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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
(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
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
Commission File Number 0-5531
FLORAFAX INTERNATIONAL, INC.
(Name of small business issuer in its charter)
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DELAWARE 41-0719035
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization)
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number (561) 563-0263
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
(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. YES X 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.
EXPLANATORY NOTE TO FORM 10-KSB/A
This Annual Report on Form 10-KSB/A amends and supersedes, to the extent
set forth herein, the Registrant's Annual Report on Form 10-KSB for the year
ended August 31, 1998 previously filed on November 25, 1998. As more fully set
forth below, the following financial and related information has been updated in
connection with the filing of the restated financial statements included herein.
The items of Form 10-KSB affected by this Amendment No. 1 on Form 10-KSB/A
are as follows:
Part I -- Item 1. Description of Business
Part II -- Item 6. Management's Discussion and Analysis or Plan of
Operation and Selected Financial Data
Item 7. Financial Statements
The Registrant has restated certain of it historical fiscal year
ended August 31, 1998 audited financial statements to modify its
accounting for the transaction with Marketing Projects, Inc. as
more fully discussed in Note 15 to the consolidated financial
statements. Listed below are the consolidated financial
statements that are responsive to Item 7 of Form 10-KSB.
Report of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders'
Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Part III -- Item 13. Exhibits and Reports on Form 8-K:
Exhibit 23 Consent of Independent Certified Public
Accountants
All page numbers for the amended Items set forth in this Form 10-KSB/A
correspond to the page numbering of the same Items in the original Form 10-KSB.
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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, which include the zip codes a shop will deliver to, the number of
orders a shop has previously received, the number of orders that a florist has
sent to the Company, and whether the florist has a fax machine. 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.
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
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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.
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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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 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Dollar amounts discussed in Item 6 are expressed in thousands.
LIQUIDITY AND CAPITAL RESOURCES
During 1998, the Company had three primary events which consumed cash
flows, as discussed below.
Prior to May 1, 1998, under the terms of an existing joint marketing
services agreement, the Company was required to pay Marketing Projects, Inc.
("MPI") commissions equaling 8% of floral orders generated from marketing
partners solicited by MPI. During the years ended August 31, 1998, 1997 and 1996
the Company recorded commissions expense of $1,050, $1,455 and $1,219 relative
to the agreement.
Effective May 1, 1998, the Company entered into an agreement with MPI that
(1) modified the rights and obligations of both parties under the existing joint
marketing servicing agreement and (2) provided for the acquisition of MPI's
proprietary marketing systems by the Company. Also on May 1, 1998, the Company
entered into a non-compete and non-disclosure agreement with MPI and the
principal employees of MPI. Total consideration of $3,670 was paid to MPI at the
time of closing and the Company is further obligated to pay up to $125 in cash
in each of the following eight fiscal quarters, contingent upon the attainment
of quarterly revenue targets.
Of total consideration paid, $150 has been allocated to the purchase of
MPI's proprietary marketing systems and $100 has been allocated to the
non-compete agreement, with amortization provided over useful lives of 1 and 2
years, respectively. These assets, net of accumulated amortization of $62, are
included in other intangible assets at August 31, 1998.
As a result of the contract modification, the Company is no longer
obligated to pay commissions to MPI on future floral orders generated from
marketing partners solicited by MPI prior to May 1, 1998. Additionally, the
Company's obligations to support such marketing partners has not been
substantially increased. As the Company believes that its future revenue stream
from these marketing partner arrangements will be
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unaffected by the contract modification, the Company determined that the
remainder of the consideration paid to MPI has no benefit to future periods and
should be expensed at the date of the contract modification. Accordingly, $3,495
of the total consideration paid has been recognized as a contract modification
expense during year ended August 31, 1998.
The Company will expense all quarterly contingent payments to the extent
and at the time they become earned. For the quarter ended August 31, 1998, the
first contingent payment of $125 was earned and paid, and is included within
selling, advertising, and promotion expenses.
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.
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.
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RESULTS OF OPERATIONS
GENERAL COMMENTS
1998 revenues 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 income declined from $3,433,000 in 1997 to a net loss of $ 623,000 in
1998, due primarily to the following two reasons. First, the Company recorded $
3,495,000 as contract modification expense related to the MPI transaction, as
more fully discussed in note ( 13) to the consolidated financial statements.
