<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 September 30, 1999
------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ----------------
Commission file number 000-23121
-------------------
U.S.A. Floral Products, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2030697
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
1025 Thomas Jefferson Street, N.W., Suite 300 East Washington, DC 20007
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (202) 333-0800
----------------------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Indicate by check 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
----- -----
The number of shares outstanding of the registrant's Common Stock, par
value $.001 per share (which is the only outstanding class of the registrant's
common stock) was 16,365,146 shares at November 15, 1999.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
----------------------------
INDEX
-----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 1999 and December 31,
1998
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 and for the Three Months Ended September
30, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the Nine Months
Ended September 30, 1999
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
Forward Looking Statements
In this Form 10-Q ("Form 10-Q"), "USA Floral," "we," "us," and "our" refer
to U.S.A. Floral Products, Inc. and its subsidiaries, unless the context
otherwise requires. This Form 10-Q contains (or incorporates by reference)
certain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"intend," "estimate," "anticipate," "believe," "expect," or "continue" or
variations thereon or similar terminology. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about USA Floral, including among other things:
. general economic and business conditions;
. changes in political, social and economic conditions and local
regulations, particularly in Central America and South America;
. changes in, or failure to comply with, government regulations;
. demographic changes;
. change in our sales mix;
. seasonal and holiday demand fluctuations;
. our ability to obtain floral products during periods of peak demand;
. changes in, or failure to maintain, current pricing levels;
. currency fluctuations;
. any reduction in sales to or loss of any significant customers;
. competition;
. changes in our business strategy or development;
. availability of sufficient capital to meet our needs or on terms or at
times acceptable to us; and
. availability of qualified personnel.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Because of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Form 10-Q might not occur.
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. Financial Statements
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands, except par value)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,533 $ 20,196
Accounts receivables, net 96,137 97,769
Inventory 24,189 18,577
Prepaid expenses and other assets 10,276 12,259
Deferred income tax assets 3,376 3,376
------------- -------------
Total current assets 138,511 152,177
Property and equipment, net 56,497 59,636
Goodwill, net 271,647 267,763
Restricted cash 3,772 3,672
Deferred financing costs 3,128 3,477
Other assets 7,428 7,309
------------- -------------
Total assets $ 480,983 $ 494,034
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 193,779 $ 5,005
Accounts payable 56,318 58,033
Accrued expenses 19,738 29,919
Due to stockholders 1,217 15,350
Income taxes payable 2,997 3,227
------------- -------------
Total current liabilities 274,049 111,534
Long-term debt 716 194,668
Deferred income tax liabilities 2,599 1,784
Other liabilities 1,584 --
------------- -------------
Total liabilities 278,948 307,986
------------- -------------
Minority interest in subsidiaries 346 423
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value; 100,000 shares authorized;
16,202 and 14,850 shares issued, respectively 16 15
Treasury stock (14 shares) (287) (287)
Additional paid-in capital 193,249 178,130
Retained earnings 8,427 8,159
Accumulated other comprehensive income 284 (392)
-------------- ------------
Total stockholders' equity 201,689 185,625
-------------- ------------
Total liabilities and stockholders' equity $ 480, 983 $ 494,034
============== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine months ended Nine months ended Three months ended Three months ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net revenues $ 699,786 $ 345,093 $ 189,402 $ 110,799
Cost of sales 518,991 250,002 138,375 79,281
------------------ ------------------ ------------------ ------------------
Gross margin 180,795 95,091 51,027 31,518
Selling, general and administrative expenses 159,687 73,609 52,623 29,053
Goodwill amortization 5,299 3,135 1,792 1,250
Integration charge 40 -- -- --
------------------ ------------------ ------------------ ------------------
Income (loss) from operations 15,769 18,347 (3,388) 1,215
Other income (expense):
Interest expense (12,337) (3,857) (4,426) (1,764)
Interest income 1,613 1,353 619 610
Other 516 468 194 91
------------------ ------------------ ------------------ ------------------
Income (loss) before income taxes and minority
interest 5,561 16,311 (7,001) 152
Provision for income taxes 5,305 7,315 (1,514) 71
------------------ ------------------ ------------------ ------------------
Income (loss) before minority interest 256 8,996 (5,487) 81
Minority interest 12 -- 9 --
------------------ ------------------ ------------------ ------------------
Net income (loss) $ 268 $ 8,996 $ (5,478) $ 81
================== ================== ================== ==================
Net income (loss) per share
Basic $ 0.02 $ 0.65 $ (0.33) $ 0.01
Diluted $ 0.02 $ 0.63 $ (0.33) $ 0.01
Weighted average shares outstanding:
Basic 16,331 13,846 16,365 14,825
Diluted 16,545 14,198 16,643 14,883
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Accumulated
--------------------- Additional Other Total
Treasury Pain-in Retained Comprehensive Stockholders'
Shares Amount Stock Capital Earnings Income (loss) Equity
------ ------- ----- ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 14,836 $ 15 $ (287) $ 178,130 $ 8,159 $ (392) $ 185,625
Exercise of stock options 7 -- 87 87
Issuance of common stock 1,359 1 15,032 15,033
Net Income 268 268
Foreign currency translation adjustment 676 676
-------------------------------------------------------------------------------------------
Balance at September 30, 1999 16,202 $ 16 $ (287) $ 193,249 $ 8,427 $ 284 $ 201,689
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 268 $ 8,996
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation 7,308 2,522
Amortization of goodwill 5,299 3,135
Amortization of deferred financing costs 574 286
Gain on disposal of property and equipment 233 52
Income applicable to minority interests (12) --
Deferred income taxes 815 --
Changes in operating assets and liabilities,
exclusive of acquired companies:
Accounts receivable (8,352) 671
Inventory (6,151) (1,184)
Due from other related parties -- 4,016
Prepaid expenses and other current assets (2,852) (2,507)
Other assets 1,294 336
Income taxes payable 244 512
Accounts payable and accrued expenses (1,898) (7,855)
Other liabilities (168) (2)
------------ ----------
Net cash provided by (used in) operating activities: (3,398) 8,978
Cash flows from investing activities:
Purchases of property and equipment (9,514) (2,619)
Proceeds from sale of property and equipment 1,274 --
Payment for business acquisitions, net of cash acquired -- (76,418)
Payments to stockholders (7,500) (625)
Increase in restricted cash (100) (3,558)
Increase in minority interest (77) --
------------ ----------
Net cash used in investing activities: (15,917) (83,220)
Cash flows from financing activities:
Proceeds from and repayments of debt (1,534) 72,301
Increase in deferred financing costs (225) (192)
Proceeds from issuance of common stock 379 --
Proceeds from exercise of stock options 87 --
Stock issuance costs (88) (707)
------------ ----------
Net cash provided by (used in) financing activities: (1,381) 71,402
Effect of exchange rates on cash 5,033 --
------------ ----------
Net decrease in cash and cash equivalents (15,663) (2,840)
Cash and cash equivalents - beginning of the period 20,196 15,582
------------ ----------
Cash and cash equivalents - end of the period $ 4,533 $ 12,742
============ ==========
</TABLE>
See Note 11 for supplemental cash flow information
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
NOTE 1 -- GENERAL
U.S.A. Floral Products, Inc., a Delaware corporation ("USA Floral" or the
"Company"), was founded in April 1997 and since then has grown to become a
worldwide distributor of floral products. USA Floral acquired eight U.S.
