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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, 1998
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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 $ 13,391,000.
On October 7, 1998, 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 $13,416,000, based upon the assumption that only officers,
directors and 10% shareholders are affiliates.
As of October 7, 1998, 7,929,223 common shares were outstanding.
Documents Incorporated by Reference
Portions of the Company's definitive proxy statement relating to the 1998 annual
meeting of shareholders are incorporated by reference into Part III of this form
10-KSB.
Transitional Small Business Disclosure Format (Check One): Yes ; No X
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Florafax International, Inc.
Index
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Reference Page
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....................................5
PART II
Item 5 Market for Common Equity and Related Stockholder Matters...............................6
Item 6 Management's Discussion and Analysis of Financial Condition and
Plan of Operation and Selected Financial Data..........................................7
Item 7 Financial Statements:
Report of Independent Certified Public Accountants....................................15
Consolidated Balance Sheets...........................................................16
Consolidated Statements of Income.....................................................18
Consolidated Statements of Changes in Stockholders Equity.............................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...................................................39
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.....................................40
Item 10 Executive Compensation................................................................42
Item 11 Security Ownership of Certain Beneficial Owners and Management........................45
Item 12 Certain Relationships and Related Transactions........................................48
Items 13 Exhibits and Reports on Form 8-K......................................................50
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Florafax International, Inc. is principally engaged in the flowers-by-wire
business of generating floral orders and providing floral order placement
services to retail florists throughout the United States. The Company is also
engaged in the business of credit and charge card processing for third parties.
As used herein, the terms "Florafax" and "Company" mean Florafax International,
Inc. (the Registrant), its divisions and subsidiaries, unless the context
requires otherwise.
All forecasts and projections in this document are "forward looking statements"
as defined in the Private Securities Litigation Reform Act of 1995, and are
based on management's current expectations of the Company's near term results,
based on current information available and pertaining to the Company. Actual
results may differ materially from those projected in the forward-looking
statements.
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. Flowers-by-wire is the
Company's primary business segment, accounting for 91% of net revenues in 1998
and 90% in 1997.
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 member
florists receive a fair 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 fairly to
member florists.
Traditionally, floral orders originated with one florist and were then filled by
another florist. However, during the past several 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 allow The Flower Club to generate orders
by marketing directly to the customers of these companies. To order through the
Flower Club, the consumer dials a toll free number and places the order at one
of the Company's order entry locations. These orders are then transmitted to
member florists via the order allocation system.
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ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
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.
The Company's flowers-by-wire business is dependent upon an adequate base of
member florists. The Company recruits member florists principally through
advertisement and direct solicitation. 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 or
directly to Florafax order entry locations.
When a member florist places 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 occur until the
order is reported to the Company. Included in floral order processing are
revenues generated by The Flower Club. 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.
The flowers-by-wire business 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 to continue to generate a significant number of the Company's
orders through The Flower Club.
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ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
Historically, the corporate relationships involving The Flower Club have been
established and serviced by an independent marketing firm. However, the Company
believes that it can achieve greater growth by operating their own marketing
department. Accordingly, during 1998 the Company acquired the operations of the
independent marketing firm and now manages its own primary marketing functions
internally. For further discussion on this acquisition please refer to
Management's Discussion and Analysis or Plan of Operation contained in this
document.
During 1997, the Company developed and began marketing a new product called
Talking Bouquet. Talking Bouquets allow the sender of a flower arrangement to
record a personal voice greeting to be retrieved by the recipient of the flower
arrangement. In addition, the Company had formed a marketing alliance with a
firm in the gift basket industry. This alliance allows the Company to offer
products other than flowers to The Flower Club customers as well as member
florists. Gift baskets are distributed through member florists and also by
direct shipment to the consumer.
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 and non floral merchants 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 business, Florafax Delivery, Inc.,
which had been incorporated in Arkansas since 1961.
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.
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ITEM 1. DESCRIPTION OF BUSINESS (CONTINUED)
EMPLOYEES
As of August 31, 1998, the Company had approximately 194 employees of which 98
are full time. Virtually all of the Company's employees support the
flowers-by-wire business to some extent.
COMPETITION
The flowers-by-wire industry is principally comprised of five 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.
The direct marketing to consumers of flowers and gift baskets has become
intense. There are several other nationally recognized firms that compete with
the company for the consumer direct market. Several of these are larger than the
Company including firms such as Florists Transworld Delivery (FTD) and 800
Flowers.
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.
ITEM 2. DESCRIPTION OF PROPERTY
During 1998, the Company purchased an office building and land in Vero Beach,
Florida for $672,500 which had previously been leased by the Company. During
1997, the Company added an additional 8,000 square feet to the Vero Beach
facility at a cost of $480,000, bringing the total square footage of corporate
headquarters to approximately 16,000. The Company used working capital to
finance both of these transactions. The Company's administration, accounting,
finance, credit, marketing, and customer service departments all reside at the
Vero Beach facility. In addition, the new portion of the building houses a
modern order center capable of accommodating up to 150 telephone sales
representatives.
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ITEM 2. DESCRIPTION OF PROPERTY (CONTINUED)
The Company's Tulsa facilities are leased under a five year operating lease
agreement expiring September 1, 2002. The lease agreement requires monthly
payments of $3,338 plus utilities. The Tulsa facility maintains all computer
operations, programming and data management operations. In addition, the
facility is capable of accommodating up to 125 telephone sales representatives.
ITEM 3. LEGAL PROCEEDINGS
During 1997, the Company received a $1,041,000 court award related to a dispute
that arose in 1990 with GTE/Market Resources, Inc. There were no conditions
attached to the award and accordingly, the amount was included in other income
for the fiscal year ended August 31, 1997.
The Company is from time to time subject to pending claims and lawsuits arising
in the ordinary course of business. In the opinion of management, the ultimate
resolution of such claims and lawsuits will not have a materially adverse affect
on the Company's operations or consolidated financial position. There are no
material legal proceedings to which any director, officer or affiliate of the
Company, or any owner of record or beneficiary of more than 5% of the Company's
outstanding capital stock, is a party adverse to the Company or has a material
interest adverse to the Company.
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 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Florafax Common Stock started trading on the National Association of Securities
Dealers, Inc. (NASD) SmallCap Market, with a symbol of FIIF on May 30, 1997.
Prior to that date, the stock was traded in the "Over the Counter" or "Pink
Sheet" market. The number of registered shareholders of Common Stock at October
7, 1998 was 1,198 based on information furnished by the Company's transfer
agent. In addition, the Company believes that, at October 7, 1998, there were an
additional 500 to 1,000 holders of Common Stock who held in "street" or
"nominee" name, based on the prior year 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, 1998
and 1997, the high and low bid prices for the Florafax Common Stock as reported
by the NASD. The quotations for the first three quarters of 1997 are based on
the Over the Counter market quotations which reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not represent actual
transactions.
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BID PRICES
HIGH LOW
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1998:
First quarter $ 6-1/8 $ 3-1/4
Second quarter 6-3/8 5-1/16
Third quarter 6-1/4 5
Fourth quarter 6 4-5/16
1997:
First quarter $ 2-13/16 $ 1-15/16
Second quarter 3-7/16 2-3/8
Third quarter 3-3/8 2-7/16
Fourth quarter 4-1/8 3-1/8
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On October 7, 1998, the closing bid quotation of Florafax Common Stock as
reported by published financial sources was $4.75.
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 OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 1998, the Company has working capital surplus of $1,443,000.
Additionally, the Company's operating activities have contributed operating cash
of $2,596,000 and $3,091,000 during 1998 and 1997, respectively. During 1998,
the Company had three events which used the cash flows from operations, as
discussed below.
First, during 1998, the Company acquired substantially all the assets of
Marketing Projects, Inc. ("MPI"), a California corporation in a transaction
accounted for using the purchase method. The purchase price was $3,670,000,
including expenses, which was funded with a $2,500,000 borrowing from First
Union National Bank, under a $5,000,000 borrowing base agreement, and cash on
hand. The purchase resulted in the recording of $3,770,000 in goodwill, which is
being amortized over 20 years. In addition to the purchase price, the Company
may pay up to $125,000 in each of the subsequent eight fiscal quarters,
contingent upon the performance of the business acquired. For the quarter ended
August 31, 1998 the business acquired performed at a level sufficient to require
the Company to pay to MPI the first $125,000 installment of the contingent
payments which amount is included in the goodwill number above. In conjunction
with the MPI acquisition, the Company paid $100,000 for a two-year noncompete
agreement with the principal employees of MPI. The acquisition will allow the
Company to perform its primary marketing activities internally, and is expected
to improve operating margins in future years.
Second, capital expenditures for the purchase of the corporate offices and other
operational equipment (totaling $1,318,000) were paid for from operating cash.
Third, during the third quarter of 1997 the Company began repurchasing shares of
it's common stock under a Board approved plan that was announced in 1997. During
1998, the Company purchased $178,000 of it's stock under this plan. As of August
31, 1998, the Company has 519,975 shares of it's own common stock held as
treasury shares at a cost of $1,616,000.
During 1998, the Company entered into a credit agreement with First Union
National Bank, which provides for borrowings of up to $5,000,000, subject to
certain terms and conditions which the Company is in compliance with. The
facility bears interest at 8-1/2% and will remain in force until February 16,
2000. No principal payments are due until the end of the period at which time
any principal amounts outstanding will convert to a 36-month fully amortizing
loan based on level principal payments plus interest. In addition to the
business purchase noted above, the Company plans to use the facility from time
to time for operating activities and strategic business acquisitions as
considered necessary. Other events involving the Company's indebtedness are
discussed below.
