<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
FLORAFAX INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-5531 41-0719035
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
8075 20TH STREET
VERO BEACH, FLORIDA 32966
(561) 563-0263
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
ANDREW W. WILLIAMS
FLORAFAX INTERNATIONAL, INC.
8075 20TH STREET
VERO BEACH, FLORIDA 32966
(561) 563-0263
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES A. BLALOCK III JONATHAN L. AWNER
ANDREWS & KURTH L.L.P. AKERMAN, SENTERFITT & EIDSON, P.A.
1701 PENNSYLVANIA AVENUE, N.W. ONE S.E. 3RD AVENUE, 28TH FLOOR
WASHINGTON, D.C. 20006 MIAMI, FLORIDA 33131
TELEPHONE: (202) 662-2700 TELEPHONE: (305) 374-5600
FACSIMILE: (202) 662-2739 FACSIMILE: (305) 374-5095
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the Registration Statement becomes effective and all other
conditions to the merger of a wholly owned subsidiary of Registrant with and
into Gerald Stevens, Inc. pursuant to the Agreement and Plan of Merger, dated as
of December 9, 1998, as amended on April 9, 1999, described in the enclosed
Proxy Statement/Prospectus have been satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
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PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1)(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value....... 28,052,878 shares 2.59 $72,656,954.00 $20,198.63
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated in accordance with Rule 457(f)(2) on the basis of the aggregate
book value of the outstanding shares of common stock of Gerald Stevens, Inc.
computed as of December 31, 1998.
(2) $3,194.44 previously paid in connection with the filing of the Registrant's
preliminary proxy statement on Schedule 14A (Registration No. 0-5531).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
TO THE STOCKHOLDERS OF FLORAFAX INTERNATIONAL, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
AT 2:30 P.M. ON APRIL 23, 1999
BENT PINE COUNTRY CLUB
6001 CLUBHOUSE DRIVE
VERO BEACH, FLORIDA 32967
The board of directors of Florafax International, Inc. invites you to
attend our annual meeting to vote on the following proposals, together with any
other business that may properly come before the meeting:
1. PROPOSED STOCK ISSUANCE AND CHANGE OF CONTROL. To consider and
vote upon a proposal for the issuance of shares of our common stock, $0.01
par value, in connection with the merger of Gerald Stevens, Inc. into a
subsidiary of ours, and the associated change of control of our company.
The Agreement and Plan of Merger, which describes the terms of the stock
issuance and change of control in detail, is attached to the accompanying
Proxy Statement/Prospectus as Annex A.
2. PROPOSED AMENDMENT TO CERTIFICATE OF INCORPORATION. In connection
with the merger, to consider and vote upon a proposal to amend our
Certificate of Incorporation. If approved by our stockholders, the
amendment will become effective upon completion of the merger and will
change our name from "Florafax International, Inc." to "Gerald Stevens,
Inc." and increase the number of authorized shares of our common stock from
70,000,000 to 250,000,000. The Certificate of Amendment to be filed with
the Secretary of State of the State of Delaware is attached to the
accompanying Proxy Statement/Prospectus as Annex C.
3. ELECTION OF DIRECTORS. In connection with the merger, to elect
five persons to serve as our directors upon completion of the merger until
our next annual meeting or until their successors have been qualified.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR EACH OF THESE
PROPOSALS.
You may vote on these proposals in person or by proxy. If you cannot attend
the meeting, we urge you to complete and return the enclosed proxy card promptly
in the accompanying postage-paid envelope, so that your shares will be
represented and voted in accordance with your instructions. Of course, if you
attend the meeting, you may personally vote, even if you have already returned
your signed proxy. You may revoke your proxy at any time before the meeting
either in writing or by personal notification.
Only stockholders of record at the close of business on March 31, 1999 will
be entitled to notice of and to vote at the meeting or any adjournments or
postponements of the meeting.
By the Order of the Board of Directors,
/s/ KELLY S. MCMAKIN
KELLY S. MCMAKIN
Secretary
Vero Beach, Florida
April 12, 1999
PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY TODAY.
<PAGE> 3
-------------------------
PROXY STATEMENT
FOR ANNUAL MEETING
OF
FLORAFAX INTERNATIONAL, INC.
-------------------------
PROSPECTUS OF
FLORAFAX INTERNATIONAL, INC.
Our board of directors and the board of directors of Gerald Stevens, Inc.
have agreed to a merger designed to create one of the leading floral and gift
retailers and marketers. We have entered into a merger agreement with Gerald
Stevens which, based on our closing stock price of $17.75 per share on April 7,
1999, will require us to issue an aggregate of approximately 28.1 million shares
of our common stock to Gerald Stevens stockholders having an aggregate market
value of approximately $498 million. Gerald Stevens is a private company and
therefore you cannot assess the market value of its common stock by referring to
any public trading activity. Following the merger, the current Gerald Stevens
stockholders will own approximately 77.5% of the total outstanding shares of our
common stock.
Under The Nasdaq Stock Market rules, we cannot complete the merger unless
our stockholders approve the issuance of our common stock and the associated
change of control of our company. This will be one of the proposals we will
submit for your approval at the annual meeting. In addition, we will submit for
your approval an amendment to our Certificate of Incorporation which will change
our name to "Gerald Stevens, Inc." and increase the number of authorized shares
of our common stock. We will also ask you to elect five persons to serve as our
directors until our next annual meeting.
The annual meeting is an important meeting which affects your investment in
our company. We invite you to attend the annual meeting and vote your shares
directly. However, even if you do not attend, you may vote by proxy, which
allows you to direct another person to vote your shares on your behalf. We are
furnishing this document to our stockholders to solicit their proxies to be
voted at the annual meeting in support of each of the proposals.
The date, time and place of the annual meeting is as follows:
2:30 p.m., April 23, 1999
Bent Pine Country Club
6001 Club House Drive
Vero Beach, FL 32967
This document provides you with detailed information about the merger and
the matters to be submitted for stockholder approval at our annual meeting. We
encourage you to read the entire document carefully, including all of its
annexes. WE ESPECIALLY ENCOURAGE YOU TO READ THE "RISK FACTORS" SECTION WHICH
BEGINS ON PAGE 12. You may obtain additional information about us from documents
we have filed with the Securities and Exchange Commission.
We will mail this document along with the proxy to our stockholders
beginning on or about April 12, 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL 12, 1999.
<PAGE> 4
We have not authorized anyone to give any information or make any
representation about the matters discussed in this document that differs from or
adds to the information in this document or any of the Annexes attached to this
document. Therefore, if anyone does give you different or additional
information, you should not rely on it. The information contained in this
document speaks only as of its date unless the information specifically
indicates that another date applies.
-------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Questions and Answers about the Annual Meeting of Florafax
Stockholders.............................................. 1
Summary..................................................... 3
Risk Factors................................................ 12
Cautionary Statement Concerning Forward-Looking
Statements................................................ 21
The Annual Meeting.......................................... 22
Proposal No. 1 -- Stock Issuance and Change of Control...... 24
General................................................... 24
Background of the Merger.................................. 24
Our Reasons for the Merger; Recommendations of Our Board
of Directors........................................... 28
Opinion of ABN AMRO....................................... 30
Gerald Stevens' Reasons for the Merger.................... 38
Change of Control......................................... 40
Accounting Treatment...................................... 41
Interests of Executive Officers, Directors and Director
Nominees in the Matters to be Acted Upon............... 41
Absence of Appraisal Rights for Florafax Stockholders..... 42
Stock Market Listing...................................... 42
Treatment of Stock Certificates........................... 42
The Merger Agreement...................................... 42
Material Federal Income Tax Consequences of the Merger.... 46
Effects of Merger on Rights of Stockholders............... 48
Nasdaq Requirement for Stockholder Approval of the Change
of Control and the Stock Issuance...................... 48
Florafax International, Inc. ............................... 49
Gerald Stevens, Inc......................................... 51
Selected Historical Financial Data for Gerald Stevens....... 56
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Gerald Stevens............... 57
Proposal No. 2 -- Amendment to Certificate of
Incorporation............................................. 66
Proposal No. 3 -- Election of Directors..................... 67
Information Concerning Directors and Officers............... 68
Security Ownership of Certain Beneficial Owners............. 75
Description of Florafax Capital Stock....................... 79
Appointment of Auditors..................................... 80
Annual Reports.............................................. 80
Proxy Solicitation.......................................... 80
Other Matters............................................... 81
Experts..................................................... 81
</TABLE>
i
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Legal Matters............................................... 82
Stockholder Proposals for 2000 Annual Meeting............... 82
Where You Can Find More Information......................... 82
Index to Pro Forma Consolidated Financial Statements........ PF-1
Index to Financial Statements............................... F-1
Annex A -- Agreement and Plan of Merger................... A-1
Annex A-1 -- Amendment No. 1 to Agreement and Plan of
Merger......................................... A-1-1
Annex B -- Opinion of ABN AMRO............................ B-1
Annex C -- Certificate of Amendment....................... C-1
Annex D-1 -- Annual Report of Florafax International, Inc.
on Form 10-KSB for the fiscal year ended August
31, 1998....................................... D-1-1
Annex D-2 -- Amendment No. 1 on Form 10-KSB/A to Annual
Report of Florafax International, Inc. on Form
10-KSB for the fiscal year ended August 31,
1998........................................... D-2-1
Annex D-3 -- Quarterly Report of Florafax International,
Inc. on Form 10-QSB for the quarterly period
ended November 30, 1998........................ D-3-1
Annex D-4 -- Amendment No. 1 on Form 10-QSB/A to Quarterly
Report of Florafax International, Inc. on Form
10-QSB for the quarterly period ended November
30, 1998....................................... D-4-1
Annex D-5 -- Current Report of Florafax International, Inc.
on form 8-K/A dated August 11, 1998............ D-5-1
Annex D-6 -- Current Report of Florafax International, Inc.
on Form 8-K dated December 9, 1998............. D-6-1
</TABLE>
ii
<PAGE> 6
QUESTIONS AND ANSWERS ABOUT THE
ANNUAL MEETING OF FLORAFAX STOCKHOLDERS
Q: WHEN AND WHERE IS THE ANNUAL MEETING?
A: Our 1999 Annual Meeting of Stockholders
will be held on April 23, 1999, beginning at 2:30 p.m., at Bent Pine
Country Club, 6001 Clubhouse Drive, Vero Beach, Florida 32967.
Q: WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
A: At the annual meeting, you will be asked to
approve three proposals:
1. STOCK ISSUANCE AND CHANGE OF CONTROL. You will be asked to approve the
issuance of our common stock to Gerald Stevens stockholders in
connection with the proposed merger and the associated change of control
of our company.
2. AMENDMENT TO OUR CERTIFICATE OF INCORPORATION. You will be asked to
approve an amendment to our certificate of incorporation that will
change our name from "Florafax International, Inc." to "Gerald Stevens,
Inc." and increase the number of authorized shares of our common stock
from 70,000,000 to 250,000,000.
3. ELECTION OF DIRECTORS. You will be asked to elect five directors to
serve from the date the merger is completed until the next annual
meeting.
Q: WHAT IS THE VOTE REQUIRED TO APPROVE EACH OF
THE PROPOSALS?
A: The affirmative vote of a majority of the
shares of our common stock present in person or by proxy and entitled to
vote is required to approve proposals 1 and 3. The affirmative vote of a
majority of the total number of outstanding shares of our common stock is
required to approve proposal 2.
Q: WILL THE PROPOSALS BE APPROVED?
A: Yes. All of our directors, executive officers
and significant stockholders have executed a voting agreement. Under this
voting agreement, these stockholders have agreed to vote all of their
shares, which constitute approximately 56.7% of the outstanding shares of
our common stock, in favor of each of the three proposals to be presented
at the annual meeting. This voting agreement assures that all three
proposals will be approved even if all of our other stockholders vote their
shares against the proposals. Nevertheless, we encourage you to attend the
annual meeting, either in person or by proxy, because of its importance to
your investment in Florafax.
Q: WHO WILL VOTE AT THE ANNUAL MEETING?
A: All individuals who own our common stock
at the close of business on March 31, 1999 may vote at the annual meeting.
Q. WHAT DO I NEED TO DO NOW?
A. Simply indicate on your proxy card how you
want to vote and then mail your signed and dated proxy card in the enclosed
postage-paid return envelope as soon as possible. Our board of directors
unanimously recommends that you vote in favor of each of the three
proposals.
Q. WHAT IF I PLAN TO ATTEND THE ANNUAL MEETING
IN PERSON?
A. We recommend that you send in your proxy
card even if you plan to attend the annual meeting in person. Sending in
your proxy card will ensure that your vote is counted in the event that you
cannot attend the annual meeting. However, sending in your proxy card will
not prevent you from attending the annual meeting or voting in person.
1
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE
ANNUAL MEETING OF FLORAFAX STOCKHOLDERS -- (CONTINUED)
Q. IF MY SHARES ARE HELD BY MY BROKER, WILL MY BROKER VOTE MY SHARES FOR ME?
A. Your broker will not be able to vote your shares of common stock without
voting instructions from you on proposals 1 or 2. Your broker will be able
to vote your shares, absent voting instructions from you, on proposal 3.
You should instruct your broker how to vote your shares on each of the
proposals, following the directions provided by your broker.
Q. DO I NEED TO EXCHANGE MY STOCK CERTIFICATE WHEN THE NAME "FLORAFAX
INTERNATIONAL, INC." IS CHANGED TO "GERALD STEVENS, INC."?
A. No. We and our transfer agent will continue to honor your existing
Florafax stock certificates after the name of the company is changed.
WHO CAN HELP ANSWER MY QUESTIONS?
If you have more questions about
the stock issuance and the associated change in control,
the amendment to our certificate of incorporation
or the election of directors,
you should contact Mr. Kelly McMakin at:
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Telephone: (561) 563-0263
E-mail: [email protected]
2
<PAGE> 8
SUMMARY
This summary highlights selected information contained elsewhere or
incorporated by reference in this document. This summary may not contain all of
the information that is important to you. Where appropriate, we have included
page references to direct you to a more complete description of the topics
presented in this summary.
THE COMPANIES
FLORAFAX INTERNATIONAL, INC.
8075 20th Street
Vero Beach, Florida 32966
(561) 563-0263
We are principally engaged in the business of generating floral orders and
providing floral order placement services to retail florists throughout the
United States. We are one of only five flowers-by-wire service providers in the
United States. We are also engaged in the business of credit and charge card
processing for third parties.
GERALD STEVENS, INC.
One Financial Plaza, Suite 1101
100 S.E. 3rd Avenue
Fort Lauderdale, Florida 33394
(954) 713-5000
Gerald Stevens was established in 1998 with the goal of becoming the
nation's leading branded retailer and consumer marketer of flowers, floral
related merchandise and gifts. Gerald Stevens recently has acquired floral
retailers, which have a total of 100 stores, a flower import company, a floral
order generation business and an internet floral business.
OUR REASONS FOR THE MERGER
The proposed merger with Gerald Stevens presents us with the opportunity to
develop a national retail floral brand. We see this opportunity as a way to
diversify our existing business and enhance stockholder value through the
potential for long-term growth. We believe that our stockholders will benefit
from the merger and resulting investment in the combined Florafax/Gerald Stevens
entity because we believe the merger provides our stockholders:
- ownership in a larger entity with the opportunity of further significant
growth;
- a growth-oriented management team;
- improved market liquidity;
- lower financing costs and other cost savings; and
- a means to improve the quality of product and service delivered.
We also considered detriments and uncertainties to the merger, including:
- difficulties in integrating the companies' operations;
- Gerald Stevens management's limited experience in the floral industry;
- the limited operating history of Gerald Stevens; and
- difficulties in implementing the growth strategy.
To review the background of the merger and our reasons for the merger in
greater detail, as well as related detriments and uncertainties, please read the
discussion under "Proposal No. 1, Stock Issuance and Change of Control" which
begins on page 24, as well as the "Risk Factors" section of this document which
begins on page 12.
OUR RECOMMENDATIONS TO STOCKHOLDERS
Our board of directors believes that the merger is in the best interests of
our stockholders and unanimously recommends that you vote "FOR" the proposals
to:
- issue our common stock in connection with the merger and approve the
associated change of control;
- amend our certificate of incorporation; and
- elect the five director nominees.
3
<PAGE> 9
THE STOCK ISSUANCE AND CHANGE OF CONTROL
We have attached the merger agreement and its amendment as Annexes A and
A-1, respectively, to this document. We encourage you to read the merger
agreement, and its amendment, as they are the legal documents that govern the
merger.
THE TERMS OF THE MERGER.
In the merger, we will issue Gerald Stevens stockholders between 1.25 and
1.35 shares of our common stock for each share of Gerald Stevens common stock
they own. The exact exchange ratio will depend on the average daily closing sale
price of our common stock on The Nasdaq SmallCap Market for the 45 consecutive
trading days immediately preceding the third trading day prior to the annual
meeting. We set out the ranges of daily closing sales prices and related
exchange ratios in the following table:
<TABLE>
<CAPTION>
AVERAGE DAILY
CLOSING SALE PRICE EXCHANGE RATIO
- ----------------------------- --------------
<S> <C>
less than $5.00/share........ 1.25 shares
equal to or greater than
$5.00 but less than
$6.50/share................ 1.30 shares
equal to or greater than
$6.50/share................ 1.35 shares
</TABLE>
The daily closing sale price of our common stock has remained above $6.50
per share since November 23, 1998. Because of this, we expect the exchange ratio
to be 1.35 shares of our common stock for each share of Gerald Stevens common
stock. We expect that approximately 20.8 million shares of Gerald Stevens common
stock will be outstanding at the time we complete the merger. Therefore, we
expect to issue approximately 28.1 million shares of our common stock to Gerald
Stevens stockholders in connection with the merger. Based on our recent range of
daily closing sale prices on the Nasdaq SmallCap Market of $14 to $21 per share,
the aggregate value of the shares to be issued to Gerald Stevens stockholders
would range from approximately $393.4 million to $590.1 million. Our
stockholders will not receive any shares of common stock in the merger. Gerald
Stevens will become our wholly-owned subsidiary when the merger is completed.
OWNERSHIP OF FLORAFAX AFTER THE MERGER.
We estimate that the shares of our common stock to be issued to Gerald
Stevens stockholders in the merger will represent approximately 77.5% of the
total outstanding shares of our common stock following the merger.
OUR BOARD OF DIRECTORS AND MANAGEMENT
FOLLOWING THE MERGER.
In connection with the merger, we will ask our stockholders to elect the
five director nominees to serve on our board of directors. Four of the director
nominees, Steven R. Berrard, Thomas C. Byrne, Gerald R. Geddis and Kenneth R.
Royer, were nominated by Gerald Stevens and currently serve on the Gerald
Stevens board of directors. One director nominee, Andrew W. Williams, was
nominated by us and currently serves on our board of directors. For information
regarding our director nominees, see "Proposal No. 3, Election of Directors"
which begins on page 66.
After the merger, our executive officers will be:
<TABLE>
<CAPTION>
NAME POSITION
- --------------------- ----------------------------
<S> <C>
Gerald R. Geddis Chief Executive Officer and
President
Albert J. Detz Senior Vice President and
Chief Financial Officer
Adam D. Phillips Senior Vice President, Chief
Administrative Officer,
General Counsel and
Secretary
Steven J. Nevill Senior Vice President and
Chief Information Officer
</TABLE>
For information regarding our new executive officers, see page 74.
OTHER INTERESTS OF OFFICERS, DIRECTORS AND
DIRECTOR NOMINEES IN THE STOCK ISSUANCE.
In considering the recommendation of our board of directors that you vote
in favor of the proposed issuance of our common stock in the merger, you should
be aware of interests which some of our officers, directors and director
nominees have that are separate from and in addition
4
<PAGE> 10
to the interests of our stockholders generally. These interests are as follows:
- Upon completion of the merger, James H. West, James J. Pagano and Kelly
S. McMakin, who are officers of our company, will enter into employment
agreements with us on terms substantially similar to the terms under
which they were employed with us prior to the merger.
- Upon the completion of the merger, 12,500 stock options held by T. Craig
Benson, who was one of our directors at the time the merger agreement was
approved, would have become fully exercisable at a price of $2.66 per
share (Compared to the $10.31 per share price on the date the merger
agreement was executed). Mr. Benson has since resigned and has forfeited
these options.
- We have agreed to indemnify each person who was an officer or director of
either our company or Gerald Stevens prior to completion of the merger
with respect to their service in that capacity.
Our board of directors was aware of these interests and took them into
account when approving the merger agreement and when making its recommendation
that you approve the stock issuance.
ACCOUNTING TREATMENT OF THE MERGER.
The merger is intended to qualify as a "pooling of interests" for
accounting and financial reporting purposes.
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS.
Our stockholders' rights are governed by Delaware law and by our
certificate of incorporation and bylaws. The rights of Gerald Stevens'
stockholders are governed by Delaware law and by its certificate of
incorporation and bylaws. Upon completion of the merger, the rights of all
stockholders of the combined company will be governed by Delaware law and by our
certificate of incorporation, which will be amended as described in this
document, and bylaws.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.
The merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended. If the merger
qualifies as a reorganization, Gerald Stevens stockholders will not recognize
gain or loss on the exchange of Gerald Stevens common stock for our common stock
pursuant to the merger, except to the extent that a stockholder receives cash in
lieu of fractional shares of our common stock. There will be no tax consequences
to persons who are our stockholders prior to the merger. We expect Gerald
Stevens will receive a legal opinion regarding these tax consequences.
Our stockholders will not experience any tax consequences as a result of
the merger. However, Gerald Stevens stockholders may experience tax consequences
as a result of the merger. Tax matters are very complicated and the tax
consequences to each Gerald Stevens stockholder will depend on the facts of his
or her situation. Each Gerald Stevens stockholder should consult his or her tax
advisor for a full understanding of the tax consequences of the merger.
ABSENCE OF APPRAISAL RIGHTS FOR FLORAFAX.
Under Delaware law, our stockholders do not have appraisal rights with
respect to any of the proposals to be acted upon at the annual meeting.
OPINION OF OUR FINANCIAL ADVISOR.
ABN AMRO Incorporated has delivered to our board of directors its written
opinion that, as of the date of the opinion, the exchange ratio of our common
stock to Gerald Stevens common stock as set forth in the merger agreement is
fair from a financial point of view to our stockholders. We have attached copy
of the ABN AMRO fairness opinion as Annex B to this document. We encourage you
to read this opinion carefully.
We have paid ABN AMRO a $50,000 retainer fee and $150,000 for rendering the
fairness opinion. In addition, upon completion of the merger, we will pay ABN
AMRO an additional $1.1 million. Under the terms of an amendment to the
engagement letter, if the merger agreement is terminated we will pay ABN AMRO a
termination fee of $700,000, less amounts already paid.
5
<PAGE> 11
TRANSACTION DIAGRAM
The following diagram illustrates the structure of the merger and the
related stock issuance.
[TRANSACTION DIAGRAM CHART]
OWNERSHIP CHARTS
The following pie charts illustrate the estimated change in our beneficial
ownership resulting from our merger with Gerald Stevens and the associated stock
issuance.
PRIOR TO THE MERGER . . .
<TABLE>
<S> <C>
We had approximately 8.2 million shares
[PRIOR TO MERGER PIE CHART] outstanding. Our directors, officers and
significant stockholders owned approximately 56.7%
of our common stock. Our other stockholders owned
approximately 43.3% of our common stock.
</TABLE>
FOLLOWING THE MERGER . . .
<TABLE>
<S> <C>
We will have approximately 36.2 million shares
outstanding. Our pre-merger directors, officers and [FOLLOWING THE MERGER PIE CHART]
significant stockholders will own approximately
12.8% of our common stock, as opposed to 56.7%
prior to the merger. Our other pre-merger
stockholders will own approximately 9.7% of our
common stock, as opposed to 43.3% prior to the
merger.
Gerald Stevens' pre-merger directors and
executive officers and their affiliates will own [LEGEND CHART]
approximately 34.3% of our common stock. Gerald
Stevens' other pre-merger stockholders will own
approximately 43.2% of our common stock.
</TABLE>
6
<PAGE> 12
SUMMARY SELECTED HISTORICAL FINANCIAL DATA
The summary selected historical financial data for Florafax presented below
for each of the five years ended and as of August 31, 1998, 1997, 1996, 1995,
and 1994 have been derived from the audited consolidated financial statements of
Florafax. The summary selected historical financial data for Gerald Stevens
presented below for the period May 7, 1998 (inception) to September 30, 1998 and
as of September 30, 1998 have been derived from the audited financial statements
of Gerald Stevens. The summary selected historical financial data for the three
month periods ended November 30, 1998 and 1997 and as of November 30, 1998 for
Florafax and for the three month period ended and as of December 31, 1998 for
Gerald Stevens have been derived from their respective unaudited consolidated
financial statements. The data should be read in conjunction with the
consolidated financial statements, related notes, management's discussion and
analysis, and other financial information which are included in this document
for Gerald Stevens, and Florafax's Annual Report on Form 10-KSB, as amended on
Form 10-KSB/A, for the year ended August 31, 1998 included in this document as
Annexes D-1 and D-2 respectively, and Florafax's Quarterly Report on Form
10-QSB, as amended on Form 10-QSB/A, for the quarter ended November 30, 1998
included in this document as Annexes D-3 and D-4 respectively. It is expected
that the merger will be treated as a pooling of interests for accounting
purposes. Under pooling rules, the historical financial statements of Florafax
would be restated to reflect the combination with Gerald Stevens.