businesses in the floral industry (the "Founding Companies") simultaneously with
the initial public offering ("IPO") of its Common Stock in October 1997,
acquired six U.S. businesses in the floral industry in January 1998 (the
"January 1998 Class"), acquired eight businesses in the floral industry in April
1998 (the "April 1998 Class"), acquired nine businesses in the floral industry
in July 1998 (the "July 1998 Class"), and on October 1, 1998 acquired the
business of Florimex Worldwide GmbH and related entities ("Florimex"), an
international distributor of floral products headquartered in Nuremberg, Germany
(together, the "Acquisitions"). These financial statements include the results
of operations of USA Floral and the Founding Companies, the January 1998 Class,
the April 1998 Class, the July 1998 Class and Florimex subsequent to their
acquisitions.
The unaudited condensed consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal, recurring nature.
The unaudited interim financial information should be read in conjunction
with the consolidated financial statements contained in the Company's 1998
Annual Report on Form 10-K.
NOTE 2 - ACQUISITIONS
Contingent purchase consideration related to earn-out arrangements included
in the definitive agreements for DL Jones and Allan Stanley were achieved during
the nine month period ended September 30, 1999. These earn-out arrangements
provided for the Company to pay additional consideration based on adjusted
earnings before interest and taxes, as defined, for the twelve months ended
February 28, 1999 for DL Jones in the amount of $1,468 and for the twelve months
ended March 31, 1999 for Allan Stanley in the amount of $5,422. These contingent
purchase considerations have been reflected as additions to goodwill at
September 30, 1999. Further, the earn-out arrangement included in the definitive
agreement for Channel Islands provides for the Company to pay additional
consideration, not to exceed $3,000, based on adjusted earnings before interest
and taxes, as defined, for the eighteen month period ending December 31, 1999
for Channel Islands.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
NOTE 3 - EARNINGS PER SHARE
The shares used in computing net income per share are as follows:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
------------------- ------------------ -------------------- --------------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding
- basic 16,331 13,846 16,365 14,825
Dilution attributable to options 100 352 - 58
Dilution attributable to potentially
issuable shares under earnout
arrangements 114 - 278 -
------------------- ------------------ -------------------- --------------------
Weighted average shares outstanding
- diluted 16,545 14,198 16,643 14,883
------------------- ------------------ -------------------- --------------------
</TABLE>
Included in the weighted average shares outstanding - basic are 113 shares
of common stock attributable to contingent consideration earned and unpaid and
50 shares of common stock to be issued under the employee stock purchase plan at
September 30, 1999.
NOTE 4 - INVENTORY
Inventory consists of the following finished goods:
September 30, December 31,
1999 1998
--------------------- --------------------
Hardgoods $18,098 $15,574
Perishables 6,091 3,003
--------------------- --------------------
$24,189 $18,577
===================== ====================
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. The Company does not believe that any of these
proceedings will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
Antidumping
Beginning in 1986, the U.S. Department of Commerce (the "DOC") imposed an
antidumping duty deposit ("ADD") on the importation of certain flowers (the
"Antidumping Order") from Colombia. Such antidumping duty is subject to change
based upon annual reviews of the flower growers' margins. On May 20, 1999, a
settlement was reached whereby all open review periods through February 28, 1997
(periods 5, 6, 7, 9 and 10) were finalized at the cash deposit rate. That is,
the Company does not owe any additional antidumping duties for those periods. On
July 20, 1999, the DOC revoked the Antidumping Order on fresh cut flowers from
Colombia retroactive to March 1, 1997, the beginning of period 11. Further, the
DOC stated that, as a result of the retroactive revocation, the DOC has
terminated its reviews of periods 11 and 12 and that the DOC intends to refund
any ADD collected on or after March 1, 1997. Therefore, as a result of the final
determinations by the DOC regarding open review periods and the DOC's
retroactive revocation of the Antidumping Order, the Company released
approximately $2.2 million in antidumping reserves during the second quarter of
1999. The release of the reserves was recorded as a reduction to cost of sales.
Further, due to the uncertainty of the amount and the timing of the ADD refunds
related to periods subsequent to March 1, 1997, such refunds, if any, will be
recorded as a reduction to cost of sales at the time of the receipt of such
refunds.