First, during the first quarter of 1997 the Company retired $333,000 of
long-term debt bearing interest at 10%, thereby substantially reducing interest
expense in 1997. Management believes that this 10% interest rate was well in
excess of the short-term rates the Company would be able to obtain if it chose
to hold and invest this cash.
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Second, while the Company's loan agreement does not call for principal payments
until the year 2000, the Company made principal payments of $482,000 and
approximately $1,000,000 during the last quarter of 1998 and the first month of
1999, respectively. It is anticipated that the Company will fully retire this
note in 1999.
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 collecting and
settling funds, the timing of these cash flows has a significant impact on the
Company's liquidity.
During 1998 and 1997, 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 a significant portion of the money from these
orders within days after processing the transaction.
In 1998 and 1997 the Company incurred significant capital expenditures for
facilities and related equipment necessary to handle the growth of the Company.
While the Company is expected to incur additional capital expenditures in the
upcoming year, these expenditures are expected to be less than the 1998 and 1997
amounts.
RESULTS OF OPERATIONS
GENERAL COMMENTS
1998 revenues and operating income reached ten year record highs. 1998 revenues
are up over the prior year in every major category. 1997 revenues were also up
over the prior year in every major category.
NET REVENUES
Net revenues from member dues and fees during 1998 increased by 16% from 1997,
compared to a 19% increase from 1996 to 1997. During 1998, the Company continued
to experience an increase in its dues-paying floral members. Dues-paying members
at August 31, 1998 totaled approximately 5,200 compared to 4,850 at August 31,
1997, and 4,300 at August 31, 1996. 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 adding new members.
Floral order processing revenue has continued to grow, increasing by 17% from
1997 to 1998 and by 10% from 1996 to 1997. The increase is due primarily to
orders generated by
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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. In addition to the growth of
Flower Club revenues, during 1998 the Company also experienced an increase in
it's florist shop to shop orders, Talking Bouquet revenues and gift basket
revenues.
Directory fees and advertising revenues experienced a slight increase (5%)
during 1998 due to moderate increases in both advertising and directory fees.
During 1997 directory fees and advertising increased by 10%, which was primarily
attributable to an increase in advertising revenues.
Net revenues from charge card processing increased by 13% during 1998 compared
to an increase of 17% during 1997. The increase in both 1998 and 1997 is
attributable to an increase in dollar volumes processed. During 1998, gross
dollars processed were $392,000,000 compared to $318,000,000 in 1997. The credit
card processing industry continues to be extremely competitive with increasing
costs from card issuers and demands by larger customers for lower discount
rates. The Company continues to adjust the pricing of it's products to remain
competitive in the market. The Company's response to the increased competition
could lead to lower margins in the upcoming year.
The Company also earns revenue from the sale and lease of credit card terminals
and printers. Sale and lease revenues amounted to $256,000 in 1998 and $232,000
in 1997.
EXPENSES
General and administrative expenses increased by 12% in 1998 and 9% in 1997,
when compared to the preceding years.
For 1998 the two primary components of the increase were in salaries and wages,
and telephone expense. Salaries and wages experienced and increased due to an
increase in phone operators needed to handle the increased Flower Club volume,
as well as general wage increases necessary to remain competitive in the job
market. Telephone expense increased primarily due to the increase in Flower Club
volume. Management is currently negotiating with several national long distance
carriers in hopes of obtaining reduced long distance rates. If negotiations are
successful the Company may not experience an increase in telephone expense in
the upcoming year.
The main component of the 1997 increase was in salaries and wages, which
increased due to an increase in phone operators needed to handle the increased
Flower Club volume, as well as general wage increases necessary to remain
competitive in the job market. In addition to greater labor costs there was also
an increase in building rent necessary to accommodate the additional telephone
operators. Conversely, the Company negotiated a new telephone contract with its
long distance carrier thereby reducing telephone expense in 1997.
Selling, advertising and promotion expense increased by 23% during 1998. The
increase
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was comprised of two main components. First, the Company established its own
marketing department to interface with current Flower Club partners, as well as
prospect for new partners. Second, the Company experimented with new ideas and
campaigns during 1998, some of which were successful and some of which were not.
This caused a significant increase in the cost of flyers. Campaigns which were
not successful have been abandoned. However, the Company intends to continue
attempting new ideas and programs in an effort to increase revenues. Conversely,
the Company experienced a decline in commissions paid to an independent
marketing firm which had been the Company's primary source of marketing until
the third quarter of 1998, at which time the Company acquired the primary
operations of this firm, thereby eliminating the commissions. As a result of
this acquisition, the Company may experience a decline in selling expenses in
the upcoming year. See Management's Discussion and Analysis of Plan of Operation
for a more detailed discussion of this acquisition.
Selling, advertising and promotion expenses increased by 22% during 1997. The
primary cause for this increase is 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. In addition to Flower Club related expense increases, in
1997 the Company also incurred increased costs in sales salaries and
commissions. The Company has hired a Marketing Director as well as additional
sales persons, in an effort to continue the growth in revenues experienced over
the past few years.
Depreciation and amortization have increased during 1998 compared to 1997.
During 1997 and 1998, the Company expanded it's facilities as well as purchased
new computer and telephone equipment, thereby causing an increase in
depreciation. In addition, the acquisition of Marketing Projects, Inc. (see note
13 to the consolidated financial statements) caused the Company to record a
significant amount of goodwill, as well as a noncompete agreement. The
amortization of these intangible assets increased amortization expense in 1998,
and is expected to increase amortization expense in future periods.
OTHER INCOME (EXPENSE)
Interest expense for 1998 resulted from the note associated with the acquisition
of MPI. Interest expense for 1997 was virtually eliminated, as the Company had
total debt in 1997 of only $80,000 for the majority of the year.
Other income for 1997 consisted of litigation proceeds (see Note 4 to the
consolidated financial statements), which were offset by a charge to earnings
for the unamortized balance of a consulting agreement, and a charge to earnings
for a certain contingency reserve.
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INCOME TAXES
During 1997, the Company recorded a net income tax benefit of $519,000,
consisting of a deferred income tax benefit of $637,000 and a current income tax
expense of $118,000. The valuation allowance at August 31, 1997 consists
primarily of general business credits that may expire prior to the Company's
ability to utilize them. As of August 31, 1997, the Company has available net
operating loss carryforwards of $2,949,000, which expire in the year 2012.
During 1998, the Company recorded a net income tax expense of $536,000,
consisting of a deferred income tax expense of $522,000 and a current income tax
expense of $14,000. The deferred income tax expense in 1998 included the effects
of a reduction of $131,000 in the valuation allowance related to certain
business and other credits which the Company determined would be used to offset
future tax expense. At August 31, 1998, the remaining valuation allowance of
$250,000 consists primarily of certain capital losses that do not meet the
requirements for recognition as an asset. As of August 31, 1998, the Company has
available net operating loss carryforwards of $2,752,000 which expire in the
year 2013.
FASB 109 requires deferred tax assets related to net operating loss
carryforwards to be allocated between current and noncurrent based upon the
reversal date of the temporary differences. It was not anticipated that the
majority of the net operating losses would be used to offset income in 1998;
therefore, the carryforwards were classified as noncurrent at August 31, 1997.
As of August 31, 1998, the Company expects to recognize sufficient income in
1999 to afford utilization of the majority of net operating loss carryforwards
thereby resulting in a current classification.
RECENT PRONOUNCEMENTS
Earnings Per Share
In February 1997, the FASB issued Statement No. 128, Earnings per Share, which
is effective for years ending after December 15, 1997. Consequently, the Company
has changed the method used to compute earnings per share and has restated all
prior periods. Under the new requirements, primary earnings per share is
replaced with basic earnings per share which excludes the dilutive effect of
stock options and other common stock equivalents.
Segments
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes FASB Statement No. 14.
The Statement uses a management approach to report financial and descriptive
information about a company's operating segments. Operating segments are
revenue-producing components of the enterprise for which separate financial
information is produced internally for the Company's management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997. The Company does not believe that the new standard will significantly
change its presentation of segment information.
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Comprehensive Income
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The Statement requires that total comprehensive income and comprehensive income
per share be disclosed with equal prominence as net income and earnings per
share. Comprehensive income is defined as all changes in stockholders' equity
exclusive of transactions with owners such as capital contributions and
dividends. The statement is effective for fiscal years beginning after December
15, 1997. The Company believes that the future tax benefits for compensation
deductions related to a variable stock option plan, in excess of amounts
recorded for accounting purposes, which are reflected as additions to paid-in
capital are the only differences between net income and comprehensive income.
Year 2000 Issue
The Company believes that it has adequately addressed the year 2000 issues. For
externally purchased software the Company has performed various test
transactions and concluded that these applications are ready for use in the year
2000. For internally developed software the Company has assessed the
applications and determined that relatively minor changes will be required for
the year 2000 at a minimal cost and effort. In addition, major vendors that the
Company relies upon to operate the credit card segment of the Company's business
have informed the Company that they are year 2000 compliant.
Forward-looking Statements
When used in this report, the words "plan(s)," "intends(s)," "expect(s),"
"feel(s)," "will," "may," "believe(s)," "anticipate(s)," and similar expressions
are intended to identify forward-looking statements. The events described in
such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the
Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis or Plan of Operation" in the report, as
well as the Company's periodic reports of Form 10-KSB, 10-QSB and 8-K filed with
the Securities and Exchange Commission.
