -------- -------- -------- -------- --------
49,511 9,019 3,834 62,364 37,932 10,335 4,839 53,106
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) $ (2,051) $ 1,348 $ (3,834) $ (4,537) $ 1,205 $ (268) $ (4,839) $ (3,902)
======== ======== ======== ======== ======== ======== ======== ========
Retail Segment. Product sales within the Retail segment include sales
of floral and gift products at retail businesses and sales of floral product by
the Company's import business. Service and other revenue within the Retail
segment is generated at the Company's retail businesses and consists of delivery
and other service fees charged to customers and commissions on orders
transmitted to and fulfilled by other retail florists. Total Retail segment
revenue for the three months ended November 30, 2000 increased by $8.3 million,
or 21.3%, to $47.5 million compared to the same period in the prior year due
principally to significant increases in the number of stores operated in the
current versus prior-year period.
19
Cost of product sales within the Retail segment includes the cost of
products sold at retail businesses and at the Company's import business. Cost of
product sales for the three months ended November 30, 2000 increased by $2.6
million, or 19.6%, to $15.8 million compared to the same period in the prior
year due principally to significant increases in the number of stores operated
in the current versus prior-year period.
Retail segment gross margins as a percentage of total revenue for the
three months ended November 30, 2000 increased by 0.5% to 66.8%, compared to the
same period in the prior year. The majority of the gross margin percentage
increases are related to changes in the mix between revenue at the Company's
retail stores and revenue at its import business. As a result of acquisitions,
higher margin retail store revenue increased significantly while lower margin
import revenue decreased when compared to the prior year.
Retail segment operating expenses for the three months ended November
30, 2000 increased by $7.6 million to $26.1 million, compared to the same period
in the prior year, due principally to increases in the number of stores operated
in the current versus prior year period. Retail segment operating expenses as a
percentage of total revenue for the three months ended November 30, 2000
increased by 7.7% to 55.1%, compared to the same period in the prior year.
The majority of the operating expense percentage increase in the three
months ended November 30, 2000 compared to the same period in the prior year is
due to higher labor, employee benefits, occupancy and vehicle expenses incurred
at the Company's retail outlets. Additionally, the period-to-period change in
mix between the Company's retail store and import businesses described above,
and the fact that operating expenses as a percentage of revenue are
significantly higher at the Company's retail stores compared to its import
business, also contributed to the higher operating expense percentage in the
current quarter.
Retail segment selling, general and administrative expenses for the
three months ended November 30, 2000 increased by $1.1 million to $6.2 million,
compared to the same period in the prior year due principally to increases in
the number of stores operated in the current versus the prior year period.
Retail segment selling, general and administrative expenses as a percentage of
total revenue for the three months ended November 30, 2000 decreased by 0.1% to
13.0%, compared to the same period in the prior year due principally to
decreases in advertising expenses.
Order Generation Segment. Product sales within the Order Generation
segment for the three months ended November 30, 2000, representing sales made by
Calyx & Corolla, increased by $0.2 million, or 7.8% to $2.5 million. Service and
other revenue within the Order Generation segment consists of order generation
commissions and processing fees, wire service dues and fees, and credit card
processing fees. Total Order Generation segment service and other revenue for
the three months ended November 30, 2000 increased by $0.1 million, or 1.6% to
$7.9 million, compared to the same period in the prior year.
Cost of goods sold within the Order Generation segment were $0.8
million for the three months ended November 30, 2000 and 1999. As a result,
gross margins as a percentage of product sales revenue for the three months
ended November 30, 2000 increased to 65.8% from 63.4% in the same period of the
prior year. This increase is attributable to improved product purchasing.
20
Total Order Generation segment selling, general and administrative
expenses for the three months ended November 30, 2000 decreased by $1.2 million,
or 13.6% to $7.7 million, compared to the same period in the prior year. This
decrease is primarily attributed to reduced advertising at our Calyx & Corolla
business unit.