NOTE 6 - INTEGRATION PLANS
In November 1998, in connection with management's plan to reduce costs and
improve operating efficiencies, the Company announced an integration plan, which
is expected to result in a charge of approximately $3.8 million.
As part of its integration plan, the Company will integrate certain
warehouse and distribution facilities, principally those associated with the
Company's import and bouquet manufacturing operations in Miami, Florida.
Approximately $3.4 million of the charge was recorded in the fourth quarter of
1998. An additional $40 of the charge was recorded in the first nine months of
1999. The balance of the charge is expected to be recorded in the fourth quarter
of 1999. The integration charges principally relate to the write-down to fair
value of equipment made obsolete or redundant, severance related to the
termination of approximately 180 employees, and lease termination costs due to
the decision to merge certain facilities. The integration of the warehouses and
distribution facilities began in November 1998 and is expected to be complete by
December 1999.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
The major components of the integration charge are as follows:
Severance and related costs $ 800
Write-down of property, plant and equipment 2,100
Lease termination costs 400
Professional fees and other costs 500
===========
$ 3,800
===========
At September 30, 1999, approximately $600 of the integration charge
remained in accrued liabilities and 177 employees had been terminated with no
additional terminations planned. Management believes the $600 integration charge
will be sufficient to cover the remaining costs associated with closing excess
facilities and for non-cash write-downs of recorded assets. A summary of the
integration activity is presented below:
Balance at December 31, 1998 $2,924
1999 Activity:
Non-cash write-down of
property and equipment (1,163)
Lease termination cash payments (175)
Reduction in workforce and other
cash outflows (986)
============
Balance at September 30, 1999 $600
============
In connection with the Company's acquisition of Florimex, the Company
acquired approximately $2.7 million in reserves for a restructuring of the
German wholesale operation and a plan to integrate certain operations,
warehouses and distribution facilities, principally those associated with the
International Division of the Company's operations in the Netherlands. Of the
reserves, approximately $2.575 million relates to severance payments for 25
employees and the balance of approximately $125 relates to the write-down of
assets. The integration of the operations, warehouses and distribution
facilities is expected to be complete by December 1999.
At September 30, 1999, $1.6 million of the integration charge remained in
accrued liabilities and 16 employees had been terminated with an additional 9
terminations to be completed in 1999. The balance was comprised of $1.4 million
for severance and related costs, and $200 for non-cash write-downs of recorded
assets. A summary of the integration activity is presented below:
Balance at December 31, 1998 $2,367
1999 Activity:
Reduction in workforce cash outflows (630)
Other cash outflows (160)
=============
Balance at September 30, 1999 $1,577
=============
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
NOTE 7 - GEOGRAPHIC REGION AND BUSINESS SEGMENT INFORMATION
Segment information has been provided for each of the periods presented in
the Company's statement of operations. The Company is primarily organized on a
geographic basis with an International Division and a North America Division and
secondarily organized on the products and services that it offers. Each division
has three segments: import/export, wholesale distribution and bouquet
manufacturers. The import/export segment purchases flowers from farms located
primarily in South America, Africa and Europe and sells them to wholesalers and
bouquet manufacturers. The wholesale distribution segment purchases perishable
flowers and floral related hardgoods from farms, importer/exporters and brokers
and sells them to retail florists and mass marketers. The bouquet manufacturers
segment procures and produces fresh cut floral bouquets for distribution
primarily to mass markets, broadly defined as supermarkets and discount
retailers. The Company's reportable divisions and segments are strategic
business units that offer different floral related products and services. They
are managed separately because each business division and segment requires
different marketing and management strategies. The Company evaluates segment
performance and allocates resources to them based on gross margin, income from
operations, and return on assets employed.
The accounting policies of the segments are the same as those described in
the Company's 1998 Annual Report on Form 10K. Segment data includes intersegment
sales and transfers which the Company accounts for as if the sales or transfers
were to unrelated third parties, that is, the sales occurred at current market
prices.
The following tables present information about reported segments:
<TABLE>
<CAPTION>
North America Division For the nine months ended September 30, 1998
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $149,187 $117,241 $78,665 $345,093
Revenues - intercompany 16,834 81 1,447 18,362
Gross margin 42,073 38,138 14,880 95,091
Depreciation and amortization 2,408 2,035 1,192 5,635
Integration charge - - - -
Income from operations 14,477 4,268 1,683 20,428
</TABLE>
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
<TABLE>
<CAPTION>
North America Division For the three months ended September 30, 1998
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $47,397 $40,637 $22,765 $110,799
Revenues - intercompany 5,913 45 412 6,370
Gross margin 13,731 12,992 4,795 31,518
Depreciation and amortization 912 845 468 2,225
Integration charge - - - -
Income (loss) from operations 3,042 (330) (957) 1,755
</TABLE>
There was no International Division during the first nine months of 1998.