The events described in such statements, and the success of the management
strategies described by those statements, are subject to certain risks and
uncertainties which could cause actual results to differ from those discussed;
among those risks and uncertainties which are particular to the Company are:
continued consumer spending on discretionary items such as flowers and gifts,
the success of the Company in maintaining relations with corporate marketing
partners, the success of the Company in maintaining a strong
-12-
<PAGE> 15
membership base, the continued use of credit cards as a preferred method of
payment by customers of members, increased labor costs, constant competition,
and the health of the retail flower industry as a whole.
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>
YEAR ENDED AUGUST 31
1998 1997 1996 1995 1994
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Selected income statement data:
Net revenues $ 13,391 $ 11,609 $ 10,299 $ 8,449 $ 7,567
Net income (loss) (1,2,3) $ 1,768 $ 3,433 $ 2,262 $ 707 $ (311)
Basic earnings (loss) per share $ 0.23 $ 0.43 $ 0.36 $ 0.12 $ (0.06)
Diluted earnings (loss) per share $ 0.20 $ 0.39 $ 0.35 $ 0.12 $ (0.06)
</TABLE>
1) The Company recorded income of $1,041 in 1997 related to cash received from
a court award. See Note 4 to the Notes to the Consolidated Financial
Statements.
2) Net income in 1997 and 1996 includes income tax benefits of $637 and $863,
respectively, primarily from the recognition of benefits related to net
operating loss carryforwards. See note 6 to the Notes to the Consolidated
Financial Statements.
3) Net income in 1996 includes an extraordinary gain of $128 from the
forgiveness of certain debt.
<TABLE>
<CAPTION>
AUGUST 31
1998 1997 1996 1995 1994
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected balance sheet data:
Current assets $ 6,702 $ 6,325 $ 5,686 $ 3,733 $ 2,847
Current liabilities 5,259 5,209 5,198 5,131 5,259
Working capital (deficiency) 1,443 1,116 488 (1,398) (2,412)
Total assets 14,727 10,594 8,822 6,468 5,946
Long-term debt, less current maturities 2,018 80 334 3,034 3,142
Stockholders' equity (deficiency) 6,948 5,253 3,237 (1,756) (2,215)
</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, 1998 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Florafax International, Inc. at August 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
October 8, 1998
-15-
<PAGE> 18
Florafax International, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
(In Thousands, Except
Share Data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,438 $ 4,170
Restricted cash 106 97
Accounts receivable:
Trade, less allowances of $482 at August 31,
1998 and $509 at August 31, 1997 1,421 1,317
Charge card issuers 211 343
Other 110 94
1,742 1,754
Deferred tax asset, net of allowance 1,265 264
Prepaid and other assets 151 40
Total current assets 6,702 6,325
Property and equipment, at cost:
Fixtures and equipment 1,594 1,324
Computer systems 977 798
Communication systems 1,121 1,010
Land, building and leasehold improvements 1,282 524
4,974 3,656
Accumulated depreciation and amortization 2,992 2,713
1,982 943
Other assets:
Excess of cost over net assets of acquired businesses, net of
accumulated amortization of $61 5,704 1,995
Deferred tax asset, net of allowance 163 1,236
Other 176 95
6,043 3,326
Total assets $14,727 $10,594
</TABLE>
See accompanying notes.
-16-
<PAGE> 19
Florafax International, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
AUGUST 31
1998 1997
(In Thousands, Except
Share Data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 80 $ -
Accounts payable 3,986 3,754
Accrued member benefits 116 147
Accrued credit card fees 440 359
Other accrued liabilities 637 949
Total current liabilities 5,259 5,209
Deferred tax liability 450 -
Long-term debt, less current maturities 2,018 80
Membership security deposits 52 52
Total liabilities 7,779 5,341
Stockholders' equity:
Preferred stock ($10 par value, 600,000 shares authorized
at August 31, 1998 and 1997, respectively, none issued) - -
Common stock ($0.01 par value, 70,000,000 shares
authorized, 8,449,198 and 8,253,004 issued at
August 31, 1998 and 1997, respectively) 85 83
Additional paid-in capital 10,211 10,108
Accumulated deficit (1,732) (3,500)
Treasury stock, at cost (519,975 and 480,975
shares at August 31, 1998 and 1997,
respectively) (1,616) (1,438)
Total stockholders' equity 6,948 5,253
Total liabilities and stockholders' equity $ 14,727 $ 10,594
</TABLE>
See accompanying notes.
-17-
<PAGE> 20
Florafax International, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
(In Thousands, Except Per
Share Data)
<S> <C> <C>
Net revenues:
Member dues and fees $ 2,778 $ 2,392
Floral order processing 7,189 6,162
Directory and advertising fees 1,476 1,405
Charge card processing 1,822 1,618
Other revenue 126 32
13,391 11,609
Expenses:
General and administrative 6,524 5,838
Selling, advertising and promotion 3,960 3,209
Directory publishing 315 383
Depreciation and amortization 414 261
11,213 9,691
Operating income 2,178 1,918
Other income (expense):
Interest expense (82) (6)
Interest income 165 183
Other 43 819
126 996
Income before income taxes 2,304 2,914
Income tax (expense) benefit:
Current income taxes (14) (118)
Deferred income taxes (522) 637
(536) 519
Net income $ 1,768 $ 3,433
</TABLE>
See accompanying notes.
-18-
<PAGE> 21
Florafax International, Inc.
Consolidated Statements of Income (continued)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
(In Thousands, Except Per
Share Data)
<S> <C> <C>
Weighted average common and common
equivalent shares outstanding:
Basic 7,824 8,076
Diluted 8,665 8,715
Basic earnings per share:
Net income $0.23 $0.43
Diluted earnings per share:
Net income $0.20 $0.39
See accompanying notes.
</TABLE>
-19-
<PAGE> 22
Florafax International, Inc.
Consolidated Statements of Changes in
Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK
NUMBER OF ADDITIONAL
SHARES PAR PAID-IN ACCUMULATED TREASURY
ISSUED VALUE CAPITAL DEFICIT STOCK TOTAL
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1996 8,233 $83 $10,087 $(6,933) $ - $ 3,237
Issuance of common stock 20 - 21 - - 21
Purchase of treasury stock - - - - (1,438) (1,438)
Net income - - - 3,433 - 3,433
Balance at August 31, 1997 8,253 83 10,108 (3,500) (1,438) 5,253
ISSUANCE OF COMMON STOCK 196 2 27 - - 29
PURCHASE OF TREASURY STOCK - - - - (178) (178)
COMPENSATION EXPENSE UNDER
STOCK OPTION PLAN - - 76 - - 76
NET INCOME - - - 1,768 - 1,768
BALANCE AT AUGUST 31, 1998 8,449 $85 $10,211 $(1,732) $(1,616) $ 6,948
</TABLE>
See accompanying notes.
-20-
<PAGE> 23
Florafax International, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,768 $ 3,433
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income tax expense (benefit) 522 (637)
Depreciation 279 179
Amortization 135 82
Compensation expense under stock option plan 76 -
Provision for doubtful accounts 113 170
Changes in operating assets and liabilities:
Accounts receivable (115) (323)
Prepaid and other assets (111) 14
Other assets (55) 84
Accounts payable 246 (159)
Accrued liabilities and member benefits (262) 249
Membership security deposits - (1)
Net cash provided by operating activities 2,596 3,091
INVESTING ACTIVITIES
Capital expenditures (1,318) (844)
Change in restricted cash (9) 2
Purchase of business (3,870) -
Net cash used in investing activities (5,197) (842)
</TABLE>
-21-
<PAGE> 24
Florafax International, Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
(In Thousands)
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt $ 2,500 $ -
Proceeds from exercise of stock options and warrants 29 21
Purchase of treasury stock (178) (1,438)
Payments on long-term debt (482) (333)
Net cash used in financing activities 1,869 (1,750)
Net increase (decrease) in cash and cash equivalents (732) 499
Cash and cash equivalents at beginning of year 4,170 3,671
Cash and cash equivalents at end of year $ 3,438 $ 4,170
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 53 $ 1
Cash paid during the year for income taxes 82 52
</TABLE>
See accompanying notes.
-22-
<PAGE> 25
Florafax International, Inc.
Notes to Consolidated Financial Statements
August 31, 1998
(In Thousands, Except Share Data)
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. Florafax International, Inc. is principally engaged in the
flowers-by-wire business of generating floral orders and providing floral order
placement services to retail florists throughout the United States. The Company
is also engaged in the business of credit and charge card processing for
third-party companies.
(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
Restricted cash at August 31, 1998 and 1997 pertains to the Company's credit
card processing agreement with its sponsoring bank totaling $106 and $97,
respectively.
(d) Floral order processing - revenue recognition
Floral order processing net revenues consist primarily of two types of
transactions. First, there are orders placed through the Company's order center,
which are recorded at the time the order is placed which coincides with
delivery. Second, there are orders sent between the Company's member florists,
which are recorded upon receipt of the reporting document, prepared by the
delivering florist, that confirms delivery.
(e) Member dues and fees and directory and advertising fees
Member dues, fees, directory and advertising fees 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 deferred until the directories are distributed
to member florists.
-23-
<PAGE> 26
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Charge card processing
Charge card processing revenue represents fees for processing credit card
transactions for members and others. Revenues are recognized when the service is
provided.
(g) Concentration of Credit Risk
A significant portion of 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.
(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
Building and leasehold improvements 3 to 30 years
</TABLE>
-24-
<PAGE> 27
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(i) Amortization of Excess of Cost Over Net Assets of Acquired Businesses
(Goodwill)
Goodwill of $1,995 arose prior to October 31, 1970 and, therefore, is not
required to be amortized. As a result of the acquisition of Marketing Projects,
Inc. (see note 13 to the consolidated financial statements) goodwill of $3,770.