<TABLE>
<CAPTION>
FLORAFAX GERALD STEVENS
------------------------------------------------------------------- -----------------------------
THREE MONTH PERIOD FROM
PERIODS ENDED THREE MONTH MAY 7, 1998
NOVEMBER 30, YEARS ENDED AUGUST 31, PERIOD ENDED (INCEPTION) TO
----------------- ----------------------------------------------- DECEMBER 31, SEPTEMBER 30,
1998 1997 1998 1997 1996 1995 1994 1998 1998
------- ------- ------- ------- ------- ------- ------- ------------ --------------
(IN THOUSANDS EXCEPT
(IN THOUSANDS EXCEPT PER SHARE DATA) PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT
DATA:
Total revenue............ $ 3,755 $ 3,260 $13,391 $11,609 $10,299 $ 8,449 $ 7,567 $17,001 $ 0
Operating income
(loss)................. 609 496 (1,431) 1,918 1,562 952 20 160 (2,137)
Net income
(loss)(1)(2)(3)........ 287 338 (623) 3,433 2,262 707 (311) 165 (2,116)
Basic earnings (loss) per
share.................. 0.04 0.04 (.08) 0.43 0.36 0.12 (0.06) 0.01 (0.21)
Diluted earnings (loss)
per share.............. 0.03 0.04 (.08) 0.39 0.35 0.12 (0.06) 0.01 (0.21)
Weighted average common
and common equivalent
shares outstanding:
Basic.................... 7,944 7,751 7,824 8,076 5,988 5,701 5,532 18,321 10,004
Diluted.................. 8,801 8,718 7,824 8,715 6,375 5,872 5,532 18,479 10,004
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
----------------- ----------------------------------------------- DECEMBER 31, SEPTEMBER 30,
1998 1997 1998 1997 1996 1995 1994 1998 1998
------- ------- ------- ------- ------- ------- ------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET
DATA:
Working capital
(deficiency)........... $ (62) $ 979 $ 493 $ 1,116 $ 488 $(1,398) $(2,412) $ 5,963 $ 5,965
Intangible assets........ 1,995 2,175 1,995 2,090 2,256 2,366 2,473 37,525 1,520
Total assets............. 11,975 11,413 11,886 10,594 8,822 6,468 5,946 55,810 8,486
Long-term debt........... 1,000 80 2,018 80 334 3,034 3,142 122 0
Total liabilities........ 7,045 5,998 7,329 5,341 5,585 8,224 8,461 7,600 817
Stockholders' equity
(deficit).............. 4,930 5,415 4,557 5,253 3,237 (1,756) (2,515) 48,210 7,668
</TABLE>
- -------------------------
(1) Florafax's net income in 1998 includes a contract modification fee of $3,495
related to the Company's contract with Marketing Projects, Inc.
(2) Florafax recorded income of $1,041 in 1997 related to cash received from a
court award. See Note 4 of the Notes to Consolidated Financial Statements
of Florafax.
(3) Florafax's 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 carry forwards. See Note 6 of the Notes to
Consolidated Financial Statements of Florafax.
(4) Florafax's net income in 1996 includes an extraordinary gain of $128 from
the forgiveness of certain debt.
7
<PAGE> 13
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
FLORAFAX
The table below presents summary pro forma consolidated financial data for
Florafax for the periods indicated below. The table modifies the historical
financial information of Florafax to give effect to (1) the merger with Gerald
Stevens, which is presented under the column heading entitled "Florafax/Gerald
Stevens Pro Forma Combined" and (2) the merger with Gerald Stevens, the
significant acquisitions completed or probable of completion by Gerald Stevens
subsequent to September 30, 1998 and the private placement completed by Gerald
Stevens on October 1, 1998, which is presented under the column heading entitled
"Florafax/Gerald Stevens Pro Forma As Adjusted." The statement of operations
data below reflects the pro forma transactions as if they had occurred at the
beginning of the period presented. The balance sheet data below reflects the pro
forma transactions as if they had occurred at November 30, 1998. See "Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
THREE MONTH PERIOD YEAR ENDED
ENDED NOVEMBER 30, 1998 AUGUST 31, 1998
-------------------------------------------- --------------------------------------------
FLORAFAX/ FLORAFAX/ FLORAFAX/ FLORAFAX/
GERALD STEVENS GERALD STEVENS GERALD STEVENS GERALD STEVENS
FLORAFAX PRO FORMA PRO FORMA FLORAFAX PRO FORMA PRO FORMA
HISTORICAL COMBINED AS ADJUSTED HISTORICAL COMBINED AS ADJUSTED
---------- -------------- -------------- ---------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $3,755 $20,756 $28,801 $13,391 $13,391 $104,234
Operating income (loss).......... 609 769 1,502 (1,431) (3,568) 2,757
Net income (loss)................ 287 404 810 (623) (3,741) 1,109
Basic earnings (loss) per
share.......................... 0.04 0.02 0.02 (0.08) (0.21) 0.03
Diluted earnings (loss) per
share.......................... 0.03 0.01 0.02 (0.08) (0.21) 0.03
</TABLE>
<TABLE>
<CAPTION>
AT NOVEMBER 30, 1998
--------------------------------------------
FLORAFAX/ FLORAFAX/
GERALD STEVENS GERALD STEVENS
FLORAFAX PRO FORMA PRO FORMA
HISTORICAL COMBINED AS ADJUSTED
---------- -------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)..... $ (62) $ 5,901 $ 1,980
Intangible assets................ 1,995 39,520 68,638
Total assets..................... 11,975 67,785 99,302
Long term debt................... 1,000 5,122 19,929
Total liabilities................ 7,045 18,645 39,145
Stockholders' equity............. 4,930 49,140 60,157
</TABLE>
8
<PAGE> 14
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
GERALD STEVENS
The table below presents summary unaudited pro forma consolidated financial
data for Gerald Stevens for the periods indicated below. The table modifies the
historical financial information of Gerald Stevens to give effect to the
significant acquisitions completed or probable of completion by Gerald Stevens
subsequent to September 30, 1998 and the private placement completed by Gerald
Stevens on October 1, 1998 as if the transactions had occurred at the beginning
of the periods presented for statement of operations data and to give effect to
the significant acquisitions completed or probable of completion by Gerald
Stevens subsequent to December 31, 1998 as if the acquisitions had occurred as
of December 31, 1998 for balance sheet data. See "Pro Forma Consolidated
Financial Statements."
<TABLE>
<CAPTION>
THREE MONTH PERIOD MAY 7, 1998 (INCEPTION)
ENDED DECEMBER 31, 1998 TO SEPTEMBER 30, 1998
------------------------ ------------------------
PRO FORMA PRO FORMA
HISTORICAL AS ADJUSTED HISTORICAL AS ADJUSTED
---------- ----------- ---------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $17,001 $25,046 $ 0 $90,843
Operating income (loss)........................ 160 893 (2,137) 4,188
Net income (loss).............................. 165 571 (2,116) 1,924
Basic earnings (loss) per share................ 0.01 0.03 (0.21) 0.10
Diluted earnings (loss) per share.............. 0.01 0.03 (0.21) 0.10
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------
PRO FORMA
HISTORICAL AS ADJUSTED
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 5,963 $ 2,042
Intangible assets.............................. 37,525 66,643
Total assets................................... 55,810 87,327
Long term debt................................. 122 14,929
Total liabilities.............................. 7,600 28,100
Stockholders' equity........................... 48,210 59,227
</TABLE>
9
<PAGE> 15
COMPARATIVE PER SHARE DATA
Set forth below are historical earnings (loss) and book value per share
data of Florafax and Gerald Stevens individually, Gerald Stevens Pro Forma
Equivalent and Florafax/Gerald Stevens pro forma as adjusted. The Gerald Stevens
Pro Forma Equivalent and the Florafax/Gerald Stevens pro forma as adjusted
earnings per share give effect to the completion of the merger, the private
placement completed on October 1, 1998 and the significant acquisitions
completed or probable of completion by Gerald Stevens subsequent to September
30, 1998 as if they had occurred as of the beginning of the period.
The Gerald Stevens Pro Forma Equivalent and the Florafax/Gerald Stevens pro
forma as adjusted book value per share gives effect to the merger, the private
placement completed on October 1, 1998 and the significant acquisitions
completed or probable of completion by Gerald Stevens subsequent to the date
presented as if they had occurred as of the date presented.
The historical earnings (loss) and book value per share were derived from
and should be read in conjunction with the respective financial statements,
including notes thereto of Florafax, Gerald Stevens and the significant
businesses acquired or probable of being acquired by Gerald Stevens subsequent
to September 30, 1998. The unaudited pro forma earnings and book value per share
were derived from and should be read in conjunction with, the unaudited pro
forma consolidated financial statements and notes thereto included elsewhere in
this document. No cash dividends were declared on Florafax or Gerald Stevens
common stock for the periods presented.
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1998 1997 1996
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
FLORAFAX -- HISTORICAL
Diluted Earnings (Loss) Per Share.......... $ 0.03 $ (.08) $ 0.39 $ 0.35
Book Value Per Share....................... $ 0.62 $ 0.57 N/A N/A
GERALD STEVENS -- HISTORICAL
Diluted Earnings (Loss) Per Share.......... $ 0.01 $ (0.21) N/A N/A
Book Value Per Share....................... $ 2.59 $ 0.77 N/A N/A
FLORAFAX/GERALD STEVENS -- PRO FORMA AS
ADJUSTED
Diluted Earnings Per Share(a).............. $ 0.02 $ 0.03 $ 0.39 $ 0.35
Book Value Per Share(a).................... $ 1.73 $ 1.48 N/A N/A
GERALD STEVENS PRO FORMA EQUIVALENT
Diluted Earnings Per Share(b).............. $ 0.03 $ 0.04 N/A N/A
Book Value Per Share(b).................... $ 2.33 $ 1.99 N/A N/A
</TABLE>
- -------------------------
(a) Diluted earnings (loss) per share and book value per share are based on our
historical shares outstanding and Gerald Stevens' historical shares
outstanding adjusted for an assumed exchange ratio of 1.35 shares of our
common stock for one share of Gerald Stevens common stock in the merger.
(b) Diluted earnings (loss) per share and book value per share are based on our
historical shares outstanding adjusted for an assumed exchange ratio of 1.35
shares of our common stock for one share of Gerald Stevens common stock in
the merger and Gerald Stevens' historical shares outstanding.
10
<PAGE> 16
MARKET PRICE AND DIVIDEND INFORMATION
FLORAFAX
Our common stock began trading on the Nasdaq SmallCap Market under the
symbol FIIF on May 30, 1997. Prior to that date, our common stock was traded in
the "Over the Counter" or "Pink Sheet" market. The number of registered
stockholders of our common stock at December 31, 1998 was 1,229 based on
information furnished by our transfer agent. In addition, we believe that, at
December 31, 1998, there were an additional 500 to 1,000 holders of our 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 we are aware.
The table below sets forth by quarter for its fiscal years ended August 31,
1998 and 1997, and for the quarter ended November 30, 1998, the high and low bid
prices for our common stock as reported by Nasdaq. 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.
<TABLE>
<CAPTION>
BID PRICES
-----------------
HIGH LOW
------- -------
<S> <C> <C>
1999:
First quarter............................................... $ 7 1/4 $ 4
Second quarter.............................................. 21 7/8 6 7/16
Third quarter (through April 7)............................. 18 3/4 14 5/8
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
</TABLE>
On April 7, 1999, the closing sale price of our common stock as reported by
published financial sources was $17 3/4 per share. We urge you to obtain current
market quotations for shares of our common stock.
We have never paid dividends on our common stock. Payment of dividends in
the future will be at the discretion of our board of directors and will be
dependent upon our earnings, financial condition, capital requirements and other
factors deemed relevant by our board of directors.
Under the terms of the credit agreement, as amended, between us and First
Union National Bank, there are no restrictions upon the payment of cash
dividends on our common stock, except that we are required to maintain a
Tangible Net Worth, as defined in the credit agreement, of at least $3 million.
This net worth requirement could restrict the payment of dividends on our common
stock from time to time. At December 31, 1998, our Tangible Net Worth was in
excess of $3 million.
GERALD STEVENS
Gerald Stevens is a privately-held company. Its common stock does not trade
in any market.
Gerald Stevens has never paid dividends on its common stock. Payment of
dividends in the future will be at the discretion of the Gerald Stevens board of
directors and will be dependent upon Gerald Stevens' earnings, financial
condition, capital requirements and other factors deemed relevant by the Gerald
Stevens board of directors.
11
<PAGE> 17
RISK FACTORS
The merger and ownership of our common stock following the merger involve
the following risks. You should carefully consider these risks together with all
other information contained in this document in evaluating the proposed merger
and your investment in our common stock.
FLUCTUATION IN THE VALUE OF OUR COMMON STOCK ISSUED IN THE MERGER
The exchange ratio is a fixed ratio in that it will not be adjusted as a
result of any increase in the average closing sale price of our common stock in
excess of $6.50 per share for a 45 trading day period prior to the merger. On
December 9, 1998 when we entered into the merger agreement, the closing price of
our common stock was $10.31 per share, and for the 45 trading day period prior
to that the average daily closing sale price of our common stock was $4.80 per
share. Recently, our common stock has traded at prices ranging from about $14 to
$21 per share. The price of our common stock at the time the merger is
completed, and for the 45 trading day period prior to the merger, will likely be
higher than $6.50 per share based on recent market prices. We believe that the
recent volatility and increase in our market price may be due to various factors
which are beyond our control or which are unrelated to our results of operations
or financial condition. We believe that these factors may include:
- speculation based on market assessments of the likelihood that the merger
will be completed;
- speculation based on the growth prospects of the post-merger combined
company;
- the relatively small volume of outstanding shares that are available to
trade in the market; and
- general market and economic conditions.
As a result of the fixed exchange ratio, we will not be able to adjust the
number of shares of our common stock to be issued in the merger based on
continued increases in the market price of our common stock. In addition, we
cannot "walk away" from the merger or renegotiate the terms of the merger
agreement due to increases in the market price of our common stock. Since we
cannot "walk-away" or renegotiate the terms of the merger agreement, upon
completion of the merger we will be required to issue to Gerald Stevens
stockholders shares of our common stock having an aggregate value which has
increased from approximately $288.7 million to approximately $498.0 million with
the rise in our stock price from $10.31 per share on December 9, 1998 to $17.75
per share on April 7, 1999.
POTENTIAL ADVERSE EFFECTS ARISING FROM THE CHANGE OF CONTROL OF FLORAFAX
EXISTING STOCKHOLDERS WILL LOSE CONTROL.
We presently have approximately 8.2 million shares of common stock issued
and outstanding. We expect to issue approximately 28.1 million new shares of
common stock to Gerald Stevens stockholders in the merger. As a result, Gerald
Stevens stockholders together will own approximately 77.5% of the total shares
outstanding after the merger, and our existing stockholders together will own
approximately 22.5% of the total shares outstanding after the merger.
NEW DIRECTORS AND EXECUTIVE OFFICERS WILL HAVE CONTROL.
The directors and executive officers of Gerald Stevens, consisting of
Messrs. Geddis, Berrard, Byrne, Royer, Detz, Phillips and Nevill, will own
approximately 34.3% of the total shares of our common stock outstanding
immediately following the completion of the merger. Although these individuals
have not agreed to vote together on matters submitted to a vote of our
stockholders after the merger, if they vote together, they could have the
ability to control or substantially influence the outcome of most matters
submitted to a vote of our stockholders, including the election of directors. In
addition, at the annual meeting and in connection with the merger, five persons
will be nominated to serve as our directors upon completion of the merger. Of
those five nominees, only Mr. Williams is currently an incumbent director
12
<PAGE> 18
of Florafax. The other four nominees, Messrs. Berrard, Byrne, Geddis and Royer,
constitute the existing board of directors of Gerald Stevens. Although there is
no agreement among them, if Messrs. Berrard, Byrne, Geddis and Royer were to act
and vote together as members of our board of directors, they would have the
ability to control most actions submitted to a vote of the board of directors.
NEW DIRECTORS AND EXECUTIVE OFFICERS HAVE LIMITED INDUSTRY EXPERIENCE.
Other than Messrs. Royer and Williams, none of our proposed directors and
executive officers have any significant experience in the floral industry. We
cannot assure you that the proposed new directors and executive officers of our
company will be successful in the floral industry.
LIMITED COMBINED OPERATING HISTORY MAY NOT BE INDICATIVE OF FUTURE RESULTS
Gerald Stevens was established in May 1998, and commenced its operations in
October 1998 upon the completion of its acquisition of ten floral businesses.
For the period from its inception to September 30, 1998, Gerald Stevens was a
development stage company with no revenue and generated a net loss of $2.1
million. Accordingly, Gerald Stevens has only a limited operating history upon
which an evaluation of its business, its growth strategy and its prospects can
be based. The pro forma consolidated financial statements of Gerald Stevens and
the businesses it has acquired cover periods when Gerald Stevens and these
businesses were not under common control or management. These pro forma
financial statements do not indicate our future financial condition or operating
results. You must evaluate our prospects following the merger in light of the
risks, expenses and difficulties frequently encountered by companies in the
early stages of a new growth strategy. We cannot assure you that our recent
growth in pro forma revenue and net income will be indicative of the growth or
profitability of the combined Florafax/Gerald Stevens entity. We also cannot
assure you that our new strategy of building a nationally branded floral
retailer with a local distribution network will lead to growth, profitability or
increased market prices for our common stock.
WE MAY HAVE DIFFICULTIES INTEGRATING OUR COMPANY WITH GERALD STEVENS
Following the merger, we plan to integrate the administrative operations of
Gerald Stevens together with our administrative operations. Gerald Stevens
previously operated independently. We cannot assure you that we will be able to
combine these operations without encountering difficulties. These difficulties
could result from having different operating practices, computers or other
information systems. These difficulties could also result from having personnel
with different business backgrounds and corporate cultures in the same company.
As a result, we cannot assure you that we will achieve anticipated cost savings
and operating efficiencies.
In addition, Gerald Stevens is in the process of simultaneously integrating
administrative and other operations of numerous floral retailers and other
businesses, each of which previously operated independently. We cannot assure
you that we will be able to continue to combine these operations without
encountering difficulties, or that we will achieve anticipated cost savings and
operating efficiencies.
OUR POTENTIAL INABILITY TO IMPLEMENT THE GROWTH STRATEGY
Upon completion of the merger, we will adopt the business strategy that has
been utilized by Gerald Stevens. Our business strategy will focus on growing our
revenue and operations internally by opening new retail locations and expanding
sales on the internet and through other order generating operations, as well as
growing our revenue and operations by making acquisitions of floral and gift
retailers and other
13
<PAGE> 19
complementary businesses. The success of our growth strategy will depend on a
number of factors including our ability to:
- assess the value, strengths and weaknesses of acquisition candidates;
- evaluate the costs and projected returns of expanding our operations;
- expand our customer base;
- market our products and services effectively over the internet and in
traditional media;
- lease desirable store locations on suitable terms and complete
construction on a timely basis;
- promptly and successfully integrate acquired businesses and new retail
locations with existing operations; and
- obtain financing to support this expansion.
In addition, we currently anticipate expanding our operations not only in
the lines of business conducted by Gerald Stevens, but also possibly into other
related and complementary businesses. We cannot assure you that our entry into
any new lines of business will be successful, as we may lack the understanding
and experience to operate profitably in new lines of business.
We cannot assure you that we will be able to identify suitable acquisition
candidates or locations for new stores. If we are not able to identify suitable
acquisition candidates or if acquisitions of suitable candidates are
prohibitively expensive, we may be forced to alter our growth strategy. We
expect our growth strategy may affect short-term cash flow and net income as we
increase our indebtedness and incur additional expenses. As a result, our
operating results may fluctuate. We cannot assure you our growth strategy will
result in improving our profitability. If we fail to implement our growth
strategy successfully, the market price of our common stock may decline.
DEMANDS ON OUR RESOURCES DUE TO GROWTH
Our anticipated growth could place significantly increasing demands on our
management and our operational, financial and marketing resources. These demands
are due to our plans to:
- acquire and integrate numerous floral retailers;
- open new locations;
- increase the number of our employees;
- expand the scope of our operating and financial systems;
- broaden the geographic area of our operations;
- increase the complexity of our operations;
- increase the level of responsibility of management personnel; and
- continue to train and manage our employee base.
We cannot assure you that our management and resources now or in the future
will be adequate to meet the demands resulting from our expected growth.
WE MAY INCUR UNEXPECTED LIABILITIES WHEN WE ACQUIRE BUSINESSES
During the acquisition process, we may fail or be unable to discover some
of the liabilities of companies or businesses we acquire. These liabilities may
result from a prior owner's non-compliance with applicable federal, state or
local laws. For example, we may be liable after an acquisition of a business for
the prior owner's failure to pay taxes or comply with environmental regulations.
While we
14
<PAGE> 20
will try to minimize our potential exposure by conducting thorough
investigations during the acquisition process, we cannot assure you that we will
identify all existing or potential liabilities. We also generally will require
each seller of acquired businesses or properties to indemnify us against
undisclosed liabilities. In some cases this indemnification obligation may be
supported by deferring payment of a portion of the purchase price or other
appropriate security. However, we cannot assure you that this indemnification
will be adequate to fully offset the possible liabilities associated with the
business or property acquired.
GOODWILL RESULTING FROM ACQUISITIONS MAY ADVERSELY AFFECT OUR RESULTS
Our pro forma as adjusted goodwill related to acquired businesses, net of
amortization, at November 30, 1998 was approximately $69 million, which
represents approximately 69% of our pro forma as adjusted total assets of
approximately $99 million and exceeds our pro forma as adjusted total
stockholders equity of approximately $60 million. The $69 million of goodwill
will result in an annual amortization expense of approximately $2.3 million,
based upon the amortization of goodwill related to the acquisition of retail
floral businesses and National Flora, an order generation business, over useful
lives of 40 years and 20 years, respectively. Goodwill and related amortization
are expected to increase principally as a result of future retail floral
business acquisitions, and the amortization of goodwill and other intangible
assets could adversely affect our financial condition and results of operations.
We have considered various factors, including projected future cash flows, in
determining the purchase prices of our acquired retail floral businesses, and we
do not believe that any material portion of the goodwill related to any of these
acquisitions will dissipate over a period shorter than 40 years. However, our
earnings in future years could be significantly adversely affected if management
later determines either that the remaining balance of goodwill is impaired or
that a shorter amortization period is applicable.
WE WILL DEPEND ON ADDITIONAL CAPITAL FOR OUR FUTURE GROWTH
Our ability to remain competitive, sustain our expected growth and expand
our operations largely depends on our access to capital. We anticipate making
numerous acquisitions of floral businesses which will require ongoing capital
expenditures. We also expect to make expenditures to continue to integrate the
acquired floral businesses with our existing businesses. To date, Gerald Stevens
has financed capital expenditures and acquisitions primarily through private
equity and its credit facility. We have a $5 million credit facility in place at
the present time. Gerald Stevens has recently increased its bank credit facility
from $20 million to $40 million. Additionally, on February 23, 1999 Gerald
Stevens and its lending bank agreed to the terms and conditions of an
arrangement whereby the bank will act as the sole and exclusive agent and lead
arranger for a $50,000,000 to $75,000,000 syndicated bank credit facility on a
best efforts basis and also offer its commitment to lend up to $15,000,000 of
the facility. In addition, to execute our growth strategy and meet our capital
needs, we plan to issue additional equity securities, which may have a dilutive
effect on the interests of our stockholders. We cannot assure you that any
additional capital will be available on terms acceptable to us. Our failure to
obtain sufficient additional capital in the future could curtail or alter our
growth strategy or delay capital expenditures.
DEBT COVENANTS MAY RESTRICT OUR GROWTH
Restrictive covenants contained in our existing credit facilities may limit
our ability to finance future acquisitions, new locations and other expansion of
our operations. Credit facilities obtained in the future likely will contain
similar restrictive covenants. These covenants may also require us to achieve
specific financial ratios and to obtain bank consent prior to completing our
proposed acquisitions.
With regard to acquisitions, Gerald Stevens' existing credit facility
requires, among other things, that at least 35% of the cost of acquisition be
paid for in the form of Gerald Stevens common stock and that the proceeds of
loans used to pay the cost of acquisition cannot exceed three times the acquired
company's earnings before interest, taxes, depreciation and amortization. These
requirements do not apply if outstanding loans are equal to or less than 50% of
the total loan commitment or if outstanding loans exceed 50% of the total loan
commitment and the ratio of debt to earnings before interest, taxes,
15
<PAGE> 21
depreciation and amortization is equal to or less than 1.5 to 1, or if the cost
of acquisition is not greater than $1.25 million and the total cost of
acquisitions not approved by the bank in a fiscal year does not exceed 10% of
stockholders' equity at the end of the preceding fiscal year.
Gerald Stevens' revolving credit agreement also requires it to maintain
financial ratios which limit total debt and capital expenditures. Consolidated
debt cannot exceed earnings before interest, taxes, depreciation and
amortization by a ratio of 3 to 1 or exceed consolidated stockholders' equity.
In addition, the ratio of earnings before interest, taxes, depreciation and
amortization to the sum of capital expenditures, interest expense, cash income
taxes and current maturities of indebtedness must not be less than 1.5 to 1
through March 31, 1999 or less than 1.75 to 1 thereafter.
Our credit facility requires us, at the end of each fiscal year, to
maintain a ratio of current assets to current liabilities of not less than 1.2
to 1; a tangible net worth of at least $3 million; and to maintain a total
liabilities to tangible net worth ratio of less than 2 to 1.
Any of these covenants could become more restrictive over time. Our ability
to respond to changing business and economic conditions and to secure additional
financing for operating and capital needs may be significantly restricted by
these covenants. Furthermore, we may be prevented from engaging in transactions
including acquisitions which are important to our growth strategy. Any breach of
these covenants could cause a default under our debt obligations and result in
our debt becoming immediately due and payable. We are not certain whether we
would have, or would be able to obtain, sufficient funds to make these
accelerated payments.
OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE DUE TO SEASONALITY
Unit sales of floral products have historically been seasonal, concentrated
primarily in the first and second calendar quarters as a result of holidays such
as Valentine's Day and Mother's Day. In particular, a significant portion of our
annual revenue is expected to be derived from sales of floral products for
Valentine's Day. Historically, Valentine's Day sales have been relatively lower
in those years when the holiday falls on a Saturday or Sunday. In 1999,
Valentine's Day was on Sunday. We estimate that combined revenue of our company
and Gerald Stevens on a pro forma basis for the week preceding Valentine's Day
in 1999 was approximately 3% lower than Valentine's Day revenue in 1998.
In contrast to the first and second calendar quarters, unit sales of floral
products are significantly lower in the third and fourth calendar quarters.
These quarters have relatively few flower-giving holidays. Negative fluctuations
have been particularly pronounced and net losses have been incurred in these
quarters. In the past, we have experienced quarterly variations in revenue and
cash flows. We expect to continue to experience quarterly fluctuations in
operating results due to the factors discussed above and other factors. These
factors include additional selling, general and administrative expenses to
acquire and support new business and the timing and magnitude of capital
expenditures. We intend to plan our operating expenditures based on revenue
forecasts. Any revenue shortfall below these forecasts in any quarter would
likely decrease our operating results for that quarter.