<TABLE>
<CAPTION>
North America Division For the nine months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $163,550 $143,115 $131,257 $437,922
Revenues - intercompany 33,012 2,235 4,216 39,463
Gross margin 50,505 45,004 26,776 122,285
Depreciation and amortization 3,518 2,367 1,762 7,647
Integration charge - 40 - 40
Income from operations 16,109 1,465 1,992 19,566
</TABLE>
<TABLE>
<CAPTION>
International Division For the nine months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $168,962 $50,190 $42,712 $261,864
Revenues - intercompany 51,863 101 464 52,428
Gross margin 37,263 13,130 8,117 58,510
Depreciation and amortization 1,613 1,258 752 3,623
Integration charge - - - -
Income from operations 2,717 165 1,322 4,204
</TABLE>
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Consolidated For the nine months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $332,512 $193,305 $173,969 $699,786
Revenues - intercompany 84,875 2,336 4,680 91,891
Gross margin 87,768 58,134 34,893 180,795
Depreciation and amortization 5,131 3,625 2,514 11,270
Integration charge - 40 - 40
Income from operations 18,826 1,630 3,314 23,770
</TABLE>
<TABLE>
<CAPTION>
North America Division For the three months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $40,677 $39,446 $33,634 $113,757
Revenues - intercompany 8,007 1,315 1,426 10,748
Gross margin 12,367 12,526 7,462 32,355
Depreciation and amortization 1,183 876 646 2,705
Integration charge - - - -
Income (loss) from operations 1,036 (1,763) (540) (1,267)
</TABLE>
<TABLE>
<CAPTION>
International Division For the three months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $51,487 $14,013 $10,145 $75,645
Revenues - intercompany 15,236 33 226 15,495
Gross margin 12,663 3,829 2,180 18,672
Depreciation and amortization 504 351 248 1,103
Integration charge - - - -
Income (loss) from operations 901 (332) 140 709
</TABLE>
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Consolidated For the three months ended September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
Revenues - external customers $92,164 $53,459 $43,779 $189,402
Revenues - intercompany 23,243 1,348 1,652 26,243
Gross margin 25,030 16,355 9,642 51,027
Depreciation and amortization 1,687 1,227 894 3,808
Integration charge - - - -
Income (loss) from operations 1,937 (2,095) (400) (558)
</TABLE>
Total assets as of December 31, 1998 and September 30, 1999 by segment are:
<TABLE>
<CAPTION>
Total Assets December 31, 1998
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
North America Division $143,171 $95,167 $69,780 $308,118
International Division 65,010 21,298 18,653 $104,961
-------------------------------------------------------------------------
Total segment assets $208,181 $116,465 $88,433 $413,079
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
Total Assets September 30, 1999
-------------------------------------------------------------------------
Import/ Wholesale Bouquet
Export Distribution Manufacturers Total
------ ------------ ------------- -----
<S> <C> <C> <C> <C>
North America Division $156,286 $101,201 $73,209 $330,696
International Division 56,377 17,956 12,465 86,798
-------------------------------------------------------------------------
Total segment assets $212,663 $119,157 $85,674 $417,494
=========================================================================
</TABLE>
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
Reconciliations of total segment income (loss) from operations to total
consolidated income (loss) before income taxes and total segment assets to
consolidated total assets are as follows:
<TABLE>
<CAPTION>
Income (loss) from Operations Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total segment income (loss) from operations $23,770 $20,428 $(558) $1,755
Interest income 1,613 1,353 619 610
Interest expense (12,337) (3,857) (4,426) (1,764)
Other income 516 468 194 91
Unallocated corporate S,G&A expenses (6,664) (2,081) (2,459) (540)
Unallocated goodwill amortization (1,337) - (371) -
-------------------------------------------------------------------
Total consolidated income (loss) before
income taxes and minority interest $5,561 $16,311 $(7,001) $152
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Total Assets September 30, December 31,
1999 1998
------------------------------------------
<S> <C> <C>
Total segment assets $417,494 $413,079
Elimination of intercompany receivables (4,205) (6,464)
Goodwill not allocated to segments 55,632 70,462
Other assets 12,062 16,957
------------------------------------------
Total consolidated assets $480,983 $494,034
==========================================
</TABLE>
The following table presents revenues by geographic area:
<TABLE>
<CAPTION>
Revenues Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States $413,773 $334,731 $106,812 $105,890
Germany 103,516 - 43,331 -
Netherlands 82,465 - 7,628 -
Other foreign countries 100,032 10,362 31,631 4,909
--------------------------------------------------------------------------
Total $699,786 $345,093 $189,402 $110,799
==========================================================================
</TABLE>
Revenues are based upon which country the sale originates (i.e., where the
legal subsidiary is domiciled) and do not include intercompany sales.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
The following table presents long-lived assets by geographic area:
Long-lived Assets September 30, December 31, 1998
1999
------------------------------------------
United States $245,279 $240,425
Germany 74,659 36,495
Netherlands 8,091 42,412
Other foreign countries 14,443 22,525
==========================================
Total $342,472 $341,857
==========================================
NOTE 8 - INCOME TAXES
The tax provision for the three months ended September 30, 1999 includes
approximately $1.9 million representing the tax effect on the income for the six
months ended June 30, 1999 resulting from a change in the Company's estimate of
its annual effective tax rate. This change in the effective tax rate occurred
because of the Company's less than anticipated operating results through the
first nine months of 1999.
NOTE 9 - CREDIT FACILITY
Effective October 2, 1998, the Company amended and restated its existing
credit agreement with a syndicate of lenders for which Bankers Trust Company
serves as agent (the "Amended Credit Agreement"). Pursuant to the terms of the
Amended Credit Agreement, the amount of the Company's revolving credit
facilities was increased to $200 million, of which the sub-limit for permitted
acquisitions is $180 million and the sub-limit for working capital purposes and
letters of credit is $20 million. In addition, of the $200 million in revolving
credit facilities, up to $15 million has been designated to be a revolving loan,
which is available to certain foreign subsidiaries of USA Floral in either
Deutsche Marks or Guilders. Further, a new $50 million, Deutsche Mark
denominated term loan was created as an additional source of borrowings in
excess of the $200 million revolving credit facilities. Borrowings under the
revolving credit facilities bear interest, at the Company's option, at (a)
Bankers Trust Company's base rate plus an applicable margin of up to 1.0% or (b)
a Eurodollar rate plus an applicable margin of up to 2.5%. Borrowings under the
term loan bear interest at the interbank rate for Deutsche Marks plus an
applicable margin of up to 2.5%. Following the execution of the Amended Credit
Agreement the Company paid a financing fee of approximately $3.6 million, which
has been deferred and will be amortized over the term of the Amended Credit
Agreement. In addition, a commitment fee of 0.50% will be charged on the unused
portion of the revolving credit facilities on a quarterly basis. Both the
revolving credit facilities and the term loan mature five years from the closing
date. The installments of the term loan maturing in the next five years are:
1999 - zero, 2000 - $2.5 million, 2001 - $12.5 million, 2002 - $20 million and
2003 - $15 million. At September 30, 1999, the aggregate outstanding
indebtedness under both the revolving credit facilities and the term loan was
approximately $194.5 million and the combined effective interest rate was
approximately 8.3% for the nine months ended September 30, 1999.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
Borrowings under the Amended Credit Agreement are collateralized by
receivables, inventories, equipment and certain real property. Under the terms
of the Amended Credit Agreement, the Company is required to maintain certain
financial ratios and other financial and non-financial conditions. The Amended
Credit Agreement prohibits the Company from incurring additional indebtedness,
limits certain investments, advances or loans and restricts substantial asset
sales, capital expenditures and cash dividends.