The goodwill is being amortized over twenty years, and has accumulated
amortization of $61 at August 31, 1998.
In accordance with FASB 121, Accounting for the Impairment of Long-Lived Assets
and Assets to be disposed of, the Company periodically analyzes the carrying
value of its goodwill and other long-lived assets for indicators of impairment,
using an undiscounted projected cash flow approach. If such cash flows indicate
an impairment is present, the Company would make adjustments to the carrying
value of long-lived assets based upon appraisals, discounted cash flows, or
otherwise as the Company considers appropriate. After reviewing the results and
considering other qualitative factors, management is of the opinion that the
carrying amount of the 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.
(l) Reclassification of prior year balances
Certain prior year balances have been reclassified in order to conform to
current year presentation.
(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 February 1997, the FASB issued Statement No. 128, Earnings per Share, which
is effective for years ending after December 15, 1997. As a result, the Company
was required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements, primary earnings
per share is replaced with basic earnings per share which excludes the dilutive
effect of stock options and other common stock equivalents. Basic earnings per
share is higher than primary earnings per share by $.02 and $.03 for the fiscal
years ending August 31, 1998 and 1997, respectively. Diluted earnings per share
was not different than fully diluted earnings per share.
Segments
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes FASB Statement No. 14.
The Statement uses a management approach to report financial and descriptive
information
-26-
<PAGE> 29
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
about a company's operating segments. Operating segments are revenue-producing
components of the enterprise for which separate financial information is
produced internally for the Company's management. The Statement is effective for
financial statements for fiscal years beginning after December 15, 1997 and,
accordingly, will apply to the Company's fiscal year ended August 31, 1999. The
Company believes that its current segment disclosures will not be materially
affected upon adoption.
Comprehensive Income
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The Statement requires that total comprehensive income and comprehensive income
per share be disclosed with equal prominence as net income and earnings per
share. Comprehensive income is defined as all changes in stockholders' equity
exclusive of transactions with owners such as capital contributions and
dividends. The statement is effective for fiscal years beginning after December
15, 1997, and accordingly will apply to the Company's fiscal year ended August
31, 1999. Currently, the Company believes that the future tax benefits for
compensation deductions, related to the Management Plan (Note 5), in excess of
amounts recorded for accounting purposes, which are reflected as additions to
paid-in capital are the only differences between net income and comprehensive
income.
(o) Stock-based Compensation
The Company accounts for stock-based compensation in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and, in cases where fixed plan
exercise prices equal or exceed fair market value, recognizes no compensation
expense for the stock option grants.
In cases where exercise prices are less than fair value, compensation is
recognized over the period of performance or the vesting period or, in cases of
the variable plan, compensation expense is recognized at the time when both
exercise price and the number of shares are determinable.
-27-
<PAGE> 30
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(p) Advertising Costs
Advertising costs associated with related to the cost of coupons included in
corporate partner advertising campaigns are expensed upon first showing.
Advertising expense amounted to $1,350 and $881 in 1998 and 1997, respectively.
2. LONG-TERM DEBT
At August 31, 1998, long-term debt consisted of a bank line of credit in the
amount of $2,018 with interest payable monthly at the prime rate of the lending
institution, currently 8-1/2%, collateralized by substantially all assets of the
Company. Under the terms of the note, the Company may borrow up to $5,000 until
February 16, 2000. No principal payments are due until February 16, 2000, at
which time any principal amounts outstanding at the end of this period will
convert to a 36-month fully amortizing loan based on level principal payments
plus interest. A one-time commitment fee related to this note amounted to $13.
Approximately $2,982 is available for future borrowings under the bank line of
credit.
At August 31, 1998 and 1997, current maturities of long-term debt included a 5%
subordinate debenture in the amount of $80, maturing on December 27, 1998 with
interest payable annually on December 31.
Scheduled maturities of notes payable at August 31, 1998 for each of the next
five years and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 80
2000 336
2001 673
2002 673
2003 336
2,098
Current portion 80
$2,018
</TABLE>
-28-
<PAGE> 31
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
3. LEASES
Noncancelable lease 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>
1999 $ 84
2000 56
2001 49
2002 47
2003 2
$ 238
</TABLE>
Total rental expense for years 1998 and 1997, which includes other than
noncancelable agreements, was $156 and $261, respectively. Of these amounts,
annual rentals for office facilities for years 1998 and 1997 were $49 and $155,
respectively. Until January 1998 the Company's building lease for its Vero Beach
location (annual rental $33 plus sales tax) was with a relative of the Chairman
of the Board of Directors. In January 1998, the company purchased this property
(see note 8 to the consolidated financial statements).
4. CONTINGENCIES
During 1990, the Company filed a lawsuit against GTE Market Resources, Inc.
(GTE/MR) for failure on the part of GTE/MR to fulfill certain contractual
telecommunication services on behalf of the Company. On November 23, 1993, a
jury awarded the Company $1,481 in damages against GTE/MR. GTE/MR appealed the
case, which was ultimately ruled on by the Oklahoma Supreme Court. In 1997 the
Oklahoma Supreme Court upheld the decision of the trial court, and ruled in
favor of the Company. The Company recognized a pretax gain, net of related legal
fees, of $1,041 resulting from the award, which is included in other income in
the Consolidated Statement of Income.
-29-
<PAGE> 32
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
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, 1998 and 1997, there were no shares of
preferred stock issued.
On October 26, 1995, the Board of Directors approved a Nonemployee Directors'
Stock Option Plan ("Director Plan"). 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, 1998, 500,000 shares of the Company's
common stock were authorized under the Director Plan, options covering 260,000
shares have been granted which expire on various due dates through January 30,
2008. As of August 31, 1998, none of the options have been exercised.
On October 26, 1995, the Board of Directors approved a Management Incentive
Stock Plan ("Management Plan"). 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 1,000,000.
As of August 31, 1998, options covering 355,000 shares have been granted which
expire on various dates through November 13, 2006. Options exercised under this
plan during 1998 and 1997 were 11,000 and 1,000, respectively.
Options granted to employees under the Management Plan vest 25% upon issuance
with additional vesting of 25% after each year of continuous employment. As of
August 31, 1998 and 1997, options exercisable under the Management Plan totaled
199,000 and 119,000, respectively.
On November 16, 1996 the Board of Directors granted options to purchase 50,000
shares of common stock at fair market value to a Board member. This option
vested 25% upon issuance with additional vesting of 25% each year. As of August
31, 1998, none of these options had been exercised.
-30-
<PAGE> 33
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
On June 25, 1997, the Board of Directors granted options for the purchase of
305,000 shares of common stock at fair market value to officers and key
employees of the Company at an exercise price of $4 per share. These options
vest in 25% increments when the market price of the Company's common stock
reaches $5.00, $7.50, $10.00 and $12.50 per share, respectively, for twenty
consecutive trading days. Unexercised vested options expire in 2006. The portion
of unvested options, if any, expire in the year 2002. Compensation expense for
these variable plan options is recorded when the option vests, at the amount
that the targeted market price exceeds the exercise price. As of August 31,
1998, 76,000 of these shares had vested and were exercisable (none at August 31,
1997). Compensation expense of $76 was recorded for the year ended August 31,
1998 (none at August 31, 1997).
On January 28, 1997 the shareholders approved an increase in the number of
shares of authorized common stock from 18,000,000 to 70,000,000.
At August 31, 1998, the Company has outstanding 403,000 warrants for the
purchase of common stock at a price of one dollar per share, all of which are
currently exercisable. The warrants originated in connection with a previous
financing. All of these warrants expire January 1, 2001.
-31-
<PAGE> 34
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding stock options for years 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE TOTAL
OF RANGE PER EXERCISE
SHARES SHARE PRICE
<S> <C> <C> <C>
Shares under option at August 31,
1998 957,000 $1.41 to $5.88 $2,978
1997 888,000 $1.41 to $4.00 $2,529
Options granted during year ended
August 31,
1998 80,000 $5.88 $ 470
1997 668,000 $2.66 to $4.00 $2,204
Options exercised during year
ended August 31,
1998 11,000 $1.41 to $2.66 $ 20
1997 1,000 $1.41 $ 1
Options expired or canceled
during year ended August 31,
1998 1,000 1.41 $ 1
1997 - - $ -
Options exercisable at August 31, 1998 560,000 $1.41 to $5.88 $ 659
Shares reserved at August 31, 1998 for:
Director stock option plan 500,000
Management stock option plan 988,000
1,488,000
</TABLE>
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, Accounting and Disclosure of Stock-Based Compensation (Statement 123),
which encourages, but does not require companies to recognize stock awards based
on their fair value at the date of grant.
-32-
<PAGE> 35
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair value method of that Statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1998
and 1997: risk free interest rates of 6.0%; dividend yield of zero; volatility
factors of the expected market price of the Company's common stock based on
historical trends; and weighted-average expected lives of the options from four
to ten years.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option's vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Pro forma net income $1,280 $3,016
Pro forma earnings per share
Basic $ 0.16 $ 0.37
Diluted 0.15 0.35
Weighted average shares
Basic 7,824 8,076
Diluted 8,665 8,715
</TABLE>
-33-
<PAGE> 36
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
The components of the income tax provision (benefit) as of August 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Current income taxes $ 14 $ 118
Deferred income taxes 522 (637)
Income tax provisions $536 $(519)
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes as of August 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Allowances for bad debts $ 181 $ 191
Accrued liabilities and other 115 73
Depreciation and amortization 150 216
Net operating losses 939 1,110
Compensation under stock option plan 29 -
General business credits 247 456
Basis difference in assets of business acquired
(433) -
1,228 2,046
Valuation allowance (250) (546)
Total deferred taxes $ 978 $ 1,500
</TABLE>
FASB 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. At
August 31, 1998, the remaining valuation allowance of $250 consists primarily of
certain capital losses that do not meet the requirements for recognition as an
asset. This represents a change in the valuation
-34-
<PAGE> 37
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
allowance for the current year of $296 as compared to a change of $1,606 in the
prior year. As of August 31, 1997, the Company has available net operating loss
carryforwards of $2,572, which expire in the years 2000 through 2012. In
addition, certain business credits, principally alternative minimum tax,
amounting to $131 expire in 1999 through 2003.