Second, in 1997 the Company recorded other income of $819,000 resulting
primarily from litigation proceeds (see note 11 to the consolidated financial
statements).
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 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% $686,000 in 1998 and
9% $505,000 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 an increase 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
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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% $751,000 during
1998. The increase 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% $580,000
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 contract modification agreement entered into in
1998 with Marketing Projects, Inc. (see note 13 to the consolidated financial
statements) caused the Company to record an intangible asset related to
marketing techniques , as well as a noncompete agreement. The amortization of
these intangible assets increased amortization expense in 1998.
During 1998 the Company paid $3,495,000 to MPI to modify a servicing
agreement with MPI. Prior to modifying this servicing agreement, MPI acted as an
agent that interfaced with the Company's Flower Club corporate customers. By
modifying the servicing agreement the Company began interfacing with the
corporate customers directly, thereby strengthening these relationships.
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.
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 benefit of $ 682,000,
all of which was recorded as a deferred income tax benefit. At August 31, 1998,
the remaining valuation allowance of $ 405,000 consists
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primarily of certain capital losses that do not meet the requirements for
recognition as an asset, as well as income tax credits that the Company does not
believe will be realized. As of August 31, 1998, the Company has available net
operating loss carryforwards of $ 4,980,000 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 or
1999; therefore, the carryforwards were classified as noncurrent at August 31,
1998 and August 31, 1997.
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.
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
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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 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 two 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:
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<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------
1998 1997 1996 1995 1994
----------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(RESTATED
SEE NOTE 4)
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SELECTED INCOME STATEMENT DATA:
Net revenues................................... $13,391 $11,609 $10,299 $8,449 $7,567
Net income (loss) (1,2,3)...................... $ (623) $ 3,433 $ 2,262 $ 707 $ (311)
Basic earnings (loss) per share................ $ (.08) $ 0.43 $ 0.38 $ 0.12 $(0.06)
Diluted earnings (loss) per share.............. $ (.08) $ 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.
4) See Note 15 to the financial statements relative to restatement of the
Company's financial statements for the year ended August 31, 1998.
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------------------------
1998 1997 1996 1995 1994
----------- ------- ------ ------- -------
(IN THOUSANDS)
(RESTATED
SEE NOTE 4
ABOVE)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Current assets................................ $ 5,752 $ 6,325 $5,686 $ 3,733 $ 2,847
Current liabilities........................... 5,259 5,209 5,198 5,131 5,259
Working capital (deficiency).................. 493 1,116 488 (1,398) (2,412)
Total assets.................................. 11,886 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)............. 4,557 5,253 3,237 (1,756) (2,515)
</TABLE>
10
<PAGE> 11
ITEM 7. RESTATED FINANCIAL STATEMENTS
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.
As more fully discussed in Note 15, the Company has restated its financial
statements for the year ended August 31, 1998 with respect to its accounting for
the Company's acquisition of the assets of Marketing Projects, Inc. (MPI), and
cancellation of a Servicing Agreement between the Company and MPI .
/s/ ERNST & YOUNG LLP
Tampa, Florida
October 8, 1998,
except for Notes 14 and 15, as to which the dates are
December 9, 1998 and April 6, 1999, respectively
11
<PAGE> 12
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31
-------------------------
1998 1997
------------ -------
(IN THOUSANDS, EXCEPT
SHARE DATA)
(RESTATED
SEE
NOTE 15)
<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........................ 301 264
Prepaid and other assets.................................... 165 40
------- -------
Total current assets................................... 5,752 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....... 1,995 1,995
Marketing techniques, net of accumulated amortization of
$50....................................................... 100 --
Deferred tax asset, net of allowance........................ 1,881 1,236
Other intangible assets..................................... 176 95
------- -------
4,152 3,326
------- -------
Total assets........................................... $11,886 $10,594
======= =======
</TABLE>
See accompanying notes.