As of September 30, 1999, the Company was in compliance with all applicable
financial covenants, except the leverage ratio. Pursuant to the terms of the
Credit Agreement, non-compliance with one or more financial covenants provides
for the lenders to terminate the commitment and declare the principal balance
and any accrued interest on all loans and obligations immediately due and
payable. Hence, the outstanding balance has been classified as a current
liability at September 30, 1999. The Company obtained a waiver letter through
December 31, 1999 from the Bank with respect to the non-compliance under the
Amended Credit Agreement. The Company is currently discussing the amendment of
the financial covenants under the Amended Credit Agreement with the bank. There
can be no assurance that any such amendment will be available on terms favorable
to the Company.
NOTE 10 - COMPREHENSIVE INCOME (LOSS)
The table below presents the components of the Company's comprehensive income
(loss) for the quarter and the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $268 $8,996 $(5,478) $81
Foreign currency translation adjustment
676 (437) (167) (230)
===============================================================
Comprehensive income (loss) $944 $8,559 $(5,645) $(149)
===============================================================
</TABLE>
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands)
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
--------------------------------------------
<S> <C> <C>
Cash paid during the period for interest $9,723 $3,277
====== ======
Cash paid during the period for income taxes $4,500 $6,738
====== ======
Supplemental disclosure of non-cash transactions:
Business acquisitions:
Cash paid for business acquisitions $ - $83,782
Less: cash acquired - 7,364
------ -----
Cash paid for business acquisitions, net - 76,418
Issuance of common stock for business acquisitions - 81,816
------ ------
- 158,234
Fair value of net assets acquired, net of cash - 18,189
------ ------
$ - $140,045
====== ========
</TABLE>
During the nine months ended September 30, 1999 the Company accrued $8,178 in
contingent consideration for earn-outs which was satisfied through cash payments
of $4,023 and issuance of common stock in the amount of $4,155.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Statement of Operations: For the three For the three
(in thousands except per months ended months ended
share data) September 30, 1999 September 30, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $189,402 100.0% $110,799 100.0%
Cost of sales 138,375 73.1% 79,281 71.6%
----------------------------------------------------
Gross margin 51,027 26.9% 31,518 28.4%
Selling, general and
administrative expenses 52,623 27.8% 29,053 26.2%
Goodwill amortization 1,792 0.9% 1,250 1.1%
Integration charge - 0% - 0.0%
----------------------------------------------------
Income (loss) from operations (3,388) (1.8)% 1,215 1.1%
Interest expense (4,426) (2.3)% (1,764) (1.6)%
Interest income 619 0.3% 610 0.5%
Other income 194 0.1% 91 0.0%
----------------------------------------------------
Income (loss) before income taxes and minority
interest (7,001) (3.7)% 152 0.0%
Provision for income taxes (1,514) (0.8)% 71 0.0%
----------------------------------------------------
Income (loss) before minority interest
(5,487) (2.9)% 81 0.0%
Minority interest 9 0.0% - 0.0%
----------------------------------------------------
Net income (loss) $(5,478) (2.9)% $81 0.0%
====================================================
Net income (loss) per share:
Basic $ (0.33) $ 0.01
Diluted $ (0.33) $ 0.01
Shares used in computing net income per share:
Basic 16,365 14,825
Diluted 16,643 14,883
</TABLE>
Results of Operations
- ---------------------
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Net Revenues. Net revenues for the quarter ended September 30, 1999 were
$189.4 million. Revenues increased from $110.8 million in the same quarter last
year. Revenues for the North America Division were $113.8 million, or 60.0% of
the consolidated revenues and revenues for the International Division were $75.6
million, or 40.0%. Revenues for the International Division consisted
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
primarily of revenues from Germany, the Netherlands, Italy and Japan. In 1998,
all revenues were generated by the North America Division because there was no
International Division during the first nine months of 1998.
Gross margin. Gross margin for the three months ended September 30, 1999
and 1998 were $51.0 million and $31.5 million, respectively. Gross margin as a
percentage of net revenue was 26.9%, for the three months ended September 30,
1999 and 28.4% for the three months ended September 30, 1998. The decline in the
gross margin percentage is primarily attributable to the inclusion of the
International Division in 1999. Historically, the International Division
operates at a lower gross margin and therefore, reduces the consolidated gross
margin of the Company. For the three months ended September 30, 1999, the gross
margin of the International Division was 24.7%. The North America Division gross
margin was 28.4% for the three months ended September 30, 1999 and for the same
period in the prior year.
Selling, General and Administrative. Selling, general and administrative
expenses were $52.6 million in the three months ended September 30, 1999, or
27.8% of net revenues and $29.1 million in the three months ended September 30,
1998, or 26.2% of net revenues. Increases in selling, general and administrative
expenses for the three months ended September 30, 1999 is due primarily to the
following: an increase in selling expenses associated with higher revenues in
the North America West Coast Bouquet operations; an increase in expenses
associated with building an infrastructure for a publicly held multi-national
corporation; start-up cost associated with the Company's Blytheville, AK
operations and Interactive Services Division; and Year 2000 remediation and
system conversion costs.
