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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 [Fee Required]
For the fiscal year ended August 31, 1996
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or
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 0-5531
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Florafax International, Inc.
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(Name of small business issuer in its charter)
Delaware 41-0719035
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8075 20th Street, Vero Beach, Florida 32966
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 563-0263
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value of $.01
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]
State issuers' revenues for its most recent fiscal year $10,299,000.
On October 10, 1996, the aggregate market value of the Common Stock based upon
the average bid and asked prices as reported by the NASD held by nonaffiliates
was approximately $17,446,000.
As of October 10, 1996, 8,209,727 common shares were outstanding.
Documents Incorporated by Reference
None
Transitional Small Business Disclosure Format (Check One): Yes ; No X
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Florafax International, Inc.
Index
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Reference Page
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PART I
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Item 1 Description of Business........................................................... 1
Item 2 Description of Property........................................................... 4
Item 3 Legal Proceedings................................................................. 5
Item 4 Submission of Matters to a Vote of Security Holders............................... 6
PART II
Item 5 Market for Common Equity and Related Stockholder
Matters........................................................................ 7
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of Operations and
Selected Financial Data........................................................ 8
Item 7 Financial Statements:
Report of Independent Certified Public Accountants............................. 15
Consolidated Balance Sheets.................................................... 16
Consolidated Statements of Operations.......................................... 18
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)......................................... 20
Consolidated Statements of Cash Flows.......................................... 21
Notes to Consolidated Financial Statements..................................... 23
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 37
PART III
Items 9, 10, 11 and 12 are incorporated by reference to the
Company's definitive proxy statement, pursuant to Regulation
14A, which will involve the election of directors. However,
if such definitive proxy statement is not filed with the
Securities and Exchange Commission within 120 days following
August 31, 1996, such items will be filed as an amendment to
this Form 10-KSB under a cover of a Form 8 not later
than the end of the 120 day period................................................ 38
Item 13 Exhibits and Reports on Form 8-K.................................................. 39
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Florafax International, Inc. is principally engaged in the business
of generating floral orders and providing floral order placement services to
retail florists. The Company is also a third-party processor of credit cards.
As used herein, the terms "Florafax" and "Company" mean Florafax International,
Inc. (the Registrant), its divisions and subsidiaries, unless the context
requires otherwise.
FLOWERS-BY-WIRE
The Company operates a flowers-by-wire business which enables Florafax member
florists (independent owners) to send and deliver floral orders throughout the
United States. Floral orders between florists are transacted primarily by
telephone or by the Company's order allocation system.
The Company's order allocation system has the ability to distribute orders
ratably to Florafax member florists. Once an order is taken, the system analyzes
the area to ascertain which member florists will deliver to that location. The
system then determines which florist should receive that order based on certain
criteria. The most important of the distribution criteria is that all florists
are to receive an equitable number of orders. Once the system determines which
florist is to receive the order it is sent via facsimile or telephone.
Management believes that the Company's order allocation system is presently the
only system in the industry that is capable of distributing orders equitably to
member florists.
Historically, floral orders have usually originated with one florist and were
then filled by another florist. However, during the past two years the Company
has been generating a significant portion of floral orders through its wholly
owned subsidiary, The Flower Club. The Flower Club has arrangements with
numerous nationally recognized companies which allows The Flower Club to
generate orders by marketing directly to the customers of these companies. These
orders do not require individuals to initiate the floral order at a flower shop.
Instead, the consumer dials a toll free number and places the order at the
Company's order entry department. These orders are then transmitted to member
florists via the order allocation system.
Flowers-by-wire is the Company's primary business, accounting for 88% of net
revenues in 1996, 85% in 1995 and 84% in 1994.
Florists, and their advertisements, are listed in the "Florafax Directory,"
which is published and distributed several times a year. The Company produces
the "Florafax Directory," brochures, and sales and promotional materials for use
by the Company and its member florists.
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When a member florist sends a floral order, he or she selects another florist
from the Florafax Directory near the desired point of delivery and contacts the
selected florist by use of the telephone or fax machine. In the event a florist
cannot find a fulfilling florist in the area they wish to send an order, they
can call the Company's order entry department and the Company will place the
order. The sending florist is paid by the customer for the purchase and the
receiving (or fulfilling) florist is responsible for designing and delivering
the flowers to the recipient, and will be paid by Florafax. The Company is
capable of placing floral orders virtually anywhere in the world.
Member florists are on a "reporting plan" under which the sending florist, who
collects the price of the flowers from the customer, normally pays the Company
80% of the sales price and the Company generally pays the receiving florist 71%
of the sales price, retaining 9% for its processing services. Under this
"reporting plan" the Company is normally not aware of the transaction until the
receiving florist reports the order. Accordingly, accounting recognition of the
revenue on floral shop to floral shop transactions does not normally occur until
the order is reported to the Company. Included in floral order processing are
revenues generated by The Flower Club. As more fully discussed in Management's
Discussion and Analysis, these revenues have a significantly greater profit
margin (before marketing expenses) when compared to traditional processing
services. Consequently, net revenues from floral order processing have been much
higher than 9%, and increase in proportion to Flower Club generated orders.
Revenues and associated costs related to floral orders generated by The Flower
Club are recorded in the month that the order was filled, as the revenue process
is complete and the Company has the information needed to record the
transaction.
A florist applying to become a Florafax member is evaluated to determine his or
her ability to operate in accordance with the Company's rules and regulations,
to provide a quality product and to comply with the credit policies established
by the Company. Member florists are eligible to receive orders from, and send
orders to, any other member.
The Company's flowers-by-wire operation is seasonal in that its member florists
send a much higher volume of orders during Thanksgiving, Christmas, Valentine's
Day, Easter and Mother's Day. In response to this seasonality and to generate
additional business for its member florists, the Company formed The Flower Club
to generate additional orders by pursuing relationships with nationally
recognized corporations. The Company engages in joint marketing campaigns with
these corporations not only during holidays, but also during nonseasonal periods
in an effort to provide member florists with orders during slow periods of the
year. Management expects the upward trend in orders from nontraditional
campaigns to continue. No one Florafax member florist accounts for as much as 5%
of the Company's annual flowers-by-wire revenue.
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CREDIT AND CHARGE CARD PROCESSING
Through its wholly owned subsidiary, Credit Card Management System, Inc. (CCMS),
the Company makes available to its members an electronic credit card and charge
card processing system, FloraCash. FloraCash automatically provides
authorization codes for each transaction and captures all the transaction data
electronically, which can allow florists to receive frequent, automatic deposits
directly to their bank accounts. FloraCash terminals and optional printers are
sold or leased by the Company at competitive rates.
HISTORY
Florafax was incorporated under the laws of Delaware in 1970 as the successor to
Spotts International, Inc., a company engaged in the premium promotion business.
In 1970, Florafax acquired a flowers-by-wire service, Florafax Delivery, Inc.,
which had been incorporated in Arkansas since 1961. In 1974, Florafax sold
Spotts International, Inc.
In April 1992, the Company incorporated Credit Card Management System, Inc., an
Oklahoma corporation formed to provide credit card processing services to both
floral and nonfloral businesses.
In March 1994, the Company incorporated The Flower Club, Inc. to generate
additional orders for its member florists.
EMPLOYEES
As of August 31, 1996, the Company had approximately 150 employees of which 74
are full time.
COMPETITION
The flowers-by-wire industry is principally comprised of six companies. Because
many florists subscribe to more than one flowers-by-wire service, competition is
intense. Usage can be affected by the quality and cost of services offered by
each company, promotional programs, industry reputation and traditional patterns
of usage employed by the sending florist. The Company believes that its
flowers-by-wire service is competitive in the industry.
In the credit card industry there are many banks and other companies which
process credit and charge card transactions on behalf of their business clients.