CONSUMERS MAY REDUCE DISCRETIONARY PURCHASES OF FLOWERS
We believe that the floral industry is influenced by general economic
conditions and particularly by the level of personal discretionary spending by
consumers. As a result, the floral industry could experience periods of decline
and recession during economic downturns. The industry may experience sustained
periods of decline in sales in the future. Any decline in personal discretionary
spending or in the industry could have a negative effect on our business or
prospects.
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COMPETITION MAY ADVERSELY IMPACT OUR PERFORMANCE
The floral industry is highly competitive. Competition exists in each link
of the distribution chain. Following the merger, we expect competition from:
- flower growers, importers, wholesalers and bouquet companies;
- floral wire services;
- traditional floral shops;
- supermarkets and mass merchandisers;
- garden centers;
- internet retailers; and
- floral order generators and other marketers of floral and floral-related
products.
In many of our markets, our competitors have larger and greater financial
resources than we do. A few public companies, including Dole Food Company, Inc.,
recently have been attempting to consolidate flower growers, importers,
wholesalers and bouquet companies, and to expand their sales of flowers to
supermarkets. Dole Food Company may attempt to extend its strong brand, which is
well-known for fresh produce, to flowers. The GERALD STEVENS(SM) brand is new,
and may not be marketed effectively by us. We plan to acquire floral and gift
retailers and order generators and other businesses in the floral industry, and
to expand our penetration into supermarkets. We cannot assure you that we will
be able to compete successfully against our existing and any future competitors.
WE MAY INCUR ANTI-DUMPING LIABILITY
The majority of flowers sold in the United States are grown in other
countries. Flower importing companies are subject to anti-dumping duties.
Generally, if the United States Department of Commerce determines that a foreign
grower sold flowers to an importer in the United States for a price less than
the constructed value of the flowers, then the Commerce Department may impose an
anti-dumping duty upon the importer. The Commerce Department is currently
conducting anti-dumping reviews of the prices paid for flowers imported from
Colombia for two twelve-month periods. The Commerce Department's decision with
respect to three other periods is being appealed. In addition, the Commerce
Department may initiate additional reviews at any time. Through our import
operations following the merger, we may be subject to and incur a liability for
anti-dumping duties imposed by the Commerce Department.
POLITICAL AND ECONOMIC EVENTS IN FOREIGN COUNTRIES MAY LIMIT SUPPLY OF FLOWERS
Flowers are imported principally from countries in South America and Latin
America. The political and economic climate in several of these countries from
time to time has been volatile. In some of these countries, this volatility has
from time to time adversely affected many aspects of the economy, including
flower production. At times, this volatility has also impacted trade relations
with the United States. We cannot assure you that future political and economic
events in these flower growing countries will not reduce the production or
export of flowers. Any adverse changes in the production or export of flowers
from flower producing countries could have a material impact on our business,
financial condition, results of operations or prospects.
WE MAY HAVE DIFFICULTIES TRANSPORTING FLOWERS
The perishable nature of flowers requires the floral industry to have a
transportation network that can quickly move products from the farm to the
retailer. The existing distribution system that transports flowers from farms to
retailers may be adversely affected. Flowers grown in South America are
typically
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transported to the United States, principally Miami, via charter flights. We
cannot assure you that these charter flights can continue or that the Miami
International Airport will never be shut down. After flowers arrive in Miami or
other ports of entry, they are distributed throughout the United States
primarily via refrigerated trucks. We cannot assure you that there will be no
fuel shortages, work stoppages in the trucking industry or other problems
encountered in transporting flowers.
POTENTIAL ADVERSE EFFECTS OF BAD WEATHER IN FLOWER GROWING REGIONS
The supply of perishable floral products depends significantly on weather
conditions where the products are grown. Severe weather, including unexpected
cold weather, may have an adverse effect on the available supply of flowers,
especially at times of peak demand. For example, in order for a sufficient
supply of roses to be available for sale on Valentine's Day, rose-growing
regions must not suffer a freeze or other harsh conditions in the weeks leading
up to the holiday. Any shortages or disruptions in the supply of fresh flowers,
or any inability on our part to procure our flower supply from alternate sources
at acceptable prices in a timely manner, could lead to the inability to fulfill
orders during periods of high demand, and the loss of customers.
PROBLEMS WITH ORDER TRANSMISSION NETWORKS AND THE COMPATIBILITY OF OUR SYSTEMS
A large percentage of floral industry revenue is dependent upon the ability
of the party taking an order from a consumer to transmit the order to a
delivering florist outside the immediate geographic market. Over the past
several years, this process has increasingly relied on electronic communications
and computers to create networks that serve as the transmission medium for
orders. We believe that a substantial number of floral industry participants use
one or more of these networks. In the event that one or more of these networks
were to become disabled, or our systems were unable to communicate with the
network or any other transmission medium, we could not use our normal
computer-based methods for communicating orders. We would either need to route
orders via alternative wire services, requiring reconfiguration of the existing
wire interfaces and programming logic, or be required to make individual
telephone calls or send faxes to florists. Conducting business primarily through
telephone and fax orders would cause our company to operate in a slower and more
costly manner. Any of these situations could have a negative impact on our
business, financial condition, results of operations or prospects.
RELATIONSHIPS WITH FLORAL WIRE SERVICE BUSINESSES MAY DETERIORATE
The retail floral industry has traditionally relied upon floral wire
services, including ours, to act as intermediaries to effectively manage, among
other things, the financial settlement between florists and serve as a
clearinghouse for orders. To our knowledge, these intermediaries do not
currently operate retail stores but do engage in other marketing and floral
order taking activities. After the merger, we will engage in both wire service
and retail activities. We do not know what the competitive response may be by
the other wire service intermediaries. Any action they may take which limits or
impacts the ability of our retail operations to settle or transmit orders
through their wire services may have a short term material adverse impact on our
business, financial condition or results of operations.
Wire service intermediaries also provide financial rebates or incentives to
those florists, order generators and other parties that transmit and/or
financially settle a large number of orders through their system. These rebates
and incentives provide a significant portion of our operating profit. Any change
in the industry's rebate or incentive structure may have a material impact on
our business, financial condition, results of operations or prospects.
RELATIONSHIPS WITH OUR MEMBER FLORISTS MAY DETERIORATE
Following the merger, some of the member florists of our wire service
business may not want to continue as members if they perceive that we are in
competition with them through our Gerald Stevens
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retail stores. This risk may be heightened when Gerald Stevens acquires or opens
retail operations in markets where our member florists are located. Loss of
member florists could have a negative impact on our business, financial
condition, results of operations or prospects.
YEAR 2000 ISSUE MAY ADVERSELY AFFECT OUR COMPUTER SYSTEM AND OPERATIONS
Businesses we acquire prior to January 1, 2000 may not have taken
appropriate steps to address their Year 2000 issues. Critical issues these
companies face include Year 2000 readiness of their telephone switches,
voicemail systems, store server hardware and operating systems, and the business
software installed on their store systems. Any businesses acquired that have not
adequately addressed these issues pose immediate operational and financial
risks. We may incur significant costs to replace, rather than upgrade, equipment
and software to ensure Year 2000 compliance. These costs could have a negative
impact on our business, financial condition, results of operations or prospects.
Additionally, we may experience significant Year 2000 related operating
problems. These problems may include our inability to:
- input floral orders into the system;
- communicate electronically with Gerald Stevens stores;
- communicate with vendors;
- conduct accounting and banking functions; and
- manage the business effectively due to lack of information.
We cannot assure you that we will not be materially adversely impacted by
such problems.
UNCERTAINTY OF INTERNET USE AND ITS IMPACT ON OUR OTHER ADVERTISING
We believe that the Internet and electronic commerce will play an
increasingly important role in floral and gift related merchandising and order
taking over the coming years. As such, we intend to devote significant financial
resources to our Internet operations. We cannot assure you, however, that the
use of the Internet and electronic commerce by consumers to purchase flowers and
gifts will continue to increase. We cannot assure you that other purchasing
mediums will not replace the Internet. Additionally, unlike building traditional
retail stores, where there is a limited amount of prime retail real estate and
significant capital requirements, among other things, there are few barriers to
entry on the Internet. Our competitors may be better funded or have other
proprietary technologies or approaches to the Internet business which may make
it difficult for us to compete on the Internet. In any of these instances, our
business, financial condition, results of operation or prospects may be
materially adversely impacted.
A significant amount of our call center order taking operations results
from advertisements placed in telephone directories in many markets. Many of our
current contracts for telephone directory ads provide us with priority placement
in the florists section of the directory. As these contracts expire, the cost of
maintaining our priority placement may increase. Also, as Internet phone
directories increase in use, the value we receive from ads in traditional phone
books may decrease.
POSSIBLE DEPRESSING EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a large number of shares of our common stock in the market after
the merger could cause a decrease in the market price of our common stock. The
perception that these sales may occur also could depress the market price of our
common stock. We only have about 8.2 million shares outstanding now, and we will
be issuing approximately 28.1 million shares to Gerald Stevens stockholders in
the merger. After the merger, former stockholders of Gerald Stevens who are not
current or former directors, executive officers or affiliates of Gerald Stevens
will hold, in aggregate, approximately 15.6 million shares
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of our common stock. These shares will be eligible to be sold in the public
market immediately after the merger closes. In addition, former stockholders of
Gerald Stevens who become our directors or executive officers, or are affiliates
of our directors or executive officers, will hold a total of approximately 12.4
million shares of our common stock. These shares generally may be resold as soon
as we publish our results of operations for a period of at least 30 days'
combined operations following completion of the merger. Any actual sales or any
perception that sales of a substantial number of shares may occur could
adversely affect the market price of our common stock.
WE DO NOT INTEND TO RESOLICIT VOTES IF THE MERGER AGREEMENT IS AMENDED
All of our directors, executive officers and significant stockholders have
executed a voting agreement with Gerald Stevens. Under this voting agreement,
these persons have agreed to vote all of their shares, which constitute
approximately 56.7% of the approximately 8.2 million outstanding shares of our
common stock, in favor of each of the three proposals to be presented at the
annual meeting. Thus, the voting agreement ensures the approval of each of the
three proposals even if all of our other stockholders vote their shares against
the proposals. Because the voting agreement ensures the approval of the
proposals to be presented at the annual meeting, we do not intend to resolicit
stockholder approval for the proposals even if material amendments are made to
the merger agreement or if any conditions to the closing, including the
condition that the merger be accounted for as a pooling of interests, are waived
by either party. Although we have no present intention to amend the merger
agreement after the date of this document in any material respect, you should be
aware that an amendment to the merger agreement could change the terms of the
proposed merger and possibly have an adverse effect on you as one of our
stockholders.
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CAUTIONARY STATEMENT CONCERNING
FORWARD-LOOKING STATEMENTS
This document contains or incorporates by reference forward-looking
statements that are subject to risks and uncertainties. Forward-looking
statements include information concerning our financial condition, results of
operations, plans, objectives, future performance and business. We include
forward-looking statements in descriptions of future earnings and cash flows,
anticipated capital expenditures and acquisitions, and management's strategies,
plans and objectives. Statements preceded by, followed by or that include the
words "believes," "expects," "anticipates" or similar expressions are considered
to be forward-looking statements.
Forward-looking statements involve both known and unknown risks and
uncertainties. Because forward-looking statements are subject to known and
unknown risks and uncertainties, actual results or performance may differ
materially from the expected results or performance expressed or implied by the
forward-looking statements. The following important factors, in addition to
factors we discuss elsewhere in this document and in the documents which we
incorporate into this document by reference, could affect our actual results or
performance:
- our ability to integrate our operations with Gerald Stevens' operations
following the merger;
- the availability of acquisition and expansion opportunities on attractive
terms;
- our ability to integrate and successfully operate acquired businesses;
- our ability to develop and implement systems to manage rapidly growing
operations;
- the availability of capital to fund growth and acquisition opportunities;
- our limited operating history in floral retailing and related businesses;
- delay in the completion of the merger;
- competition in the floral industry;
- changes in prices or sources of supply of flowers;
- changes resulting from consolidation in the floral industry;
- the potential for a reduction in rebates we receive from floral wire
service companies;
- consumer acceptance of the internet as a purchasing medium for flowers
and floral related products and gifts;
- the effect and costs of Year 2000 issues; and
- adverse conditions in the capital markets or in the general economy.
If you would like additional information about these and other important
factors which could affect our actual results or performance, read the "Risk
Factors" section of this document. You should also read our Annual Report on
Form 10-KSB, as amended by Form 10-KSB/A, for the year ended August 31, 1998. We
have included these documents with this document as Annexes D-1 and Annex D-2,
respectively.
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THE ANNUAL MEETING
We will hold our annual meeting of stockholders on April 23, 1999, at Bent
Pine Country Club, 6001 Clubhouse Drive, Vero Beach, Florida 32967, commencing
at 2:30 p.m., local time.
THE PURPOSE OF OUR ANNUAL MEETING
The purpose of our annual meeting is to:
(1) approve the proposed issuance of shares of our common stock in
connection with the merger of Red Cannon Acquisition Corp., a Delaware
corporation and our wholly owned subsidiary, with and into Gerald Stevens,
and the associated change of control of our company;
(2) approve an amendment to our certificate of incorporation that,
upon completion of the merger, will change our name from "Florafax
International, Inc." to "Gerald Stevens, Inc." and increase the number of
authorized shares of our common stock from 70,000,000 to 250,000,000; and
(3) elect Steven R. Berrard, Thomas C. Byrne, Gerald R. Geddis,
Kenneth R. Royer and Andrew W. Williams as our directors to serve from the
date the merger is completed until the next annual meeting or until their
successors have been qualified.
RECORD DATE; SHARES ENTITLED TO VOTE
Our board of directors has fixed the close of business on March 31, 1999 as
the record date for determining holders of our common stock entitled to notice
of, and to vote at, the annual meeting. Only holders of our common stock at the
close of business on the record date will be entitled to notice of, and to vote
at, the annual meeting. Each share of our common stock will be entitled to one
vote on each matter to be acted upon at the annual meeting.
QUORUM; VOTE REQUIRED
QUORUM.
Our bylaws require the holders of a majority of the outstanding shares of
our common stock be present in person or by proxy for any action to be taken on
the proposals. For purposes of determining whether the quorum requirement is
met, we will count abstentions and broker non-votes as shares present. A broker
non-vote occurs when a broker does not vote on a matter, due to the absence of
specific voting instructions from the beneficial owner of the shares held by the
broker. Nasdaq rules preclude brokers from voting in the absence of specific
voting instructions from the beneficial owner on the proposals relating to the
stock issuance and the associated change of control and the amendment to our
certificate of incorporation. Therefore, broker non-votes will not be voted for
or against these proposals.
VOTE REQUIRED.
The affirmative vote of the holders of a majority of our outstanding shares
of common stock is required to approve the amendment to our certificate of
incorporation. In determining whether approval of the amendment to the
certificate of incorporation has received the requisite number of votes,
abstentions, broker non-votes and shares of our common stock not represented at
the annual meeting will have the same effect as a vote against this proposal.
The affirmative vote of the holders of a majority of the shares of our
common stock present in person or by proxy and entitled to vote is required to
approve the proposed stock issuance and associated change of control and to
elect directors. In determining whether the approval of the proposed stock
issuance and associated change of control and whether the director nominees have
received the requisite number of votes, abstentions and shares present but
withheld from voting will count as votes against the proposals or
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against election. Broker non-votes will be treated as present at the annual
meeting for purposes of determining a quorum but will not be counted as votes
cast on these matters.
FLORAFAX VOTING AGREEMENT
All of our directors, executive officers and significant stockholders, who
own approximately 56.7% of the outstanding shares of our common stock, have
entered into a voting agreement with Gerald Stevens and have agreed to vote
their shares in favor of each of the three proposals to be presented at the
annual meeting. Thus, the voting agreement ensures the approval of each of the
three proposals even if all of our other stockholders vote their shares against
the proposals.
PROXIES
Individuals appointed as proxies will vote those shares of our common stock
represented by a properly executed proxy in accordance with the instructions
indicated on the proxy. In order to be voted, we must have received a properly
executed proxy prior to or at the annual meeting. Also, the proxy must not have
been duly and timely revoked. If the stockholder provides no instructions on a
properly executed proxy, that proxy will be voted "FOR" the approval of the
proposals. A properly executed proxy marked "ABSTAIN," although counted for
purposes of determining whether there is a quorum and for purposes of
determining the aggregate voting power and number of shares represented and
entitled to vote at the annual meeting, will not be voted. However, because of
the vote required for each proposal, a proxy marked "ABSTAIN" will have the
effect of a vote against the proposals.
A stockholder may revoke a properly executed proxy at any time before the
proxy is voted. Attendance at the annual meeting will not by itself result in
revocation of a proxy.
Our board of directors is not currently aware of any business to be acted
upon at the annual meeting other than as described herein. If other matters are
properly brought before the annual meeting, the persons appointed as proxies
will have discretion to vote or act thereon according to their judgment.
We will pay the cost of soliciting proxies. We will also make arrangements
with brokerage houses and other custodians, nominees and fiduciaries to send
proxy material to beneficial owners, and we will, upon request, reimburse them
for their reasonable expenses. We urge our stockholders to send in their proxies
without delay.
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PROPOSAL NO. 1
STOCK ISSUANCE AND CHANGE OF CONTROL
GENERAL
We propose to issue approximately 28.1 million shares of our common stock
to stockholders of Gerald Stevens in the merger. The exact number of shares to
be issued will depend on the exchange ratio and will be adjusted based on the
number of shares of Gerald Stevens common stock issued and outstanding at the
time of the merger. As a result of the stock issuance, Gerald Stevens
stockholders together will own approximately 77.5% of the total shares of our
common stock outstanding after the merger.
BACKGROUND OF THE MERGER
From time to time, our management has reviewed prospects for improving
stockholder liquidity and enhancing our long-term growth potential. In the
course of these reviews, management has considered the trends toward
consolidation in the floral industry and determined that significant competitive
advantages might develop through a strategic combination that would blend our
flowers-by-wire operations with a broader customer base and wider range of
services.
In March 1998, a leading floral distributor contacted our management, to
discuss the possibility of a strategic combination. This company had acquired
and consolidated numerous floral wholesalers, importers and other floral
distribution businesses. Prompted by that contact, on March 13, 1998, we engaged
the investment banking firm of ABN AMRO Incorporated as financial advisor to
provide advice regarding issues related to stockholder value and to assist in
evaluating opportunities for strategic combinations, including the potential
acquisition of our company that had been suggested by the floral distributor.
In late March and early April, we continued to have discussions with the
floral distributor. We executed a confidentiality agreement and exchanged
information with the floral distributor, but it decided not to pursue the
opportunity after market conditions adversely affected its stock price.
A representative of New River Capital Partners, L.P., a venture capital
firm with an equity interest in Gerald Stevens, contacted our management in May
1998. On May 28, 1998, representatives of Gerald Stevens and New River Capital
Partners met with our representatives to discuss Gerald Stevens' interest in the
floral industry. At that time, Gerald Stevens had not yet developed or acquired
any operations and the nature of discussions revolved around the changing
dynamics of the floral industry and New River Capital Partners' evaluation of
the merits of investing in the floral industry. Although these discussions
continued after the meeting, we did not exchange confidential information with
Gerald Stevens and neither party proposed any combination or other transaction
between us and Gerald Stevens. On June 3, 1998, we entered into a
confidentiality agreement with New River Capital Partners. Afterwards, Gerald
Stevens provided details of its business strategy and we provided details of our
historical financial results.
On June 29, 1998, our representatives met in New York with Gerald Stevens'
representatives and their financial advisor, Allen & Company, Incorporated, to
discuss, on a conceptual basis, the merits of a possible transaction between the
companies. At the meeting, we discussed the following strategic benefits:
- our existing operations, including our call centers and THE FLOWER
CLUB(TM) brand and affinity partners, could become the foundation of
Gerald Stevens' proposed order generation operations;
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- Gerald Stevens' planned retail operations could supplement the
distribution capabilities of our wire service members; and
- Gerald Stevens' planned retail operations could send a portion of
their orders through our wire service.
Informal conversations between our representatives and representatives of Gerald
Stevens continued on those topics through July 1998.
In early August, through ABN AMRO, we exchanged updated financial
information with Gerald Stevens. At our request, in a letter dated August 6,
1998, Gerald Stevens submitted a proposal to us relating to a business
combination between the two companies. At that time, Gerald Stevens was a
development stage company with no operations, no firm commitment for debt or
equity to finance its proposed acquisitions of floral retailers, and management
with very limited experience in the floral industry. From a financial
standpoint, the terms of the proposal and the suggested valuation of the Gerald
Stevens enterprise were unattractive to our management. We believed that the
valuation assigned to Gerald Stevens in its proposal, based in part on assumed
trailing earnings before interest, taxes, depreciation and amortization of
companies not yet probable of being acquired by Gerald Stevens, could not be
supported in light of its lack of operating history. We also believed that the
valuation of our company in its proposal was conservative. At the time we
received this proposal, we informed Gerald Stevens that we were actively engaged
in discussions with a floral wire service company regarding a possible business
combination. As a result, we believed that it was prudent to reject their
proposal and continue to pursue other strategic alternatives. Our
representatives continued to speak with Gerald Stevens' representatives from
early August through October and we periodically exchanged updated financial and
operating information.
On September 3, 1998, we, along with ABN AMRO, met with representatives of
the floral wire service company and its financial advisor. The floral wire
service company submitted a written preliminary and non-binding proposal that
outlined a proposed acquisition of our business and operations for stock and
cash.
On September 8, 1998, representatives of Gerald Stevens, Allen & Company
and ABN AMRO discussed Gerald Stevens' business plan in greater detail and the
status of Gerald Stevens' pending acquisitions.
On September 23, 1998, ABN AMRO met with the floral wire service company's
financial advisor to discuss its proposal and obtain additional information
regarding the strategic benefits that might result from a combination between us
and them. We continued to talk and to exchange information with the floral wire
service company through October 5, 1998.
Following a regularly scheduled meeting of our board of directors on
October 5, 1998, ABN AMRO provided a report to members of our board of directors
and management on the status of the separate discussions that were ongoing with
Gerald Stevens and with the floral wire service company. ABN AMRO provided a
brief survey of the proposals. The survey addressed the financial positions of
each company and the relative risk involved versus the potential benefits of the
proposals. The board decided there was not enough incentive to move forward with
either transaction at that time and therefore did not reach any conclusions, but
advised management to continue discussions with both parties.
On October 14, 1998, representatives from our company and from ABN AMRO met
in Dallas with Gerald Stevens representatives. At the meeting, Gerald Stevens
introduced new personnel from their recently acquired businesses who were
experienced in the operations of the floral industry. Gerald Stevens also
provided an update on their operations and financing activities. In early
October 1998, Gerald Stevens completed a $21 million private equity financing,
obtained a $20 million line of credit with a bank and closed ten acquisitions of
floral companies. Gerald Stevens also summarized their
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business model and gave a tour of their recently acquired retail operation in
Dallas. Of particular interest to us in the Gerald Stevens business model was
its focus on generating revenue growth rather than relying solely on potential
cost savings which could be derived from the consolidation of retail floral
chains. The presentation demonstrated the ability of Gerald Stevens to raise
capital, attract quality floral management and execute transactions of the type
they forecast and made the growth prospects of a potential Florafax/Gerald
Stevens combination significantly more attractive.
On November 6, 1998, Gerald Stevens submitted a revised proposal for a
business combination with us based upon the series of discussions that had
occurred between our representatives and representatives of Gerald Stevens over
the preceding three months, including discussions at the Dallas meeting. Unlike
the earlier proposal, this new proposal had financial terms that were based upon
a valuation tied to the respective earnings contributions of the companies to
the combined entity. In discussions that followed, Gerald Stevens also advised
our management that it was taking steps toward filing for an initial public
offering of its common stock in the first quarter of 1999.
On November 9, 1998, our board of directors met by telephone to discuss
strategic alternatives and to review the recent conversations with Gerald
Stevens and the floral wire service company. During the meeting, ABN AMRO
presented its analysis of the current trends and characteristics of the industry
and the following strategic and financial alternatives:
- continuing as an independent floral wire service,
- combining with Gerald Stevens, or
- combining with the floral wire service company that had expressed
interest in a possible business combination with us.
At this meeting, our board of directors only considered the strategic and
financial alternatives presented by ABN AMRO.
At that meeting, management informed our board of directors of the
developments with Gerald Stevens and the floral wire service company. ABN AMRO
provided a comparative analysis of the two proposals which expanded on the
survey provided at the October 5, 1998 meeting. ABN AMRO also responded to
questions from board members as to the preliminary economic terms, growth
prospects and strategic rationale associated with each of the proposals. Based
on the presentation, our board of directors authorized management to continue
discussions with Gerald Stevens regarding a business combination consistent with
the terms of its November 6 proposal.
In addition, at that meeting our board of directors determined that the
opportunity presented by the floral wire service company was not a good
strategic opportunity for us. The proposal involved growing our combined wire
service business through acquisitions of green plant companies, trucking
companies and floral product companies in an effort to extend our product line
to potted household plants and to integrate delivery and product sourcing
operations into our wire services business.
The benefits of the opportunity to combine with the floral wire service
company were considered to be the following:
- we believed the combined entity would be one of the largest
flowers-by-wire services in North America;
- our market capitalization would increase;
- our stockholders would have an opportunity for greater liquidity over
time;
- if the acquisition strategy was successful, then the long-term value
to our stockholders would be enhanced;
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- our stockholders would own approximately 47% of the combined entity
and would therefore have influence on corporate governance matters;
and
- the combination would deepen and broaden our management team.
The detriments and challenges of proceeding to combine with the floral wire
service company were viewed as the following:
- the company's financial condition, including its substantial debt and
interest expense, could depress our future earnings for many years;
- the proposed transaction would be accounted for as a purchase,
creating a substantial amount of goodwill on the combined entity's
balance sheet, and would result in significant amortization expense
which would depress our future earnings for many years;
- their substantial debt could limit the ability of the combined entity
to make important or significant acquisitions that came along;
- the acquisition did not provide diversification to protect our
stockholders against any challenges or slow growth faced by the floral
wire service business;
- the consolidated revenue of the combined entity could decrease because
of member florist overlap;
- the possibility of short-term volatility in the stock performance of
the combined entity; and
- the potential inability to grow outside the floral wire service
business and to sell more products through the company's florist
network.