Income from operations. Loss from operations was $3.4 million, or (1.8)% of
net revenues, for the three months ended September 30, 1999, and income from
operations was $1.2 million or 1.1% of net revenues for the three months ended
September 30, 1998.
Interest expense. For the three months ended September 30, 1999, interest
expense was approximately $4.4 million as compared to $1.8 million for the three
months ended September 30, 1998 an increase of $2.6 million. The Company's
average borrowing rate for the three month period ended September 30, 1999 was
9.2% based on the Company's weighted average outstanding debt balance.
Provision for income taxes. The provision for income taxes was a $1.5
million tax benefit for the three months ended September 30, 1999 on a pre-tax
loss of $7.0 million compared to $71 in income tax expense for the quarter ended
September 30, 1998 on pre-tax income of $152 for the period. The 1999 and 1998
effective income tax rates of 21.6% and 46.7% is different than the statutory
rate primarily due to the non-deductibility of certain goodwill amortization.
The change in the effective tax rate in 1999 is primarily the result of
substantially lower income before provision for taxes in 1999 as compared to
1998. The effect of the non-deductibility of certain goodwill amortization is
much more pronounced with the lower base of income before provision for taxes.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
The tax provision for the three months ended September 30, 1999 includes
approximately $1.9 million representing the tax effect on the income for the six
months ended June 30, 1999 resulting from a change in the Company's estimate of
its annual effective tax rate. This change in the company's estimate of its
annual effective tax rate is because of the Company's less than anticipated
operating results through the first nine months of the 1999. The consolidated
effective tax rate utilized for the six month period ended June 30, 1999 was
approximately 54%. The revised consolidated annual effective tax rate is
estimated to be approximately 95%.
Net income. As a result of the factors discussed above, the Company had a
net loss of $5.5 million for the three months ended September 30, 1999, or
$(0.33) per basic and diluted share. The Company had net income of $81 for the
three months ended September 30, 1998, or $0.01 per basic and diluted share.
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
Statement of Operations: For the nine For the nine
(in thousands except per months ended months ended
share data) September 30, 1999 September 30, 1998
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $699,786 100.0% $345,093 100.0%
Cost of sales 518,991 74.2% 250,002 72.5%
----------------------------------------------------
Gross margin 180,795 25.8% 95,091 27.5%
Selling, general and
administrative expenses 159,687 22.8% 73,609 21.3%
Goodwill amortization 5,299 0.7% 3,135 0.9%
Integration charge 40 0.0% - 0.0%
----------------------------------------------------
Income from operations 15,769 2.3% 18,347 5.3%
Interest expense (12,337) (1.8)% (3,857) (1.1)%
Interest income 1,613 0.2% 1,353 0.4%
Other income 516 0.1% 468 0.1%
----------------------------------------------------
Income before income taxes and minority
interest 5,561 0.8% 16,311 4.7%
Provision for income taxes 5,305 0.8% 7,315 2.1%
----------------------------------------------------
Income before minority interest
256 0.0% 8,996 2.6%
Minority interest 12 0.0% - 0.0%
----------------------------------------------------
Net income $268 0.0% $8,996 2.6%
====================================================
Net income per share:
Basic $ 0.02 $ 0.65
Diluted $ 0.02 $ 0.63
Shares used in computing net
income per share:
Basic 16,331 13,846
Diluted 16,545 14,198
</TABLE>
Results of Operations
- ---------------------
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Net Revenues. Net revenues for the nine months ended September 30, 1999
were $699.8 million. Revenues increased from $345.1 million in the same period
last year. This increase was primarily due to the acquisition of the
International Division which was completed during the fourth quarter of 1998
coupled with the impact in 1999 of a full nine months of operations of the
January 1998 Class, and April 1998 Class, and July 1998 Class of acquisitions.
Revenues for the North America Division were $437.9 million, or 62.6% of the
consolidated revenues and revenues for the International Division were $261.9
million, or 37.4% of the consolidated revenues. Revenues for the International
Division consisted primarily of revenues from Germany, the Netherlands, Italy
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
and Japan. In 1998, all revenues were generated by the North America Division
since there was no International Division during the first nine months of 1998.
The Company experienced a reduction in revenues for the nine months ended
September 30, 1999, due primarily to the following: Industry wide North American
import demand from South America was weak for the first two months of 1999 as
compared to the same period in 1998, particularly since Valentine's Day fell on
a Sunday of a Holiday weekend. The industry experienced declines in average unit
sales prices in major product categories in the second quarter ranging from 20%
to 65% as compared to the same period in 1998 as a result of over supplied
markets. Industry wide Dutch exports were down approximately 10% for the first
two months of 1999, as compared to the same period in 1998 and average unit
sales prices fell approximately 10% from the prior year. The Company derives
about 40% of its revenue internationally, primarily from Europe, and estimates
that the stronger U.S. dollar versus the Euro negatively impacted reported
international revenues by approximately 5%.
Gross margin. Gross margin for the nine months ended September 30, 1999 and
1998 were $180.8 million (including approximately $2.2 million from the final
determination of antidumping duties) and $95.1 million, respectively. Gross
margin as a percentage of net revenue were 25.8% (25.5% excluding the effect of
the final determination of antidumping duties), for the nine months ended
September 30, 1999 and 27.5% for the nine months ended September 30, 1998. The
decline in the gross margin is mainly attributable to the inclusion of the
International Division in 1999. The International Division historically operates
at a lower gross margin and therefore, reduces the consolidated gross margin of
the Company. For the nine months ended September 30, 1999, the gross margin of
the International Division was 22.3%. The North America Division gross margin
was 27.9% (27.4%, excluding the effect of the final determination of antidumping
duties) for the nine months ended September 30, 1999 as compared to 27.5% for
the same period last year.