12
<PAGE> 13
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
AUGUST 31
----------------------
1998 1997
-------- --------
(IN THOUSANDS, EXCEPT
SHARE DATA)
(RESTATED
SEE
NOTE 15)
<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
Long-term debt, less current maturities..................... 2,018 80
Membership security deposits................................ 52 52
------- -------
Total liabilities...................................... 7,329 5,341
Stockholders' equity:
Preferred stock ($10 par value, 600,000 shares authorized at
August 31, 1998 and 1997)................................. -- --
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......................................... (4,123) (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............................. 4,557 5,253
------- -------
Total liabilities and stockholders' equity............. 11,886 $10,594
======= =======
</TABLE>
See accompanying notes.
13
<PAGE> 14
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
----------------------
1998 1997
--------- -------
(IN THOUSANDS, EXCEPT
SHARE DATA)
(RESTATED
SEE
NOTE 15)
<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........................ 4,085 3,209
Directory publishing...................................... 315 383
Contract modification charge.............................. 3,495
Depreciation and amortization............................. 403 261
------- -------
14,822 9,691
------- -------
Operating income (loss)..................................... (1,431) 1,918
Other income (expense):
Interest expense.......................................... (82) (6)
Interest income........................................... 165 183
Other..................................................... 43 819
------- -------
126 996
------- -------
Income (loss) before income taxes........................... (1,305) 2,914
Income tax (expense) benefit:
Current income taxes........................................ -- (118)
Deferred income taxes....................................... 682 637
------- -------
682 519
------- -------
Net income (loss)........................................... $ (623) $ 3,433
======= =======
Weighted average common and common equivalent shares
outstanding:
Basic..................................................... 7,824 8,076
Diluted................................................... 7,824 8,715
Basic earnings (loss) per share:
Net income................................................ $ (.08) $ 0.43
Diluted earnings (loss) per share:
Net income................................................ $ (.08) $ 0.39
</TABLE>
See accompanying notes.
14
<PAGE> 15
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
NUMBER OF PAR PAID-IN ACCUMULATED TREASURY
SHARES ISSUED VALUE CAPITAL STOCK 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........................ -- -- -- (623) -- (623)
----- --- ------- ------- ------- -------
Balance at August 31, 1998
(Restated See Note 15).......... 8,449 $85 $10,211 $(4,123) $(1,616) $(4,557)
===== === ======= ======= ======= =======
</TABLE>
See accompanying notes.
15
<PAGE> 16
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
---------------------
1998 1997
-------- -------
(IN THOUSANDS)
(RESTATED
SEE
NOTE 15)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ (623) $3,433
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income tax expense (benefit).................. (682) (637)
Depreciation........................................... 279 179
Amortization........................................... 124 82
Compensation expense under stock option plan........... 76 --
Provision for doubtful accounts........................ 127 170
Changes in operating assets and liabilities:
Accounts receivable.................................... (115) (323)
Prepaid and other assets............................... (125) 14
Other assets........................................... (205) 84
Accounts payable....................................... 232 (159)
Accrued liabilities and member benefits................ (262) 249
Membership security deposits........................... (1)
------- ------
Net cash provided by operating activities................. (1,174) 3,091
======= ======
INVESTING ACTIVITIES
Capital expenditures...................................... (1,318) (844)
Change in restricted cash................................. (9) 2
Investment in common stock................................ (100) --
------- ------
Net cash used in investing activities..................... (1,427) (842)
======= ======
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.
16
<PAGE> 17
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
At the time a florist applies for membership they are billed a non
refundable account set up fee. The account set up fee is ninety-nine dollars,
and is recognized as revenue at the time the florist is accepted as a member to
offset costs incurred. Once a florist has been accepted as a member, they are
billed dues and advertising fees on a monthly basis, and those billings are
recognized as income at that time. Monthly dues and advertising fees are billed
at different rates and amounts, depending on the location of the florist and the
size of the advertisement placed by the florist. The benefits of membership
include the ability to send and receive orders to and from other members,
receive orders generated by the Company via fax or telephone, the ability to
send gift baskets anywhere in the country, and certain other benefits. A florist
may cancel their membership at any time, but are responsible for monthly dues
and advertising fees as long as they remain in the membership directory.
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.
(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.
17
<PAGE> 18
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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>
(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.