Corporate. Total Corporate selling, general and administrative expenses
for the three months ended November 30, 2000 decreased by $1.1 million, or
24.4%, to $3.5 million, compared to the same period in the prior year. Based
upon capital constraints and strategic reasons, we chose to significantly reduce
or eliminate our planned expansion activities in the short-term. Based upon the
expansion slowdown, we significantly reduced personnel, technology, and other
related general and administrative costs at our Fort Lauderdale, Florida
corporate headquarters in order to align our organizational and cost structure
with the size and scope of the business we currently own and operate. A
significant portion of the reductions in personnel, technology, and other
related general and administrative costs at our corporate headquarters was
completed in the fourth quarter of fiscal 2000, and the remaining cost reduction
programs are expected to be completed in the first half of fiscal 2001.
Depreciation and Amortization. Depreciation and amortization for the
three months ended November 30, 2000 increased by $0.4 million, or 18.9%, to
$2.3 million, compared to the same period in the prior year, due principally to
amortization related to fiscal 2000 acquisitions and a full-quarter amortization
of fiscal 1999 acquisitions.
Interest. Interest expense for the three months ended November 30, 2000
increased by $1.0 million to $1.4 million, compared to the same period in the
prior year. The increase in interest expense during the current period is due
primarily to increased borrowings under the Company's revolving credit facility
to finance the expansion of its business activities, increased amortization of
deferred financing costs and, to a lesser extent, increases in interest rates.
Other Income (expense). Other income for the three months ended
November 30, 2000 increased to $0.8 million as a result of net gains on the sale
of certain non-core assets.
Income Taxes. We have significant operating loss carryforwards
available to offset future federal taxable income. Because of our current
financial position, we have provided a full valuation allowance against the
deferred tax asset account. Accordingly, we have recorded no federal income tax
provision or benefit for the three months ended November 30, 2000. However, the
Company currently pays income tax in certain states and, as a result, recorded a
provision of $0.1 million for the three months ended November 30, 2000.
Our 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.
21
Liquidity and Capital Resources
We had cash and cash equivalents of $0.4 million as of November 30,
2000 and $1.4 million as of August 31, 2000. Cash and cash equivalents decreased
by $1.0 million during the three months ended November 30, 2000 and by $2.6
million during the three months ended November 30, 1999. The major components of
these changes are discussed below.
Cash used in operating activities for the three months ended November
30, 2000 was $4.1 million compared to $6.5 million for the same period last
year. Cash used in operating activities during the current period included $3.6
million resulting from a change in payment terms with a major wire service
vendor. Cash used in operating activities improved in the current year when
compared to the prior year due primarily to improved working capital managment
offset to a lesser extent by a higher net loss in the current period.
Cash provided by investing activities for the three months ended
November 30, 2000 was $3.1 million primarily due to proceeds from the sale of
non-core business units and real estate. These assets were sold for total
consideration of $3.5 million, of which the company received $3.3 million in
cash, $0.1 million in a note receivable, and agreed to $0.1 million in
holdbacks. Capital expenditures for the three months ended November 30, 2000
were $0.2 million. Cash used in investing activities for the three months ended
November 30, 1999 was $16.9 million including $11.5 million representing the
cash portion of the purchase price of businesses acquired during the quarter and
$5.4 million of capital expenditures.
On November 6, 2000, we entered into Amendment Agreement No. 3 to
Amended and Restated Credit Agreement with our primary lender. The amendment
provides a new $7.0 million working capital line of credit through February 28,
2001 to fund seasonal cash requirements, at which date repayment is required.
The amendment also eliminates $16.0 million in scheduled reductions to our $36.0
million revolving credit facility, which were previously to occur in the second
and third quarters of fiscal 2001, until June 30, 2002, the new termination date
for the facility, and relaxes certain financial covenants. Borrowings under the
amended and restated credit agreement are secured by all of our current and
future assets, including a pledge of the stock of each subsidiary.