FASB 109 requires deferred tax assets related to net operating loss
carryforwards to be allocated between current and noncurrent based upon the
reversal date of the temporary differences. It was not anticipated that the
majority of the net operating losses would be used to offset income in 1998,
therefore the carryforwards were classified as non current as of August 31,
1997. As of August 31, 1998, the Company expects to recognize sufficient income
in 1999 to afford utilization of the majority of net operating loss
carryforwards thereby resulting in a current classification.
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.
-35-
<PAGE> 38
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS
During 1998, the Company purchased the land and buildings used for its Vero
Beach operations for approximately $673. The transactions was financed with cash
from operations. The property was previously leased from a trust administered by
a relative of the Chairman of the Board.
9. FOURTH QUARTER ADJUSTMENTS
As more fully discussed in Note 6, the Company reduced its valuation allowance
against deferred tax assets in 1998 and 1997. The reduction resulted in a credit
to income of $637 in 1997 and $296 in 1998. These reductions were recorded in
the fourth quarter of 1998 and 1997, when all of the information upon which to
make the estimate became available to management of the Company.
10. RETIREMENT PLAN
The Company sponsors a 401(k) retirement plan covering all full-time employees
who have completed one year of service. Eligible employees may elect quarterly
to contribute up to 15% of their compensation, up to the maximum contribution
allowed by law. The Company matches contributions up to a maximum of 3% of
compensation. In connection with the matching contribution, the Company's
contribution in 1998 and 1997 was $41 and $30, respectively.
11. OTHER INCOME
Other income in 1997 of $819 consists primarily of the GTE/MR lawsuit settlement
proceeds (see Note 4 to the consolidated financial statements), reduced by a
charge to earnings of the unamortized balance of a terminated consulting
agreement and a contingency reserve.
-36-
<PAGE> 39
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
12. BUSINESS SEGMENTS
The Company operates in two business segments: Flowers-by-wire services and
charge card processing for member florists, and charge card processing for
customers outside 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:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net revenues:
Flowers-by-wire $12,119 $10,416
Charge card processing 1,272 1,193
$13,391 $11,609
Operating profit after allocation of general and administrative expenses:
Flowers-by-wire $ 3,557 $ 2,690
Charge card processing 68 98
Operating profit before allocation of Corporate overhead 3,625 2,788
Corporate overhead 1,447 870
Operating income $ 2,178 $ 1,918
Identifiable assets:
Flowers-by-wire $ 8,833 $ 4,139
Charge card processing 569 472
General corporate assets 5,325 5,983
$14,727 $10,594
Depreciation expense:
Flowers-by-wire $ 220 $ 146
Charge card processing 59 33
$ 279 $ 179
Capital expenditures:
Flowers-by-wire $ 1,021 $ 625
Charge card processing 297 219
$ 1,318 $ 844
</TABLE>
-37-
<PAGE> 40
Florafax International, Inc.
Notes to Consolidated Financial Statements (continued)
13. BUSINESS COMBINATIONS
Effective May 1, 1998, the Company acquired substantially all the assets,
tangible and intangible, of Marketing Projects, Inc. ("MPI"), a California
corporation, for $3,624, plus direct expenses. The acquisition was accounted for
using the purchase method of accounting. The purchase price was funded with a
$2,500 loan from First Union National Bank (see Note 2) and cash on hand. In
addition, the Company may pay up to $125 in each of the next eight fiscal
quarters, contingent upon the performance of the business acquired. For the
quarter ended August 31, 1998, the business acquired performed at a level
sufficient to require the Company to pay MPI the full contingent amount, which
amount is included in goodwill in the accompanying financial statements.
Goodwill associated with the purchase is being amortized over 20 years. In
addition, in conjunction with the MPI acquisition, the Company paid $100 for a
two-year noncompete agreement with the principal employees of MPI, which will be
amortized over the term of the agreement.
Provided below are the unaudited pro forma revenues, net income and earnings per
share on a pro forma basis as if the acquisition occurred at the beginning of
the respective periods. Pro forma information is not necessarily indicative of
the actual results that would have been achieved had the acquisitions in fact
been consummated at the beginning of each period presented.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
1998 1997
(Unaudited, In Thousands)
<S> <C> <C>
Revenues $ 13,391 $ 11,609
Net Income 2,405 3,285
Earnings per share:
Basic 0.31 0.41
Diluted 0.28 0.38
</TABLE>
-38-
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
-39-
<PAGE> 42
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
T. CRAIG BENSON
Mr. Benson, 36, is President of the Corporate Equities Division of Service
Corporation International headquartered in Houston, Texas. Service Corporation
International is the largest publicly held funeral home/cemetery company in the
world. Mr. Benson also serves as a Director of Tanknology Environmental, Inc.
Mr. Benson has been a Director of the Company since March 1991.
S. ODEN HOWELL, JR.
Mr. Howell, 58, is a consultant to H & N Constructors, Inc., a contracting
company specializing in remodeling and rehabilitation of government facilities.
From 1988 until 1997, Mr. Howell was Secretary/Treasurer of H&N Constructors,
Inc. Mr. Howell serves as a Director of Royal Gold, Inc. and Lawson United
Corporation, and he has been a Director of the Company since February 1986.
WILLIAM E. MERCER
Mr. Mercer, 57, has been a majority owner and has served as Chairman of the
Board and Chief Executive Officer ("CEO") of Southwest Guaranty Trust Company
National Association, a national banking association limited to trust powers
only, since December, 1989. He has been a Director of the Company since April,
1987.
KENNETH G. PUTTICK
Mr. Puttick has been in the retail automobile business since 1968. He has owned
and operated several retail and real estate businesses simultaneously. Mr.
Puttick has been a Director of the Company since January, 1995.
JAMES H. WEST
Mr. West, 44, was elected Vice President, Treasurer and CFO of the Company on
February 5, 1993. On January 7, 1994, Mr. West was elected Chief Operating
Officer ("COO"), and on August 8, 1994, he was elected Secretary, of the
Company. On November 17, 1994, he was elected President. From November, 1987 to
November, 1992, Mr. West was President of M.P.I.I., Inc. ("M.P.I.I.") which is
in the funeral, cemetery and insurance business. As of the date of this Proxy
Statement, Mr. West remains as President, COO and CFO. He has been a Director of
the Company since January, 1994.
ANDREW W. WILLIAMS
Mr. Williams, 46, is, and has been a certified public accountant since 1978
practicing principally in Vero Beach, Florida. Since August, 1990, he has served
as Chairman and CEO of Equity Resource Group of Indian River County, Inc. Mr.
Williams is the President of Confidential Investment Services, Inc. In addition,
he serves as a Director of First American Bank. Mr. Williams was elected
Chairman of the Board in November, 1992 and has been a Director of the Company
since December, 1988. In September, 1994, Mr. Williams was elected CEO of the
Company.
-40-
<PAGE> 43
KELLY S. MCMAKIN
Mr. McMakin, 37, was elected Vice President and Treasurer of the Company on
November 17, 1994, and on February 6, 1995, he was elected Secretary of the
Company. From June, 1993, to the present, Mr. McMakin has been Controller of the
Company. From May 1988, through May 1993, Mr. McMakin was Controller of M.P.I.I.
As of the date of this Proxy Statement, Mr. McMakin remains as Vice President,
Secretary and Treasurer of the Company.
JAMES J. PAGANO
Mr. Pagano, 44, was elected Vice President-Marketing of the Company in January,
1998. Also, in January 1998, Mr. Pagano was elected Executive Vice President of
The Flower Club International, Inc., a wholly-owned subsidiary of the Company.
From 1991 through January, 1998, Mr. Pagano was President of Media VI - Radio
Broadcasting, an entity that operates radio stations throughout Florida.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors, officers, and any persons holding more than
ten percent of the Company's common stock to report their initial ownership of
the Company's common stock and any subsequent changes in that ownership to the
Securities and Exchange Commission ("SEC"), and to provide copies of such
reports to the Company. Based upon the Company's review of copies of such
reports received by the Company and written representations of its directors,
officers, and certain beneficial owners of stock, the Company believes that
during the year ended August 31, 1998, all Section 16(a) filing requirements
were satisfied, with the exception of William E. Mercer, who was delinquent in
filing a Form 5.