Most of these companies have greater revenues and process more transactions than
the Company. In addition, some of the Company's flowers-by-wire industry
competitors provide credit card processing services to their members. The
selection of one credit card processor over another can be affected by a variety
of factors including price, services offered and the capability of providing
specialized functions to accommodate the particular credit card processing
requirements of certain businesses. The Company believes that its credit card
processing services are competitive in the retail and wholesale floral industry
in particular and in the general credit card processing industry as a whole.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate headquarters were moved from Tulsa, Oklahoma, to Vero
Beach, Florida, in 1994. The Company's primary computer operations and order
entry system remain in Tulsa, Oklahoma. The Vero Beach facilities are leased
under an operating lease agreement expiring March 1, 2000. The lease agreement
requires monthly payments of $2,750, plus utilities and property taxes. The
Tulsa facilities are leased under a three-year operating lease agreement
expiring August 31, 1997. The lease agreement requires monthly payments of
$9,650, which includes utilities.
As a result of the Company's growth in revenue, and to avoid using outside third
parties to handle excess call volumes during the peak holiday periods, the
Company has added an order entry center at its Vero Beach location. In addition,
the Company is planning to expand this call center by adding an additional 7,000
square feet. Construction is scheduled to begin in fiscal 1997. The Company
estimates the cost to expand the order entry center will be $400,000.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following proceedings and litigation:
In October 1989, Bellerose Floral, Inc. (Bellerose) of Bayside, N.Y., an
affiliate of 800-FLOWERS, Inc., became a Florafax member florist, and Florafax
agreed to provide certain telecommunication services to Bellerose for a fee. GTE
Market Resources, Inc. (GTE/MR) was engaged by Florafax to provide order-entry
services for Florafax and to customers of Florafax, including Bellerose.
In 1990, certain disputes arose among Florafax, Bellerose and GTE/MR regarding
the services to be performed by GTE/MR. As a result, in 1990 Florafax filed an
action in Tulsa County (Oklahoma) District Court against GTE/MR and Bellerose.
Bellerose then filed an action in New York Federal Court against Florafax.
Subsequently, Florafax and Bellerose settled their claims against each other.
Florafax pursued its claim against GTE/MR for damages suffered as a result of
GTE/MR's breach of the telecommunications service agreement. On November 23,
1993 a jury awarded Florafax $1,481,000 in net damages against GTE/MR.
GTE/MR appealed this case and posted bond with the Court in order to do so. On
December 22, 1994 this case was assigned to the Oklahoma Court of Appeals by the
Oklahoma Supreme Court. On April 4, 1995, the Court of Appeals of the State of
Oklahoma released for publication its decision on the appeal filed by GTE/MR.
The award to the Company of $743,117 for consequential damages was affirmed. To
the extent that the Company was awarded lost profits for two years in the amount
of $750,000, the judgment was reversed and remanded for a determination of lost
profits as limited by Oklahoma law. The award to GTE/MR of a set-off amount of
$88,750 for unpaid invoices was affirmed, a contractual rate of 18% per annum
applied for pre-judgment interest was applied and the case remanded for a
determination of an award of GTE's reasonable attorney's fees, expenses and
other collection costs incurred in recovering the unpaid invoice amounts, but
not their fees or expenses in defending against the claims of the Company or in
pursuing other unsuccessful aspects of GTE/MR's counterclaim. The denial of the
Company's request for attorney's fees was affirmed. The Company and GTE/MR have
each petitioned the Oklahoma Supreme Court for writ of certiorari to review the
portions of the Oklahoma Court of Appeals decision adverse to their respective
interests, and both of the parties appeals have been granted. There are no
assurances that the Company will obtain a favorable ruling from the Oklahoma
Supreme Court.
The Company's legal counsel has tried this case on a contingency fee basis and,
accordingly, the Company has incurred minimal expenses related to this
litigation. However, the agreement between the Company and its legal counsel
stipulates that the Company's attorneys are to receive 40% of the net proceeds
now that the case has reached the appellate court. Consequently, the Company is
to receive 60% of the ultimate proceeds. Recognition of any of these amounts
will not be reflected in the financial statements until ultimate resolution.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders of the Company in the fourth
quarter of fiscal 1996.
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Florafax Common Stock is traded on the over-the-counter market, on a secondary
listing service, referred to as the "bulletin board" by the National Association
of Securities Dealers, Inc. (NASD), with a symbol of FIIF. The number of
registered shareholders of Common Stock at October 16, 1996 was 1,264 based on
information furnished by the Company's transfer agent. In addition, the Company
believes that, at October 16, 1996, there were an additional 500 to 1,000
holders of Common Stock who held in "street" or "nominee" name, based on the
number of proxies and annual reports requested by brokers, dealers, banks and
voting trustees of which the Company is aware.
The table below sets forth by quarter for its fiscal years ended August 31, 1996
and 1995, the high and low bid prices for the Florafax Common Stock as reported
by the NASD. The quotations represent prices in the over-the-counter market
between dealers in securities, which prices are not necessarily representative
of actual transactions, and do not include retail markups, markdowns or
commissions.
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Bid Prices
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High Low
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1996
First quarter $ 1-7/8 $ 9/16
Second quarter 1-3/4 3/4
Third quarter 2-3/16 1-3/8
Fourth quarter 2-3/8 1-11/16
1995
First quarter $ 5/16 $ 5/32
Second quarter 7/16 5/32
Third quarter 5/16 7/32
Fourth quarter 3/4 1/4
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On October 10, 1996, the closing bid quotation of Florafax Common Stock as
reported by published financial sources was $2.125.
Florafax has never paid dividends on its Common Stock. Payment of dividends on
its Common Stock in the future will be at the discretion of the Company's Board
of Directors and will be dependent upon the Company's earnings, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND SELECTED FINANCIAL DATA
LIQUIDITY AND CAPITAL RESOURCES
For fiscal 1996, operating activities provided cash of $1,845,000, investing
activities provided cash of $277,000 and financing activities used cash of
$423,000, resulting in a net increase in cash of $1,699,000.
Operating cash flow historically has been generated primarily from processing
floral orders and charge card transactions for the Company's member florists, as
well as collecting dues, fees and directory advertising from the members. Floral
order processing may require settlement with the fulfilling florist before
collection of funds from the sending florist. The terms of the Company's
receivables are 30 days, which management believes are consistent within the
industry. Charge card processing, however, generally allows the Company to
collect funds from the charge card issuer prior to settlement with the member
florist. Since in both types of transactions the Company is both collecting and
settling funds, the timing of these cash flows has a significant impact on the
Company's liquidity.
During 1996 and 1995, cash flows benefited significantly from orders generated
by The Flower Club. All Flower Club orders are paid for by credit cards, which
allows the Company to receive most of the money from these orders within days
after processing the transaction. Gross floral orders and related handling fees
generated by The Flower Club in 1996 were in excess of $15,400,000
(approximately 318,000 orders) which generated net revenues of $4,417,000. Gross
floral orders and related handling fees generated by The Flower Club in 1995
were in excess of $10,100,000 (approximately 210,000 orders) which generated net
revenues of $2,767,000.
During fiscal 1993, the Company began developing and marketing the FloraNet 5000
terminal. The FloraNet 5000 terminal is a point-of-sale credit card terminal
that allows for florists to send and receive orders on the same terminal. The
cost of developing the FloraNet 5000 terminal was approximately $73,000 in
fiscal 1993.
During 1994, the Company completed the development of the FloraNet 5000
terminal. Expenditures related to development of the terminal amounted to
approximately $41,000 in 1994. In addition, during 1994 the Company spent
$312,000 purchasing and deploying the FloraNet 5000 terminals. The Company used
$112,000 from operations and borrowed $200,000 to fund the purchase and
deployment of the FloraNet 5000 terminals. This loan is secured by certain
assets of the Company and is guaranteed by the Chairman of the Board. During
September 1996 the Company repaid this loan in full.
During 1995, management analyzed the marketing program for the FloraNet 5000
terminals. The analysis indicated that the FloraNet 5000 terminals were not
achieving the results that the Company had expected when the program was
implemented. Consequently, after careful consideration the Company decided to
discontinue further
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funding of the FloraNet 5000 program. During fiscal 1996, the Company terminated
the FloraNet 5000 program in its entirety.