All new borrowings under the amended and restated credit agreement bear
interest at a base rate of prime, plus 2%, payable monthly in arrears. At
November 30, 2000, outstanding borrowings under the revolving credit facility
were $32.1 million, including $7.1 million in base rate borrowings at prime plus
2% and $25.0 million in three Libor notes bearing interest at a weighted average
rate of 10.14%. Each Libor note terminates in December 2000, when they will
convert to base rate borrowings in accordance with Amendment No. 3.
The amended and restated agreement also requires mandatory prepayments
in the event of asset sales or equity offerings subsequent to November 6, 2000.
Mandatory prepayments are required at 100% of the first $10.0 million of net
proceeds from asset sales; 0% of the next $5.0 million; 100% of the next $13.0
million and 80% thereafter; and 75% of the net proceeds from any equity
offering. These prepayments will first permanently reduce the working capital
line of credit, then the revolving credit facility. Through November 30, 2000,
we made mandatory prepayments of $0.9 million from net proceeds received from
asset sales, reducing the commitment on the working capital line of credit to
$6.1 million.
22
The amended and restated agreement also requires minimum consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA)
threshold. We must generate consolidated EBITDA of $7.2 million in the three
months ending February 28, 2001; $14.0 million in the six months ending May 31,
2001; $13.2 million in the nine months ending August 31, 2001; and $13.8 million
in any four-quarter period ending on or after November 30, 2001. Additionally,
our capital expenditures cannot exceed $0.5 million in any fiscal quarter,
provided that we may spend up to $3.8 million for the acquisition and
implementation of a standardized point-of-sale and management information
system. All other prior financial covenants have been eliminated.
In connection with the amendment, we issued three-year warrants to
purchase an amount of common stock equal to 10% of our then outstanding common
stock on a diluted basis at an exercise price of $.01 per share. If we repay all
borrowings under the credit agreement prior to June 30, 2001, 75% of the
warrants will terminate, and if we repay all borrowings prior to December 31,
2001, 50% of the warrants will terminate. Three members of management were
required to participate in $1.0 million of the $7.0 million working capital line
and received a proportionate share of the warrants. The fair market value of the
warrants, estimated using a Black-Scholes option pricing model, is amortized to
interest expense over the term of the facility beginning in November 2000.
As of November 30, 2000, we had $3.7 million in borrowings against our
new $7.0 million working capital line and had availability on our revolving
credit and working capital line totaling $6.3 million. As of January 11, 2001 we
had $3.5 million in total availability on our credit lines, excluding
outstanding checks of approximately $2.4 million. We expect to draw the
remainder of the availability to position ourselves for increased business
expected for Valentine's Day.
Our continued losses from operations during fiscal 2000 were primarily
due to lower than expected revenue and higher than expected labor costs. In
order to improve revenue, we have implemented sales incentives and training
programs designed to increase our average sale. We have shifted responsibility
for retail advertising from a centralized group at our corporate headquarters to
individual markets and believe that we will improve revenue as a result of this
locally focused advertising. Additionally, we believe the date of Easter and the
day of the week on which Valentine's Day falls in fiscal 2001 are more favorable
as compared to fiscal 2000.
We have reduced retail headcount and implemented a labor scheduling
process in our retail operations to help insure that labor costs are in
proportion with revenue. We believe that our new retail management team will be
able to focus on the implementation of each initiative to improve market
profitability as new acquisitions have been suspended in the near-term.
Additionally, we have significantly reduced personnel, technology and other
general and administrative costs at our corporate headquarters in order to align
our organization and cost structure with the size and scope of the business we
currently own and operate.
23
We believe that the working capital line of credit will allow us to
meet our expected obligations through the beginning of our strong seasonal
period. We believe that, by implementing our near-term strategy to improve the
profitability of each of our markets through the initiatives described above, we
will generate sufficient cash flows from operating activities to meet the
ongoing cash requirements of our existing business over the next 12 months.