-41-
<PAGE> 44
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and for any executive officer whose aggregate
remuneration was $100,000 or more for the fiscal year ended August 31, 1998
("Named Officer"):
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND FISCAL YEAR ANNUAL BONUS ($) OTHER ANNUAL
PRINCIPAL COMPENSATION COMPENSATION
POSITION SALARY ($) ($) (5)
<S> <C> <C> <C> <C>
James H. West, 1998 $204,845 (1) $30,000 $ 0
President, COO and CFO 1997 $183,700 $80,000 $ 0
1996 $181,731 $65,000 $ 0
Andrew W. Williams 1998 $127,042 (2) $20,000 $ 0
CEO 1997 $105,241 $67,500 $ 0
1996 $100,731 $27,500 $ 0
Kelly S. McMakin 1998 $ 92,700 (3) $11,000 $ 0
Vice President, 1997 $ 76,069 $40,000 $ 0
Secretary and Treasurer 1996 $ 70,000 $15,492 $ 0
James J. Pagano 1998 $120,554 (4) $12,000 $ 0
Vice President - 1997 $ 36,630 0 $ 0
Marketing 1996 N/A N/A N/A
</TABLE>
For the years ended August 31, 1998, 1997 and 1996, the Company granted no
restricted stock awards, stock appreciation rights ("SARs"), long-term incentive
plan ("LTIP") awards or any other form of long-term compensation to the Named
Officers listed above.
(1) Includes $9,690 contributed by Mr. West toward Mr. West's Plan
(defined below) and $4,845 contributed by the Company toward Mr. West's Plan.
(2) Includes $10,000 contributed by Mr. Williams toward Mr. Williams'
Plan and $2,042 contributed by the Company toward Mr. Williams' Plan.
(3) Includes $7,892 contributed by Mr. McMakin toward Mr. McMakin's
Plan and $2,700 contributed by the Company toward Mr. McMakin's Plan.
(4) Includes $2,215 contributed by Mr. Pagano toward Mr. Pagano's Plan
and $554 contributed by the Company toward Mr. Pagano's Plan.
(5) Perquisites and other personal benefits received by the Named
Officers are not included because the aggregate amount of such compensation does
not exceed the lesser of $50,000 or 10% of the total amount of annual salary and
bonus for such Named Officer.
-42-
<PAGE> 45
STOCK OPTIONS
The Management Incentive Plan ("Plan") was adopted by the Board of
Directors of the Company on October 26, 1995, and was approved by the
stockholders on January 30, 1996.
Under the Incentive Plan, employees are periodically granted
market-based awards, including nonqualified stock options, incentive stock
options, stock appreciation rights ("SARs"), restricted stock and performance
share awards. Such awards are granted to those individuals whose judgment,
initiative, and efforts are responsible for the success of the Company. Each
individual award is established by an award agreement with the participant which
sets forth the terms and conditions applicable to such award. The exercise price
of an option and any SARs, which are determined at the time of the grant, may
not be less than the fair market value of the shares subject thereto on the date
of grant.
No options or SARS were granted to any Named Officer during fiscal year
1998.
-43-
<PAGE> 46
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table lists all options and SARs exercised during fiscal 1998 by
each Named Officer. The Company has not granted SARs to any of the Named
Officers.
<TABLE>
<CAPTION>
NAME SHARES VALUE NUMBER OF SECURITIES VALUE OF
ACQUIRED ON REALIZED ($) UNDERLYING UNEXERCISED UNEXERCISED
EXERCISE (#) OPTIONS/SARS IN-THE-MONEY
AT FY-END (#) EXERCISABLE/ OPTIONS/SARS
UNEXERCISABLE AT FY-END ($)
EXERCISABLE/
UNEXERCISABLE
<S> <C> <C> <C> <C>
Andrew W. Williams, 0 0 75,000 (1) 181,125/60,375(3)
CEO [56,250/18,750]
100,000 (1) 98,500/98,500 (4)
[50,000/50,000]
150,000 (2) 23,625/70,875 (5)
[37,500/112,500]
James H. West, 0 0 75,000 (1) 73,875/73,875 (4)
President, COO, CFO [37,500/37,500]
and Director 75,000 (2) 11,813/35,437 (5)
[18,750/56,250]
Kelly S. McMakin, 0 0 15,000 (1) 36,225/12,075 (3)
Vice-President, [11,250/3,750]
Secretary and 25,000 (1) 24,625/24,625 (4)
Treasurer [12,500/12,500]
30,000 (2) 4,725/14,175 (5)
[7,500/22,500]
James J. Pagano, 0 0 50,000 (2) 7,875/23,625 (5)
Vice President - 12,500/37,500
Marketing
</TABLE>
(1) Reflects nonqualified stock options granted under
the Incentive Plan.
(2) Reflects nonqualified stock options granted under
non plan options.
(3) The value of exercisable, but unexercised, options and
unexercisable options is based on a price of $1.41 per
share as of August 31, 1998 and a market price of $4.63 as
of August 31, 1998.
(4) The value of exercisable, but unexercised, options and
unexercisable options is based on a price of $2.66 per
share as of August 31, 1998 and a market price of $4.63 as
of August 31, 1998.
(5) The value of exercisable, but unexercised, options and
unexercisable options is based on a price of $4.00 per
share as of August 31, 1998 and a market price of $4.63 as
of August 31, 1998.
No options or SARS were granted to any Named Officer during
fiscal year 1998.
-44-
<PAGE> 47
NONEMPLOYEE DIRECTOR STOCK OPTIONS
On January 30, 1996, the shareholders of the Company approved the 1996
Nonemployee Directors' Stock Option Plan (the "Nonemployee Director Plan") under
which each nonemployee director, upon his or her respective election or
reelection to the Board of Directors, is granted a nonqualified option to
purchase 20,000 shares of the Company's common stock at an option price equal to
100% of fair market value on the date of grant. Each option terminates upon the
expiration of ten years from the date of grant or three months after the
optionee ceases to be a director, whichever first occurs. An option may not be
exercised prior to the expiration of six months from the date of grant, subject
to certain exceptions specified in the Nonemployee Director Plan.
Pursuant to the provisions of the Nonemployee Director Plan, options were
granted to the following nonemployee directors on January 28, 1998, for 20,000
option shares each at an option price of $5.88 per share: T. Craig Benson, S.
Oden Howell, Jr., William E. Mercer and Kenneth G. Puttick.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of November 6, 1998 information with respect
to those persons who owned (as reflected in the stock transfer records of the
Company and otherwise to the Company's knowledge) beneficially 5% or more of the
common stock of the Company. All shares are subject to the named person's sole
voting and investment power, except as set forth below.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock
<S> <C> <C>
Lance Laifer 2,072,129 (1) 24% (1)
45 West 45th Street
New York, New York 10036
Andrew W. Williams 1,333,272 (2) 15% (2)
616 Azalea Lane
Vero Beach, FL 32963
Kenneth G. Puttick 1,155,000 (3) 13% (3)
210 Osprey Court
Vero Beach, FL 32963
</TABLE>
-45-
<PAGE> 48
(1) Lance Laifer, as president, sole director and principal stockholder
of Laifer Capital Management, Inc., is deemed to have the same beneficial
ownership as Laifer Capital Management, Inc. The 2,072,129 shares of Company
common stock beneficially owned by Laifer Capital Management, Inc. include (i)
1,156,829 shares of common stock beneficially owned by Laifer Capital
Management, Inc. in its capacity as general partner and investment advisor to
Hilltop Partners, L.P. ("Hilltop"); and (ii) 267,300 shares of common stock
beneficially owned by Laifer Capital Management, Inc. in its capacity as
investment advisor to Hilltop Offshore, Ltd. ("Offshore").
Laifer Capital Management, Inc. (i) has the sole power to vote and to
direct the voting of and to dispose and direct the disposition of the 1,156,829
shares of common stock beneficially owned by it in its capacity as the General
Partner of Hilltop, (ii) has sole power to vote and to direct the voting of
267,300 shares of common stock owned by Offshore and (iii) shares with Wolfson,
with an address at One State Street Plaza, New York, New York 10004-1505
("Wolfson"), the power to dispose and direct the disposition of 648,000 shares
of common stock owned by Laifer Capital Management, Inc. in its capacity as
investment advisor to Wolfson.
(2) Includes 223,731 shares owned jointly with Mr. Williams' wife,
24,660 shares held for the benefit of Mr. Williams' children, 546,481 shares
owned by Equity Resource Group of Indian River County, Inc., of which Mr.
Williams is President, Director, and majority owner, 77,000 shares owned by
Confidential Investment Services, Inc., of which Mr. Williams is sole owner and
175,000 stock options granted to Mr. Williams under the Incentive Plan, 131,250
of which Mr. Williams has the right to acquire within sixty (60) days of the
date of the proxy statement, and 150,000 nonplan stock options, twenty-five
percent (25%) of which Mr. Williams has the right to acquire within sixty (60)
days of the date of this proxy statement.
(3) Includes 637,000 shares held by Puttick Enterprises, of which Mr.
Puttick is President, Director and owner. Includes 60,000 shares which Mr.
Puttick has the right to acquire within sixty (60) days of the date of this
proxy statement under the terms of the Nonemployee Director Plan.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of November 6, 1998 information (as
reflected in the stock transfer records of the Company and otherwise to the
Company's knowledge) with respect to (i) each director and nominee, (ii) each
executive and significant officer of the Company named in the Summary
Compensation Table herein, and (iii) all directors and such officers as a group.
All shares are subject to the named person's sole voting and investment power
except, as set forth below.