Thus, the proposal seemed to lack the upside potential that would justify a
change in control and offset the risks, and did not provide us with any clear
benefits, other than the creation of a larger enterprise.
Following adjournment of the board of directors meeting on November 9,
1998, our management spoke by telephone with representatives of Gerald Stevens
and advised them of our interest in pursuing a business combination along the
lines of the November 6 proposal. We suggested that they prepare a draft form of
merger agreement for review by us and our counsel. Gerald Stevens indicated that
it desired to proceed only if we were willing to negotiate with them
exclusively. As a result, we entered into an exclusivity agreement with Gerald
Stevens on November 10, 1998. The parties and their respective financial
advisors, auditors and legal counsel performed due diligence investigations
during the month of November and early December.
On November 16, 1998, Gerald Stevens' legal counsel circulated a draft
merger agreement for our review and comment. In response, our legal advisors
provided general comments on the draft with the objective of further
understanding the terms that Gerald Stevens might contemplate in a transaction.
Negotiations on the merger agreement continued through the month of November and
into the first week of December.
Our board of directors met by telephone December 7, 1998, to consider the
status of discussions regarding the proposed business combination with Gerald
Stevens. Our board also discussed the terms and conditions of the proposed
merger agreement, the status of the due diligence review of Gerald Stevens and
other matters. Our legal advisors reviewed the proposed merger agreement and
responded to questions regarding its terms and related documents. At that
meeting, ABN AMRO provided our board with various financial and other
information relating to the proposed transaction. Our board directed our
management to negotiate the terms of the proposed merger agreement, including a
change in the period over which the average closing sale price of our common
stock would be computed for purposes of
27
<PAGE> 33
determining the exchange ratio for Gerald Stevens common stock, and, subject to
satisfactory resolution of those issues, unanimously authorized and approved the
merger agreement.
The parties made revisions to the proposed merger agreement on December 7
and 8, 1998 in response to issues raised by our board of directors. Our Chairman
polled our board of directors by telephone on December 8, 1998 to confirm that
the revised terms of the merger agreement were satisfactory and received
unanimous authorization to proceed with execution and delivery of the merger
agreement as revised.
On December 9, 1998, ABN AMRO delivered its written opinion to the effect
that the exchange ratio contemplated by the merger agreement was fair to our
stockholders from a financial point of view.
The parties executed the merger agreement on December 9, 1998, and both
companies publicly announced the deal before the stock markets opened on
December 10, 1998.
OUR REASONS FOR THE MERGER; RECOMMENDATIONS OF OUR BOARD OF DIRECTORS
At meetings on December 7 and 8, 1998, our board of directors unanimously
approved the terms of the merger agreement and the related transactions. The
board believes that the terms of the merger are fair to, and in the best
interests of, our stockholders and unanimously recommends that you vote in favor
of the issuance of our common stock to Gerald Stevens stockholders in connection
with the merger and the associated change in control.
In the course of evaluating recent trends in the floral industry, our
management has seen challenges develop both for us and comparably sized
companies. The floral industry is undergoing a period of widespread
consolidation that could threaten the long-term viability of small, independent
floral companies. These developments led us to analyze alternatives that would
enhance stockholder value and create growth opportunities. These alternatives
included the possibility of strategic combinations with various industry
participants. After Gerald Stevens expressed interest in combining with us, our
management and board of directors continued to consider other possibilities, but
eventually recognized that the business combination proposed by Gerald Stevens
offered us the chance to develop a national retail floral brand, diversify our
existing business, improve our prospects for long-term growth and thereby
increase stockholder value. The other alternatives analyzed by our board of
directors did not offer the same growth opportunities as the proposed
combination with Gerald Stevens. The floral wire service
28
<PAGE> 34
company offered a strategic plan that would require us to focus our existing
management on operations in which we have no experience and to extend our
product line in order to successfully execute the plan. The board determined
that the business combination with Gerald Stevens was comparatively better than
the potential business combination with the floral wire service company because
the Gerald Stevens combination offered us the opportunity to grow our business
as it currently operates.
Our management believes that the merger with Gerald Stevens will reduce
risks associated with our continued independent operations, including the:
- limited ability to access capital due to our smaller capital base and
operational resources;
- potential downside exposure associated with a small number of customers
responsible for a disproportionately large percentage of revenues; and
- increasing challenge in meeting growth expectations of our stockholders.
Management believes that our stockholders will benefit from the merger and
resulting investment in a combined Florafax/Gerald Stevens entity because the
merger provides:
- the potential for increasing order volume and expanding our customer
base;
- the opportunity to develop a national brand in the retail floral
business;
- an experienced, growth oriented management team;
- a management team that previously had worked together in successfully
developing and implementing a growth strategy for Blockbuster Video;
- a means to create operational efficiencies and cost savings in the
combined operations through
-- eliminating or substantially reducing third party fees paid by Gerald
Stevens retail operations for credit card processing since we operate
our own credit card processing system,
-- increasing utilization of our call centers allowing fixed costs to be
spread over more transactions,
-- lowering our financing costs,
-- placing wire service orders through a fully-integrated system which
reduces third party costs, and
-- integrating administrative operations.
- the opportunity to monitor and control the quality of product and service
delivered through direct ownership of floral retailers;
- the opportunity to provide floral products at lower prices to our wire
service members through more competitive bulk purchasing arrangements
with wholesalers;
- the opportunity to apply database marketing skills to increase sales from
our existing customers;
- the opportunity to diversify our operations and, as a result, expand our
customer base beyond our current members of THE FLOWER CLUB(TM) and
reduce our exposure to the risk presented by the competitiveness of our
wire service operation;
- improved market liquidity and a greater ability to attract market makers,
stock market analysts and institutional investors; and
- our stockholders with ownership in a larger entity with significant
growth opportunities.
Management also believes that there are some detriments and uncertainties
to the merger with Gerald Stevens, including:
- difficulties in integrating the companies' operations;
29
<PAGE> 35
- difficulties in quantifying and ensuring the creation of potential
operational efficiencies and cost savings in the combined entity;
- Gerald Stevens' management's limited experience in the floral industry;
- Gerald Stevens' limited combined operating history;
- difficulties in implementing the growth strategy; and
- excessive demands on our resources resulting from implementing our growth
strategy.
We discuss these detriments and uncertainties in the Risk Factors section
of this document.
After consulting with and considering the analysis of ABN AMRO, our board
of directors determined that it was in the best interests of our stockholders to
pursue the merger with Gerald Stevens. In making this determination, the board
considered the positive and negative factors set forth above. In addition, the
board considered the absence of an opportunity for a strategic alliance with
other industry participants either on comparable economic terms or with a
comparable probability of a successful combination, as well as the potential
benefits of Gerald Stevens' plan to increase volume which set it apart from
other combination candidates. The board knew that Gerald Stevens had recently
completed a private placement of its common stock at a price much lower than the
valuation used in arriving at the exchange ratio. The board also knew that
Gerald Stevens had issued additional stock in acquisition transactions at
significant discounts to that valuation in the previous three months. The board
took these matters into account in approving the terms of the merger. The board
recognized that the increasing exchange ratio called for in the merger agreement
would result in an increased number of shares of stock being issued to Gerald
Stevens' stockholders if the average closing price of our common stock remained
above $6.50 per share for a 45 day period prior to the merger. Nevertheless, the
board believed that the exchange ratio was necessary to provide Gerald Stevens
stockholders with a premium in the event that our stock price increased in
response to market assessments regarding the likelihood that the merger with
Gerald Stevens would be completed. However, the board also believed that fixing
the exchange ratio for stock prices above $6.50 per share allowed our
stockholders to recognize a commensurate financial benefit as a result of
increases in the price of our common stock above $6.50 per share. Our legal
counsel advised the board about its fiduciary duties in the evaluation of the
proposed transaction. Among the items considered by the board were the
presentation made by ABN AMRO at the December 7, 1998 meeting and the written
opinion of ABN AMRO, dated December 9, 1998, to the effect that, subject to ABN
AMRO's assumptions, limitations and qualifications set forth in the opinion, the
exchange ratio used to determine the number of shares of our common stock to be
issued to Gerald Stevens stockholders in connection with the merger is fair to
our stockholders from a financial point of view. Our board of directors
believes, in light of the increase in the market price of our common stock since
the announcement of the merger and the corresponding increase in the value of
the shares to be issued to Gerald Stevens stockholders, that the terms of the
merger with Gerald Stevens remain fair and in the best interests of our
stockholders as of the date of this document. Our board of directors does not
believe the increase in the market price of our common stock presents any risks
as to its fairness and best interests determinations.
In April 1998, we restated our financial statements for fiscal year 1998 in
order to change the accounting treatment with respect to the Marketing Projects,
Inc. transaction. As a result of this restatement, our financial statements for
fiscal year 1998 now show a net loss of $623,000 compared to previously reported
net income of $1,768,000. Our board of directors and management determined that
the reasons for the merger were not materially affected by the change in
accounting treatment for the MPI transaction and the resulting restatement of
our financial statements. We kept Gerald Stevens fully informed of our decision
to restate our financial statements so that Gerald Stevens could independently
determine the impact of the restatement on our merger transaction. On April 9,
1999, we entered into an amendment to the merger agreement with Gerald Stevens
that acknowledges the restatement of our financial statements and constitutes a
waiver by Gerald Stevens of the breach of the merger agreement
30
<PAGE> 36
that would have otherwise occurred due to the restatement of our financial
statements and the corresponding reduction in our net income for fiscal year
1998.
In connection with our decision to proceed with the merger transaction
after the restatement of our financial statements, our board reconvened on March
18, 1999 to discuss the restatement of our financial statements and its impact
on the merger. Our board concluded that the fairness of the exchange ratio
contemplated by the merger agreement had not been compromised. Consequently, the
board did not request an update of the ABN AMRO fairness opinion and did not
otherwise meet with ABN AMRO.
The preceding discussion sets forth the material information and factors
considered by our board of directors in determining the fairness to our
stockholders of the stock issuance in connection with the merger and the
associated change of control. In view of the variety of factors considered in
connection with its evaluation of the merger, the board did not find it
practicable or necessary to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination.
Moreover, the board did not expressly adopt the ABN AMRO opinion as a conclusive
endorsement of the transaction, but did weigh it along with the other factors
described. Individual members of the board may have given different weights to
different factors.
OPINION OF ABN AMRO
On December 9, 1998, ABN AMRO delivered its written opinion to our board of
directors that, as of that date, the exchange ratio was fair from a financial
point of view to our stockholders. We have attached the full text of the ABN
AMRO opinion as Annex B to this document. We incorporate the opinion into this
document, and qualify this summary of the opinion, by reference to the full text
of the opinion. The opinion sets forth the assumptions made, matters considered
and limitations on the review undertaken by ABN AMRO in connection with its
opinion.
ABN AMRO provided its advisory services and opinion for the information and
assistance of the board of directors in connection with the board's
consideration of the exchange ratio provided for in the merger agreement. The
opinion addresses only the fairness of the exchange ratio to our stockholders
from a financial point of view. The opinion is not a recommendation to any
stockholder to vote in favor of the stock issuance. The terms of the merger
agreement do not require us to get an updated opinion and our board of directors
has not requested an updated opinion at this time. However, if a material
amendment were made to the merger agreement that affected the exchange ratio or
other terms of the merger, our board of directors would consider obtaining an
updated opinion from ABN AMRO.
In arriving at its opinion, ABN AMRO:
- reviewed the merger agreement and related documents;
- held discussions with our senior officers and directors as well as the
senior officers of Gerald Stevens concerning the businesses, operations
and prospects of each of the companies;
- examined publicly available information and other data which we provided;
- examined financial information, including limited historical information,
and other data which Gerald Stevens provided;
- reviewed the financial terms of the merger in relation to current and
historical market prices and trading volumes of our common stock, each
company's financial and operating data, and the capitalization and
financial condition of the companies;
- considered, to the extent publicly available, the financial terms of
recent transactions which ABN AMRO considered relevant in evaluating the
merger;
- analyzed financial, stock market and other publicly available information
relating to the businesses of other companies whose operations ABN AMRO
considered relevant;
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<PAGE> 37
- reviewed Gerald Stevens' early acquisition plans and related documents;
- reviewed the projected operating results, the strategic rationale for the
merger and sensitivity analyses relating to our operations and those of
Gerald Stevens and the combined entity; and
- interviewed our management regarding the reasonableness of its
projections and analyses.
In rendering its opinion, ABN AMRO assumed and relied upon the accuracy and
completeness of all financial and other information which it reviewed. ABN AMRO
did not make, obtain or assume any responsibility for independent verification
of this information. ABN AMRO assumed that Gerald Stevens' early acquisitions
were completed as contemplated. ABN AMRO relied upon the estimates of our
management and their concurrence with Gerald Stevens as to operating performance
and balance sheet projections resulting from the merger and Gerald Stevens'
early acquisitions. In addition, ABN AMRO assumed no responsibility for making
an independent evaluation or appraisal of the assets and liabilities of either
company or their respective subsidiaries.
ABN AMRO assumed that financial projections provided by us and Gerald
Stevens were reasonably prepared based on assumptions reflecting the best
currently available estimates and judgments of management. ABN AMRO assumed that
the merger will be completed in accordance with the terms of the merger
agreement, including that the merger will be accounted for as a pooling of
interests under generally accepted accounting principles and as a tax-free
reorganization for federal income tax purposes. Unless specifically stated, ABN
AMRO expresses no opinion regarding the terms of the merger agreement or any
other agreements contemplated by this transaction. ABN AMRO is not expressing
any opinion as to what the value of our common stock actually will be upon
completion of the merger or the price at which our common stock will trade
subsequent to the merger.
DISCUSSION OF FINANCIAL MODEL ASSUMPTIONS AND SENSITIVITY ANALYSES.
In developing each of its analyses, ABN AMRO assumed that each regional
market developed by Gerald Stevens to have a population of one million, and the
potential to generate annual revenues of approximately $55 million. ABN AMRO
assumed that Gerald Stevens would eventually have a market share of
approximately 40%. It is assumed that each market will be developed by Gerald
Stevens through a combination of acquiring and building stores. ABN AMRO also
assumed that growth in earlier years will come largely from acquisitions and in
later years will come from a progressively larger component of built stores.
In the model provided to ABN AMRO and us, Gerald Stevens contemplated
entering 69 new markets between January 1, 1999 and December 31, 2003 bringing
the total number of markets served to 80. In addition to the retail business,
the strategy includes the development of import and consumer direct businesses.
ABN AMRO, in consultation with us, applied sensitivity analysis to the Gerald
Stevens business plan and has analyzed lower growth scenarios which assume the
development of 60 new markets between January 1, 1999 and December 31, 2003,
bringing the total number of markets served to 71.
The following is a summary of all of the material financial analyses ABN
AMRO used in connection with providing its written opinion to our board of
directors on December 9, 1998. The financial model assumptions and sensitivity
analyses described above were applied to each of the analyses discussed below,
except for the comparable transaction analysis. ABN AMRO did not utilize
sensitivity analyses for the comparable transaction analysis because that
analysis is based on actual historical financial data for Gerald Stevens. ABN
AMRO has advised us, and we believe, that the fairness opinion rests on a review
of all of the analyses described below, taken in their entirety.
The parties have structured the merger and related transactions with an
exchange ratio such that Gerald Stevens will receive varying levels of our
common stock depending on the average closing price of our common stock for a 45
day period prior to the merger. At our assumed closing price of $8.00 on
32
<PAGE> 38
December 4, 1998, the exchange ratio is 1.35 and the implied value that would
inure to the Gerald Stevens stockholder was $10.80. In comparing the results of
its analysis with the value of consideration paid to Gerald Stevens in the
merger, ABN AMRO considered the full range of exchange ratios and the attendant
range of consideration paid in the merger. However, due to the significant
expected growth of Gerald Stevens, ABN AMRO focused on valuations derived from
Gerald Stevens' financial projections for each of the fiscal years ended 1999,
2000, 2001, 2002 and 2003.
COMPARABLE PUBLIC COMPANY ANALYSIS.
ABN AMRO reviewed historical and projected financial and operating
information for Gerald Stevens and compared it to corresponding financial and
operating information of the following companies in the specialty retail sector:
- Barnes & Noble, Inc.;
- Borders Group, Inc.;
- Cost Plus, Inc.;
- Party City Corp.; and
- Williams-Sonoma, Inc.
ABN AMRO conducted a search on all retailers and determined that there were
no publicly traded specialty retailers in the floral sector. All of the
specialty retailers that ABN AMRO selected experienced high growth rates in
their historical financial results and have projected five-year growth rates
which exceed 24%.
ABN AMRO also compared the Gerald Stevens financial information to
corresponding information of the following high growth companies which are
growing through acquisitions in their respective consolidating industries:
- Carriage Services, Inc.;
- Equity Corporation International;
- HA-LO Industries, Inc.;
- Lason, Inc.;
- PETsMART, Inc.;
- Pierce Leahy Corp.;
- Service Corporation International;
- Stewart Enterprises, Inc.;
- Snyder Communications, Inc.; and
- USA Floral Products, Inc.
As a result of Gerald Stevens' aggressive acquisition strategy, ABN AMRO
believed that it should be valued, in part, as a high-growth acquiror.
ABN AMRO used closing market prices as of December 4, 1998 and compared
financial statistics of the comparable companies set forth above to those of
Gerald Stevens for the indicated periods. Estimates of anticipated results were
used for the years ending December 31, 1998 and 1999. ABN AMRO based its
estimates of anticipated results on its own estimates and publicly available
information.
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<PAGE> 39
Due to the fact that Gerald Stevens is in its early stages of development
and projects growth in revenues and profitability which exceed those of the
comparable companies set forth above, ABN AMRO emphasized the 1999 multiple
ranges in its written opinion. Further, the 1999 multiple ranges were considered
better valuation parameters because the latest twelve months and projected 1998
financial data for Gerald Stevens did not incorporate the financial impact of
several acquisitions that were expected to close prior to the completion of the
merger.
ABN AMRO calculated the adjusted market capitalization, the closing share
price on December 4, 1998 multiplied by the fully diluted shares outstanding
plus debt less cash, as a multiple of latest twelve months revenues, earnings
before interest, taxes, depreciation and amortization, and earnings before
interest and taxes, and estimates for 1998 and 1999 earnings before interest,
taxes, depreciation and amortization, and earnings before interest and taxes for
each of the comparable companies as follows:
- Latest twelve months ended November 30, 1998 revenues, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
0.8x 1.6x 1.1x 1.9x to 2.0x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
3.5x 5.4x 4.5x 1.9x to 2.0x
</TABLE>
- Latest twelve months ended November 30, 1998 EBITDA, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
9.1x 16.0x 12.5x 21.0x to 22.6x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
14.3x 23.5x 18.1x 21.0x to 22.6x
</TABLE>
- Estimated 1998 EBITDA, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
9.2x 12.6x 10.3x 22.8x to 24.6x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
11.4x 17.3x 14.3x 22.8x to 24.6x
</TABLE>
- Estimated 1999 EBITDA, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
6.2x 9.8x 7.6x 10.6x to 16.4x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
9.3x 12.5x 11.0x 10.6x to 16.4x
</TABLE>
34
<PAGE> 40
- Latest twelve months ended November 30, 1998 EBIT, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
12.8x 25.0x 19.0x 23.2x to 25.0x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
16.8x 27.6x 23.1x 23.2x to 25.0x
</TABLE>
- Estimated 1998 EBIT, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
10.7x 17.3x 13.7x 25.2x to 27.2x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
10.2x 24.9x 19.1x 25.2x to 27.2x
</TABLE>
- Estimated 1999 EBIT, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
8.0x 13.7x 10.5x 14.0x to 20.4x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
12.3x 16.0x 14.0x 14.0x to 20.4x
</TABLE>
ABN AMRO also calculated market value, the closing price on December 4,
1998 multiplied by the fully diluted shares outstanding, as a multiple of last
twelve months and estimated 1998 and 1999 earnings per share for the comparative
companies, as follows:
- Latest twelve months ended November 30, 1998 earnings per share, multiple
range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
27.3x 38.1x 33.7x 41.7x to 45.0x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
23.5x 41.0x 33.5x 41.7x to 45.0x
</TABLE>
- Estimated 1998 earnings per share, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
17.6x 33.6x 24.7x 41.7x to 45.0x
</TABLE>
35
<PAGE> 41
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
22.1x 38.6x 30.6x 41.7x to 45.0x
</TABLE>
- Estimated 1999 earnings per share, multiple range:
<TABLE>
<CAPTION>
SPECIALTY RETAIL GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
14.7x 23.9x 20.3x 21.7x to 27.0x
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATING INDUSTRIES GERALD STEVENS
--------------------------- --------------
LOW HIGH MEAN
----- ----- -----
<S> <C> <C> <C>
18.3x 28.5x 23.1x 21.7x to 27.0x
</TABLE>
The implied merger value was within the range of values generated by the
comparable company analysis when taken in its entirety.
COMPARABLE TRANSACTION ANALYSIS.
ABN AMRO compared the valuation of Gerald Stevens implied by the merger as
multiples of last twelve months' revenues, earnings before interest, taxes,
depreciation and amortization and earnings before interest and taxes with
available data for 14 specialty retail transactions that have closed since
January 1, 1996, each with transaction values of less than $500 million. ABN
AMRO observed that the target companies in these transactions were generally
relevant to Gerald Stevens, but none had growth characteristics comparable to
those of Gerald Stevens. The transactions compared included:
- Xerox Corporation's acquisition of Intelligent Electronics, Inc.;
- Toys "R" Us, Inc.'s acquisition of Baby Superstore, Inc.; and
- Petco Animal Supplies, Inc.'s acquisition of Pet Food Warehouse, Inc.
In these transactions ABN AMRO observed the following range of multiples:
- 0.6x to 1.2x with of mean of 0.8x for latest twelve months revenues
versus 1.9x to 2.0x for Gerald Stevens.
- 10.1x to 18.0x with a mean of 12.3x for latest twelve months earnings
before interest, taxes, depreciation and amortization versus 21.0x to
22.6x for Gerald Stevens.
- 10.8x to 18.8x with a mean of 14.5x for latest twelve months earnings
before interest and taxes versus 23.2x to 25.0x for Gerald Stevens.
While the comparable transaction analysis does not, by itself, support ABN
AMRO's opinion, ABN AMRO considered the results of this analysis to be less
relevant than other analyses that comprised its opinion because the comparable
transaction analysis is based on latest twelve months financial data. ABN AMRO
determined that this analysis was less relevant because the latest twelve months
financial data for Gerald Stevens did not reflect the projected growth rate of
its business plan.
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<PAGE> 42
CONTRIBUTION ANALYSIS.
ABN AMRO reviewed historical and projected operating information, including
earnings before interest and taxes and earnings before interest, taxes,
depreciation and amortization for us and Gerald Stevens and the pro forma
combined entity resulting from the merger, excluding any potentially realizable
operational efficiencies and cost savings. In addition, ABN AMRO performed
various scenarios and sensitivity analyses for consideration by our board of
directors relating to varying operating performance and growth in 1999. See
"-- Discussion of Financial Model Assumptions and Sensitivity Analyses" on page
31.
Based on our estimated performance for 1998 and 1999, we would contribute
to the combined Florafax/Gerald Stevens entity:
- 18.2% to 27.3% of combined revenues
- 18.6% to 31.3% of combined earnings before interest, taxes, depreciation
and amortization
- 21.8% to 30.9% of combined earnings before interest and taxes
ABN AMRO compared these contribution estimates to the 24.7% to 26.2% fully
diluted ownership interest in the combined entity to be received by our
stockholders as of December 4, 1998.
DISCOUNTED CASH FLOW ANALYSIS.
ABN AMRO prepared a discounted cash flow analysis based on Gerald Stevens
management's estimates of their projected financial performance for the years
1999 through 2003. In the analysis, ABN AMRO calculated a range of present
values of Gerald Stevens' estimated free cash flows for the fiscal years ending
1999 to 2003 using discount rates ranging from 25% to 35%. ABN AMRO calculated a
range of Gerald Stevens' terminal earnings before interest, taxes, depreciation
and amortization multiples ranging from 9.0x to 12.0x. ABN AMRO then discounted
the terminal values to present value using the same range of discount rates.
ABN AMRO chose the discount rates and terminal multiples to reflect varying
growth prospects, relative risks and market value considerations present in the
industry. The discount rates are consistent with returns required by equity
investors for early stage, high growth companies. The discounted cash flow
analysis typically produces the greatest range and highest value in per share
amounts. This occurs because the discounted cash flow analysis uses a range of
terminal multiples and discount rates. The lowest value of the discounted cash
flow analysis will result from using the lowest terminal value and the highest
discount rate while the highest value of the discounted cash flow analysis will
result from using the highest terminal value and the lowest discount rate. In
connection with this analysis, ABN AMRO performed various scenario and
sensitivity analyses for consideration by our board of directors relating to
varying operating performance and growth. See "-- Discussion of Financial Model
Assumptions and Sensitivity Analyses" on page 31.
Using the derived discounted cash flows and terminal values, ABN AMRO
calculated the equity value per share for Gerald Stevens common stock to range
from $11.20 to $44.58, excluding any potentially realizable operational
efficiencies created in the merger. This range compared favorably to the implied
merger value of $10.80 per share for Gerald Stevens common stock, as based on
our closing price on December 4, 1998 of $8.00 per share and an exchange ratio
of 1.35 to 1.
PRO FORMA EARNINGS PER SHARE IMPACT ANALYSIS
ABN AMRO analyzed the pro forma impact of the merger on our fiscal years
1999 through 2003 earnings per share based on estimates of net income provided
by us and Gerald Stevens. Estimates of net income for us and Gerald Stevens
excluded any potentially realizable operational efficiencies and cost
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savings. ABN AMRO compared the estimated earnings per share for us on a
stand-alone basis to the estimated earnings per share for us on a pro forma
combined basis.