Specifically, we believe that funds generated from operations during the second
quarter of fiscal 2001 will be sufficient to repay amounts then outstanding on
our $7.0 million working capital line by February 28, 2001 as well as provide
the necessary working capital to position ourselves for the expected increased
business during the third quarter of fiscal 2001 associated with Easter,
Secretary's Day and Mother's Day. Moreover, we expect to generate sufficient
positive net cash from operations in the third quarter of fiscal 2001 to fund
our expected net operating cash requirements during the fourth quarter of fiscal
2001, which is traditionally a slow quarter in the retail floral business.
However, these initiatives may not be successful in generating the required cash
flows.
Other than our existing credit facility, we have no current
arrangements for additional financing. In the event that we cannot generate
sufficient cash flows from operating activities, we would be required to obtain
additional bank financing or sell assets. We may not be able to negotiate
additional bank financing on terms acceptable to us. Additionally, it is
possible that assets may be sold at prices lower than their current carrying
amount.
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. As a result, SFAS No. 133 applies
to all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133, as amended by SFAS No. 138, requires 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 adopted SFAS No. 133
during the three months ended November 30, 2000. Because the Company has no
derivatives, there was no effect on the Company's financial statements.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
Company adopted SAB 101 during the three months ended November 30, 2000.
Specific items discussed in SAB 101 include bill-and-hold transactions,
long-term service transactions, refundable membership fees, contingent rental
income, up-front fees when the seller has significant continuing involvement and
the amount of revenue recognized when the seller is acting as a sales agent or
in a similar capacity. SAB 101 also provides guidance on disclosures that should
be made for revenue recognition policies and the impact of events and trends on
revenue. The adoption of SAB 101 did not have a material effect on the financial
statements of the Company, as our revenue recognition policies are in conformity
with SAB 101.
24
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
quarters beginning after June 30, 2000. The consensus states that the accounting
for specific web site development costs should be based on a model consistent
with AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Accordingly, certain web site
development costs that are currently expensed as incurred may be capitalized and
amortized. The Company adopted EITF Issue No. 00-2 during the three months ended
November 30, 2000. The adoption of EITF Issue No. 00-2 did not have a material
effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14,
"Accounting for Certain Sales Incentives," ("EITF Issue No. 00-14") which
addresses the recognition, measurement, and income statement classification for
sales incentives offered by vendors to customers. The Company adopted EITF Issue
No. 00-14 during the three months ended August 31, 2000. Sales incentives within
the scope of this Issue include offers that can be used by a customer to receive
a reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized, the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 did not have a material effect on
our financial statements.
25
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
- ------- -----------------------------------------
During the fiscal quarter ended November 30, 2000, we issued warrants
to purchase an aggregate of 1,098,560 shares of our common stock (after
adjustment to reflect a one-for-five reverse stock split on November 14, 2000)
in connection with Amendment No. 3 to our Amended and Restated Credit Agreement.
We made such issuances in reliance upon Section 4(2) of the Securities Act of
1933, as amended.
Item 6. Exhibits and Reports on Form 8-K.
- ------ --------------------------------
(a) Exhibits. The following are being filed as exhibits to
this Report:
-----------
-- None
(b) Reports on Form 8-K. We filed the following Reports on Form 8-K
during the quarter ended November 30, 2000 and to date in the following quarter:
Date of Filing Disclosure(s)
- -------------- -------------
November 8, 2000 Announcement of Amendment No. 3 to Credit Agreement
and reverse stock split.
November 15, 2000 Announcement of completion of reverse stock split.
December 4, 2000 Announcement concerning the quotation of our common
stock on the OTC Bulletin Board.
26
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERALD STEVENS, INC.
-------------------------------
(Registrant)
Date: January 16, 2001 By /s/ Wayne Moor
-----------------------------
Wayne Moor
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
27