During 1996, the cost of computer systems declined as the Company retired
certain fully depreciated computer hardware. Communication systems reflect a
decline as well due to the termination of the FloraNet 5000 program, for which
both software and hardware were retired. In addition, the Company wrote off
fully depreciated leasehold improvements related to a portion of the Tulsa,
Oklahoma, facility that is no longer in use.
During 1996, the Company continued making only necessary capital expenditures,
spending $190,000 compared to $136,000 in 1995 and $394,000 in 1994. However,
due to the increase in order volume and maintaining two separate order centers
it became necessary for the Company to install a new order entry computer
system. The new system allows for much faster processing of orders and is better
suited for operating more than one order entry center. Of the $190,000 in
capital expenditures incurred during 1996, $159,000 was spent on computer
hardware and software.
On November 30, 1995, the Company restructured the outstanding $2,921,000
balance of its 9-1/2% convertible subordinated notes such that the notes would
mature on September 15, 1996, except for $354,000 which was due December 31,
1995. Prior to the restructuring, the notes were to mature on June 30, 1996.
As more fully discussed in Note 2 to the consolidated financial statements, on
February 28, 1996 the Company issued a $2,500,000 (face value) convertible
promissory note bearing interest at 7%, maturing on February 28, 1997, plus
warrants to acquire 650,000 shares of common stock of the Company. The proceeds
of this 7% convertible promissory note were used to retire the outstanding
balance of the 9-1/2% convertible subordinated notes. In connection with the
repayment of the 9 1/2% notes, the Company negotiated a discount of $128,000,
which was reported as an extraordinary gain. On August 30, 1996, the holder of
the $2,500,000 convertible promissory note converted the note plus approximately
$89,000 of accrued interest to 2,071,000 shares of common stock of the Company.
In addition, the unamortized value of the warrants amounting to $97,000 was
charged to interest expense upon conversion. However, the warrants which had an
exercise price of one dollar per share remain unexercised.
In September of 1996, the Company repaid all but $80,000 of its long-term debt.
RESULTS OF OPERATIONS
GENERAL COMMENTS
The Company completed its most profitable fiscal year since 1983. The Company
had operating income of $1,562,000 for 1996 compared to operating income of
$952,000 in 1995 and $20,000 in 1994. Revenues for 1996 are up over the prior
year in every category except one. Management attributes the increase in
revenues to the Company's ability to generate orders through The Flower Club,
while increasing its number of floral members as a result of providing quality
service and maintaining the lowest dues structure in the industry.
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NET REVENUES
Net revenues from member dues and fees during 1996 increased by 3% from 1995
compared to a 10% decline from 1994 to 1995. During 1996, the Company began to
experience an increase in its dues-paying floral members. Dues-paying members at
August 31, 1996 totaled 4,298 compared to 3,984 at August 31, 1995. Management
believes that the increased number of orders the Company is providing to its
members has assisted the Company in retaining its member florists as well as add
new members.
Floral order processing revenue has experienced significant growth over the past
three years, increasing by 68% from 1994 to 1995 and by 50% from 1995 to 1996.
The increase is due to orders generated by The Flower Club. The Flower Club has
established joint marketing campaigns with numerous nationally recognized
companies which allows The Flower Club to market directly to the customers of
these companies. Since its formation in 1994 The Flower Club has experienced
considerable growth, generating floral orders and handling fees of approximately
$15,400,000 during 1996, $10,100,000 during 1995 and $4,300,000 in 1994. The
gross amount of floral orders recorded by the Company totaled $27,484,000 in
1996, $21,978,000 in 1995, and $18,731,000 in 1994. The average amount of each
order reported to the Company by its members in 1996 increased to $41.24 (3.5%
increase) compared to $39.83 (3.3% increase) in 1995 and $38.54 in 1994.
Directory and advertising fees generally fluctuate in connection with the number
of dues paying member florists that belong to the Company's floral network at a
given point in time. During 1995, the Company was experiencing a decline in its
members causing directory and advertising fees to fall. However, during 1996 the
Company began to see an increase in its members, which the Company believes is
the reason that the decline in directory and advertising fees appears to have
subsided.
Directory and advertising fees remained fairly constant in 1996 compared to
1995, while 1995 revenues experienced a decline when compared to 1994 revenues.
As previously discussed, the increase in member florists has allowed the Company
to increase or, in the case of directory and advertising fees, maintain the
level of revenue experienced in the prior year. Management continues to engage
in campaigns that encourage advertising by member florists.
Net revenues from charge card processing decreased by 4% from 1995 to 1996,
compared to a 9% decrease from 1994 to 1995. The decline in revenues is a result
of a combination of several factors. Gross charge cards dollars processed were
$261,000,000 in 1996, $210,000,000 in 1995 and $161,000,000 in 1994. However,
the Company has had to lower the discount rate it charges customers to remain
competitive. In addition, the Company has experienced an increase in cost from
both the credit card companies themselves as well as a cost increase from its
sponsoring bank.
The Company also earns revenue from the sale and lease of credit card terminals
and printers. Sale and lease revenue amounted to $293,000 in 1996, $349,000 in
1995 and $389,000 in 1994.
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EXPENSES
Member support, general and administrative expenses were $5,123,000 in 1996,
compared to $4,553,000 in 1995. General and administrative expenses were higher
in 1996 for several reasons. A significant reason for the 1996 increase was the
need for additional personnel to handle the order revenue generated by The
Flower Club, which increased by over 50% when compared to 1995. In addition, a
portion of the increase is due to a general increase in salaries and related
expenses. The Company also used only its own facilities during 1996 to place
Flower Club orders, whereas in 1995 the Company contracted with certain third
parties to handle excess order volume. Legal fees were higher than anticipated
in 1996. In 1996 the Company restructured and later retired its primary debt,
filed several registration statements, and explored a potential acquisition, all
of which necessitated expenditures on legal fees. 1996 also had greater postage
and freight expense than 1995 because of the Company's growing membership. For
1996, the Company did not experience an expected increase in telephone cost
related to Flower Club orders because of a new telephone contract which reduced
per minute phone cost on most Flower Club orders.
Member support, general and administrative expenses were $4,553,000 in 1995
compared, to $4,726,000 in 1994. The Company managed to decrease 1995 salaries
and contract labor costs by $236,000 when compared to 1994. This is attributable
to two primary factors. First, the Company restructured its management and
consolidated certain departments thereby eliminating a number of personnel.
Second, the Company hired more employees to place orders generated by The Flower
Club, which eliminated a significant portion of its high cost contract labor
that was incurred during 1994. In addition to lower salaries and contract labor,
the Company also experienced a decrease in equipment lease and maintenance cost.
This was primarily attributable to the conversion of the Company's outdated
Sperry mainframe computer to an up-to-date, more efficient main frame. The
Company also reduced its 1995 legal expense by $95,000 when compared to 1994.
Even though the Company managed to reduce the aforementioned expenses, it did
experience a significant increase in telephone expense during 1995. Telephone
expense for 1995 increased by $308,000 over 1994 telephone expense, primarily as
a result of the orders generated by The Flower Club.
Selling and advertising expenses have experienced a steady increase from 1994 to
1996. The primary cause for this increase are the marketing expenses associated
with generating and maintaining The Flower Club order volume. The Flower Club
expenses included in selling expenses are commissions paid to an outside
marketing firm whose responsibilities include attracting and maintaining new
clients, printing costs for marketing pieces provided to The Flower Club members
which assist them when ordering through The Flower Club, and certain promotional
floral arrangements.
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The provision for doubtful accounts was $210,000, $173,000 and $413,000 for
fiscal years 1996, 1995 and 1994, respectively. The primary reason for the 1996
increase over 1995 is the general increase in revenues during 1996. The primary
reason for the decrease in 1995 provision for doubtful accounts when compared to
1994 is the orders generated by The Flower Club, which became substantial in
1995. These orders are paid for with credit cards which reduced potential
collection problems associated with shop-to-shop orders.