Using the various exchange ratios and sensitivity analyses, ABN AMRO
determined that the merger would reduce our earnings per share in 1999 by 0.0%
to 16.9%, increase our earnings per share in 2000 by 25.1% to 103.3%, increase
our earnings per share in 2001 by 73.1% to 237.6%, increase our earnings per
share in 2002 by 128.0% to 375.9% and increase our earnings per share in 2003 by
177.7% to 494.1%. See "-- Discussion of Financial Model Assumptions and
Sensitivity Analyses" on page 31.
ADDITIONAL DISCUSSION CONCERNING THE FAIRNESS OPINION.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses, without considering the analyses as a whole, could
create an incomplete view of the processes underlying ABN AMRO's opinion. In
arriving at its determination of the fairness of the exchange ratio from a
financial point of view, ABN AMRO considered the results of all such analyses.
No company or transaction used in the above analyses as a comparison is
identical to Gerald Stevens or us or the merger.
ABN AMRO prepared the analyses described above solely for purposes of
providing its opinion to our board of directors as to the fairness of the
exchange ratio from a financial point of view to our stockholders. The analyses
do not purport to be appraisals and do not necessarily reflect the prices at
which businesses or securities actually may be sold. Analyses based on forecasts
of future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Because these analyses are based on numerous factors or events beyond the
control of the parties and their respective advisors, and are therefore
inherently subject to uncertainty, none of ABN AMRO, Florafax, Gerald Stevens or
any other person assumes responsibility if future results are materially
different from those forecast.
OUR RELATIONSHIP WITH ABN AMRO.
We selected ABN AMRO as our financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in
transactions similar to the merger. ABN AMRO, as part of its investment banking
business, is continually engaged in the valuation of businesses in connection
with mergers and acquisitions, as well as initial and secondary offerings of
securities and valuations for other purposes. ABN AMRO has acted as financial
advisor to our board of directors in connection with this transaction and will
receive a fee for its services, including rendering this opinion. A significant
portion of the fee to be received by ABN AMRO is contingent upon the
consummation of the merger. In the ordinary course of its business, ABN AMRO and
its affiliates may actively trade our securities for their own account and for
the accounts of their customers and, accordingly, may at any time hold a long or
short position in our securities.
ABN AMRO and its predecessor companies have provided advice to us and were
paid a fee of $20,000 in November 1996 for evaluating an investment opportunity
that we decided, on advice of ABN AMRO, to decline. W. Peter Williams holds the
position of Vice President with ABN AMRO and is the father of our Chief
Executive Officer, Andrew Williams. This relationship is incidental to, and did
not have any bearing on, our decision to retain ABN AMRO as our financial
advisor to assist us in evaluating issues related to shareholder value in March
1998. In addition, Andrew Williams has agreed to retain ABN AMRO to provide him
with personal financial advisory services for approximately six months following
completion of the merger in exchange for a fee of $400,000.
Under a letter agreement dated March 13, 1998, we engaged ABN AMRO to act
as our financial advisor in connection with issues related to stockholder value.
The engagement letter, as amended, specifies the compensation to be paid to ABN
AMRO for acting in that capacity and the board approved that arrangement prior
to the time the engagement letter, as amended, was executed. Under the terms of
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the engagement letter, we have paid ABN AMRO a $50,000 retainer fee and $150,000
for rendering the fairness opinion. Under the terms of the engagement letter,
upon completion of the merger, we will pay ABN AMRO an additional $1.1 million.
If the merger agreement is terminated, we will pay ABN AMRO a termination fee of
$700,000, less amounts previously paid to them. We will also reimburse ABN AMRO
for its reasonable out-of-pocket expenses, and indemnify them against
liabilities under the federal securities laws.
GERALD STEVENS' REASONS FOR THE MERGER
At a meeting held on December 8 and continuing on December 9, 1998, the
Gerald Stevens board of directors determined that the merger was fair to its
stockholders from a financial point of view and approved the merger agreement.
At the meeting, the Gerald Stevens board received presentations from, and
reviewed the terms of the merger agreement with, Gerald Stevens' management,
financial advisors and legal counsel. Gerald Stevens did not obtain a fairness
opinion because their board believed that it and Gerald Stevens' senior
management had substantial experience, sophistication and knowledge in these
types of merger transactions. In reaching its conclusions to pursue the merger,
the Gerald Stevens board considered the following factors:
- The relationships that we have developed for marketing through our
national affinity partners provides a foundation for the combined
entity's national order generation operations and a major part of the
combined entity's expansion into national promotions, retail partnerships
and a consumer direct business.
- The operation of a floral order generation business, like THE FLOWER
CLUB(TM) program, is one of Gerald Stevens' strategic goals.
- The database and marketing experience of Gerald Stevens' management could
be used to develop continuity and loyalty programs for customers and
affinity partners of THE FLOWER CLUB(TM).
- Gerald Stevens' retail operations can use the call center marketing and
transaction processing infrastructure established by us in Vero Beach,
Florida and Tulsa, Oklahoma to provide better service to customers and
achieve cost savings for the combined entity. These benefits include
providing evening and overflow call answering service for the retail
stores, utilizing the current database of 1.5 million members of THE
FLOWER CLUB(TM) as the foundation of a centralized national database of
floral customers, and providing preferred rates on credit card processing
services for the combined entity's retail stores. Also, our order
allocation and routing experience and systems will provide Gerald Stevens
the basis to develop its internal intranet and allocation systems.
- The potential for the combined entity to rapidly expand one of the
internet businesses operated by Gerald Stevens, www.flowerlink.com, by
including interested florists who are members of our wire service
business.
- The terms and conditions of the merger, the merger agreement and related
matters. In considering the terms of the merger, the Gerald Stevens board
of directors gave particular attention to the consideration to be
received by Gerald Stevens stockholders, including that the exchange
ratio was fixed at 1.35 shares of our common stock for each share of
Gerald Stevens common stock even if the average closing sale price of our
common stock for the specified period prior to completion of the merger
was significantly in excess of $6.50 per share. The Gerald Stevens board
of directors also considered that the merger would not close if the
average closing sale price for our common stock for the specified period
prior to completion of the merger was less than $4.00 per share. In
addition, the Gerald Stevens board considered the terms of the merger
agreement as a whole and, given the directors' experience in similar
transactions and their analysis of comparable transactions, determined to
approve the merger and adopt the merger agreement.
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- The historical and current financial conditions and results of operations
of Gerald Stevens and our company before and after giving effect to the
merger. In this regard, Gerald Stevens reviewed our Annual Reports on
Form 10-KSB, its own financial reports and the pro forma financial
information of the combined entity. Historical financial statements for
Gerald Stevens may be found beginning on page F-1 of this document; pro
forma financial statements for Gerald Stevens and for the combined entity
may be found beginning on page PF-1 of this document.
- The Florafax/Gerald Stevens combination accomplishes several of Gerald
Stevens' strategic goals to enhance stockholder value:
-- The merger values Gerald Stevens common stock at an attractive
premium over the price paid in a private placement completed in
October 1998 and over the implied value of shares issued in all
acquisition transactions completed in October, November and early
December, 1998.
-- The merger provides a publicly traded currency for future acquisition
transactions, which the board anticipates will create additional
stockholder value.
-- The merger creates liquidity for Gerald Stevens stockholders
resulting from exchanging their Gerald Stevens common stock, which is
illiquid and for which there exists no public market, for registered
shares of common stock which are listed for trading on Nasdaq.
The Gerald Stevens board considered that it could realize these
strategic goals with an initial public offering of its common stock.
However, Gerald Stevens' board believed that the merger could be
completed faster, less expensively, less disruptively to management, and
without regard to current market conditions for initial public
offerings, and therefore provided a better alternative.
- The likelihood that the merger will afford Gerald Stevens stockholders
the opportunity to receive our common stock in a non-taxable transaction
for federal income tax purposes.
- The likelihood that the merger will be accounted for as a pooling of
interests business combination and that no goodwill will be created on
the financial statements of the combined entity as a result of the
merger.
- The likelihood that the merger will be completed, particularly in light
of the voting agreement signed by all of our directors, officers and
significant stockholders.
In view of the wide variety of factors considered, the Gerald Stevens board
of directors did not find it practicable to, and did not quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching its conclusions.
Gerald Stevens did not reconsider its conclusion to pursue the merger in
light of Florafax's restatement of its financial statements for the fiscal year
ended August 31, 1998.
CHANGE OF CONTROL
The following is a description of some of the changes that will occur upon
completion of the merger and related change of control:
CHANGE IN OUR OWNERSHIP FOLLOWING THE MERGER.
Following the merger, Gerald Stevens stockholders will own approximately
77.5% of our approximately 36.2 million shares of common stock issued and
outstanding.
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CHANGE IN THE COMPOSITION OF OUR BOARD OF DIRECTORS.
At the annual meeting, five persons will be nominated to serve as our
directors upon completion of the merger. Of those five, only Andrew W. Williams
currently serves on our board. The other four nominees, Messrs. Berrard, Byrne,
Geddis and Royer, make up the existing board of directors of Gerald Stevens.
Messrs. Berrard, Byrne, Geddis and Royer will make up a majority of our board of
directors from the time the merger is completed until the board is expanded to
eight or more members. Mr. Williams has the right under the merger agreement to
nominate one additional director if we expand our board of directors to seven or
more members within one year following the completion of the merger.
CHANGE IN THE COMPOSITION OF OUR MANAGEMENT TEAM.
Upon completion of the merger, Mr. Williams will resign as our Chairman of
the Board of Directors and Chief Executive Officer, although he will continue as
a non-executive member of the board. Upon completing the merger, our new board
of directors will appoint Mr. Geddis as our Chief Executive Officer and
President, Mr. Detz as our Senior Vice President and Chief Financial Officer,
Mr. Phillips as our Senior Vice President, Chief Administrative Officer, General
Counsel and Secretary, Mr. Nevill as our Senior Vice President and Chief
Information Officer and other officers of Gerald Stevens as our officers. Mr.
West will continue to serve as President of the business divisions which we
currently operate. This management team will manage our combined operations
following the merger.
CHANGES IN BUSINESS STRATEGY.
We are one of only five flowers-by-wire service providers in the United
States. Prior to the proposed merger, our business strategy has been to generate
floral orders from consumers and provide floral placement and settlement
services to retail florists. Our subsidiary, THE FLOWER CLUB(TM), has marketing
arrangements with airlines, credit card issuers and other businesses to market
flowers and gifts directly to consumers. We are also a third party processor of
credit card transactions.
Upon completion of the merger, we will adopt Gerald Stevens' business
strategy as our own. As a result, our business strategy will include creating a
branded specialty retailer and marketer in the floral and gift industry with a
national, same-day distribution infrastructure. As a result of the merger with
Gerald Stevens, we also hope to operate more than 1,000 stores within the next
five years. Our focus will be on operating floral shops in 50 of the largest 100
markets in the United States under the GERALD STEVENS(SM) brand name. We expect
that these stores will include stand-alone floral shops and "store-in-store"
locations in supermarkets and other mass merchandising operations. We anticipate
acquiring numerous florists and complementary businesses in various markets in
support of the business strategy and in execution of the business plan. We also
expect to support the business strategy by using our existing sales and
marketing organization, national order fulfillment technology and call center
capacity in the combined company's retail operations.
ACCOUNTING TREATMENT
Prior to entering into the merger agreement, we and Gerald Stevens reviewed
relevant data and consulted with our respective independent accounting firms to
determine the appropriate accounting method for the merger under Accounting
Principles Board Opinion No. 16. Based upon that review and consultation, we
intend to account for the merger as a pooling of interests.
INTERESTS OF EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES IN THE MATTERS
TO BE ACTED UPON
In considering our board of directors' recommendation that our stockholders
should approve the proposed issuance of our common stock in connection with the
merger, you should be aware that some of our executive officers, directors and
director nominees have interests in the stock issuance that are separate from
and in addition to the interests of our stockholders generally. Our board of
directors was
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aware of these interests and took them into account in approving the merger
agreement and the transactions contemplated by the merger agreement.
EMPLOYMENT AGREEMENTS.
Upon the completion of the merger, Messrs. West, Pagano and McMakin, who
are among our current executive officers, will enter into employment agreements
with us. These employment agreements will have initial periods of two years,
subject to extension, on terms substantially similar to the terms under which
they were employed with us prior to the merger.
STOCK OPTIONS.
Upon completion of the merger, 12,500 non-plan stock options held by Mr.
Benson, who was one of our directors at the time the merger agreement was
approved, would have become fully exercisable at a price of $2.66 per share
(compared to the $10.31 per share price on the date the merger agreement was
executed). Mr. Benson has since resigned and has forfeited these options.
DIRECTOR'S AND OFFICER'S INDEMNIFICATION.
In the merger agreement, we have agreed to indemnify each person who, prior
to the merger, was an officer or director of us or Gerald Stevens with respect
to their service in that capacity to the full extent provided by the certificate
of incorporation and bylaws of Gerald Stevens at the date of the merger
agreement as permitted under Delaware law. The merger agreement provides that
our certificate of incorporation and bylaws following the merger will contain
indemnification provisions substantially the same as those in the certificate of
incorporation and bylaws of Gerald Stevens at the date of the merger agreement.
These indemnification provisions may not be amended, repealed or otherwise
modified, for a period of six years after the merger is completed, in any manner
that would adversely affect the rights of persons entitled to indemnification
under the terms of the merger agreement.
COMPOSITION OF OUR BOARD OF DIRECTORS AFTER THE MERGER.
Four of the director nominees are currently directors of Gerald Stevens and
have an interest in the proposal to consider the stock issuance and associated
change of control because they are beneficial owners of Gerald Stevens common
stock. As a result of their beneficially owning Gerald Stevens common stock,
following the merger, these director nominees will own approximately 32.1% of
our total issued and outstanding common stock.
ABSENCE OF APPRAISAL RIGHTS FOR FLORAFAX STOCKHOLDERS
Delaware law does not provide our stockholders with appraisal rights with
respect to the issuance of our common stock to Gerald Stevens stockholders in
connection with the merger or with respect to any other proposal to be acted
upon at the annual meeting.
STOCK MARKET LISTING
It is a condition to the merger that the shares of our common stock issued
to Gerald Stevens stockholders in the merger will be authorized for quotation on
the Nasdaq SmallCap Market, subject only to official notice of issuance. We have
filed an application to list all of our common stock on the Nasdaq National
Market.
TREATMENT OF STOCK CERTIFICATES
Upon completion of the merger, the certificates previously representing
shares of Gerald Stevens common stock will automatically represent the right to
receive shares of our common stock in the
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amount determined by the merger agreement. No change will occur in existing
stock certificates for our common stock outstanding prior to the merger.
THE MERGER AGREEMENT
GENERAL.
The merger agreement contemplates the merger of Red Cannon Acquisition
Corp., our wholly owned subsidiary, with and into Gerald Stevens, with Gerald
Stevens continuing as the surviving corporation. Following the merger, Gerald
Stevens will be our wholly-owned subsidiary. This section of the document
describes material provisions of the merger agreement, as amended on April 7,
1999. Because the description of the merger agreement contained in this document
is a summary, it does not contain all the information that may be important to
you. Before you decide how to vote, you should carefully read the entire copy of
the merger agreement and the amendment thereto, which we have included as Annex
A and Annex A-1 respectively, with this document.
CLOSING OF THE MERGER.
The closing of the merger will take place as promptly as practicable after
the date on which all closing conditions have been satisfied or waived. The
parties expect the closing of the merger to take place as soon as practicable
after the annual meeting.
EFFECTIVE TIME OF THE MERGER.
At the closing of the merger, the parties will file a Certificate of Merger
with the Delaware Secretary of State. Unless the parties agree otherwise, the
merger will become effective at the time and date the Certificate of Merger is
duly filed or as otherwise provided for in the Certificate of Merger.
EXCHANGE RATIO FOR CONVERTING SHARES.
In the merger, each share of Gerald Stevens common stock issued and
outstanding immediately before the effective time will be converted into the
right to receive between 1.25 and 1.35 shares of our common stock. The exchange
ratio will be determined based on the average closing sale price of our common
stock for the 45 consecutive trading days ending three business days prior to
the consummation of the merger. The ranges of daily closing sales prices and the
related exchange ratios are set forth in the table below.
<TABLE>
<CAPTION>
IF THE AVERAGE DAILY CLOSING SALE PRICE IS . . . THEN THE EXCHANGE RATIO WILL BE . . .
------------------------------------------------ -------------------------------------
<S> <C>
less than $5.00 per share.............................. 1.25 shares
equal to or greater than $5.00 but less than $6.50 per 1.30 shares
share...............................................
equal to or greater than $6.50 per share............... 1.35 shares
</TABLE>
The parties have agreed to adjust the exchange ratio to account for any
split, combination or reclassification of our common stock or for the
authorization of any issuance of any other securities in exchange or in
substitution for shares of our common stock at any time between the date of the
merger agreement and the effective time of the merger.
All shares of Gerald Stevens common stock issued and outstanding
immediately prior to the effective time of the merger will no longer be
outstanding and will automatically be canceled and retired and shall cease to
exist. Each holder of a certificate that represented outstanding shares of
Gerald Stevens common stock immediately prior to the effective time of the
merger will not have any rights with respect to that certificate, except the
right to receive the shares of our common stock, or cash in lieu of fractional
shares, to which the holder is entitled under the merger agreement.
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Within five business days following the effective time of the merger, the
exchange agent will mail to each record holder of certificates of Gerald Stevens
common stock a letter of transmittal and instructions explaining how to
surrender these certificates. Gerald Stevens stockholders who surrender their
stock certificates to the exchange agent, together with a properly completed and
signed letter of transmittal and any other documents required by the
instructions to the letter of transmittal, will receive Florafax stock
certificates representing the number of shares to which the holders are entitled
in accordance with the exchange ratio, with cash being paid in lieu of
fractional shares. Holders of unexchanged Gerald Stevens stock certificates will
not receive any dividends or other distributions made by us after the merger
until their stock certificates are surrendered. Upon surrender, these holders
will receive all dividends and distributions made on their related shares of our
common stock subsequent to the effective time of the merger.
TREATMENT OF GERALD STEVENS OPTIONS.
At the effective time of the merger, we will assume each outstanding Gerald
Stevens option on the same terms and conditions which previously governed the
option. The assumed Gerald Stevens option will not give the optionee additional
benefits which the optionee did not have under the Gerald Stevens option.
The number of shares of our common stock purchasable upon exercise of any
Gerald Stevens option assumed by us will equal the number of shares of Gerald
Stevens common stock that were purchasable with the option immediately prior to
the effective time of the merger multiplied by the exchange ratio and rounded up
to the nearest whole number. The exercise price per share will equal the
exercise price per share of the option immediately prior to the effective time
of the merger divided by the exchange ratio.
As of March 31, 1999, options to purchase approximately one million shares
of Gerald Stevens common stock had been granted and remain outstanding. Options
to purchase 10,000 shares of Gerald Stevens common stock were exercisable as of
March 31, 1999.
CONDITIONS TO THE MERGER.
The obligations of the parties to effect the merger are subject to the
following principal conditions:
- approval by the Gerald Stevens stockholders of the merger agreement and
the other transactions contemplated by the merger agreement;
- approval by our stockholders of the stock issuance pursuant to the merger
and the related change of control, the Certificate of Amendment and the
election of directors;
- receipt of all state securities or "Blue Sky" permits and other
authorizations necessary to issue the shares of our common stock in the
merger;
- receipt of all material consents and approvals from any governmental
entity or other person required to complete the merger;
- receipt by the parties of pooling of interests letters from Arthur
Andersen LLP and Ernst & Young LLP; and
- our satisfaction and Gerald Stevens' satisfaction that the merger will
qualify as a pooling of interests business combination.
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Gerald Stevens need not complete the merger unless it is satisfied that we
and/or Red Cannon have met the following principal conditions:
- we and Red Cannon have performed the agreements we and Red Cannon are
required to perform;
- our representations and warranties and those of Red Cannon are true and
correct as of and since the date of the merger agreement;
- no material changes in our business have taken place; and
- Gerald Stevens has received an opinion of our counsel as to our company's
good standing as a Delaware corporation, capital structure and authority
to enter into the transaction as well as the validity of the shares to be
issued in the merger.
We and Red Cannon need not complete the merger unless we are satisfied that
Gerald Stevens has met the following principal conditions:
- Gerald Stevens has performed the agreements it is required to perform;
- the representations and warranties of Gerald Stevens are true and correct
as of and since the date of the merger agreement;
- no material changes in the business of Gerald Stevens have taken place;
and
- we have received an opinion of Gerald Stevens' counsel as to Gerald
Stevens' good standing as a Delaware corporation, capital structure and
authority to enter into the transaction.
We cannot assure our stockholders that all of the conditions to the merger
will be satisfied. In addition, we may decide to waive one or more of these
conditions and complete the merger if the reason that any condition is not
satisfied does not impair the fundamental business reasons for the merger.
REPRESENTATIONS AND WARRANTIES.
The merger agreement contains representations and warranties made by us and
Gerald Stevens to each other relating to, among other things:
- organization and similar corporate matters
- capitalization
- authorization, execution, delivery, performance and enforceability of the
merger agreement and the absence of conflicts with their charter and
bylaws as well as other documents
- accuracy of financial statements as well as the accuracy of information
supplied for use in this document
- required board and stockholder approvals
- the absence of material litigation
- compliance with laws
- absence of material changes or events
- environmental matters
- intellectual property
- absence of excess parachute payments
- voting requirements
- real estate
- insurance
- related party transactions
- inapplicability of state takeover statutes
- broker and accounting matters
- taxes
- contracts
- employee benefit plans and labor and employment matters
- ownership of assets
- Year 2000 compliance
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In addition, Gerald Stevens has made representations and warranties
relating to the identity and ownership of its significant subsidiaries. We have
made representations and warranties relating to the nature and formation of Red
Cannon, and the accuracy of our filings with the Securities and Exchange
Commission.
COVENANTS AND CONDUCT OF BUSINESS PRIOR TO THE MERGER.
Both parties have agreed that, prior to the effective time of the merger,
they will each conduct their operations in the ordinary course of business and
in keeping with past practice. Both parties have also agreed not to take any
action that could be expected to prevent the conditions to the merger from being
satisfied or would change the nature of their business or organization.
Both parties have agreed to provide each other reasonable access to their
books and records, financial data, operating data and other similar information
which is reasonably requested. The parties have also agreed to furnish each
other information concerning their business, properties, and personnel. We have
agreed to hold in confidence all documents and information concerning Gerald
Stevens and its subsidiaries furnished in connection with the merger agreement.
NO SOLICITATIONS OF A COMPETING TRANSACTION.
Both parties have agreed not to take any action to facilitate a proposal
that is or may lead to a Competing Transaction, as defined below. The parties
have agreed to terminate all existing discussions and negotiations with other
persons regarding any Competing Transaction. The parties have agreed to notify
each other of any proposals which would constitute a Competing Transaction.
Either party may participate in discussions or negotiations in connection
with an unsolicited Competing Transaction. Before either company may respond to
an unsolicited Competing Transaction, that company's board of directors must
determine in good faith that a response is likely to lead to a proposal that
would be financially more favorable than the currently contemplated merger to
that company's stockholders.
"Competing Transaction," as defined in the merger agreement, means any
tender or exchange offer, proposal for a merger, consolidation or other business
combination involving any party or any of its material subsidiaries, or any
proposal or offer to acquire in any manner a controlling equity interest in, or
substantially all of the assets of, any party or any of its material
subsidiaries, other than transactions contemplated or permitted by the merger
agreement.
TERMINATION.
The parties may terminate the merger agreement at any time prior to the
effective time of the merger in the following circumstances:
- Either party may terminate the merger agreement prior to the effective
time:
(a) by mutual written consent;
(b) if any governmental authority takes any action permanently
prohibiting the merger, and that action becomes final and cannot be
appealed; or
(c) if the merger has not been completed by March 31, 1999, other than
due to a delay or default on the part of the party seeking to
terminate the merger agreement.
If the delay described in (c) results from the absence of the required
stockholder approvals, lack of the necessary approvals from governmental
authorities or other persons, ineffective status of this registration statement
or the imposition of a court order or injunction, then the date of termination
of the merger agreement will be extended to May 31, 1999. Also, if the delay
described in (c) results from the absence
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of the necessary letters from the auditors of either party stating that the
merger qualifies as a pooling of interests business combination, then the
parties have agreed, because the merger would still be in the best interest of
their stockholders, to negotiate in good faith terms that will permit the merger
to be completed and treated as a purchase transaction. In this case the date of
termination of the merger agreement will be extended to May 31, 1999.
- Either party may terminate the merger agreement prior to the effective
time if any of the representations and warranties of the other party
fails to be true or if the other party materially breaches any covenant
contained in the merger agreement.
FEES AND EXPENSES.
Each party will pay all fees and expenses it incurs in connection with the
merger and the related transactions. However, the parties will share equally the
expenses payable in connection with the printing and mailing of the registration
statement or this document and all related Securities and Exchange Commission
filing fees.
If one party terminates the merger agreement because of the other party's
breach of a material representation, warranty or covenant, the terminating party
may to recover its reasonable attorney's fees and costs incurred in any action
brought to recover its damages caused by the breach.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a discussion of the material federal income tax
consequences that are expected to result from the merger. There will not be any
federal income tax consequences from the merger to our pre-merger stockholders
because they are not exchanging any of their shares as a result of the merger.
Unless noted otherwise, the discussion below is based on our belief and the
legal opinion of Akerman, Senterfitt & Eidson, P.A. that for federal income tax
purposes the merger will be treated as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. We have not sought, nor
will we seek, a ruling from the Internal Revenue Service concerning the federal
income tax consequences of the merger.
We base the following discussion on the provisions of the Internal Revenue
Code, the Treasury Regulations thereunder, administrative rulings and judicial
decisions in effect as of the date of this document, all of which are subject to
change that could apply retroactively. We cannot provide assurance that the
statements we make in this section will not be challenged by the Internal
Revenue Service or will be sustained by a court if challenged. Furthermore, the
statements we make in this section do not bind the Internal Revenue Service or
the courts.