Selling, General and Administrative. Selling, general and administrative
expenses were $159.7 million in the nine months ended September 30, 1999, or
22.8% of net revenues and $73.6 million in the nine months ended September 30,
1998, or 21.3% of net revenues. The increase in the 1999 nine months selling,
general and administrative expense is primarily the result of the acquisition of
18 floral businesses in 1998 and an increase in selling expenses associated with
higher revenues in the North America West Coast Bouquet operations; an increase
in expenses associated with building an infrastructure for a publicly held
multi-national corporation; start-up cost associated with the Company's
Blytheville, AK operations and Interactive Services Division; and Year 2000
remediation and system conversion costs.
Income from operations. Income from operations was $15.8 million, or 2.3%
of net revenues, for the nine months ended September 30, 1999 and $18.3 million
or 5.3% of net revenues for the nine months ended September 30, 1998.
Interest expense. For the nine months ended September 30, 1999, interest
expense was approximately $12.3 million as compared to $3.9 million for the nine
months ended September 30, 1998 an increase of $8.5 million. The increase in
interest expense is primarily the result of borrowings used to fund the cash
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
portion of the total consideration for the acquisition of the 18 floral
businesses completed during 1998. The Company's average borrowing rate for the
nine month period ending September 30, 1999 was 8.3%, based on the Company's
weighted average outstanding debt balance.
Provision for income taxes. The provision for income taxes was $5.3 million
for the nine months ended September 30, 1999 on pre-tax income of $5.6 million
and $7.3 million for the nine months ended September 30, 1998 on pre-tax income
of $16.3 million. The 1999 and 1998 effective income tax rate of 95.4% and
44.8%, respectively, are higher than the statutory rate primarily due to the
non-deductibility of certain goodwill amortization. The increase in the
effective tax rate in 1999 is primarily the result of substantially lower income
before provision for taxes in 1999 as compared to 1998. The effect of the
non-deductibility of certain goodwill amortization is much more pronounced with
the lower base of income before provision for taxes.
Net income. As a result of the factors discussed above, the Company had net
income of $0.27 million for the nine months ended September 30, 1999, or $0.02
per basic and diluted share. The Company had net income of $9.0 million for the
nine months ended September 30, 1998, or $0.65 per basic share and $0.63 per
diluted share.
Liquidity and Capital Resources
- -------------------------------
Historical. Historically, the Company's primary sources of liquidity have
been cash from operations and borrowings under our credit facility. The
Company's principal uses of liquidity will be to provide working capital, to
meet debt service requirements and finance the Company's strategic plans. For
fiscal 1998, quarterly net pro forma revenues as a percentage of total pro forma
revenues were approximately 29%, 27%, 20%, and 24%, respectively, for the first
through fourth quarters of the fiscal year on a pro forma basis. In addition,
for fiscal 1998 quarterly income from operations as a percentage of revenue for
the fiscal year 1998 were approximately 5%, 4%, (0)%, and 1.6%, respectively for
the first through fourth quarters of the fiscal year. The Company's need for
cash has historically been greater in its first and second quarters when cash
generated from operating activities coupled with draw-downs from bank lines have
been invested in receivables and to a lesser extent inventories. The Company
experiences higher levels of sales in the first two quarters of the year due to
the traditional flower giving holidays, Valentine's Day in February and Mother's
Day in May. For the first nine months in 1999 the Company used $15.7 million
cash on hand and $1.4 million in proceeds from borrowings to invest $9.5 million
in capital expenditures, pay $7.5 million in earnout arrangements, and fund
working capital for operating activities.
In the nine months ended September 30, 1999, operating activities used $3.4
million of net cash compared to $9.0 million of cash provided from operations in
the same period last year. The decrease is principally attributable to $8.7
million lower net income and $11.9 million increase in the use of cash for
working capital and other assets and liabilities partially offset by $8.2
million increase in non-cash expenses (such as depreciation and goodwill
amortization). The use of cash for working capital purposes in the 1999 nine
months compared unfavorably to the 1998 nine months due principally to the
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
acquisition of 10 floral business. As a result of the acquisition of 10 floral
businesses the Company's investment in working capital, particularly accounts
payable, accrued expenses, and inventory at September 30, 1999 increased
significantly over the same period last year.
Our capital expenditures for the nine months ended September 30, 1999 were
approximately $9.5 million. Although we currently do not have any commitments to
make significant capital expenditures, we expect to spend approximately $8
million for capital expenditures in the next twelve months in the normal course
of business.
Financing. Our existing credit agreement is with a syndicate of lenders for
which Bankers Trust Company serves as agent (the "Credit Agreement"). Pursuant
to the terms of the Credit Agreement, the amount of our revolving credit
facility were increased to $200 million, of which the sub-limit for permitted
acquisitions is $180 million and the sub-limit for working capital purposes and
letters of credit is $20 million. In addition, of the $200 million in revolving
credit facilities, up to $15 million has been designated to be a revolving loan
which is available to certain of our foreign subsidiaries in either Deutsche
Marks or Guilders. Further, a new $50 million, Deutsche Mark denominated term
loan was created as an additional source of borrowings in excess of the $200
million revolving credit facility. Borrowings under the revolving credit
facility bear interest, at our option, at (a) Bankers Trust Company's base rate
plus an applicable margin of up to 1.25% or (b) a Eurodollar rate plus an
applicable margin of up to 2.50%. Borrowings under the term loan bear interest
at the inter-bank rate for Deutsche Marks plus an applicable margin of up to
2.50%. For the execution of the Amended Credit Agreement the Company paid on
closing a financing fee of approximately $3.6 million, which has been deferred
and is being amortized over the term of the Credit Agreement. In addition, a
commitment fee of up to 0.50% is being charged on the unused portion of the
revolving credit facility on a quarterly basis. Both the revolving credit
facilities and the term loan mature five years from the closing date. At
September 30, 1999 outstanding borrowings under our Credit Agreement aggregated
$194.5 million. The Company does not have any required repayments of term loans
until December 31, 2000.