Depreciation, amortization and retirements were $393,000, $490,000 and $427,000
for 1996, 1995 and 1994, respectively. Depreciation and amortization expense for
1995 is greater than 1994 due to a full year's worth of amortization in 1995, of
intangible assets related to the Flower Club. While 1996 has this same Flower
Club amortization, many of the Company's assets with remaining book value became
fully or mostly depreciated in 1995, resulting in a lower expense for 1996. The
Company expects depreciation and amortization to continue to decline in the
upcoming year.
OTHER INCOME (EXPENSE)
Interest expense for 1996 is greater when compared to prior years due to a loan
obtained in 1996 with terms necessitating the recording of a note discount. This
discount was to be amortized to interest expense over the life of the note,
which had an original maturity date of February 28, 1997. However, prior to year
end this note was converted to common stock of the Company and, accordingly, the
entire unamortized discount was recorded as interest expense at that time. See
Note 2 to the consolidated financial statements for a more complete discussion
of this transaction.
Interest income has increased over the past three years resulting from the
Companies improved operations, that provided funds which were maintained in
interest-bearing accounts.
INCOME TAXES
The Company recorded a net income tax benefit in 1996 of $817,000 consisting of
a current provision for federal alternative minimum taxes of $46,000 and a
benefit of $863,000 related to the reduction of the valuation allowance
established in prior years. At August 31, 1995, the full valuation allowance was
provided on net deferred tax assets of $3,543,000 based upon the Company's
history of losses over several years and the uncertainty surrounding the
Company's ability to recognize such assets. During the year ended August 31,
1996, management reevaluated its historical losses, which no longer resulted in
a net cumulative loss position over the current and preceding two years, and its
projected future earnings, and reached the conclusion that it was more likely
than not that some portion of the deferred tax asset would be realized. In light
of the continuing presence of certain of the underlying uncertainties that
originally gave rise to the valuation allowance, management estimated the
portion that was more likely than not expected to be recognized amounted to the
benefit that would be realized on one year's projected net income, or $863,000.
The remaining valuation allowance at August 31,
-12-
<PAGE> 15
1996 amounts to $2,152,000 related to net operating loss carryforwards, certain
general business credits, depreciation and allowances for bad debts.
INFLATION
Over the past three years, inflation has not had a material effect on the
Company's operations and is not anticipated to have an effect in the near
future. A portion of the increase in the average dollar value of wire orders
reported to the Company represents a response by florists to general price level
increases.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Selected income statement data:
Net revenues $ 10,299 $ 8,449 $ 7,567 $ 7,164 $ 7,041
=============================================================
Net income (loss) $ 2,262 $ 707 $ (311) $ (401) $(2,317)
=============================================================
Primary earnings (loss) per share
$ 0.36 $ 0.12 $ (0.06) $ (0.08) $ (0.45)
=============================================================
Full diluted earnings (loss)
per share $ 0.35 $ 0.12 $ (0.06) $ (0.08) $ (0.45)
=============================================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Selected balance sheet data:
Current assets $ 5,686 $ 3,733 $ 2,847 $ 2,610 $ 3,128
Current liabilities 5,198 5,131 5,259 4,270 4,982
Working capital (deficiency) 488 (1,398) (2,412) (1,660) (1,854)
Total assets 8,822 6,468 5,946 5,257 6,253
Long-term debt, less
current maturities 334 3,034 3,142 3,007 3,026
Stockholders' equity
(deficiency) 3,237 (1,756) (2,215) (2,209) (1,843)
</TABLE>
-13-
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS
-14-
<PAGE> 17
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Florafax International, Inc.
We have audited the accompanying consolidated balance sheets of Florafax
International, Inc. as of August 31, 1996 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity (deficiency), and cash
flows for each of the three years in the period ended August 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Florafax International, Inc. at August 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1996, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young, LLP
Miami, Florida
October 7, 1996
-15-
<PAGE> 18
Florafax International, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
August 31
1996 1995
------------------------
(In Thousands, Except Share
Amounts)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $3,671 $1,972
Restricted cash 99 66
Restricted investment -- 500
Accounts receivable:
Members, less allowances of $532 at
August 31, 1996 and $706 at August 31, 1995 1,202 905
Charge card issuers 326 225
Other 73 34
------------------------
1,601 1,164
Deferred tax asset, net of allowance 261 --
Prepaid and other assets 54 31
------------------------
Total current assets 5,686 3,733
Property and equipment, at cost:
Fixtures and equipment 1,188 1,347
Computer systems 670 1,114
Communication systems 929 1,516
Leasehold improvements 25 311
------------------------
2,812 4,288
Accumulated depreciation and amortization 2,534 3,919
------------------------
278 369
Other assets:
Excess of cost over net assets of acquired
business 1,995 1,995
Deferred tax asset, net of allowance 602 --
Other 261 371
------------------------
2,858 2,366
------------------------
Total assets $8,822 $6,468
========================
</TABLE>
See accompanying notes.
-16-
<PAGE> 19
Florafax International, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
August 31
-----------------------------
1996 1995
(In Thousands, Except Share
Amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long-term debt $ 79 $ 466
Accounts payable 3,913 3,535
Accrued liabilities:
Member benefits 170 150
Other 1,036 980
-------------------------------
Total current liabilities 5,198 5,131
Long-term debt, less current maturities:
9-1/2% convertible subordinated notes -- 2,567
Other 334 467
-------------------------------
334 3,034
Membership security deposits 53 59
-------------------------------
Total liabilities 5,585 8,224
Stockholders' equity (deficiency):
Preferred stock ($10 par value, 600,000 shares
authorized at August 31, 1996 and 1995,
respectively, none issued) -- --
Common stock ($.01 par value, 18,000,000
shares authorized, 8,232,727 and 5,793,874 issued at August 31, 1996 and
1995, respectively, 8,209,727 and 5,770,874 outstanding at August 31,
1996 and 1995, respectively) 83 58
Additional paid-in capital 10,087 7,381
Accumulated deficit (6,933) (9,195)
Treasury stock, at cost (23,000 shares) -- --
-------------------------------
Total stockholders' equity (deficiency) 3,237 (1,756)
-------------------------------
Total liabilities and stockholders' equity (deficiency) $8,822 $6,468
===============================
</TABLE>
See accompanying notes.
-17-
<PAGE> 20
Florafax International, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
-------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Net revenues:
Member dues and fees $ 2,013 $1,953 $2,172
Floral order processing 5,503 3,670 2,179
Directory and advertising fees 1,278 1,273 1,470
Charge card processing 1,459 1,519 1,670
Other revenue 46 34 76
------------------------------------------
10,299 8,449 7,567
Expenses:
Member support, general and
administrative 5,123 4,553 4,726
Selling, advertising and promotion 2,629 1,912 1,585
Provision for doubtful accounts 210 173 413
Directory publishing 382 369 396
Depreciation, amortization and
retirements 393 490 427
------------------------------------------
8,737 7,497 7,547
------------------------------------------
Operating income 1,562 952 20
Other income (expense):
Interest expense (361) (309) (315)
Interest income 115 60 -
Other 1 4 36
Litigation costs and settlements - - (52)
------------------------------------------
(245) (245) (331)
------------------------------------------
Income (loss) before income taxes and 1,317 707 (311)
extraordinary item
Income taxes:
Current income tax expense (46) - -
Deferred income tax benefit 863 - -
------------------------------------------
817
Income (loss) before extraordinary item 2,134 707 (311)
Extraordinary item:
Extraordinary gain from forgiveness
of debt 128 - -
------------------------------------------
Net income (loss) $ 2,262 $ 707 $ (311)
==========================================
See accompanying notes.
</TABLE>
-18-
<PAGE> 21
Florafax International, Inc.