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.
(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.
18
<PAGE> 19
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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 (loss) per share is higher than primary earnings per share by $.(.01)
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 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.
19
<PAGE> 20
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
(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>
<S> <C>
1999........................................................ $ 80
2000........................................................ 336
2001........................................................ 673
2002........................................................ 673
2003........................................................ 336
------
2,098
Current portion............................................. 80
------
$2,018
======
</TABLE>
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>
20
<PAGE> 21
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES -- (CONTINUED)
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. GTE/MR appealed the case. 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 for 1997.
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.
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
21
<PAGE> 22
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
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.
Information regarding stock options for years 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER EXERCISE PRICE TOTAL
OF SHARES RANGE PER SHARE EXERCISE 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.
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.
22
<PAGE> 23
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
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
------------ ------
(RESTATED
SEE NOTE 15)
<S> <C> <C>
Pro forma net income (loss)............................ $(1,339) $3,016
Pro forma earnings (loss) per share:
Basic............................................. $ (0.17) $ 0.37
Diluted........................................... (0.17) 0.35
Weighted average shares:
Basic............................................. 7,824 8,076
Diluted........................................... 7,824 8,715
</TABLE>
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
------------ -----
(RESTATED
SEE NOTE 15)
<S> <C> <C>
Current income taxes................................... $ -- $ 118
Deferred income taxes.................................. (682) (637)
----- -----
Income tax provisions.................................. $(682) $(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
------------ ------
(RESTATED
SEE NOTE 15)
<S> <C> <C>
Allowances for bad debts............................... $ 181 $ 191
Accrued liabilities and other.......................... 119 73
Depreciation and amortization.......................... 155 216
Net operating losses................................... 1,874 1,110
Compensation under stock option plan................... --
General business credits............................... 232 456
Basis difference in intangible assets.................. 26 --
------ ------
2,587 2,046
Valuation allowance.................................... (405) (546)
------ ------
Total deferred taxes.............................. $2,182 $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 $405 consists primarily of
certain capital losses that do not meet the requirements for recognition as an
asset, as well as tax credits in the amount of $155 that are not expected to be
realized. This represents a change in the valuation allowance for the current
year of $ 141 as compared to a change of $1,606 in the prior year.
23
<PAGE> 24
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
As of August 31, 1998, the Company has available net operating loss
carryforwards of $4,980, which expire as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
--------------- ------
<S> <C>
2002................................................... $ 135
2005................................................... 22
2007................................................... 1,473
2008................................................... 1,625
2009................................................... 486
2013................................................... 1,239
------
$4,980
======
</TABLE>
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 and
1999, therefore the carryforwards were classified as non current as of August
31, 1998 and August 31, 1997.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate their fair values.
Accounts receivable and accounts payable: The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate their
fair value.
Long-term debt: The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. The
carrying amounts reported in the balance sheet for long-term debt approximate
their fair value.
8. RELATED PARTY TRANSACTIONS
During 1998, the Company purchased the land and buildings used for its Vero
Beach operations for approximately $673. The transaction 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 1997. The reduction resulted in a credit
to income of $637 in 1997. The reduction was recorded in the fourth quarter of
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
24
<PAGE> 25
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RETIREMENT PLAN -- (CONTINUED)
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.
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
------------ -------
(RESTATED
SEE NOTE 15)
<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 (loss) after allocation of general and
administrative expenses:
Flowers-by-wire........................................... $ (52) $ 2,690
Charge card processing.................................... 68 98
------- -------
Operating profit before allocation of Corporate
overhead............................................... 16 2,788
------- -------
Corporate overhead........................................ 1,447 870
------- -------
Operating income (loss)..................................... $(1,431) $ 1,918
======= =======
Identifiable assets:
Flowers-by-wire........................................... $ 5,992 $ 4,139
Charge card processing.................................... 569 472
General corporate assets.................................. 5,325 5,983
------- -------
$11,886 $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>
25
<PAGE> 26
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. MARKETING PROJECTS, INC. AGREEMENT
Prior to May 1, 1998, under the terms of an existing marketing services
agreement, the Company was required to pay Marketing Projects, Inc. ("MPI")
commissions on orders generated from marketing partners solicited by MPI. During
the years ended August 31, 1998, 1997 and 1996 the Company recorded commissions
expense of $1,050, $1,455 and $1,219 relative to the agreement.