As of September 30, 1999, the Company was in compliance with all applicable
financial covenants, except the leverage ratio. Pursuant to the terms of the
Credit Agreement, non-compliance with one or more financial covenants provides
for the lenders to terminate the commitment and declare the principal balance
and any accrued interest on all loans and obligations immediately due and
payable. The Company obtained a waiver letter through December 31, 1999 from the
Bank with respect to the non-compliance under the Amended Credit Agreement. The
Company is currently discussing the amendment of the financial covenants under
the Amended Credit Agreement with the bank. There can be no assurance that any
such amendment will be available on terms favorable to the Company.
In the event the bank group amends the financial covenants under the
Amended Credit Agreement, the Company believes that funds generated from
operations, together with borrowings under the Credit Agreement, should be
sufficient to finance our current operations and planned capital expenditure
requirements for
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
at least the next twelve months; thereafter, the Company does not believe that a
need for cash would exceed anticipated sources of cash from operations and from
the credit facility currently in place.
In June 1999, the Company retained Morgan Stanley Dean Witter and Salomon
Smith Barney to advise it in the development and consideration of strategic and
financial alternatives.
Year 2000
We have been conducting a comprehensive review of our computer systems to
identify those that could be adversely affected by the "Year 2000 issue" (which
refers to the inability of many computer systems to process accurately dates
later than December 31, 1999), and we are executing a plan to remediate or
replace affected systems.
Our Year 2000 compliance project includes four phases: (1) evaluation of
our owned or leased systems and equipment to identify potential Year 2000
compliance issues; (2) remediation or replacement of any systems and equipment
determined to be non-compliant (and testing of remediated systems before
returning them to production); (3) inquiry regarding Year 2000 readiness of
material business partners and other third parties on whom our business is
dependent; and (4) development of contingency plans, where feasible, to address
potential third party non-compliance or failure of our material systems.
The initial phase of the Year 2000 compliance project included the
evaluation of all software, hardware and equipment we owned or licensed, and
identification of those systems and equipment requiring Year 2000 remediation.
Analysis of all material software and hardware has been completed and of those
systems requiring remediation or replacement, approximately 90% (or 94% of all
system users) have already been replaced by Year 2000 compliant hardware and
software. We anticipate that all remaining material systems will be remediated
or replaced by November 1999.
The costs and timing for replacement of certain of our systems that were
not Year 2000 compliant have been anticipated as part of our planned information
systems spending. We estimate that the total additional cost of managing the
Year 2000 project, remediating existing systems and replacing non-compliant
systems, is approximately $6.0 million of which approximately $1.2 million will
be expensed as incurred, and $4.8 million will be capitalized. Although we
believe our Year 2000 compliance efforts with respect to our systems will be
successful, any failure or delay could cause actual costs and timing to differ
materially from that presently contemplated. We intend to develop a contingency
plan to permit our primary operations to continue if the modifications and
conversions of our systems are not successfully completed on a timely basis, but
the foregoing cost estimates do not take into account any expenditures
associated with such contingencies. Our cost estimates also do not include time
or costs that may be incurred as a result of third parties' not becoming Year
2000 compliant on a timely basis.
We are communicating with our business partners, including the key
suppliers, vendors, banks and other third parties with whom we do business, to
obtain information regarding their state of readiness with respect to the Year
2000 issue. Failure of third parties to remediate Year 2000 issues affecting
their
<PAGE>
U.S.A. FLORAL PRODUCTS, INC.
(dollars and shares in thousands)
respective businesses on a timely basis, or to implement contingency plans
sufficient to permit uninterrupted continuation of their businesses in the event
of a failure of their systems, could have a material adverse effect on our
business and results of operations. Assessment of third party Year 2000
readiness is expected to be substantially completed by the end of September
1999. We can not determine our worst case scenario until the assessment of third
parties' Year 2000 compliance is completed.
Our Year 2000 compliance project includes development of a contingency plan
designed to support critical business operations in the event of the occurrence
of systems failures or the occurrence of reasonably likely worst case scenarios.
The contingency plans were substantially developed as of June 30, 1999.
We may not be able to compensate adequately for business interruption
caused by certain third parties. Potential risks include suspension or
significant curtailment of service or significant delays by banks, utilities or
common carriers, or at U.S. ports of entry. Our business also could be
materially adversely affected by the failure of governmental agencies to address
Year 2000 issues affecting our operations. For example, a significant amount of
our merchandise is grown outside the United States, and we are dependent upon
the issuance by foreign governmental agencies of export visas for, and upon the
U.S. Custom Service to process and permit entry into the United States of, such
merchandise. If failures in government systems result in the suspension or delay
of these agencies' services, we could experience significant interruption or
delays in our product flow.
The costs and timing for management's completion of Year 2000 compliance,
modification and testing processes are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, the success of third parties'
Year 2000 compliance efforts and other factors. There can be no assurance that
these assumptions will be realized or that actual results will not vary
materially.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There has been no material change in the information set forth in our
December 31, 1998 Form 10-K filed with the Securities and Exchange Commission on
March 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
U.S.A. Floral and its subsidiaries are from time to time parties to
lawsuits arising out of our respective operations. We believe that any
pending litigation to which we or our subsidiaries are parties will not
have a material adverse effect upon our consolidated financial position
or results of operations.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Pursuant to the Credit Agreement, the Company is not permitted
to pay dividends upon its common stock without the consent of
the lenders thereunder.
(c) Not applicable.
(d) Not applicable.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S.A. FLORAL PRODUCTS, INC.
Date: November 15, 1999 By: /s/ W. Michael Kipphut
------------------------------------
W. Michael Kipphut,
Chief Financial Officer
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
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