Consolidated Statements of Operations (continued)
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
-------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Weighted average common and common equivalent
shares outstanding:
Primary 6,279 5,777 5,532
Fully diluted 6,375 5,872 5,532
Primary earnings (loss) per share:
Income (loss) before extraordinary item
$ 0.34 $ 0.12 $ (0.06)
Extraordinary gain from forgiveness
of debt 0.02 0.00 0.00
-------------------------------------------
Net income (loss) $ 0.36 $ 0.12 $(0.06)
===========================================
Full diluted earnings (loss) per share:
Income (loss) before extraordinary item
$ 0.33 $ 0.12 $(0.06)
Extraordinary gain from forgiveness
of debt 0.02 0.00 0.00
-------------------------------------------
Net income (loss) $ 0.35 $ 0.12 $(0.06)
===========================================
</TABLE>
See accompanying notes.
-19-
<PAGE> 22
Florafax International, Inc.
Consolidated Statements of Changes in
Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Number of Additional
Shares Par Paid-In Accumulated
Outstanding Value Capital Deficit Total
(In Thousands)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1993 5,499 $55 $7,327 $(9,591) $(2,209)
Issuance of common
stock 50 1 4 - 5
Relinquishment of common
stock by a shareholder (23) - - - -
Net loss - - - (311) (311)
---------------------------------------------------------------------
Balance at August 31, 1994 5,526 56 7,331 (9,902) (2,515)
Issuance of common
stock 245 2 50 - 52
Net income - - - 707 707
---------------------------------------------------------------------
Balance at August 31, 1995 5,771 58 7,381 (9,195) (1,756)
Issuance of common
stock 368 4 41 - 45
Issuance of warrants - - 97 - 97
Conversion of debt 2,071 21 2,568 - 2,589
Net income - - - 2,262 2,262
---------------------------------------------------------------------
Balance at August 31, 1996 8,210 $83 $10,087 $(6,933) $ 3,237
=====================================================================
</TABLE>
See accompanying notes.
-20-
<PAGE> 23
Florafax International, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $2,262 $ 707 $ (311)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Extraordinary gain from forgiveness
of debt (128) - -
Deferred income tax benefit (863) - -
Depreciation and amortization 391 490 423
Equipment retirements - - 4
Provision for doubtful accounts 210 173 413
Noncash compensation expense - 62 -
Amortization of discount on debt 97 - -
Accrued interest converted in connection with
debt conversion 89 - -
Changes in operating assets
and liabilities:
Accounts receivable (647) 8 (79)
Inventories - - 65
Prepaid and other assets (23) (1) 73
Other assets - - (87)
Accounts payable 378 821 (4)
Accrued liabilities 76 147 227
Unearned directory income - - (125)
Membership security deposits (6) (1) (4)
--------------------------------------
Net cash provided by operating activities 1,836 2,406 595
INVESTING ACTIVITIES
Capital expenditures (190) (136) (394)
Acquisition of certain assets - - (100)
Decrease (increase) in restricted cash (33) 464 (451)
Sale (purchase) of restricted investment 500 (500) -
--------------------------------------
Net cash provided by (used in) investing activities 277 (172) (945)
</TABLE>
-21-
<PAGE> 24
Florafax International, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
-------------------------------------
(In Thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt
and warrants $2,500 $ 356 $200
Proceeds from issuing stock options
and warrants 45 - 5
Increase (reduction) in bank overdraft - (1,065) 671
Payments of long-term debt (2,959) (111) (75)
-------------------------------------
Net cash (used in) provided by
financing activities (414) (820) 801
-------------------------------------
Net increase in cash and cash equivalents 1,699 1,414 451
Cash and cash equivalents at beginning
of year 1,972 558 107
-------------------------------------
Cash and cash equivalents at end of year $3,671 $1,972 $558
=====================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 317 $ 310 $309
=====================================
Supplemental financing noncash transaction:
Conversion of long-term debt plus related
accrued interest of $89 to common stock $2,589 $ - $ -
=====================================
</TABLE>
See accompanying notes.
-22-
<PAGE> 25
Florafax International, Inc.
Notes to Consolidated Financial Statements
August 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of Florafax
International, Inc. and its wholly owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
(b) Cash and Cash Equivalents
The Company considers as cash equivalents all highly liquid overnight investing
accounts at banking institutions plus other interest bearing deposits having
original maturities of less than three months.
(c) Restricted Cash and Investment
Restricted cash at August 31, 1996 and 1995 pertains to the Company's credit
card processor agreement with the Company's credit card sponsoring bank totaling
$99,000 and $31,000, respectively. Additionally, at August 31, 1995, restricted
cash related to the Company's overdraft facility totaled $35,000.
At August 31, 1995, the restricted investment consisted of a $500,000 par value
FNMA discount note which was held by a bank as collateral pursuant to an
overdraft facility that expired on September 30, 1995. On August 31, 1995, the
carrying value approximated the market value of the note. The FNMA discount note
matured and was redeemed on September 8, 1995.
(d) Floral Orders
The flowers-by-wire service comprises the Company's primary business. The
Company generates and distributes floral orders for its members and produces
membership directories which are distributed to the members.
-23-
<PAGE> 26
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Floral order processing net revenues are generally recorded upon receipt of a
reporting document prepared by the florist who delivers the order to the
ultimate recipient. In most instances the florist delivers the order prior to
notifying the Company of the delivery. Net revenues represent gross amounts of
floral orders and related fees charged by the florist who takes the order, less
amounts due to the florist who ultimately fills the order. For floral orders
taken directly from customers by the Company's order entry department, net
revenues and related costs are recorded upon receipt of the order from the
customer.
(e) Member Dues and Directory Advertising
Member dues, fees and advertising are billed monthly and recognized as income at
that time. Billings for directories occur twice per year, while the actual
directories are produced and distributed several times per year. Directory
revenues are recognized as the directories are distributed.
(f) Recognition of Service and Collection Fees
The service and collection fees and interest income relating to accounts that
have been canceled are not recognized as income until collected since collection
is not certain.
(g) Concentration of Credit Risk
The Company's accounts receivables are concentrated in the floral wire service
industry. Credit risk is inherent in the floral wire service industry.
Consequently, to reduce this risk the Company reviews new member applications
for credit worthiness. If a florist applying for membership does not meet
certain credit standards the florists application for membership is usually
declined. Once a florist has been accepted as a member, the account is monitored
by accounts receivable analysts who maintain continuous direct contact with the
florist. If the account becomes delinquent, the florist is turned over to a
collection agency to begin immediate collection procedures.
-24-
<PAGE> 27
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Property and Equipment Depreciation
The provisions for depreciation and amortization are computed using the
straight-line method for financial reporting purposes with the following
estimated useful lives:
<TABLE>
<CAPTION>
Description Estimated Useful Lives
----------------------------------------------------------------
<S> <C>
Fixtures and equipment 2 to 10 years
Computer systems 3 to 10 years
Communication systems 2 to 5 years
Leasehold improvements 3 to 13 years
</TABLE>
(i) Amortization of Excess of Cost Over Net Assets (Goodwill)
Goodwill of $1,995,000 arose prior to October 31, 1970 and, therefore, is not
required to be amortized.
At August 31, 1996 and 1995, the Company, in accordance with its policy, has
analyzed the carrying value of its goodwill using an undiscounted cash flow
approach, using expected future cash flows from operations. After reviewing the
results and considering other qualitative factors, management is of the opinion
that goodwill has not been impaired.
(j) Income Taxes
The Company accounts for income taxes using Financial Accounting Standard Board
(FASB) Statement No. 109, Accounting for Income Taxes. FASB Statement No. 109
requires the asset and liability method of accounting for income taxes. Under
the asset and liability method of FASB Statement No. 109 deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under FASB Statement No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recorded in income in the period that
includes the enactment date.
-25-
<PAGE> 28
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(k) Weighted Average Number of Shares Outstanding
The weighted average number of shares outstanding is adjusted to recognize the
dilutive effect, if any, of outstanding stock options and warrants and the
weighted average conversion rights of convertible debt.