Effective May 1, 1998, the Company entered into an agreement with MPI that
(1) modified the rights and obligations of both parties under the marketing
servicing agreement and (2) provided for the acquisition of MPI's proprietary
marketing systems by the Company. Also on May 1, 1998, the Company entered into
a non-compete and non-disclosure agreement with MPI and the principal employees
of MPI. Total consideration of $3,670 was paid to MPI at the time of closing and
the Company is further obligated to pay up to $125 in cash in each of the
following eight fiscal quarters, contingent upon the attainment of quarterly
revenue targets.
Of total consideration paid, $150 has been allocated to the purchase of
MPI's proprietary marketing systems and $100 has been allocated to the
non-compete agreement, with amortization provided over useful lives of 1 and 2
years, respectively. These assets, net of accumulated amortization of $62, are
included in other intangible assets at August 31, 1998.
Under the original marketing services agreement, the Company was obligated
to pay MPI commissions equaling 8% of floral orders generated from marketing
partners solicited by MPI. This 8% commission was continuously payable to MPI
even in the event the marketing services agreement was terminated by either
party. As a result of the May 1, 1998 contract modification, the Company is no
longer obligated to pay any commissions to MPI on future floral orders generated
from marketing partners solicited by MPI prior to May 1, 1998.
The Company believes that this contract modification will result in the
realization of significant cost savings in future years due to the elimination
of the 8% MPI commission obligation. The Company further believes that its
future revenue stream and support requirements relative to these marketing
partner arrangements will be generally unaffected by the contract modification.
Further, the May 1, 1998 payment also served to compensate MPI for the loss of
commissions that would have otherwise been payable to them. Since the Company's
contractual relationship was directly with the respective marketing partners and
MPI was not expected to perform continuing services with regards to these
partners, the Company believes that the MPI contract modification represents the
termination of a marketing agreement.
Based upon the above, the Company determined that the remainder of the
consideration paid to MPI has no benefit to future periods and should be
expensed at the date of contract modification. Accordingly, $3,495 of the total
consideration paid has been recognized as a contract modification expense during
the year ended August 31, 1998.
The MPI contract modification further provided that any orders generated
from new marketing partners solicited by MPI after May 1, 1998 will be
commissionable at a 4% rate. Because this commission rate approximates the
current market rate within the floral industry and because of the uncertainty of
the amount of floral orders to be generated in the future on this reduced
commission basis, the Company allocated no value to this contract provision.
Since the quarterly contingent payments are based upon the attainment of
future revenue targets, the Company will record such payments as sales
commissions to the extent and at the time they become earned. For the quarter
ended August 31, 1998, the first contingent payment of $125 was earned and paid,
and is included within selling, advertising, and promotion expenses.
26
<PAGE> 27
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENT -- MERGER WITH GERALD STEVENS, INC.
On December 9, 1998, the Company and Gerald Stevens, Inc. entered into a
Merger Agreement that, if consummated, would result in Gerald Stevens, Inc.
becoming a wholly owned subsidiary of the Company. The merger is planned to be
effected by the issuance of our common stock. Depending on the market prices of
our common stock in effect at the time of consummation of this merger, the
Company will issue between 1.25 and 1.35 shares of our common stock for each
share of outstanding Gerald Stevens, Inc. Common Stock. Based upon the current
number of Gerald Stevens, Inc. common shares outstanding, the number of shares
of our common stock issued will range from approximately 26.0 million shares to
28.1 million shares.
15. RESTATEMENT OF 1998 CONSOLIDATED FINANCIAL STATEMENTS
As more fully discussed in Note 13, effective May 1, 1998 the Company
entered into a contract modification agreement with MPI. At that time the
contract was accounted for as a business combination. However, subsequent to the
original accounting of the transaction the Company had several discussions with
the Securities and Exchange Commission. As a result of these conversations, the
Company re-evaluated the facts and circumstances surrounding the MPI transaction
and concluded that the transaction should be accounted for as a contract
modification rather than a business combination. Consequently, the Company has
restated it's financial statements to account for the transaction as a contract
modification.