<TABLE>
<CAPTION>
<S> <C> <C>
Andrew W. Williams 1,333,272 (1) 15% (1)
616 Azalea Lane
Vero Beach, FL 32963
Kenneth G. Puttick 1,155,000 (2), (3) 13% (2), (3)
210 Osprey Court
Vero Beach, FL 32963
</TABLE>
-46-
<PAGE> 49
<TABLE>
<S> <C> <C>
William E. Mercer 196,000 (3) 2% (3)
2121 Sage Road,
Suite 150
Houston, TX 77056
S. Oden Howell, Jr. 303,300 (3) 3% (3)
2603 Grassland Drive
Louisville, KY 40299
T. Craig Benson 325,000 (3) (4) 4% (3)
1929 Allen Parkway
Houston, TX 77219
James H. West 425,321 (5) 5% (5)
1705 Sand Dollar Way
Vero Beach, FL 32963
Kelly S. McMakin 126,500 (6) 1% (6)
15 Royal Palm Blvd.
Vero Beach, FL 32960
James J. Pagano 55,500 (7) 1% (7)
8075 20th Street
Vero Beach, FL 32966
All Directors, Executive 3,919,893 (8) 44% (8)
and Significant Officers
as a group
</TABLE>
(1) Includes 223,731 shares owned jointly with Mr. Williams' wife,
24,660 shares held for the benefit of Mr. Williams' children, 546,481 shares
owned by Equity Resource Group of Indian River County, Inc., of which Mr.
Williams is President, Director, and majority owner, 77,000 shares owned by
Confidential Investment Services, Inc., of which Mr. Williams is sole owner and
175,000 stock options granted to Mr. Williams under the Incentive Plan, 131,250
of which Mr. Williams has the right to acquire within sixty (60) days of the
date of the proxy statement, and 150,000 nonplan stock options, 37,500 of which
Mr. Williams has the right to acquire within sixty (60) days of the date of this
proxy statement.
(2) Includes 637,000 shares held by Puttick Enterprises, of which Mr.
Puttick is President, Director and owner.
(3) Includes 60,000 shares which said individual has the right to
acquire within sixty (60) days of the date of this proxy statement under the
terms of the Nonemployee Director Plan.
(4) Includes 50,000 stock options granted to Mr. Benson under a nonplan
agreement with the Company, seventy-five percent (75%) of which Mr. Benson has
the right to acquire within sixty (60) days of this proxy statement.
-47-
<PAGE> 50
(5) Includes (i) 75,000 stock options granted to Mr. West under the
Incentive Plan, 56,250 of which Mr. West has the right to acquire within sixty
(60) days of this proxy statement, and (ii) 75,000 nonplan stock options,
twenty-five percent (25%) of which Mr. West has the right to acquire within
sixty (60) days of this proxy statement.
(6) Includes (i) 40,000 stock options granted to Mr. McMakin under the
Incentive Plan, 30,000 of which Mr. McMakin has the right to acquire within
sixty (60) days of this proxy statement, and (ii) 30,000 nonplan stock options,
twenty-five percent (25%) of which Mr. McMakin has the right to acquire within
sixty (60) days of this proxy statement.
(7) Includes (i) 50,000 nonplan stock options, twenty-five percent
(25%) of which Mr. Pagano has the right to acquire within sixty (60) days of
this proxy statement. Also includes 3,000 shares owned jointly with Mr. Pagano's
wife and 2,500 shares held by Mr. Pagano as custodian for his minor daughter,
Erika C. Pagano.
(8) The shares shown for all directors and all executive and
significant officers as a group include 571,250 shares which they have the right
to acquire within sixty (60) days of this proxy statement under the terms of the
Nonemployee Director Plan, the Incentive Plan, or nonplan agreements with the
Company. In addition, this total includes 313,750 options that the directors and
officers do not have the right to acquire within sixty (60) days of this proxy
statement.
The Company is not aware of any arrangement or pledge of securities of the
Company by any person which may at a date subsequent to the date of these proxy
materials result in a change of control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since September 1, 1995, through the date of this Proxy Statement, there were no
transaction or series of transactions, to the knowledge of the Company, to which
the Company or any of its subsidiaries was a party, in which the amount involved
exceeded $60,000 and in which any affiliate of the Company, officer, executive
officer, director, nominee for director, record holder, beneficial security
holder owning 5% or more of any class of the Company's voting securities, or any
member of the immediate family of any of the foregoing persons, had a direct or
indirect material interest, except as described below:
(1) Mr. Benson, a director of the Company, is an officer of Service
Corporation International ("SCI"). The Company provides SCI with credit card and
charge card processing services to its funeral and cemetery divisions. The
Company provides SCI credit card processing services on the same terms and
conditions as it would for unaffiliated parties with similar volumes of
business. The Company received estimated net revenues of $274,000 from SCI (as
reported by the Company on its 10-KSB for fiscal year 1998) for these services
during fiscal year 1998.
(2) On August 28, 1994, pursuant to the Agreement, as set forth in the
"Executive Officers" Section, the Company committed to loan $70,000, bearing an
interest rate of 7.75% per annum, to James H. West, President, COO and CFO, of
which $57,000 was advanced on the date of the loan. On November 7, 1994 the
Company advanced to Mr. West an additional $5,000 under the terms of the
original $70,000 commitment. On January 28, 1997, the Company increased the
total amount of the commitment from $70,000 to $100,000. The loan is secured by
real estate owned by
-48-
<PAGE> 51
Mr. West and will be repaid upon liquidation of the real estate. As of August
31, 1998, the balance on this note, including interest, was approximately
$37,000.
In the opinion of management of the Company, these transactions were
negotiated at arm's length and involve either market, or better than market,
commercial terms and conditions under the circumstances then existing.
There are no family relationships between any nominee or member of the
Board of Directors or executive officer of the Company. There are no
arrangements, agreements or understandings, to the knowledge of the Company, by
which any nominee for director is bound and pursuant to which he was selected as
a nominee.
-49-
<PAGE> 52
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
<S> <C> <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, 1998 and 1997 16
Consolidated Statements of Income for the years
ended August 31, 1998 and 1997 18
Consolidated Statements of Changes in Stockholders'
Equity for the years ended August 31, 1998 and 1997 20
Consolidated Statements of Cash Flows for the years
ended August 31, 1998 and 1997 21
Notes to Consolidated Financial Statements 23
3. Exhibits
Exhibit Reference
</TABLE>
The following items pertain to this report and, accordingly, are filed herewith:
(10) Material contracts:
(a) Second amendment to Independent Sales Organization and
Merchant Servicing Agreement between Registrant and Universal
Savings Bank dated September 1, 1998.
(11) Computation of per share earnings
(23) Consent of Independent Certified Public Accountants
(27) Financial Data Schedule (For SEC use only)
-50-
<PAGE> 53
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (CONTINUED)
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.
-51-
<PAGE> 54
Exhibit Reference
(10) Material Contracts (continued)
(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. 7% Convertible Promissory Note in the
amount of $2,500,000 dated February 28, 1996 due February 28,
1997.
(n) Security agreement dated February 28, 1996 executed in
connection with the $2,500,000 Convertible Promissory Note.
(o) Common Stock Purchase Warrant for 250,000 shares of the
registrants common stock expiring January 1, 2001.
(p) Common Stock Purchase Warrant for 400,000 shares of the
registrants Common stock expiring January 1, 2001.
(q) Construction Agreement dated September 30, 1996 between
Registrant And C.E. Block, Architect of Vero Beach, Florida.
(r) Building purchase Agreement between Registrant and Alvin
Wunderlich Sr. Trust Number 1.
(s) Building lease Agreement between Registrant and Verne W.
Anderson and Mariella Anderson Living Trust
(t) Nonqualified, Nonplan Option Agreement between Registrant and
Andrew W. Williams, Chairman of the Board and CEO.
(u) Nonqualified, Nonplan Option Agreement between Registrant and
James H. West, President and CFO.
(v) Nonqualified, Nonplan Option Agreement between Registrant and
Kelly S. McMakin, Treasurer and Secretary.
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<PAGE> 55
Exhibit Reference
(10) Material Contracts (continued)
(w) Nonqualified, Nonplan Option Agreement between Registrant and
James J. Pagano, Vice President and Marketing Director
(x) Amendment dated January 7, 1998 to building purchase
agreement between Registrant and Alvin Wunderlich Sr. Trust
Number 1
(y) Promissory note agreement dated January 16, 1998 in the
amount of $5,000,000 between Registrant and First Union
National Bank
(z) Loan agreement dated January 16, 1998 between Registrant and
First Union National Bank.
(aa) Security Agreement dated January 16, 1998 between
Registrant and First Union National Bank.
(bb) Closing Statement dated January 16, 1998 between
Registrant and First Union National Bank.
(cc) Asset purchase and sale agreement dated May 1, 1998
between Registrant and Marketing Projects Inc., of
Westlake Village California
(dd) Noncompetiton and nondisclosure agreement dated May 29,
1998 between Registrant and David Appell, Robert
Bourdom, Randolph Commans and Phyllis Hooker of Westlake
Village, California
(ee) Bill of sale, assignment and assumption dated May 1,
1998 between Registrant and Marketing Projects, Inc., of
Westlake Village, California.
(ff) Escrow agreement dated May 29, 1998 between Registrant,
Marketing Projects, Inc., and First Union National Bank.
(gg) First amendment to escrow agreement dated May 29, 1998
between Registrant, Marketing Projects, Inc., and First
Union National Bank.
(hh) Management Incentive Stock Plan approved January 30,
1996
(ii) Non-Employee Director Stock Option Plan approved January
30, 1996.
-53-
<PAGE> 56
(22) Subsidiaries of the Registrant
(b) Reports on Form 8-K
On August 11, 1998 the Company filed an 8-K/A amending the 8-K previously filed
by the Company on June 8, 1998. The 8-K/A amended the 8-K to include financial
statements required to be filed with the 8-K.
-54-
<PAGE> 57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Florafax International, Inc.