(l) Reclassification of prior year balances
In previous years, certain marketing expenses related to Flower Club revenues
were recorded as a reduction of floral and other order processing revenues. The
Company has reviewed the manner in which these expenses were reported and
believes that a more appropriate and meaningful practice is to report these
expenses in the selling, advertising and promotion line item in the consolidated
statements of operations. The amount of these expenses were $1,901,000 in 1996,
$1,403,000 in 1995 and $474,000 in 1994.
In addition, the balance sheet as of August 31, 1995 includes a reclassification
in the amount of $384,000 for accounts payable to members which will be settled
as a reduction of accounts receivable from these members.
(m) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(n) Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement 121, Accounting for the Impairment of
Long-Lived Assets and Assets to be Disposed Of, which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets carrying amount. Statement 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement 121 in the first quarter of fiscal year end
August 31, 1997 and, based on current circumstances, does not believe the effect
of adoption will be material.
-26-
<PAGE> 29
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1995, the FASB issued Statement 123, Accounting for Stock-Based
compensation, which provides an alternative to APB 25, Accounting for Stock
Issued to Employees, in accounting for stock-based compensation issued to
employees. This Statement allows for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for companies
that continue to account for stock-based compensation arrangements under Opinion
25, Statement 123 requires disclosure of the pro forma effect on net income and
earnings per share of its fair value based accounting for those arrangements.
These disclosure requirements are effective for fiscal years beginning after
December 15, 1995, or upon initial adoption of the statement, if earlier. The
Company continues to evaluate the provisions of Statement 123 and has not
determined whether it will adopt the recognition and measurement provisions of
that Statement, which the Company expects would result in increased compensation
expense in future periods.
2. CONVERTIBLE SUBORDINATED AND OTHER DEBT
In July 1986, the Company issued $4,000,000 in 9-1/2% convertible subordinated
notes (the "9-1/2% Notes") with an original maturity date of June 30, 1996.
Interest on the 9-1/2% Notes was payable semiannually on June 30 and December
31. When issued, the notes were convertible into 888,888 shares of common stock
at a conversion price of $4.50 per share. The 9-1/2% Notes were convertible at
any time prior to maturity and were callable by the Company.
Under a restructuring agreement in December 1988, the Company exchanged $1
million of the 9-1/2% Notes for 627,451 shares of its common stock at an
exchange price of $1.59 per share, which represented the average of the bid and
asked prices of such common stock on November 1, 1988. The conversion price of
the remaining 9-1/2% Notes outstanding was then reduced to $3.00 per share.
Also, the Company agreed to redeem $1 million of the remaining 9-1/2% Notes from
50% of its net income beginning in 1989 and annually thereafter, until the $1
million is fully redeemed.
On November 30, 1995, the Company restructured the outstanding $2,921,000
balance of the 9-1/2% Notes such that they would mature on September 15, 1996,
except for $354,000 which matured on December 31, 1995.
-27-
<PAGE> 30
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
2. CONVERTIBLE SUBORDINATED AND OTHER DEBT (CONTINUED)
On February 28, 1996, the Company issued a $2,500,000 secured convertible
promissory note bearing interest at seven percent per annum with a maturity date
of February 28, 1997 (the "7% Note"). The 7% Note was convertible into common
stock of the Company at a rate of $1.25 per share on certain terms and
conditions contained in the 7% Note.
The proceeds from the 7% Note were used to repay the 9-1/2% Notes due to mature
September 15, 1996. In connection with the repayment of the 9-1/2% Notes the
Company negotiated a discount of $128,000 which is reported as an extraordinary
item in the consolidated statement of operations.
In conjunction with the issuance of the 7% Note, the Company issued warrants to
purchase 650,000 shares of common stock of the Company with an exercise price of
$1.00 per share, on terms and conditions contained in the warrants as well as
certain registration rights for resale of the shares of common stock issuable
upon exercise of the warrants. The warrants expire January 1, 2001. Proceeds
attributable to the warrants, using an estimated fair value of $97,000, were
recorded as a discount to the 7% Note with a credit to paid in capital. The
discount was being amortized over the life of the 7% Note using the effective
method.
On August 30, 1996, the 7% Note plus accrued interest was converted to 2,071,166
common shares of the Company. As a condition to the 7% Note conversion, certain
Board members and other shareholders purchased all but 71,166 of the shares
issued. As a result of the 7% Note conversion the unamortized balance of the 7%
Note discount was charged to interest expense.
At August 31, 1996, other long-term debt includes:
A note payable to Citrus Bank in the amount of $333,000, with principal and
interest payments due monthly bearing interest at ten percent maturing August
30, 2000, and guaranteed by the Chairman of the Board of Directors. On September
16, 1996, the Company repaid the note although classification in the
accompanying financial statements remains long-term in accordance with the
original terms. At August 31, 1996, long-term debt also includes a 5%
subordinated debenture in the amount of $80,000 maturing in 1998 with interest
payable annually on December 31.
-28-
<PAGE> 31
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
2. CONVERTIBLE SUBORDINATED AND OTHER DEBT (CONTINUED)
At August 31, 1995, other long-term debt includes:
A 5% subordinated debenture in the amount of $80,000, maturing in 1998 with
interest payable annually on December 31, a note payable to Andrew W. Williams,
Chairman of the Board, in the amount of $68,000, with principal and interest
payments due monthly, bearing interest at 8-1/2%, maturing December, 1999, and
three promissory notes due to Citrus Bank of Vero Beach, Florida aggregating
$103,000, bearing interest ranging from prime plus one to prime plus two percent
(9.75% to 10.75% at August 31, 1995), guaranteed by the Chairman of the Board.
Principal and interest payments on the Citrus Bank notes are due monthly and
vary depending on the interest rate, with the final payment due November 9,
1998.
A note payable to Citrus Bank in the amount of $216,000, with principal and
interest payments due monthly, bearing interest at prime plus one percent (9.75%
at August 31, 1995), maturing November 2000, guaranteed by the Chairman of the
Board.
At August 31, 1995, the Company had available a $575,000 line of credit with PNC
Bank. This line matured on September 15, 1995 and was collateralized by
investments and cash totaling $535,000. The line of credit was terminated during
1996.
3. LEASES
Obligations of the Company for annual payments under various operating leases
for buildings and equipment are as follows:
<TABLE>
<CAPTION>
Minimum
Lease
Payments
--------
<S> <C>
1997 $204,000
1998 83,000
1999 67,000
2000 26,000
--------
$380,000
========
</TABLE>
-29-
<PAGE> 32
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
3. LEASES (CONTINUED)
Total rental expense for years 1996, 1995, and 1994 was $245,000, $242,000, and
$367,000, respectively. Of these amounts, annual rentals for office facilities
for years 1996, 1995 and 1994 were $116,000, $123,000, and $185,000,
respectively. The Company's building lease for its Vero Beach location (annual
rental $33,000) is with a relative of the Chairman of the Board of Directors.
4. CONTINGENCIES
In October 1989, Bellerose Floral, Inc. (Bellerose) of Bayside, N.Y., an
affiliate of 800-FLOWERS, Inc., became a Florafax member florist, and Florafax
agreed to provide certain telecommunications services to Bellerose for a fee.
GTE/MR was engaged by Florafax to provide order-entry services to Florafax and
to customers of Florafax, including Bellerose.
In 1990, certain disputes arose among Florafax, Bellerose and GTE/MR regarding
the services to be performed by GTE/MR. As a result, in 1990 Florafax filed an
action in Tulsa County (Oklahoma) District Court against GTE/MR and Bellerose.
Bellerose then filed an action in New York Federal Court against Florafax.
Subsequently, Florafax and Bellerose settled their claims against each other.
Florafax pursued its claim against GTE/MR for damages suffered as a result of
GTE/MR's breach of the telecommunications service agreement. On November 23,
1993 a jury awarded Florafax $1,481,000 in net damages against GTE/MR.