In the following discussion, we assume that Gerald Stevens stockholders
will hold their stock as a capital asset. The discussion does not address all of
the tax consequences that may be relevant to particular Gerald Stevens
stockholders in light of their personal circumstances or to taxpayers subject to
special treatment under the federal income tax laws. The discussion does not
address any aspect of state, local or foreign tax law.
THE DISCUSSION BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES
OF GENERAL APPLICATION THAT WE EXPECT TO RESULT FROM THE MERGER BASED ON AN
OPINION OF AKERMAN, SENTERFITT & EIDSON, P.A. THEREFORE THE FOLLOWING DISCUSSION
IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE BASED ON THE INDIVIDUAL
CIRCUMSTANCES OF EACH GERALD STEVENS STOCKHOLDER. WE URGE GERALD STEVENS
STOCKHOLDERS TO CONSULT THEIR TAX ADVISORS TO DETERMINE THE TAX CONSEQUENCES OF
THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN
INCOME AND OTHER TAX LAWS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
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<PAGE> 53
TAX CONSEQUENCES TO US AND TO GERALD STEVENS.
The merger is intended to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code. If the merger qualifies as a reorganization, we,
along with Red Cannon and Gerald Stevens, will be "a party to a reorganization"
within the meaning of Section 368(b) of the Internal Revenue Code and for
federal income tax purposes, no gain or loss will be recognized by us or Gerald
Stevens with respect to the exchange of our common stock for Gerald Stevens
common stock in the merger. Should the merger not qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code, as discussed
below, Gerald Stevens stockholders could incur a significant income tax
liability but we, along with Red Cannon and Gerald Stevens, should not incur an
income tax liability.
TAX CONSEQUENCES TO GERALD STEVENS STOCKHOLDERS.
If the merger qualifies as a reorganization under Section 368(a) of the
Internal Revenue Code, no gain or loss will be recognized by Gerald Stevens
stockholders on their exchange of Gerald Stevens common stock for our common
stock in the merger, except to the extent that Gerald Stevens stockholders
receive cash in lieu of fractional shares of our common stock. Each Gerald
Stevens stockholder's tax basis in the shares of our common stock received in
the merger will equal the stockholder's tax basis in the shares of Gerald
Stevens common stock surrendered in exchange therefor, less the portion of such
basis, if any, allocable to a fractional share. The holding period of the shares
of our common stock received by each Gerald Stevens stockholder in the merger,
including any fractional share interest, will include the holding period of the
Gerald Stevens common stock surrendered in exchange therefor.
We will not issue fractional shares of our common stock in the merger. A
Gerald Stevens stockholder who, in connection with the merger, receives cash in
lieu of a fractional share of our common stock will be treated as having
received the fractional share in the merger and then as having received the cash
in a redemption of the fractional share. Unless this redemption is found to be
essentially equivalent to a dividend, each Gerald Stevens stockholder will
recognize gain or loss measured by the difference between the tax basis in the
fractional share deemed surrendered and the amount of cash received. Such gain
or loss would be capital gain or loss, and would be short-term or long-term
capital gain or loss depending on the Gerald Stevens stockholder's holding
period for the Gerald Stevens common stock.
Should the merger not qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, each Gerald Stevens stockholder
would recognize gain or loss on the exchange of their shares of Gerald Stevens
common stock for shares of our common stock and, potentially, cash in lieu of
fractional shares of our common stock, as if that Gerald Stevens stockholder had
sold those shares of Gerald Stevens common stock for an amount equal to the fair
market value of the consideration. Any gain or loss will be measured by the
difference between a Gerald Stevens stockholder's tax basis in the Gerald
Stevens common stock surrendered in the merger and the sum of the fair market
value of the shares of our common stock and cash in lieu of fractional shares
received by the Gerald Stevens stockholder in the merger. Such gain or loss
would be capital gain or loss, and would be short-term or long-term capital gain
or loss depending on the Gerald Stevens stockholder's holding period for the
Gerald Stevens common stock.
EFFECTS OF MERGER ON RIGHTS OF STOCKHOLDERS
Upon completion of the merger, Gerald Stevens stockholders will become our
stockholders and the rights of former Gerald Stevens stockholders will continue
to be governed by Delaware law, but will also be governed by our certificate of
incorporation and bylaws. There are no material differences between the current
rights of stockholders of Gerald Stevens and the rights the Gerald Stevens
stockholders will have after completion of the merger as our stockholders, other
than that our certificate of incorporation authorizes our board of directors to
issue shares of "blank check" preferred stock, without stockholder
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approval. As a result, the preferred stock could have voting and other rights
that could adversely affect the rights of holders of our common stock.
NASDAQ REQUIREMENT FOR STOCKHOLDER APPROVAL OF THE CHANGE OF CONTROL AND THE
STOCK ISSUANCE
Nasdaq National Stock Market rules require stockholder approval prior to:
a. the issuance of securities when the issuance will result in a change
of control of the issuer, and
b. the issuance of common stock in connection with an issuer's
acquisition of the stock of another company if:
-- the common stock will have upon issuance voting power equal to or in
excess of 20% of the voting power outstanding before such issuance,
or
-- the number of shares of common stock to be issued will be equal to or
in excess of 20% of the number of shares of common stock outstanding
before such issuance.
The issuance of our common stock in connection with the merger will result
in a change of control of Florafax. Furthermore, our acquisition of the common
stock of Gerald Stevens will result in the issuance of approximately 28.1
million shares of our common stock which will, upon issuance, have voting power
in excess of 20% of the voting power outstanding before the issuance and will be
in excess of 20% of the number of shares of common stock outstanding before the
issuance of the stock. Thus, for Nasdaq purposes, the affirmative vote of a
majority of the votes cast by the holders of outstanding shares of our common
stock present at the annual meeting in person or by proxy will be required to
approve both the change of control and the issuance of our common stock to
Gerald Stevens stockholders.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE STOCK ISSUANCE IN CONNECTION WITH THE MERGER AND THE ASSOCIATED CHANGE OF
CONTROL.
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FLORAFAX INTERNATIONAL, INC.
We are 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. We are also engaged in the business of credit and
charge card processing for third parties. In addition to the description of our
business that follows and the other information about our company that is
included in this document, we have provided documents in Annexes D-1 through D-6
to this document for your review that contain important financial information
about us.
FLOWERS-BY-WIRE
We operate a flowers-by-wire business which enables our member florists,
who are independent owners, to send and deliver floral orders throughout the
United States. We transact floral orders between florists primarily by telephone
or by our order allocation system. Flowers-by-wire is our primary business
segment, accounting for 91% of net revenue in 1998 and 90% in 1997.
Our order allocation system has the ability to distribute orders ratably to
our member florists. Based on our management's experience in the flowers-by-wire
business and its observation of other wire services, we believe that most other
wire services typically do not select the florist to receive an order in an
equitable manner, but simply require the florist that originates the order to
select the shop that will fill that order. On our system, once an order is
taken, the system analyzes the area to ascertain which member florist will
deliver to that location. The system then determines which florist should
receive that order based on the distribution criteria. One 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, the order is sent via
facsimile or telephone. As a result, management believes that our order
allocation system is presently the only system in the industry that distributes
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 we have has
been generating a significant portion of floral orders through our wholly owned
subsidiary, THE FLOWER CLUB(TM). THE FLOWER CLUB(TM) has written agreements with
numerous nationally recognized companies, including airlines, credit card
issuers, retailers and other businesses, which allow it to generate orders by
marketing directly to the customers of these companies by inserting flyers into
the customers' periodic statements. To order through THE FLOWER CLUB(TM), the
consumer dials a toll free number and places the order at one of our order entry
locations. The order is then transmitted to member florists via the order
allocation system. THE FLOWER CLUB(TM) products and handling fees accounted for
gross revenues of approximately $21,500,000 in 1998 compared to traditional
shop-to-shop orders which resulted in gross revenues of approximately $9,750,000
in 1998.
Florists, and their advertisements, are listed in the "Florafax Directory,"
which is published and distributed several times a year. We produce the
"Florafax Directory," brochures, and sales and promotional materials for use by
us and our member florists.
Our flowers-by-wire business is dependent upon an adequate base of member
florists. We recruit member florists principally through advertisement and
direct solicitation. A florist applying to become a member is evaluated to
determine his or her ability to operate in accordance with our rules and
regulations, to provide a quality product and to comply with the credit policies
we establish. Member florists are eligible to receive orders from, and send
orders to, any other member or directly to our order entry locations. If member
florists choose to send orders directly to other members, they can circumvent
our order allocation system, which could affect the profitability of our order
allocation system.
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 florist to fulfill the order in the area they wish
to send an order, they can call our order entry department and we will place the
order. The sending florist is paid by the customer for the purchase, and the
receiving florist, who is responsible for designing and delivering the flowers
to the recipient, will be paid by us. We are capable of placing floral orders
virtually anywhere in the world. Member florists are on a "reporting plan" under
which the sending florist normally pays us 80% of the sales price and we
generally pay the receiving florist 71% of the sales price, retaining 9% for
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our processing services. Under this "reporting plan" we are 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 us. Included in floral order
processing are revenues generated by THE FLOWER CLUB(TM). Revenues and
associated costs related to floral orders generated by THE FLOWER CLUB(TM) are
recorded in the month that the order is filled, as the revenue process is
complete and we have 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 the weeks preceding Thanksgiving, Christmas,
Valentine's Day, Easter and Mother's Day. In response to this seasonality and to
generate additional business for its member florists, we formed THE FLOWER
CLUB(TM) to generate additional orders by pursuing relationships with nationally
recognized corporations. We engage 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 our orders
through THE FLOWER CLUB(TM).
Historically, an independent marketing firm established and serviced the
corporate relationships of THE FLOWER CLUB(TM). However, we believe that we can
achieve greater growth by operating our own marketing department. Accordingly,
during 1998 we acquired the operations of the independent marketing firm and now
manage our primary marketing functions internally.
During 1997, we 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, we have formed a relationship with a firm in the gift
basket industry that allows our systems to interface and transmit purchases so
that we never need to take possession of or ship the products. This relationship
allows us to offer products other than flowers to THE FLOWER CLUB(TM) 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 our wholly-owned subsidiary, Credit Card Management System, Inc.,
we make an electronic credit card and charge card processing system, known as
FloraCash, available to our members. The FloraCash processing system allows
merchants to accept credit cards and charge cards by automatically providing
authorization codes for each transaction and capturing all the transaction data
electronically. The FloraCash system allows florists and non-floral merchants to
receive frequent, automatic deposits directly to their bank accounts. We sell
and lease FloraCash terminals and optional printers at competitive rates.
RECENT DEVELOPMENTS
In December 1998, we were notified by the National Association of
Securities Dealers, Inc. that they had commenced an inquiry into the trading
activity in our common stock during the period leading up to the date we
publicly announced that we had entered into the merger agreement with Gerald
Stevens. We have cooperated with the NASD in the conduct of their inquiry.
In March 1999, we were notified by the Internal Revenue Service that they
plan to audit our tax return for fiscal year 1997. We do not believe that this
audit will have a material adverse impact on our financial statements or our
financial condition.
HISTORY
We were 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, we acquired a flowers-by-wire business, Florafax Delivery, Inc.
In April 1992, we incorporated Credit Card Management System, Inc., an
Oklahoma corporation.
In March 1994, we incorporated The Flower Club International, Inc., a
Florida corporation.
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GERALD STEVENS, INC.
GERALD STEVENS BUSINESS STRATEGY
Gerald Stevens is a retailer and marketer of flowers, floral-related
merchandise and gifts. Headquartered in Fort Lauderdale, Florida, Gerald Stevens
is building a national chain of retail stores, including stand-alone flower
shops and supermarket "store-in-store" locations. Gerald Stevens is also
creating a national sales and marketing division to sell its products via the
internet, catalogues, direct mail and dial-up numbers. In order to assure its
customers of fresh, quality flowers, Gerald Stevens is building its own cut
flower and related materials sourcing operation. Gerald Stevens is also
establishing relationships with a number of growers and vendors around the
world. Our management believes that in concert, these operations will provide
Gerald Stevens with control over both the product and distribution network
necessary to make the GERALD STEVENS(SM) brand synonymous with superior service,
quality and value. We believe that this strategy differentiates Gerald Stevens
from competitors in the floral industry who only focus on singular components of
floral order generation or the floral distribution network.
Gerald Stevens was formed in May 1998 by its current management and New
River Capital Partners to create a branded retail floral company capable of
meeting its customers' entire retail floral needs from order taking to
production to delivery. We believe that the management of Gerald Stevens can
apply its experience from prior successful implementations of regional, national
and international growth strategies for branded consumer products, including
video rental, music retailing and automotive retailing, to build a profitable
growth company in the retail floral industry. We believe that this experience in
developing branded consumer product companies is applicable across industries.
For example, management of Gerald Stevens, while serving together as executive
officers of Blockbuster, had various executive, administrative, operational and
financial responsibilities and directly supervised Blockbuster personnel who
acquired and converted small, independently owned video and music stores into
the BLOCKBUSTER VIDEO(TM) and BLOCKBUSTER MUSIC(TM) brands and systems, and
opened hundreds of new Blockbuster locations across the country. As a result, we
believe that the management of Gerald Stevens has the skills and experience to
establish GERALD STEVENS(SM) as the preeminent brand in the floral industry by
capitalizing on the following attributes of the retail floral industry:
- According to the United States Department of Commerce studies, the floral
industry is:
-- large, with total industry retail revenue of approximately $16
billion in 1997;
-- fragmented, with the top ten retailers accounting for less than 5% of
the industry; and
-- growing, as reflected by annual growth of approximately 9% over the
last two years.
- The floral industry is further characterized by high margins, with an
average gross margin of 67% which significantly exceeds that of most
retail industries, and is under-marketed as marketing expenditures are
typically less than 3% of sales.
- The absence of a national retail brand despite the fact that there are
many examples of highly successful, very profitable floral retailers in
major metropolitan areas.
- The current supply chain, which our management believes adds little
incremental value but creates substantial incremental costs, can be
avoided by a national retailer, resulting in fresher product with a
longer shelf life, lower prices and higher customer satisfaction.
- The decentralized nature of the industry, coupled with the current retail
transaction processing flow in which most orders are placed via telephone
and delivered by a local retailer, results in inefficiencies that can be
reduced by centralizing within each market the order taking, production
of floral arrangements and delivery functions.
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- A large national customer database that can be compiled quickly as:
-- many local florists maintain local databases of more than 10,000
customers per store which are generated from fulfilling wire service
orders; and
-- floral orders generate information on both the customer making the
purchase and the recipient.
- The suitability of flowers for marketing through the Internet. Our
management believes that consumer behavior is well-established for
placing a telephone order for flowers, without seeing the product prior
to purchasing it, and trusting that the product will be delivered
satisfactorily. The enhanced nature of an Internet transaction,
particularly the ability of the consumer to see the type of product
available, leads many experts to predict that flowers will be among the
top products sold over the Internet.
Our management believes that significant opportunities exist to increase
flower consumption in the United States. According to the Floral Marketing
Association, the United States currently ranks 13th worldwide in per capita
consumption of flowers, with only 25% of households purchasing flowers annually.
Per capita consumption has risen steadily over the past several years, in part,
from the increased availability of flowers in convenient locations such as
supermarkets. Our management believes that this growth is also the result of
favorable demographic and "lifestyle trends" which encourage increased flower
consumption.
Our management believes that its business combination with Gerald Stevens
will allow it to capitalize on the attractive opportunities in the floral
industry and create new growth by:
- Assembling a national distribution and merchandising network to leverage
the efficiencies created through centralized purchasing, merchandising,
order-taking and delivery, while targeting both gift giving and
self-consumption;
- Developing GERALD STEVENS(SM) into an easily recognized and
well-respected floral brand, synonymous with a high level of value,
quality and customer service;
- Establishing a leading position in each channel through which consumers
currently purchase flowers and related merchandise, including traditional
florists, supermarkets, mass market retailers, catalogs and online,
supported by an innovative national sales and marketing organization; and
- Building a complete flower sourcing and distribution organization.
Through its combination with Gerald Stevens, our management plans to
develop a retail network in 50 of the country's 100 largest regional areas, and
have a strong presence in selected additional markets. In each of the targeted
urban areas to be served, management intends to develop a retail network
utilizing a "Hub and Satellite" system. Several of Gerald Stevens' current
retailers have successfully implemented this strategy in their markets, and
management believes it is the most efficient operating structure to maximize
production, both in terms of costs and consistency of presentation, and optimize
local deliveries. Hub stores will centralize regional procurement, in-bound call
centers, production of arrangements and delivery. The hub stores will also
provide support for satellite stores, which will target walk-in business in
high-traffic locations and serve as smaller distribution outlets for orders
destined outside of the hub delivery area.
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The diagrams below compare traditional florists to the Gerald Stevens "Hub
and Satellite" system. Gerald Stevens believes that a "Hub and Satellite"
network of stores provides the most efficient method of fulfilling orders.
(Delivery System Chart)
Because orders generated nationally via the internet or "800" and other
telephone numbers must be delivered locally, the hub stores, serving as a
backbone for Internet and telephone orders delivery, should benefit from the
expected increase in Internet orders received from both its web sites and the
web sites of other e-commerce participants. More importantly, our management
believes hub stores provide Gerald Stevens with a competitive advantage in that
the company will control many of its orders from the time the order is placed
through delivery, an important distinction that our management believes will be
a powerful marketing message in the years to come.
Gerald Stevens' florists, including those florists recently acquired, are
currently achieving, on average, pre-tax income from operations, after adding
back owner distributions and other non-recurring expenses incurred during the 12
month period preceding the purchase by Gerald Stevens, equal to approximately 9%
of their revenue. Nevertheless, Gerald Stevens' strategy is to increase the
profitability of its stores. By consolidating the operations of its florists, we
expect Gerald Stevens to recognize substantial cost savings, particularly in the
cost of cut flowers and other related merchandise. We expect Gerald Stevens to
achieve significant revenue growth through a number of merchandising and
marketing activities, including the development of a national brand. Among other
initiatives, we expect that Gerald Stevens will utilize its sizable growing
customer database to create loyalty programs, reminder services and provide
other member benefits. We also expect that Gerald Stevens will provide more
information to its customers about the variety of products available in the
stores and the care and handling of that product, and to elevate the level of
customer service provided.
In addition to expanding its traditional retail operation, Gerald Stevens
is aggressively building its order generation business. As described above,
flowers require local delivery to execute the overwhelming
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majority of orders. Flowers are unlike other products sold over the telephone
and Internet, such as books, music and computers, as flowers are perishable and
are not easily arranged and packaged for same-day delivery and therefore require
special handling. A company selling flower bouquets and arrangements nationally
or in markets where it does not own retail stores must send the order through a
wire service to be filled by a local florist. The sending company thus has no
control over the quality of the product delivered to the customer or the level
of service provided. Our management believes that a nationally recognized
branded retail operation will have a competitive advantage over companies
seeking to sell flowers nationally over the internet or via toll-free telephone
in terms of both customer service and value. As a result, management believes
that these segments, particularly the internet, represent a growth opportunity
for Gerald Stevens.
We believe that our call center and marketing infrastructure, combined with
Gerald Stevens' current and planned online operations, provide the combined
company with a strong foundation for future growth in these lines of business.
BUSINESS AND OPERATIONS OF GERALD STEVENS
As of April 7, 1999, Gerald Stevens has acquired floral and gift retailers
with an aggregate of 102 stores, a flower importer, a floral order generation
business and an internet services company. The following is a list of the floral
and gift retailers acquired by Gerald Stevens:
<TABLE>
<CAPTION>
STORE-IN-
TRADITIONAL STORE TOTAL DATE
BUSINESS NAME (D/B/A) MARKET STORES OPERATIONS STORES FOUNDED
--------------------- ------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Cactus Flower Florists.............. Scottsdale, AZ 4 4 1972
Boesen the Florist.................. Des Moines, IA 5 11 16 1923
Dr. Delphinium...................... Dallas, TX 1 1 1989
Eastern Floral & Gift............... Grand Rapids, MI 3 3 1948
Fallons Creative Flowers............ Raleigh, NC 4 4 1920
Maple Lee Flowers................... Columbus, OH 1 1 1945
Martina's Flowers................... Augusta, GA 1 1 1975
Norton Flowers & Gifts.............. Ann Arbor, MI 4 4 1892
Royer's Flower Shops................ Lebanon, PA 14 21 35 1945
Connell Flower Shop................. Columbus, OH 1 1 1905
Flowers from Woodcroft.............. Durham, NC 1 1 1983
Jennie's Flower Shop................ Tampa, FL 2 2 1954
Alan Preuss Florists................ Milwaukee, WI 3 3 1892
Coe's Campus Flowers................ Ames, IA 1 1 1932
John Wolf Florist................... Savannah, GA 1 1 1895
Flower Patch........................ Salt Lake City, UT 13 13 1981
Country Lane Flower Shops........... Detroit, MI 2 2 1974
Creative Flowers.................... Tampa, FL 1 1 1986
Flowers Plus........................ Columbus, OH 1 1 1996
</TABLE>
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<TABLE>
<CAPTION>
STORE-IN-
TRADITIONAL STORE TOTAL DATE
BUSINESS NAME (D/B/A) MARKET STORES OPERATIONS STORES FOUNDED
--------------------- ------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
Flowers by Edith.................... Lakeland, FL 1 1 1956
Flowers Plus........................ Casselberry and 2 2 1995
Gainesville, FL 1995
Hidden Hills Floral................. Jacksonville, FL 1 1 1988
Flowers from Holland................ Atlanta, GA 1 1 1982
Weinstock's Flowers & Gifts......... Atlanta, GA 1 1 1917
Phoebe Floral Shop.................. Allentown, PA 1 1 1932
</TABLE>
Gerald Stevens also operates AGA Flowers, a leading Miami based importer of
cut flowers. Through a long-term supply arrangement with two farms in Colombia,
as well as relationships with more than 40 other farms in Colombia and Ecuador,
Gerald Stevens has the opportunity to purchase and contract grow cut flowers for
its own use and the sale to third parties.
Gerald Stevens also operates National Flora, a national retail flower order
forwarding business. National Flora primarily engages in the business of
forwarding long distance floral and related gift orders acquired through a
variety of advertising efforts including telephone directory advertising,
internet web pages, affinity partnerships, corporate programs and direct mail
marketing. National Flora sends its orders to florists in its "preferred
florist" network.
Through its "FlowerLink" subsidiary, Gerald Stevens operates an Internet
business serving nearly 1,000 member florists across the country and an Internet
service provider in Central Pennsylvania. Gerald Stevens' online operations also
include a number of websites operated by National Flora and its retail chains.
Following the merger, we will continue the expansion started by Gerald
Stevens through the acquisitions of additional floral businesses. As of April 7,
1999, Gerald Stevens has entered into agreements to acquire three additional
floral businesses, with an aggregate of twenty-two stores. Gerald Stevens
expects to consummate these transactions prior to the closing of the merger. If
Gerald Stevens does not consummate these transactions prior to the closing of
the merger, as permitted under the merger agreement, we will assume and pursue
the rights of Gerald Stevens under these letters of intent after the merger.
Also, Gerald Stevens has entered into non-binding letters of intent to acquire
ten additional floral businesses, with an aggregate of seventeen stores. The
transactions contemplated by the non-binding letters of intent are subject to
customary contingencies and conditions, including the completion of due
diligence reviews and the negotiation and execution of definitive purchase
agreements. Neither we nor Gerald Stevens can give you assurance that any of
these acquisitions will be completed.
Gerald Stevens was incorporated in the state of Delaware in May 1998.
Gerald Stevens' principal executive offices are located at 100 S.E. 3rd Avenue,
Suite 1101, Fort Lauderdale, FL 33394, and Gerald Stevens' telephone number is
(954) 713-5000.
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SELECTED HISTORICAL FINANCIAL DATA
FOR GERALD STEVENS
The selected historical financial data for Gerald Stevens presented below
for the period from May 7, 1998 (date of inception) to September 30, 1998 and as
of September 30, 1998 have been derived from the audited financial statements of
Gerald Stevens. The selected historical financial data for Gerald Stevens
presented below for the three month period ended and as of December 31, 1998
have been derived from Gerald Stevens' unaudited consolidated financial
statements. The data should be read in conjunction with the audited and
unaudited financial statements, related notes, management's discussion and other
financial information of Gerald Stevens for the periods indicated above and
contained elsewhere in this document.
<TABLE>
<CAPTION>
THREE MONTH MAY 7, 1998
PERIOD ENDED (INCEPTION) TO
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ --------------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
SELECTED INCOME STATEMENT DATA:
Total revenue............................................... $17,001 $ 0
Operating income (loss)..................................... 160 (2,137)
Net income (loss)........................................... 165 (2,116)
Basic earnings (loss) per share............................. 0.01 (0.21)
Diluted earnings (loss) per share........................... 0.01 (0.21)
Weighted average common and common equivalent shares
outstanding:
Basic..................................................... 18,321 10,004
Diluted................................................... 18,479 10,004
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
<S> <C> <C>
SELECTED BALANCE SHEET DATA:
Working capital............................................. $ 5,963 $5,965
Intangible assets........................................... 37,525 1,520
Total assets................................................ 55,810 8,486
Long-term debt.............................................. 122 0
Total liabilities........................................... 7,600 817
Stockholders' equity........................................ 48,210 7,668
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF GERALD STEVENS
The following discussion and analysis of the financial condition and
results of operating of Gerald Stevens should be read in conjunction with Gerald
Stevens' audited financial statements and related notes thereto and the pro
forma consolidated financial information included elsewhere in this document.
GENERAL
Gerald Stevens was formed on May 7, 1998 to become a leading branded
retailer and consumer marketer of flowers, floral-related merchandise and gifts.
Through September 30, 1998, Gerald Stevens was in the development stage, had no
revenue, and all efforts of Gerald Stevens had been directed to developing a
business strategy, raising capital, and acquiring leading retail flower shops
and other floral related businesses. Effective October 1, 1998, Gerald Stevens
commenced its operations upon the completion of its acquisition of ten operating
flower businesses and, as a result, emerged from the development stage.
LIQUIDITY AND CAPITAL RESOURCES
On August 11, 1998, New River Capital Partners, a limited partnership whose
managing general partner is a partnership controlled by Steven R. Berrard and
whose administrative general partner is a corporation controlled by Thomas C.