Date: November 25, 1998 /s/ Andrew W. Williams
------------------------------------
Andrew W. Williams
Chairman and Chief Executive Officer
Date: November 25, 1998 /s/ James H. West
-------------------------------------
James H. West
President and Chief Financial Officer
Date: November 25, 1998 /s/ Kelly S. McMakin
-------------------------------------
Kelly S. McMakin
Controller and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Andrew W. Williams Chairman of the Board November 25, 1998
- ------------------------------
Andrew W. Williams
/s/ T. Craig Benson Director November 25, 1998
- ------------------------------
T. Craig Benson
/s/ Solomon Oden Howell, Jr. Director November 25, 1998
- ------------------------------
Solomon Oden Howell, Jr.
/s/ William E. Mercer Director November 25, 1998
- ------------------------------
William E. Mercer
/s/ Kenneth G. Duttick Director November 25, 1998
- ------------------------------
Kenneth G. Duttick
/s/ James H. West Director November 25, 1998
- ------------------------------
James H. West
<PAGE> 1
Exhibit 10(a)
SECOND AMENDMENT
TO
INDEPENDENT SALES ORGANIZATION
AND
MERCHANT SERVICING AGREEMENT
This Second Amendment to the Independent Sales Organization and
Merchant Servicing Agreement ("Agreement") is entered into as of the 1st day of
September, 1998, by and between Universal Savings Bank, F.A., a federally
chartered savings bank, and its wholly owned subsidiary USB Payment Processing,
Inc., a Delaware corporation, with offices at 754 N. 4th Street, Milwaukee, WI
53203 (hereinafter "USB") and Florafax International, Inc., a Delaware
corporation, with offices at 8075 20th Street, Vero Beach, FL 32966
(hereinafter "FFI") and Credit Card Management System, Inc., an Oklahoma
corporation, with offices at 8075 20th Street, Vero Beach, FL 32966
(hereinafter "CCMS").
RECITALS
WHEREAS, USB, FFI and CCMS entered into the Agreement dated December
31, 1995 outlining the terms and conditions of a business relationship in which
USB would provide payment processing services on behalf of FFI and CCMS for
certain merchants; and
WHEREAS, Section 9.1 of the Agreement provides that the Agreement
shall terminate on December 31, 1998; and
WHEREAS, the parties wish to amend and extend the Agreement as of the
effective date first set forth above;
NOW, THEREFORE, the USB, FFI and CCMS hereby agree as follows:
I. FFI and CCMS agree that USB shall be the exclusive provider of
payment processing and settlement Services as contemplated by
Article 2 of the Agreement.
II. Section 2.5 of the Agreement shall be amended to provide for a
revised "Exhibit B" which is attached hereto and incorporated by
reference and made a part of this Second Amendment to the
Agreement.
III. Section 9.1 of the Agreement is amended to read as follows:
9.1 Term. Subject to the rights of the parties to terminate
this Agreement as hereinafter provided, this Agreement shall
terminate as of August 31, 2000. Notwithstanding the
foregoing,
<PAGE> 2
the security interests, liens, rights and remedies granted to USB and
all of the duties, obligations and liabilities of FFI and CCMS to USB
shall continue in full force and effect until all obligations of FFI
and CCMS to USB pursuant to this Agreement have been paid, performed or
otherwise satisfied in full.
IV. Section 9.3(c) shall be amended to read as follows:
9.3(c) CHANGE IN MANAGEMENT OF USB. Kenneth W. Biel shall cease to be
an officer of USB.
V. Section 11.12 regarding notices shall be amended to provide notification to
Kenneth W. Biel, President and Chief Executive Officer of USB.
As hereby amended and supplemented, the Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, the undersigned have executed this Second
Amendment to the Agreement as of the date first set forth above.
USB:
UNIVERSAL SAVINGS BANK, F.A.
USB PAYMENT PROCESSING, INC.
/s/ Kenneth W. Biel
- -------------------------------------
Kenneth W. Biel
President and Chief Executive Officer
FFI:
FLORAFAX INTERNATIONAL, INC., a
Delaware corporation
/s/ James H. West
- -------------------------------------
James H. West, President
Signatures continue next page
2
<PAGE> 3
CCMS:
CREDIT CARD MANAGEMENT SYSTEM, INC., an
Oklahoma Corporation
/s/ James H. West
- -------------------------------------
James H. West, President
3
<PAGE> 4
EXHIBIT B
TO THE
SECOND AMENDMENT TO THE AGREEMENT
PRICING SCHEDULE
I. The interchange rates for floral, death care and all other current
processing FFI merchants shall be as published and charged from time to
time by MasterCard and Visa USA ("Card Associations"). The pricing by USB
for all volume of processing shall be as set forth below and as amended in
accordance with the Agreement from time to time:
1. Actual Interchange, dues, assessments and all costs charged by the Card
Associations PLUS 0.04% (4 basis points).
2. Daily download of interchange activity, settlement file transfer and
customer service assistance to FFI shall be at $.06 per transaction.
3. Authorization services, IF PROVIDED, shall be at $.075 per transaction.
A charge of $.75 per voice authorization will be charged.
4. FFI shall be responsible for mailing and documentation of Retrieval
requests and shall pay to USB $3.00 per Retrieval.
5. FFI shall pay to USB $10.00 per Chargeback.
6. Conversion of electronic processing terminals - $25.00 per
occurrence.
7. Special programming requests at $50.00 per hour.
8. New applications for processing - $20.00 application fee.
9. Customer Service call outside of 8:30 a.m. - 5:00 p.m. CST (Mon.-Fri.)
will result in a charge to FFI of $3.00 per call.
10. Check reconciliation services - large dollar items - $50.00 month.
11. All other services not listed above will be priced upon request.
II. Pricing for FFI merchants solicited outside of the floral and death care
industry will be priced by USB in accordance with its credit standards and
procedures in place and in accordance with the interchange rates of the
Card Associations plus the above stated processing costs.
III. ACH Pricing shall be as follows:
1. $.08 per ACH generated
2. $.75 per ACH reject
3. $20.00 minimum per ACH tape
<PAGE> 1
EXHIBIT 11: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
1998 1997
(In Thousands Except Per
Share Data)
<S> <C> <C>
Primary
Average shares outstanding 7,824 8,076
Net effect of dilutive stock options and warrants
based on the treasury stock method using average market price -- --
Total 7,824 8,076
Net income $1,768 $3,433
Per share amount $ 0.23 $ 0.43
Fully diluted
Average shares outstanding 7,824 8,076
Net effect of dilutive stock options and warrants
based on the treasury stock method using the
year-end market price 841 639
Total 8,665 8,715
Per share amount $ 0.20 $ 0.39
</TABLE>
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<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 8, 1998, 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, 1998.
/s/Ernst & Young LLP
Tampa, Florida
November 20, 1998
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<PAGE> 2
<TABLE>
<CAPTION>
DIRECTORS AND
PRINCIPAL OCCUPATIONS OFFICERS OFFICES
- --------------------- -------- -------
<S> <C> <C>
T. CRAIG BENSON* ANDREW W. WILLIAMS CORPORATE HEADQUARTERS
President, Corporate Equities Chairman of the Board and 8075 20th Street
Division of Service Chief Executive Officer Vero Beach, Florida 32966
Corporation International 561-563-0263
Houston, Texas JAMES H. WEST
President and Chief Financial
Officer FORM 10-KSB
SOLOMON O. HOWELL, JR.*+ -----------
Consultant to A copy of the exhibits
H&N Constructors, Inc. KELLY S. MCMAKIN accompanying the Form 10-KSB
Louisville, Kentucky Vice President, Treasurer report filed with The Securities
and Secretary & Exchange Commission can be
WILLIAM E. MERCER*+ obtained by writing to:
Chairman of the Board and JAMES J. PAGANO Kely S. McMakin
Chief Executive Officer Vice President and 8075 20th Street
Southwest Guaranty Trust Marketing Director Vero Beach, Florida 32966
Company
Houston, Texas AUDITORS
--------
KENNETH G. PUTTICK*+ ERNST & YOUNG LLP
Owner of Ken Puttick Tampa, Florida
Buick-Cadillac
Vero Beach, Florida
JAMES H. WEST CORPORATE COUNSEL
President of -----------------
Florafax International, Inc. CAUTHORN, HALE, HORNBERGER,
Vero Beach, Florida FULLER, SHEEHAN & BECKER
One Riverwalk Place, Suite 620
ANDREW W. WILLIAMS 700 North St. Mary's Street
Chairman of the Board and San Antonio, Texas 78205
Chief Executive Office
Florafax International, Inc. TRANSFER AGENT
AND REGISTRAR
--------------
REGISTRAR AND TRANSFER COMPANY
10 Commerce Drive
Cranford, New Jersey 07016
</TABLE>
+Member of audit committee
*Member of compensation committee
-59-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 3,544,000
<SECURITIES> 0
<RECEIVABLES> 2,224,000
<ALLOWANCES> 482,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,702,000
<PP&E> 4,974,000
<DEPRECIATION> 2,992,000
<TOTAL-ASSETS> 14,727,000
<CURRENT-LIABILITIES> 5,259,000
<BONDS> 2,098,000
0
0
<COMMON> 85,000
<OTHER-SE> 6,863,000
<TOTAL-LIABILITY-AND-EQUITY> 6,948,000
<SALES> 0
<TOTAL-REVENUES> 13,391,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,213
<LOSS-PROVISION> 113,000
<INTEREST-EXPENSE> 82,000
<INCOME-PRETAX> 2,304,000
<INCOME-TAX> 536,000
<INCOME-CONTINUING> 1,768,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,768,000
<EPS-PRIMARY> .23
<EPS-DILUTED> .20
</TABLE>