GTE/MR appealed this case and posted bond with the Court in order to do so. On
December 22, 1994, this case was assigned to the Oklahoma Court of Appeals by
the Oklahoma Supreme Court. On April 4, 1995, the Court of Appeals of the State
of Oklahoma released for publication its decision on the appeal filed by GTE/MR.
The award to the Company of $743,117 for consequential damages was affirmed. To
the extent that the Company was awarded lost profits for two years in the amount
of $750,000, the judgment was reversed and remanded for a determination of lost
profits as limited by Oklahoma law. The award to GTE/MR of a set-off amount of
$88,750 for unpaid invoices was affirmed, a contractual rate of 18% per annum
applied for pre-judgment interest was applied and the case remanded for a
determination of an award of GTE's reasonable attorney's fees, expenses and
other collection costs incurred in
-30-
<PAGE> 33
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
4. CONTINGENCIES (CONTINUED)
recovering the unpaid invoice amounts, but not their fees or expenses in
defending against the claims of the Company or in pursuing other unsuccessful
aspects of GTE/MR's counterclaim. The denial of the Company's request for
attorney's fees was affirmed. The Company and GTE/MR have each petitioned the
Oklahoma Supreme Court for writ of certiorari to review the portions of the
Oklahoma Court of Appeals decision adverse to their respective interests, and
both of the parties appeals have been granted. There are no assurances that the
Company will obtain a favorable ruling from the Oklahoma Supreme Court.
The Company's legal counsel has tried this case on a contingency fee basis and,
accordingly, the Company has incurred minimal attorneys fees related to this
litigation. However, the agreement between the Company and its legal counsel
stipulates that the Company's attorneys are to receive 40% of the net proceeds
from the case. Consequently, the Company is to receive 60% of the ultimate
proceeds, less certain expenses. Recognition of any of these amounts will not be
reflected in the financial statements until ultimate resolution.
5. STOCKHOLDERS' EQUITY
The Company has authorized a total of 600,000 shares of preferred stock with a
par value of ten dollars. At August 31, 1996 and August 31, 1995, there were no
shares of preferred stock issued.
The Company had an incentive stock option plan (the "Plan") under which both
qualified and nonqualified options were granted to key management personnel and
to members of the Board of Directors. There had been no activity in connection
with the Plan for the fiscal years ended August 31, 1995 and 1994 and for the
five months ended January 30, 1996. On January 30, 1996, the plan was
terminated.
In November 1994, the Company granted options to purchase 300,000 shares of
common stock at its fair market value on the date of grant ($0.20 per share) to
certain officers and directors. As of August 31, 1996, all of these options had
been exercised.
In February 1995, the Company granted options to purchase 100,000 shares of
common stock at its fair market value on the date of grant ($0.25 per share) to
certain marketing consultants of the Company. As of August 31, 1996, all of
these options had been exercised.
-31-
<PAGE> 34
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
On October 26, 1995, the Board of Directors adopted a Nonemployee Directors'
Stock Option Plan ("Director Plan"), subject to shareholder approval. On January
30, 1996, the shareholders of the Company approved the Director Plan. Under the
terms of the Director Plan each nonemployee director shall be granted an option
to purchase 20,000 shares at fair market value as of the date the Director is
elected as a Board member. After the initial grant to the directors, each
director shall be granted additional options to purchase 20,000 shares upon each
respective reelection to the Board of Directors. At August 31, 1996, 500,000
shares of the Company's common stock were authorized under the Director Plan,
options covering 100,000 shares have been granted which expire on January 29,
2006. As of August 31, 1996, none of the options have been exercised.
On October 26, 1995, the Board of Directors adopted a Management Incentive Stock
Plan ("Management Plan"), subject to shareholder approval. On January 30, 1996,
the shareholders of the Company approved the Management Plan. Under the terms of
the Management Plan, the Board of Directors, at their discretion, may grant
options to purchase common shares of the Company to various employees of the
Company. The maximum number of options which may be granted under the Management
Plan is 500,000. At August 31, 1996, options covering 121,000 shares have been
granted which expire on January 29, 2006. As of August 31, 1996, none of the
options have been exercised.
Options granted to employees under the Management Plan vest 25% upon issuance
with additional vesting of 25% after each year of continuous employment.
At August 31, 1996, options exercisable under the Management Plan totaled
30,250.
-32-
<PAGE> 35
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding stock options for years 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
Exercise
Number Price Total
of Range Per Exercise
Shares Share Price
------------------------------------------------
<S> <C> <C> <C>
Shares under option at August 31,
1996 221,000 $1.41 to $1.56 $ 327,000
1995 400,000 $.20 to $.25 85,000
1994 - - -
Options granted during year ended
August 31,
1996 221,000 $1.41 to $1.56 327,000
1995 400,000 $.20 to $.25 85,000
1994 - - -
Options exercised during year
ended August 31,
1996 400,000 $.20 to $.25 85,000
1995 - - -
1994 50,000 $0.10 5,000
Options expired or canceled
during year ended August 31,
1996 - - -
1995 - - -
1994 65,000 $1.60 104,000
Options exercisable at August 31, 1996 130,250
Shares reserved at August 31, 1996 for:
Director stock option plan 500,000
Management stock option plan 500,000
---------
1,000,000
=========
</TABLE>
-33-
<PAGE> 36
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
During 1995, the Company granted a total of 245,000 shares of common stock to
certain employees and marketing consultants of the Company. These grants were
charged to expense based on the market price of the Company's stock on the date
of the grant.
During fiscal 1994, the Company's Chairman relinquished to the Company at
nominal cost 23,000 shares of common stock which are held in treasury.
6. INCOME TAXES
The Company recorded a net income tax benefit in 1996 of $817,000 consisting of
a current provision for Federal alternative minimum taxes of $46,000 and a
benefit of $863,000 related to the reduction of the valuation allowance
established in prior years. At August 31, 1995, the full valuation allowance was
provided on net deferred tax assets of $3,543,000 based upon the Company's
history of losses over several years and the uncertainty surrounding the
Company's ability to recognize such assets. During the year ended August 31,
1996, management reevaluated its historical losses, which no longer resulted in
a net cumulative loss position over the current and preceding two years, and its
projected future earnings and reached the conclusion that it was more likely
than not that some portion of the deferred tax asset would be realized. In light
of the continuing presence of some of the underlying uncertainties that
originally gave rise to the valuation allowance, management estimated that it is
more likely than not that it would realize a benefit of $863,000, based on the
upcoming year's projected income. The remaining valuation allowance at August
31, 1996 amounts to $2,152,000 related to net operating loss carryforwards,
certain general business credits, depreciation and allowances for bad debts.
Significant components of the Company's net deferred tax assets as of August 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------
<S> <C> <C>
Allowances for bad debts $ 184 $ 256
Accrued liabilities and other 87 95
Depreciation and amortization 217 213
Net operating losses 2,123 2,591
General business credits 404 388
----------------------------------
3,015 3,543
Valuation allowance (2,152) (3,543)
==================================
$ 863 $ -
==================================
</TABLE>
-34-
<PAGE> 37
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Accounts receivable and accounts payable: The carrying amounts reported in the
balance sheet for accounts receivable and accounts payable approximate their
fair value.
Long-term debt: The fair values of the Company's long-term debt are estimated
using discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The carrying
amounts reported in the balance sheet for long-term debt approximate their fair
value.
8. ACQUISITIONS
On March 10, 1994, the Company purchased from Andy Williams, Chairman of the
Board, certain assets, primarily trademarks and rights to telephone numbers, of
Savannah Floral Services, Inc. ("Savannah"). Subsequent to the purchase of these
assets they were transferred to The Flower Club, Inc. ("Flower Club"), a
subsidiary of the Company. The acquisition cost consisted of a $105,000 note
payable to Mr. Williams and the satisfaction of $193,000 of accounts receivable
from Savannah. In addition, the former owner of Savannah has executed a
consulting and noncompete agreement with Florafax.