Byrne, purchased 5,684,755 shares of Gerald Stevens' common stock for an
aggregate purchase price of $5,500,000. Messrs. Berrard and Byrne are also
directors of Gerald Stevens. Also on August 11, 1998, Gerald R. Geddis, the
President and Chief Executive Officer of Gerald Stevens, purchased 2,445,478
shares of Gerald Stevens common stock for an aggregate purchase price of
$2,366,000.
In August and September 1998, several of Gerald Stevens' employees and
other investors purchased 1,398,130 shares of Gerald Stevens common stock for an
aggregate purchase price of $1,471,565.
On July 31, 1998, Gerald Stevens acquired substantially all of the assets
of International Floral Network, Inc. for $1.5 million in cash and 475,553
shares of Gerald Stevens common stock, with cash paid and shares issued in
August 1998. International Floral Network's acquired assets consisted solely of
rights to acquire 33 retail floral businesses under non-binding letters of
intent with the owners of those businesses. Gerald Stevens allocated the
aggregate consideration of approximately $2.0 million to the nine letters of
intent it intended to pursue. Prior to September 30, 1998, Gerald Stevens ceased
discussions with one of these entities at which time the unamortized allocated
portion of the consideration of $479,860 was charged to amortization expense.
The remaining balance of $1,520,140 has been capitalized as part of the purchase
price upon the acquisition of the other eight retail florists chains during the
three months ended December 31, 1998.
All of the aforementioned stockholders who were issued shares of Gerald
Stevens common stock in August and September 1998 have entered into a
stockholders agreement that contains, among other things, a voting agreement
which provides that a majority of the directors of Gerald Stevens will be
designated by New River Capital Partners. The stockholders agreement prohibits
transfers of Gerald Stevens common stock until the earlier of October 1, 2000 or
such time as Gerald Stevens becomes a public company, in which case Gerald
Stevens has a right of first refusal for any sales of Gerald Stevens common
stock in an amount in excess of $500,000 until October 1, 2000.
On October 1, 1998, Gerald Stevens issued 4,581,583 shares of its common
stock in a private placement for consideration of approximately $20,900,000, net
of underwriting fees and expenses. Individuals who purchased shares in the
private placement have agreed to give Gerald Stevens a right of
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first refusal, prior to transferring such shares, until the earlier of the date
that Gerald Stevens becomes a public company or August 31, 2000.
On September 30, 1998, Gerald Stevens entered into a revolving credit
agreement with a bank in which the bank agreed to loan Gerald Stevens up to
$20,000,000 for a term of 18 months. Cash borrowings bear interest at either the
Eurodollar market rate plus a percentage ranging from 100 to 225 basis points
depending on Gerald Stevens consolidated leverage ratio for the quarter ended
prior to the borrowing, or at Gerald Stevens option, a base rate equal to the
higher of the federal funds rate plus .5% or the prime rate. Gerald Stevens
effective Eurodollar borrowing rate and its base rate as of April 7, 1999 are
5.94% and 7.75%, respectively. The line of credit will be used to finance
business acquisitions and provide working capital for general corporate
purposes. Borrowings under the revolving credit agreement are secured by all
Gerald Stevens' current and future assets, including a pledge of the stock of
each business that is acquired by Gerald Stevens. The revolving credit agreement
contains covenants requiring bank approval of certain of Gerald Stevens
acquisitions, and the maintenance of agreed upon financial ratios, as more
specifically described in the following paragraphs.
With regard to acquisitions, the revolving credit facility requires, among
other things, that at least 35% of the cost of acquisition be paid for in the
form of Gerald Stevens common stock and that the proceeds of loans used to pay
the cost of acquisition cannot exceed 3 times the acquired company's earnings
before interest, taxes, depreciation and amortization. These requirements do not
apply if outstanding loans are equal to or less than 50% of the total loan
commitment, or if outstanding loans exceed 50% of the total loan commitment and
the ratio of debt to EBITDA is equal to or less than 1.5 to 1, or if the cost of
acquisition is not greater than $1.25 million and the total cost of acquisitions
not approved by the bank in a fiscal year does not exceed 10% of shareholders'
equity at the end of the preceding fiscal year.
The revolving credit agreement also requires Gerald Stevens to maintain
financial ratios which limit total debt and capital expenditures. Consolidated
debt cannot exceed earnings before interest, taxes, depreciation and
amortization by a ratio of 3 to 1 or exceed consolidated shareholders' equity.
In addition, the ratio of EBITDA to the sum of capital expenditures, interest
expense, cash income taxes and current maturities of indebtedness must not be
less than 1.5 to 1 through March 31, 1999 or less than 1.75 to 1 thereafter.
On February 23, 1999 Gerald Stevens and its primary lender agreed to the
terms and conditions of an amendment to its existing bank credit facility to
increase the size of this credit facility from $20,000,000 to $40,000,000. The
closing of this amendment occurred on March 16, 1999. Additionally, on February
23, 1999 Gerald Stevens and its lending bank agreed to the terms and conditions
of an arrangement whereby the bank will act as the sole and exclusive agent and
lead arranger for a $50,000,000 to $75,000,000 syndicated bank credit facility
on a best efforts basis and also offer its commitment to lend up to $15,000,000
of the facility.
Gerald Stevens anticipates that assuming there are no material adverse
changes in or material disruption of conditions in the financial, banking or
capital markets, the aforementioned syndicated credit facility will be closed in
the second quarter of 1999. Upon closing the syndicated credit facility,
management intends to terminate the then existing credit facilities of both
Gerald Stevens and Florafax.
Gerald Stevens seeks to establish a leading position in each channel
through which consumers currently purchase flowers and related merchandise,
including the traditional retail florist, supermarket and mass merchant,
catalog, online and other marketing related channels. Gerald Stevens plans to
develop a retail network in 50 of the country's 100 largest regional areas and
have a strong presence in selected additional markets.
Gerald Stevens intends to implement its business strategy largely by the
acquisition of retail florist and other florist related businesses throughout
the country. Upon acquisition, Gerald Stevens expects to
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incur capital costs to remodel and retrofit some of its acquired stores to be
consistent with the GERALD STEVENS(SM) store format. Additionally, Gerald
Stevens plans to fill out regional markets by constructing a number of new hub
or satellite stores. To facilitate its high rate of planned growth and to
effectively integrate business activities and processes, Gerald Stevens expects
to incur substantial computer and communication costs.
Gerald Stevens intends to finance the costs of its business acquisitions
and capital expenditures with a combination of debt and equity capital, as well
as cash generated from internal operations. Specifically, Gerald Stevens expects
to finance the cost of future business acquisitions by paying cash and issuing
shares of common stock to the sellers of these businesses in reasonably equal
values. In addition to increasing its line of credit, Gerald Stevens also plans
to offer for sale, in either private placements or public offerings, shares of
Gerald Stevens common stock as circumstances and market conditions dictate. At
December 31, 1998, Gerald Stevens had no indebtedness from borrowings against
its revolving credit facility. Gerald Stevens believes that its $40 million
credit facility, along with the existing $5 million credit facility of Florafax,
will provide adequate capital to meet its cash requirements over the next 12
months.
Gerald Stevens believes that it will be successful in raising additional
debt, including but not limited to increasing its credit facility from $40
million to $50 million, and equity capital in the future that, together with
cash provided from operations, will be adequate to finance the planned expansion
of its business beyond the next 12 months. However, Gerald Stevens cannot
provide assurance that temporary or long-term adverse changes in global capital
markets will not interrupt or curtail its growth plans.
BUSINESS COMBINATIONS
From October 1, 1998 through December 31, 1998, Gerald Stevens acquired
thirteen retail florist businesses and one floral import business for total
consideration of $44,203,518, consisting of $24,492,122 in cash and 4,036,829
shares of Gerald Stevens common stock. From January 1, 1999 through April 7,
1999, Gerald Stevens acquired or has entered into probable agreements to acquire
ten retail florist businesses and also acquired National Flora, a floral order
generation business, for total consideration of $44,542,462, consisting of
$28,281,608 in cash and 2,133,631 shares of Gerald Stevens common stock. All of
the sellers of the acquired businesses who received shares of Gerald Stevens
common stock have entered into stockholder agreements that contain terms that
are similar to the terms of the stockholder agreements required for individuals
who became stockholders in August and September 1998.
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The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above:
<TABLE>
<CAPTION>
PURCHASE PRICE
------------------------- SHARE
COMPANY TOTAL CASH STOCK SHARES PRICE
- ------- ----------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
1998 ACQUISITIONS:
Royer's Flower Shops................... $11,158,046 $ 6,333,566 $ 4,824,480 1,015,680 $4.75
Boesen the Florist..................... 5,150,007 2,485,000 2,665,007 561,054 4.75
Maple Lee Flowers...................... 4,698,003 2,539,000 2,159,003 454,527 4.75
Dr. Delphinium......................... 3,102,326 879,825 2,222,501 467,895 4.75
Cactus Flower Florists................. 3,000,002 1,800,000 1,200,002 252,632 4.75
AGA Flowers............................ 2,935,000 1,467,502 1,467,498 308,947 4.75
Eastern Floral & Gift.................. 2,924,000 2,924,000 -- -- N/A
Martina's Flowers...................... 1,948,038 1,168,036 780,002 164,211 4.75
Norton's Flowers & Gifts............... 1,566,000 548,099 1,017,901 214,295 4.75
Fallon's Creative Flowers.............. 1,917,094 1,117,094 800,000 168,421 4.75
Jennie's Flower Shop................... 3,575,000 2,000,000 1,575,000 262,500 6.00
Other Acquisitions..................... 2,230,002 1,230,000 1,000,003 166,667 6.00
---------------------------------------------------
Total 1998 Acquisitions...... 44,203,518 24,492,122 19,711,397 4,036,829
1999 ACQUISITIONS*:
Phoebe's............................... 2,816,622 2,194,770 621,852 73,159 $8.50
National Flora......................... 19,727,200 9,952,200 9,775,000 1,150,000 8.50
Kuhn's................................. 6,200,000 5,580,000 620,000 36,471 17.00
Other Acquisitions..................... 15,798,640 10,554,638 5,244,002 874,001 6.00
---------------------------------------------------
Total 1999 Acquisitions...... 44,542,462 28,281,608 16,260,854 2,133,631
Total........................ $88,745,980 $52,773,730 $35,972,251 6,170,460
===================================================
</TABLE>
* includes businesses Gerald Stevens has probable agreements to acquire.
In December 1998, Gerald Stevens entered into a definitive merger agreement
with Florafax, a company that 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. Depending upon the
average closing sale price, each share of Gerald Stevens common stock
outstanding immediately prior to the merger will be converted into the right to
receive between 1.25 and 1.35 shares of our common stock. Completion of the
merger is dependent upon stockholder approval, among other things.
The Florafax/Gerald Stevens pro forma as adjusted goodwill related to
acquired businesses, net of amortization, at November 30, 1998 was approximately
$69 million, which represents approximately 69% of our pro forma as adjusted
total assets of approximately $99 million and exceeds our pro forma as adjusted
total stockholders equity of approximately $60 million. The $69 million of
goodwill will result in an annual amortization expense of approximately $2.3
million, based upon the amortization of goodwill related to the acquisition of
retail floral businesses and National Flora, an order generation business, over
useful lives of 40 years and 20 years, respectively. Goodwill and related
amortization are expected to increase principally as a result of future retail
floral business acquisitions, and the amortization of goodwill and other
intangible assets could adversely affect financial condition and results of
operations. Gerald Stevens has considered various factors, including projected
future cash flows, in determining the purchase prices of acquired retail floral
businesses, and does not believe that any material portion of the goodwill
related to any of these acquisitions will dissipate over a period shorter than
40 years. However, earnings in future years could be significantly adversely
affected if management later determines either that the remaining balance of
goodwill is impaired or that a shorter amortization period is applicable.
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RESULTS OF OPERATIONS
Three Months Ended December 31, 1998
Gerald Stevens consolidated results of operations for the three months
ended December 31, 1998 include the operating results of Gerald Stevens and its
recently acquired wholly-owned subsidiaries. As such, these consolidated results
of operations are comprised of corporate overhead expenses incurred by Gerald
Stevens together with the operating results of nine floral retail businesses and
one floral import business that were acquired on October 1, 1998 for the full
three month period, and of four floral retail businesses acquired in November
and December 1998 for the periods from acquisition date to December 31, 1998.
REVENUE
Product sales were $15,431,265 and included sales of floral and gift
products by Gerald Stevens' retail businesses totaling $12,993,465 and sales of
floral products by Gerald Stevens import business of $2,437,800. Service and
other revenue totaled $1,569,531 and principally was comprised of delivery and
other service fees charged to customers, and commissions earned on orders
transmitted to and fulfilled by other outside retail florists.
OPERATING COSTS AND EXPENSES
The following table sets forth all operating costs and expenses of Gerald
Stevens acquired businesses as a percentage of related total revenue, and
further sets forth the total corporate overhead expenses of Gerald Stevens as a
percentage of total revenue for the three month period ended December 31, 1998:
<TABLE>
<CAPTION>
RETAIL IMPORT
BUSINESSES BUSINESS TOTAL
---------- -------- -----
<S> <C> <C> <C>
Cost of product sales...................................... 34.9% 74.7% 40.6%
Salaries & benefits........................................ 35.0% 12.2% 31.7%
Operating expenses......................................... 9.2% 3.1% 8.4%
Selling, general & administrative.......................... 9.0% 4.3% 8.3%
Depreciation & amortization................................ 1.5% 0.2% 1.3%
---- ---- ----
Total Acquired Business operating costs & expenses......... 89.6% 94.5% 90.3%
==== ====
Total Corporate operating costs & expenses................. 8.7%
----
Total operating costs & expenses........................... 99.0%
====
</TABLE>
Cost of product sales was $6,909,023 and included cost of product sales at
Gerald Stevens retail businesses totaling $5,086,993 and cost of product sales
at Gerald Stevens import business of $1,822,030. Gross margins on product sales
at Gerald Stevens retail businesses and at Gerald Stevens import business, as a
percentage of related product sales, averaged 60.9% and 25.3%, respectively,
during the period.
Salaries and benefits expenses were $5,927,549, and included salaries and
benefit expenses at Gerald Stevens retail businesses, import business and
corporate headquarters totaling $5,095,231, $297,052, and $535,266,
respectively.
Operating expenses were $1,434,403 and included operating expenses at
Gerald Stevens retail businesses, import business, and corporate headquarters
totaling $1,344,982, $74,660, and $14,761, respectively. Operating expenses are
comprised primarily of occupancy and customer delivery expenses.
Selling, general and administrative expenses were $2,136,744 and included
selling, general and administrative expenses at Gerald Stevens retail
businesses, import business and corporate headquarters
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totaling $1,307,713, $105,218, and $723,813, respectively. Selling, general and
administrative expenses consist principally of advertising, legal and
accounting, and travel expenses.
Depreciation and amortization expenses were $433,268 and included
depreciation and amortization expenses at Gerald Stevens retail businesses,
import business, and corporate headquarters totaling $216,583, $5,721 and
$210,964. Depreciation and amortization expenses at corporate headquarters
consist mainly of goodwill amortization related to Gerald Stevens acquired
businesses.
OTHER INCOME (EXPENSES)
Interest income was $84,566 and related principally to earnings on the
investment of excess Gerald Stevens' cash balances.
Interest expense was $84,891 and related principally to the amortization of
debt issue costs and unused facility fees on Gerald Stevens' revolving credit
facility.
Other income was $55,764 and relates to income from Gerald Stevens'
investment in Internet Services, LP, a 49% owned business which is accounted for
under the equity method of accounting, and various other miscellaneous income
items at Gerald Stevens' retail businesses.
PROVISION FOR INCOME TAXES
An income tax provision of $50,100 related to state income taxes was
recorded during the period. There was no federal income tax provision recorded
due to the utilization of net operating loss carry forwards during the period.
Period from May 7, 1998 (Inception) to September 30, 1998
From May 7, 1998, the date of inception, to September 30, 1998, Gerald
Stevens' business was in the process of being organized and developed. During
this initial start-up period, Gerald Stevens:
- recruited and hired its initial officers and corporate employees,
- performed floral industry market research,
- developed its detailed business plan,
- visited and had discussions with numerous retail florist and other floral
related businesses throughout the country,
- completed the acquisition of the assets of International Floral Network,
- negotiated and signed definitive purchase agreements with ten founding
businesses,
- and made arrangements for two private placements of Gerald Stevens common
stock and established its initial bank credit facility.
During this initial period, Gerald Stevens had no revenue and recognized
total operating expenses of $2,137,439, consisting principally of audit,
consulting, legal and compensation costs. Operating expenses include a write-off
of $479,860 related to Gerald Stevens' acquisition of the assets of
International Floral Network and approximately $540,000 of costs reimbursed to
SB Management Corp., a corporation controlled by Mr. Berrard, a director of
Gerald Stevens. See "-- Liquidity and Capital Resources" and Note 7 of Notes to
Gerald Stevens, Inc. Financial Statements contained elsewhere herein.
Gerald Stevens earned interest income of $22,134, incurred interest expense
of $1,111 and reported a net loss for the period from May 7, 1998, the date of
inception, to September 30, 1998 of $(2,116,416).
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YEAR 2000 ISSUE
Gerald Stevens has developed a Year 2000 compliance plan and completed a
preliminary assessment of Year 2000 issues, risks, and exposures. Every business
acquired by Gerald Stevens to date has Year 2000 issues in various stages of
investigation and resolution. These issues typically include telephone switches,
voicemail systems, store server hardware and operating systems, and the business
software installed on their store systems.
Gerald Stevens has reviewed the telephone switch hardware and software for
each acquired business. Year 2000 certified hardware and software upgrades are
available from the switch vendors for all currently acquired telephone systems.
Several of the switches have already been replaced or upgraded. The remaining
non-compliant equipment will be upgraded by the third quarter, 1999. Gerald
Stevens has acquired certification letters from each affected telephone switch
and software vendor. Gerald Stevens believes it has taken appropriate and
reasonable steps to mitigate Year 2000 risk to its acquired telephone systems.
Gerald Stevens has reviewed the business-computing environment for each
acquired business. This typically consists of a UNIX server and several dumb
terminals used for point-of-sale and back office functions. Gerald Stevens is
currently upgrading all servers to the Year 2000 certified version of SCO UNIX.
Where necessary, the UNIX server hardware is being replaced to ensure Year 2000
compliance. These upgrades are expected to be complete by the third quarter,
1999.
Some of the businesses acquired by Gerald Stevens use commercially
available retail florist software that is not currently Year 2000 compliant.
Gerald Stevens has received written notification from their software vendors
that a software release that fixes all known Year 2000 problems will be
delivered to Gerald Stevens' affected retail florists during the first quarter
of 1999 at no cost. Gerald Stevens plans to test the new software releases
immediately upon receipt from the vendors. Additionally, Gerald Stevens has
developed a contingency plan, which includes the replacement of any
non-compliant retail florist software with fully compliant software that is
being used today by one of Gerald Stevens' other retail florist businesses.
The impact of failure due to Year 2000 problems depends on the technology
affected. In the event that the telephone systems failed, the store would be
unable to take or fulfill telephone orders. This would have a substantial impact
on the store's ability to conduct business. To mitigate this risk, the company
has contracted with a third party provider who has an inventory of Year 2000
compliant telephone switches, and who could replace the affected equipment with
a new telephone switch and software within 72 hours. While this would increase
company costs, it would minimize any loss of sales resulting from the failure.
In the event the computer hardware failed in the store, it would impact the
ability of the store to make computer-supported transactions, including
point-of-sale, ordering, and receipt transactions. This would have a substantial
impact on the store's ability to conduct business. To mitigate this risk, the
company will acquire Year 2000 compliant computing platforms to deploy if
necessary to any affected location. While this would increase company costs, it
would minimize any loss of sales resulting from the failure.
Gerald Stevens is currently conducting a review of significant third
parties that support any critical aspect of its business. Currently, all of
Gerald Stevens' significant software and hardware providers have indicated,
either orally or in writing, that they are, or expect to be, Year 2000
compliant. Gerald Stevens is in the process of implementing each of these
providers' Year 2000 compliant products and expects to complete this
implementation by the third quarter of 1999. In addition, Gerald Stevens has
received confirmation from approximately 20% of its third party trading
partners, support organizations and suppliers that they are Year 2000 compliant.
IBM is currently conducting a Year 2000 project for Gerald Stevens which will
allow Gerald Stevens to complete its Year 2000 compliance check of these third
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parties by the end of May 1999. Gerald Stevens will continue this review, but
expects no significant Year 2000 issues to be discovered with its critical third
party business partners.
Gerald Stevens plans to conduct a full Year 2000 exposure review of all
future 1999 acquisition target companies prior to consummating the acquisition.
The current estimate for expenditures related to investigating and
resolving Year 2000 issues within Gerald Stevens is $1.25 million dollars. Based
on its preliminary assessment of Gerald Stevens' Year 2000 issues and
considering its primary and contingency plans, Gerald Stevens' management does
not expect Year 2000 issues to have a material impact on its business,
operations, or its financial condition or results of operations.
INFLATION
Gerald Stevens anticipates that its business will be affected by general
economic trends. Because some of Gerald Stevens' inventory is grown in countries
other than the United States, economic conditions in those countries could
affect the cost of product purchases. During the past year Gerald Stevens has
not experienced noticeable effects of inflation, but believes that cost
increases due to inflation should be able to be passed on to its customers.
SEASONALITY
The floral industry is seasonal in that revenue is much greater during
holidays such as Thanksgiving, Christmas, Valentine's Day and Mothers Day.
Conversely, during the summer months, floral retailers tend to experience a
decline in revenue. In addition, the floral industry in general may be affected
by economic conditions and other factors, including floral promotions,
competition and the climate in key flower growing regions.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components for fiscal years beginning after
December 15, 1997. The implementation of SFAS No. 130 did not have a material
effect on Gerald Stevens' financial statements as comprehensive income is equal
to net loss.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires an entity to disclose important information regarding its
operating segments for fiscal years beginning after December 13, 1998. The
composition of the Company's businesses is changing. Accordingly, the Company
will evaluate the need for segment disclosures when it implements the new
standards in fiscal 2000. Following the completion of the business combination
transactions described in Note 6, Gerald Stevens will operate in one segment.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," requires an entity to expense all
software development costs incurred in the preliminary project stage, training
costs and data conversion costs for fiscal years beginning after December 15,
1998. Gerald Stevens believes that this statement will not have a material
effect on Gerald Stevens' accounting for computer software development or
acquisition.
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," requires the immediate expensing of current start-up costs as well
as existing costs previously capitalized for fiscal years beginning after
December 15, 1998. Gerald Stevens has no capitalized start-up costs as of
September 30, 1998.
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PROPOSAL NO. 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
We are seeking stockholder approval to amend our certificate of
incorporation to change the name of our company and increase the number of
authorized shares of our common stock.
Our board of directors adopted this proposed amendment to the certificate
of incorporation on December 9, 1998, subject to stockholder approval of the
stock issuance in connection with the merger and the associated change of
control.
We have summarized the reasons for the proposed amendment below. We urge
stockholders to read the complete Certificate of Amendment, a copy of which we
have attached as Annex C.
We propose to amend Article I of the certificate of incorporation to change
our name from "Florafax International, Inc." to "Gerald Stevens, Inc." We are
proposing the change in our name in connection with the merger. The change in
our name is consistent with our strategy of developing the GERALD STEVENS(SM)
name to be recognized as a fully-integrated branded floral retailer and
marketer.
We also propose to amend Article IV of the certificate of incorporation to
increase the number of authorized shares of our common stock from 70 million to
250 million. Of the 70 million shares presently authorized for issuance,
approximately 59.8 million shares are unissued and unreserved. On February 10,
1999, we had approximately 8.2 million shares issued and outstanding, 1.5
million shares reserved for issuance under employee benefit plans and
approximately 600,000 shares subject to warrants and options issued outside
employee benefit plans. Based on the currently anticipated exchange ratio, upon
completion of the merger, we expect to have approximately 36.2 million shares
issued and outstanding and 1.5 million shares reserved for issuance under
employee benefit plans. The proposed amendment increases the number of
authorized shares of our common stock by 180 million shares. Any additional
shares of common stock, if issued, would have the same rights as the shares of
our common stock currently outstanding.
Our board of directors believes that the proposed increase in authorized
shares of our common stock is in the best interests of both us and our
stockholders. With this amendment to our certificate of incorporation, our board
of directors will have the flexibility to act promptly to meet future business
needs as they arise. We anticipate using our common stock as a form of
consideration in future acquisitions. Furthermore, the additional authorized
shares will allow us to keep sufficient shares readily available to maintain
financing and capital raising flexibility, for stock splits and stock dividends,
employee benefit plans and other proper business purposes. By having additional
shares readily available for issuance, our board of directors will be able to
act expeditiously without spending the time and incurring the expense of
soliciting proxies and holding special meetings of stockholders.
Our board of directors may issue additional shares of common stock only if
the action is permissible under Delaware law and the Nasdaq rules. For example,
if our board of directors were to make a stock acquisition which resulted in an
increase of 20% or more in the number of shares of our common stock outstanding,
Nasdaq rules would require stockholder approval. If additional shares were
issued, there could be a dilutive effect on our per share earnings and on
stockholder voting power.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE PROPOSED
AMENDMENT TO OUR CERTIFICATE OF INCORPORATION.
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PROPOSAL NO. 3
ELECTION OF DIRECTORS
Our bylaws currently state that our board of directors shall consist of not
less than three nor more than nine directors, as determined from time to time by
a duly adopted resolution of the board of directors. The board of directors has
resolved that, upon completion of the merger, the board will consist of five
directors. No proxy will be voted for more than five individuals.
The five nominees for directors named and described below were selected by
the board of directors in connection with the negotiation of the terms of the
merger with representatives of Gerald Stevens. Each director elected shall hold
office from the time the merger is completed until our next annual meeting of
stockholders or until his respective successor is duly elected and qualified.
Each nominee for director has agreed to stand for election and, if elected, has
agreed to serve as a director upon completion of the merger. In the event any
nominee is unable or declines to serve as a director at or before the annual
meeting, the board of directors has determined that a majority of the remaining
nominees may select a qualified replacement nominee to fill the vacancy. Our
management is not aware of any nominee who is unable to serve, does not own the
qualifying shares, or will decline to serve if elected.