The following tables reflect the more significant effects of the
restatements on certain components of operations and financial condition:
<TABLE>
<S> <C>
EFFECTS ON OPERATIONS
Operating income, as previously reported.................... $ 2,178
Adjustment related to:
Adjustment to amortization expense........................ 11
Contingent commission expense............................. (125)
Contract modification expense............................. (3,495)
-------
Restated operating (loss)................................... (1,431)
=======
Net (loss) income, as previously reported................... $ 1,768
Adjustment related to:
Adjustment to amortization expense........................ 11
Contingent commission expense............................. (125)
Contract modification expense............................. (3,495)
Income tax effect of adjustments.......................... (1,218)
-------
Restated net (loss) income.................................. (623)
=======
Basic income, per share, as previously reported............. $ 0.23
Adjustment related to:
Adjustment to amortization expense........................ --
Contingent commission expense............................. (0.02)
Contract modification expense............................. (.45)
Income tax effect of adjustments.......................... .16
-------
Restated basic income (loss) per share...................... (0.08)
=======
</TABLE>
27
<PAGE> 28
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. RESTATEMENT OF 1998 CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<S> <C>
Diluted income, per share, as previously reported........... $ 0.20
Adjustment related to:
Adjustment to amortization expense........................ --
Contingent commission expense............................. (0.02)
Contract modification expense............................. (0.40)
-------
Income tax effect of adjustments.......................... .14
-------
Restated diluted income (loss) per share.................... (0.08)
=======
EFFECTS ON FINANCIAL CONDITION
Deferred tax assets-current, as previously reported......... $ 1,265
Adjustment related to:
Reclassification of net operating loss carryforwards...... (967)
Reclassification of tax credits........................... (247)
Reclassification of valuation allowance................... 250
-------
Restated deferred tax assets-current........................ 301
=======
Excess of cost over net assets of acquired businesses, net
of amortization, as previously reported................... $ 5,704
Adjustment related to:
Adjustment to amortization expense........................ 61
Restatement of goodwill related to MPI.................... (3,770)
-------
Restated excess of cost over net assets of acquired
businesses, net of amortization........................... 1,995
=======
Accumulated deficit, as previously reported................. $(1,732)
Adjustment related to:
Adjustment to amortization expense........................ 11
Contingent commission expense............................. (125)
Contract modification expense............................. (3,495)
Income tax effect of adjustments.......................... 1,218
-------
Restated accumulated deficit................................ (4,123)
=======
</TABLE>
28
<PAGE> 29
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereto duly authorized.
Florafax International, Inc.
Date: April 8, 1999 /s/ ANDREW W. WILLIAMS
--------------------------------------
Andrew W. Williams
Chairman and Chief Executive Officer
Date: April 8, 1999 /s/ JAMES H. WEST
--------------------------------------
James H. West
President and Chief Financial Officer
Date: April 8, 1999 /s/ KELLY S. MCMAKIN
--------------------------------------
Kelly S. McMakin
Controller and Treasurer
Pursuant to the requirements of the Securities and 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.
<TABLE>
<S> <C> <C>
/s/ ANDREW W. WILLIAMS Chairman of the Board April 8, 1999
- -------------------------------------
Andrew W. Williams
/s/ SOLOMON ODEN HOWELL, JR. Director April 8, 1999
- -------------------------------------
Solomon Oden Howell, Jr.
/s/ WILLIAM E. MERCER Director April 8, 1999
- -------------------------------------
William E. Mercer
/s/ KENNETH G. PUTTICK Director April 8, 1999
- -------------------------------------
Kenneth G. Puttick
/s/ JAMES H. WEST Director April 8, 1999
- -------------------------------------
James H. West
</TABLE>
<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, except for Notes 14 and 15 as to which the
dates are December 9, 1998 and April 6, 1999, respectively, with respect to the
consolidated financial statements of Florafax International, Inc. included in
this Annual Report (Form 10-KSB/A) for the year ended August 31, 1998.
/s/ ERNST & YOUNG LLP
Tampa, Florida
April 7, 1999