9. BUSINESS SEGMENTS
The Company operates in two business segments: Flowers-by-wire services and
charge card processing for member florists and charge care processing for
customers not involved in the floral industry. Net revenues, operating income
before and after allocating general and administrative expenses, identifiable
assets, depreciation expense and capital expenditures for the two segments are
provided for below:
-35-
<PAGE> 38
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
9. BUSINESS SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
------------------------------------
Business Segments (In Thousands)
<S> <C> <C> <C>
Net revenues:
Flowers-by-wire $ 9,041 $7,196 $ 6,335
Charge card processing 1,258 1,253 1,232
------------------------------------
$10,299 $8,449 $ 7,567
====================================
Operating profit before allocation of
general and administrative expenses:
Flowers-by-wire $ 5,587 $4,472 $ 3,792
Charge card processing 1,200 1,135 994
------------------------------------
$ 6,787 $5,607 $ 4,786
====================================
Operating profit (loss) after allocation of
general and administrative expenses:
Flowers-by-wire $ 2,176 $1,508 $ 762
Charge card processing 233 90 (365)
------------------------------------
$ 2,409 $1,598 $ 397
====================================
Identifiable assets:
Flowers-by-wire $ 3,737 $3,910 $ 4,144
Charge card processing 325 227 301
------------------------------------
$ 4,062 $4,137 $ 4,445
====================================
Depreciation expense:
Flowers-by-wire $ 272 $ 333 $ 296
Charge card processing 19 55 91
------------------------------------
$ 291 $ 388 $ 387
====================================
Capital expenditures:
Flowers-by-wire $ 162 $ 93 $ 363
Charge card processing 28 43 25
------------------------------------
$ 190 $ 136 $ 388
====================================
</TABLE>
10. FOURTH QUARTER ADJUSTMENTS
As more fully discussed in Note 6, the Company reduced its valuation allowance
against deferred tax assets resulting in a deferred tax benefit of $863,000.
This adjustment was recorded in the fourth quarter of the current fiscal year
when all of the information upon which to make the estimate became available to
management of the Company.
-36-
<PAGE> 39
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
-37-
<PAGE> 40
PART III
ITEMS 9, 10, 11, AND 12 ARE INCORPORATED BY REFERENCE TO THE COMPANY'S
DEFINITIVE PROXY STATEMENT, PURSUANT TO REGULATION 14A, WHICH WILL INVOLVE THE
ELECTION OF DIRECTORS. HOWEVER, IF SUCH DEFINITIVE PROXY STATEMENT IS NOT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS FOLLOWING AUGUST 31,
1996, SUCH ITEMS WILL BE FILED AS AN AMENDMENT TO THIS FORM 10-KSB UNDER A COVER
OF A FORM 8 NOT LATER THAN THE END OF THE 120-DAY PERIOD.
-38-
<PAGE> 41
Item 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
<S> <C>
(a) 1. Financial Statements
Included in Part II of this report:
Report of Independent Certified Public Accountants 15
Consolidated Balance Sheets at August 31, 1996 and 1995 16
Consolidated Statements of Operations for the years
ended August 31, 1996, 1995 and 1994 18
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) for the years ended August 31, 1996, 1995 and 1994 20
Consolidated Statements of Cash Flows for the years
ended August 31, 1996, 1995 and 1994 21
Notes to Consolidated Financial Statements 23
</TABLE>
3. Exhibits
Exhibit Reference
The following items pertain to this report and, accordingly, are filed herewith
(11) Computation of per share earnings
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule (For SEC use only)
-39-
<PAGE> 42
The following items have been included as exhibits in filings by the Company in
a previous filing and, accordingly, are incorporated hereby reference.
Exhibit Reference
(3) Articles of incorporation and Bylaws of the Registrant, as amended.
(10) Material Contracts
(a) Convertible subordinated notes due to Clark Estates maturing
June 30, 1996.
(b) Subordinated debentures maturing in 1998.
(c) Agreement dated December 3, 1993, Addendum, Second Addendum,
Third Addendum, Fourth Addendum and Fifth Addendum thereto
by and between the Registrant and Citizens Fidelity Bank and
Trust Company (now PNC Bank, Kentucky, Inc.).
(d) Purchase Agreement for certain assets formerly owned by
Savannah Floral Services, Inc. dated March 10, 1994.
(e) Note Payable to Andrew Williams dated March 10, 1994.
(f) Promissory Note to Citrus Bank dated November 9, 1993.
(g) Promissory Note to Citrus Bank dated November 17, 1993.
(h) Promissory Note to Citrus Bank dated January 25, 1994.
(i) Loan to James H. West, Director, President and Chief
Financial Officer, dated August 28, 1994
(j) Consulting agreement with David Harper of Ventura County
California dated December 10, 1993
(k) Promissory Note to Citrus Bank dated August 31, 1995.
(l) Operating lease agreement between Registrant and Alvin
Wunderlich dated April 1995.
(m) Agreement of Purchase and Sale made and entered into to be
effective December 29, 1995 by and between Registrant
and St. James Partners, LTD.
-40-
<PAGE> 43
(10) Material Contracts (continued)
(n) Convertible Promissory Note in the amount of $2,500,000 dated
February 28, 1996 due February 28, 1997.
(o) Security agreement dated February 28, 1996 executed in
connection with the $2,500,000 Convertible Promissory Note.
(p) Common Stock Purchase Warrants for 250,000 shares of the
registrants common stock expiring January 1, 2001.
(q) Common Stock Purchase Warrants for 400,000 shares of the
registrants common stock expiring January 1, 2001.
(22) Subsidiaries of the Registrant
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of fiscal 1996.
-41-
<PAGE> 1
Exhibit 11: Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Year ended August 31
1996 1995 1994
------------------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
Primary
Average shares outstanding 5,988 5,701 5,532
Net effect of dilutive stock options and
warrants based on the treasury stock
method using average market price 291 76 -
------------------------------------------
Total 6,279 5,777 55,532
==========================================
Net income (loss) $2,262 $ 707 $ (311)
==========================================
Per share amount $ 0.36 $ 0.12 $(0.06)
==========================================
Fully diluted
Average shares outstanding 5,988 5,701 5,532
Net effect of dilutive stock options and
warrants-based on the treasury stock
method using the year-end market price
387 171 -
------------------------------------------
Total 6,375 5,872 5,532
==========================================
Per share amount $ 0.35 $ 0.12 $(0.06)
==========================================
</TABLE>
-42-
<PAGE> 1
EXHIBIT 23
Consent of Independent Certified Public Accountants
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 333-10067), (Form S-8 No. 333-07271) and (Form S-8 No. 333-07267)
of Florafax International, Inc. and in the related prospectuses of our report
dated October 7, 1996, with respect to the consolidated financial statements of
Florafax International, Inc. included in this Annual Report (Form 10-KSB) for
the year ended August 31, 1996.
/s/ Ernst & Young LLP
Miami, Florida
November 8, 1996
-43-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,770,000
<SECURITIES> 0
<RECEIVABLES> 2,133,000
<ALLOWANCES> 532,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,686,000
<PP&E> 2,812,000
<DEPRECIATION> 2,534,000
<TOTAL-ASSETS> 8,822,000
<CURRENT-LIABILITIES> 5,198,000
<BONDS> 334,000
0
0
<COMMON> 83,000
<OTHER-SE> 3,154,000
<TOTAL-LIABILITY-AND-EQUITY> 8,822,000
<SALES> 0
<TOTAL-REVENUES> 10,299,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,737,000
<LOSS-PROVISION> 210,000
<INTEREST-EXPENSE> 361,000
<INCOME-PRETAX> 1,317,000
<INCOME-TAX> (817,000)
<INCOME-CONTINUING> 2,134,000
<DISCONTINUED> 0
<EXTRAORDINARY> 128,000
<CHANGES> 0
<NET-INCOME> 2,262,000
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.35
</TABLE>