If the proposals are approved and the merger is completed, the nominees to
the board of directors, if elected, will begin service effective as of the time
the merger is completed. The current members of our board of directors will
continue to serve as directors until the merger is completed. If the merger is
not completed by March 31, 1999, the board of directors will call a special
meeting of stockholders and will select a different group of nominees, which may
include one or more of the current members of the board of directors, to stand
for election.
OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE FOLLOWING
NOMINEES FOR DIRECTOR. THE HOLDERS OF PROXIES INTEND TO VOTE FOR THE FOLLOWING
NOMINEES FOR DIRECTOR.
For your review, we furnish the following information about each of the
nominees. This information includes all positions each of the director nominees
has held with us and the nominees' other principal occupations during the last
five years.
STEVEN R. BERRARD, 43, is a member of the Gerald Stevens board of
directors. In 1997, Mr. Berrard co-founded, with Mr. Byrne, New River Capital
Partners, a venture capital firm with investments in Gerald Stevens and other
private companies, and he controls New River Capital Partners' managing general
partner. Mr. Berrard has served as President and Co-Chief Executive Officer of
Republic Industries, Inc. since October 1996. Republic Industries is the world's
largest automotive retailer with over 375 dealerships throughout the United
States and also owns and operates the Alamo Rent-A-Car, National Car Rental
System and CarTemps USA auto rental businesses. Mr. Berrard served as Chief
Executive Officer of AutoNation Incorporated, from March 1996 until its
acquisition by Republic Industries in January 1997. AutoNation's developing
national chain of used vehicle megastores is now part of Republic Industries'
automotive retail operations. From September 1994 through March 1996, Mr.
Berrard served as President and Chief Executive Officer of Blockbuster
Entertainment Group, a division of Viacom Inc., which, prior to its acquisition
by Viacom Inc. in September 1994, operated as Blockbuster Entertainment
Corporation. From January 1993 to September 1994, Mr. Berrard served as
President and Chief Operating Officer of Blockbuster. Mr. Berrard joined
Blockbuster in June 1987 as Senior Vice President, Treasurer and Chief Financial
Officer, and he became a director of Blockbuster in May 1989. Blockbuster had
approximately 19 video stores in early 1987, and was the world's largest video
and music retailer with over 5,000 stores worldwide in early 1996. In addition,
Mr. Berrard served as President and Chief Executive Officer and a director of
Spelling Entertainment Group Inc., a television and filmed entertainment
producer and distributor, from March 1993 through March 1996, and served as a
director of Viacom Inc. from September 1994 until March 1996. Mr. Berrard
presently serves as a
67
<PAGE> 73
director of Republic Industries and of Florida Panthers Holdings, Inc., which
owns and operates luxury resorts, arena and entertainment facilities and a
professional sports franchise.
THOMAS C. BYRNE, 36, is a member of the Gerald Stevens board of directors.
Currently, Mr. Byrne is a limited partner of New River Capital Partners and
controls an administrative partner of New River Capital Partners. Prior to
co-founding New River with Mr. Berrard in 1997, Mr. Byrne served in various
executive positions at Blockbuster, from 1989 to 1997, most recently as Vice
Chairman in 1997 where his responsibilities included Business Development,
International Operations, and Technology and Online Operations. Additionally,
Mr. Byrne was President of Viacom Retail Group, which launched the award-
winning Viacom Entertainment Store and the Nickelodeon Store concept. Mr. Byrne
is a Certified Public Accountant and prior to joining Blockbuster was employed
with KPMG Peat Marwick.
GERALD R. GEDDIS, 48, is a member of the Gerald Stevens board of directors,
and serves as Chief Executive Officer and President of Gerald Stevens. From 1988
to 1996, Mr. Geddis served in various executive positions at Blockbuster,
including as President from 1995 to 1996, as Chief Operating Officer in 1996, as
Vice President of European Operations from 1992 to 1994, and as Zone Vice
President from 1989 to 1992. Blockbuster had more than 5,000 BLOCKBUSTER
VIDEO(TM) stores and 500 BLOCKBUSTER MUSIC(TM) stores in more than 27 countries
in 1996, and collectively, these stores employed more than 60,000 people. For
the 17 years prior to 1989, Mr. Geddis served in various positions with Tandy
Corporation.
KENNETH ROYER, 67, is a member of the Gerald Stevens board of directors.
Prior to joining Gerald Stevens in October 1998, Mr. Royer had been serving as a
consultant in the floral industry. For over 40 years, Mr. Royer was Chairman of
the Board of Directors of Royer's Flowers. Founded in 1945, Royer's Flowers by
1998 had become one of the five largest florists in the United States with 35
locations in central Pennsylvania. Mr. Royer has served as Chairman of the
Retail Council of the Society of American Florists, and also has served as
director of the Society of American Florists. Mr. Royer also has served as
Chairman of the American Florists Marketing Council and recently completed a
term as Treasurer of the American Florists Endowment. A regular speaker at
national florist conventions, Mr. Royer writes a regular column for The Florist
Review entitled "Royer on Retailing" and authored a book on the floral industry
entitled Retailing Flowers Profitably in 1998.
ANDREW W. WILLIAMS, 46, has been a member of our board of directors since
December 1988, Chairman of the Board of Directors since November 1992 and the
Chief Executive Officer since September 1994. Since 1978 Mr. Williams has been a
certified public accountant practicing principally in Vero Beach, Florida. In
addition, he serves as a director of First American Bank.
There are no family relationships between any nominee or member of our
board of directors or our executive officers. Other than the merger agreement,
to our knowledge, there are no arrangements, agreements or understandings by
which any nominee for director is bound and under which he was selected as a
nominee.
INFORMATION CONCERNING DIRECTORS AND OFFICERS
MEETINGS AND COMPENSATION OF DIRECTORS
During fiscal year 1998, our board of directors held three meetings. Each
of our directors has waived, indefinitely, his monthly fees and his fees for
attending board and committee meetings. We reimburse all of our directors for
out-of-pocket expenses incurred by them in connection with their service on the
board and committees of the board. No member of the board of directors, the
audit committee or the compensation committee attended less than 75% of the
meetings held. The board of directors does not have a nominating committee.
Management nominees for director are elected by a majority vote of the board of
directors.
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<PAGE> 74
NONEMPLOYEE DIRECTORS' STOCK OPTION PLAN
On January 30, 1996, our stockholders approved the Nonemployee Directors'
Stock Option Plan. Under this stock option plan, we grant each nonemployee
director, upon his or her respective election or reelection to the board of
directors, a nonqualified option to purchase 20,000 shares of our common stock
at an option price equal to 100% of fair market value on the date of grant. Each
exercisable option terminates upon the expiration of ten years from the date of
grant or three months after the resignation or removal of the optionee as a
director, whichever first occurs. However, if an optionee ceases to be a
director for reasons other than resignation, removal for cause or death, the
exercisable options terminate upon the expiration of ten years from the date of
grant or within three years after the optionee ceases to be a director,
whichever occurs first. An optionee may not exercise an option prior to the
expiration of six months from the date of grant, subject to exceptions specified
in the Nonemployee Directors' Stock Option Plan.
On January 28, 1998, we granted options to purchase 20,000 shares of our
common stock under the Nonemployee Directors' Stock Option Plan to the following
nonemployee directors: T. Craig Benson, S. Oden Howell, Jr., William E. Mercer
and Kenneth G. Puttick. We granted no other options to nonemployee directors in
our fiscal year ended August 31, 1998. The following lists the amount and
exercise prices of all options currently outstanding under the Nonemployee
Directors' Stock Option Plan as of the date of this document:
<TABLE>
<CAPTION>
AMOUNT OF SHARES EXERCISE
SUBJECT TO OPTIONS PRICE
- ------------------ --------
<S> <C>
80,000...................................................... $1.56
80,000...................................................... $2.86
80,000...................................................... $5.86
</TABLE>
The vesting of options granted under the Nonemployee Directors' Stock
Option Plan will not be changed in the merger.
AUDIT COMMITTEE
The audit committee of the board of directors currently consists of William
E. Mercer, S. Oden Howell, Jr. and Kenneth G. Puttick. The audit committee did
not meet during the 1998 fiscal year. The functions of the audit committee are
to:
- review the qualifications and independence of the independent auditors;
- recommend the appointment of the independent auditors;
- review the scope of the annual audit and the annual audit process;
- review the annual audited financial statements; and
- report the activities of the audit committee to the board of directors.
COMPENSATION COMMITTEE
The compensation committee of the board of directors currently consists of
S. Oden Howell, Jr., Kenneth G. Puttick and William E. Mercer. The compensation
committee did not meet during the 1998 fiscal year. The functions of the
compensation committee are to review the compensation of officers and other
management personnel and to make recommendations concerning such compensation.
The compensation committee also administers some of our employee benefit plans.
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<PAGE> 75
NOMINATING COMMITTEE
The board of directors does not have a standing nominating committee or a
committee performing similar functions.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers, and any persons holding more than 10 percent of
our common stock to report their initial ownership of such common stock and any
subsequent changes in such ownership to the Securities and Exchange Commission.
Section 16(a) also requires these individuals to provide copies of the reports
to us. Based upon our review of copies of the reports which we have received, we
believe that during our fiscal year ended August 31, 1998, all Section 16(a)
filing requirements were satisfied, with the exception of a delinquent Form 5
filed by William E. Mercer.
EXECUTIVE OFFICERS
As of the date of this document, the following persons were our executive
officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Andrew W. Williams............................. 46 Chairman of the board of directors and
Chief Executive Officer
James H. West.................................. 44 President, Chief Operating Officer and
Chief Financial Officer
Kelly S. McMakin............................... 37 Treasurer, Secretary, Vice President
and Controller
James J. Pagano................................ 44 Vice President -- Marketing
</TABLE>
ANDREW W. WILLIAMS is one of our director nominees. His biographical
information appears under "Proposal No. 3 -- Election of Directors."
JAMES H. WEST joined us as our Vice President, Treasurer and Chief
Financial Officer in February 1993. In January 1994, Mr. West was elected Chief
Operating Officer. From August 1994 until February 1995, he served as our
Secretary. On November 17, 1994, he was elected President. From November 1987 to
November 1992, Mr. West was President of M.P.I.I., Inc. which is in the funeral,
cemetery and insurance business. He has been one of our directors since January
1994.
KELLY S. MCMAKIN has served as our Secretary since February 1995, Vice
President and Treasurer since November 1994 and Controller since June 1993. From
May 1988 through May 1993, Mr. McMakin served as Controller of M.P.I.I., Inc.
JAMES J. PAGANO has served as our Vice President -- Marketing since January
1998. Mr. Pagano has served as Executive Vice President of The Flower Club
International, Inc., our wholly-owned subsidiary, since January 1998. From May
1997 to January 1998, Mr. Pagano served as our Marketing Director. From 1991
through May 1997, Mr. Pagano was President of Media VI -- Radio Broadcasting, an
entity that operates radio stations throughout Florida.
There are no arrangements, agreements or understandings, to our knowledge,
by which any of the persons described above was selected as an executive
officer.
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<PAGE> 76
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Members of our compensation committee during fiscal 1998 were:
Thomas Craig Benson
Solomon O. Howell, Jr.
William E. Mercer
Kenneth G. Puttick
Mr. Benson is an officer of Service Corporation International. We provide
Service Corporation International with credit card and charge card processing
services for their funeral and cemetery divisions. We provide Service
Corporation International credit card processing services on the same terms and
conditions as we would for unaffiliated parties with similar volumes of
business. We received estimated net revenues of $274,000 from Service
Corporation International for these services during fiscal year 1998. Mr. Benson
resigned from the board of directors on March 8, 1999.
PERFORMANCE GRAPH
(PERFORMANCE GRAPH)
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<PAGE> 77
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
our Chief Executive Officer, and for our executive officers whose total annual
salary and bonus exceeded $100,000 for the fiscal year ended August 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION(1) SECURITIES ALL OTHER
------------------ UNDERLYING COMPEN-
NAME AND POSITION YEAR SALARY BONUS OPTIONS(2) SATION(3)
- ----------------- ---- -------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
James H. West(4).......................... 1998 $204,845 $30,000 -- $4,845
President, COO and CFO 1997 183,700 80,000 75,000 4,238
1996 181,731 65,000 75,000 --
Andrew W. Williams(5)..................... 1998 127,042 20,000 -- 2,042
Chairman of the board of 1997 105,241 67,500 150,000 2,856
directors, CEO 1996 100,731 27,500 175,000 --
Kelly S. McMakin(6)....................... 1998 92,700 11,000 -- 2,700
Vice President, Secretary and 1997 76,069 40,000 30,000 2,223
Treasurer 1996 70,000 15,492 40,000 --
James J. Pagano (7)....................... 1998 120,554 12,000 -- 554
Vice President -- Marketing 1997 36,630 -- 50,000 --
1996 -- -- -- --
</TABLE>
- -------------------------
(1) We have omitted the column for "Other Annual Compensation" because there is
no compensation required to be reported in such column. The aggregate amount
of perquisites and other personal benefits provided to each listed officer
is less than 10% of his total annual salary and bonus.
(2) The exercise price of each option was based on the fair market value of our
common stock on the date of grant.
(3) Represents cash payments to the listed officers under our 401(k) plan.
(4) Mr. West's options consist of 75,000 options issued under the Management
Incentive Stock Plan at an exercise price of $2.66 per share and 75,000
options issued at an exercise price of $4.00 per share.
(5) Mr. Williams' options consist of 75,000 options at a per share exercise
price of $1.40 per share and 100,000 options at a per share exercise price
of $2.66 per share, each issued under the Management Incentive Stock Plan,
and 150,000 options issued at an exercise price of $4.00 per share.
(6) Mr. McMakin's options consist of 15,000 options at a per share exercise
price of $1.40 per share and 25,000 options at a per share exercise price of
$2.66 per share issued under the Management Incentive Stock Plan, and 30,000
options issued at an exercise price of $4.00 per share.
(7) Mr. Pagano's options consist of 50,000 options issued at an exercise price
of $4.00 per share.
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<PAGE> 78
EMPLOYMENT AGREEMENTS
Each of our executive officers serves at the pleasure of our board of
directors. Except for Mr. West, we have no employment agreements with any of our
executive officers. Under Mr. West's employment agreement, he agreed to:
- serve as our Chief Operating Officer and Chief Financial Officer;
- receive a minimum annual salary of $140,000 and other standard employee
benefits;
- receive a bridge loan to purchase a home in Vero Beach, Florida. The loan
is secured by real estate owned by Mr. West and will be repaid upon
liquidation of the real estate;
- not compete with us and to maintain confidentiality of our information;
- serve for a term of one year, which is renewable automatically for
additional annual terms, unless terminated earlier; and
- pay Mr. West one year's severance upon termination without cause.
Under the merger agreement, Mr. Williams entered into a non-compete
agreement with us. This agreement continues during Mr. Williams' tenure and for
a period of three years after his termination. This agreement prohibits Mr.
Williams from the following:
- engaging in a business in competition with us;
- soliciting our customers or employees; and
- using or disclosing our proprietary information.
In connection with the merger, we anticipate entering into employment
agreements with Messrs. West, Pagano, McMakin and other employees. We anticipate
that these employment agreements will include restrictions on competing with us
or soliciting our employees and customers. These restrictions continue during
the employment term and for two years thereafter. No additional compensation
will be given as consideration for the parties entering into the non-compete
agreement. In the event that the non-compete agreements with current members of
our senior management are determined to be unenforceable, those individuals may
compete directly with the new combined entity.
MANAGEMENT INCENTIVE STOCK PLAN
Our board of directors adopted the Management Incentive Stock Plan on
October 26, 1995. The stockholders approved this plan on January 30, 1996. Under
the Management Incentive Stock Plan, we may periodically grant employees
market-based awards, including nonqualified stock options, incentive stock
options, stock appreciation rights, restricted stock and performance share
awards. We grant these awards to those individuals whose judgment, initiative
and efforts contribute to our success. Each individual award is established by
an award agreement with the participant which sets forth the terms and
conditions applicable to the award. The exercise price of an option is
determined at the time of the grant. The exercise price may not be less than the
fair market value of the shares of our common stock subject to the award on the
date of grant.
We did not grant any options to any executive officer during our fiscal
year ended August 31, 1998. As of the date of this document, 310,000 shares of
our common stock subject to options granted under the Management Incentive Stock
Plan are outstanding. In addition, 355,000 shares of our common stock subject to
non-plan options are outstanding. The vesting of options granted under the
Management Incentive Stock Plan and outside of this plan will not change as a
result of the merger.
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<PAGE> 79
We have no long term incentive plan, pension plan or other plan as defined
by the rules and regulations of the Securities and Exchange Commission except
for the Nonemployee Directors' Stock Option Plan and the Management Incentive
Stock Plan.
OPTION HOLDINGS AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information regarding the number and value
of securities underlying unexercised stock options held by our four most highly
compensated executive officers at August 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Andrew W. Williams........................ 143,750 181,250 $303,419 $229,806
James H. West............................. 56,250 93,750 85,688 109,313
Kelly S. McMakin.......................... 31,250 38,750 65,609 50,886
James J. Pagano........................... 12,500 37,500 7,875 23,625
</TABLE>
- -------------------------
(1) The value of the unexercisable in-the-money options is based on the per
share market price of our common stock. On August 31, 1998, the closing
price for our common stock was $4.63.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
You should be aware of the following transactions or relationships between
us and our directors and executive officers:
- Mr. Benson, who was one of our directors, is an officer of Service
Corporation International. We provide Service Corporation International
with credit card and charge card processing services to its funeral and
cemetery divisions. We have received estimated net revenues of $274,000
from Service Corporation International for these services during fiscal
year 1998.
- On August 28, 1994, under the employment agreement with Mr. West, we
committed to loan Mr. West $70,000, bearing an interest rate of 7.75% per
annum. We advanced $57,000 to him on the date of the loan. On November 7,
1994, we advanced Mr. West an additional $5,000 under the terms of the
original $70,000 commitment. On January 28, 1997, we increased the total
amount of the commitment from $70,000 to $100,000. Our loan is secured by
real estate owned by Mr. West and must be repaid upon liquidation of the
real estate. As of August 31, 1998, approximately $37,000 is outstanding
under the loan to Mr. West.
- On January 5, 1998, we purchased from a trust the premises where we are
currently headquartered. The purchase price was $673,000. The trustee of
the trust, who was the seller in such transaction, is the father-in-law
of Mr. Williams. Mr. William's spouse and the siblings of Mr. William's
spouse are the beneficiaries named under such trust.
These three transactions were negotiated at arm's length and are subject to
the same terms and conditions that an unaffiliated party would receive. We
sought to obtain either market, or better than market, commercial terms and
conditions under the circumstances then existing.
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<PAGE> 80
NEW EXECUTIVE OFFICERS
The merger agreement provides that the following individuals will serve as
our executive officers upon consummation of the merger:
GERALD R. GEDDIS will serve as our Chief Executive Officer and
President. His biographical information appears under "Proposal No.
3 -- Election of Directors."
ALBERT J. DETZ, 50, will serve as our Senior Vice President and Chief
Financial Officer. Prior to joining Gerald Stevens, Mr. Detz worked at
Blockbuster from 1991 to 1997, having most recently served as Senior Vice
President and Chief Financial Officer from October 1994 to June 1997. Prior
to Blockbuster, Mr. Detz served in various finance related positions for 11
years within the Computer Systems Division of Gould Electronics, Inc., and
at Encore Computer Corporation. Prior to these experiences, Mr. Detz worked
in the audit and tax departments of Coopers & Lybrand. Additionally, Mr.
Detz is Vice President, Chief Financial Officer of Data Core Software
Corporation, a development stage organization for whom his services are
primarily of a consulting nature.
STEVEN J. NEVILL, 34, will serve as our Senior Vice President and
Chief Information Officer. From 1996 until joining Gerald Stevens in
February 1999, Mr. Nevill was a principal at Kurt Salmon Associates where
he was responsible for a wide variety of projects, including information
systems strategy, systems development, logistics assessment and
re-engineering. From 1991 to 1995, Mr. Nevill was Director of Strategic
Services for the American Retail Group where he was involved in the
creation of strategic plans, development and implementation of new systems
and technology platforms for all functions, and a variety of special
systems initiatives.
ADAM D. PHILLIPS, 36, will serve as our Senior Vice President, Chief
Administrative Officer, General Counsel and Secretary. From January 1998
until joining Gerald Stevens in July 1998, Mr. Phillips was a shareholder
of the law firm of Akerman, Senterfitt & Eidson, P.A. in Fort Lauderdale,
Florida. From 1993 through 1997, Mr. Phillips served in various capacities
at Blockbuster, having most recently served as Executive Vice President,
Chief Administrative Officer and General Counsel in 1996 and 1997. While at
Blockbuster, Mr. Phillips was responsible for the company's legal, human
resources and communications departments. Prior to joining Blockbuster, Mr.
Phillips was associated with the law firm of Kirkland & Ellis in Chicago,
Illinois.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information with respect to those persons
who beneficially owned 5% or more of our common stock at April 7, 1999, and
those persons expected to beneficially own 5% or more of our common stock after
completion of the merger. All shares are or will be subject to the named
person's sole voting and investment power, except as set forth below. All
information in the table is based upon reports filed by such persons with the
Securities and Exchange Commission and upon questionnaires submitted to us in
connection with the preparation of this document.
<TABLE>
<CAPTION>
PRIOR TO
COMPLETION AS OF COMPLETION
OF THE MERGER(1) OF THE MERGER(2)
NAME AND ADDRESS ----------------- -----------------
OF BENEFICIAL OWNER SHARES % SHARES %
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Lance Laifer(3)....................................... 2,072,129 25.4% 2,072,129 5.7%
45 West 45th Street
New York, New York 10036
</TABLE>
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<PAGE> 81
<TABLE>
<CAPTION>
PRIOR TO
COMPLETION AS OF COMPLETION
OF THE MERGER(1) OF THE MERGER(2)
NAME AND ADDRESS ----------------- -----------------
OF BENEFICIAL OWNER SHARES % SHARES %
- ------------------- --------- ----- --------- -----
<S> <C> <C> <C> <C>
Andrew W. Williams(4)................................. 1,112,303 13.2% 1,112,303 3.0%
616 Azalea Lane
Vero Beach, Florida 32963
Kenneth G. Puttick(5)................................. 1,155,000 14.1% 1,155,000 3.2%
210 Osprey Court
Vero Beach, Florida 32963
Steven R. Berrard(6).................................. -- -- 7,977,104 22.0%
110 S.E. 6th Street
Ft. Lauderdale, Florida 33301
Gerald R. Geddis...................................... -- -- 3,402,005 9.4%
100 S.E. 3rd Avenue
Ft. Lauderdale, Florida 33394
Gerald Stevens, Inc.(1)............................... 5,350,103 60.3% -- --
100 S.E. 3rd Avenue
Ft. Lauderdale, Florida 33394
</TABLE>
- -------------------------
(1) Prior to completion of the merger, Gerald Stevens is deemed to beneficially
own an aggregate of 5,350,103 shares of our common stock, including shares
reflected in this table as owned by Messrs. Laifer, Williams and Puttick,
under a voting agreement.
(2) The aggregate amounts and percentages of our common stock to be beneficially
owned by each named person or group as of completion of the merger is based
on an assumed exchange ratio of 1.35 shares of our common stock to be issued
for each share of Gerald Stevens common stock outstanding at April 7, 1999.
(3) 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. The 2,072,129 shares of our common stock
beneficially owned by Laifer Capital consists of (1) 1,156,829 shares of our
common stock of which Laifer Capital has the sole power to vote and direct
the disposition in its capacity as general partner and investment advisor to
Hilltop Partners, L.P., (2) 267,300 shares of our common stock of which
Laifer Capital has the sole power to vote and direct the disposition in its
capacity as investment advisor to Hilltop Offshore, Ltd. and (3) 648,000
shares of our common stock of which Laifer Capital shares the power to vote
and direct the disposition with Zev Wolfson (with an address at One State
Street Plaza, New York, New York, 10004-1505) in its capacity as an
investment advisor, account custodian and attorney-in-fact to Mr. Wolfson.
(4) Includes 286,118 shares of our common stock owned jointly with Mr. Williams'
wife, 24,660 shares of our common stock held for the benefit of Mr.
Williams' children, 58,704 shares of our common stock owned by Equity
Resource Group of Indian River County, Inc., of which Mr. Williams is
President, director and majority owner, and 77,000 shares of our common
stock owned by Confidential Investment Services, Inc., of which Mr. Williams
is sole owner. Includes 300,000 shares of our common stock subject to
options which are exercisable within 60 days, of which 150,000 such shares
are subject to options granted to Mr. Williams under the Management
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<PAGE> 82
Incentive Stock Plan and 150,000 shares are subject to options granted to
Mr. Williams under a non-plan agreement with us.
(5) Includes 637,000 shares of our common stock held by Puttick Enterprises, of
which Mr. Puttick is President, director and owner, and 60,000 shares of our
common stock subject to options exercisable within 60 days of the date of
this document.
(6) The aggregate amount of our common stock to be beneficially owned by Mr.
Berrard as of completion of the merger consists of 7,977,104 shares to be
owned by New River Capital Partners. Mr. Berrard controls and beneficially
owns his interests in New River Capital Partners indirectly through other
entities.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 7, 1999 and as of the
completion of the merger, information about each director and nominee, each of
our executive officers named in the Summary Compensation Table on page 65, each
person expected to become an executive officer after completion of the merger,
and all directors, director nominees, executive officers and proposed executive
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>
PRIOR TO COMPLETION AS OF COMPLETION OF
OF THE MERGER THE MERGER(1)
----------------------- ------------------------
APPROXIMATE APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Andrew W. Williams (2).................... 1,112,303 13.2% 1,112,303 3.0%
616 Azalea Lane
Vero Beach, FL 32963
Kenneth G. Puttick (3)(4)................. 1,155,000 14.1% 1,155,000 3.2%
210 Osprey Court
Vero Beach, FL 32963
William E. Mercer (4)..................... 196,000 2.4% 196,000 *
2121 Sage Road,
Suite 150
Houston, TX 77056
S. Oden Howell, Jr. (4)................... 303,300 3.7% 303,300 *
2603 Grassland Drive
Louisville, KY 40299
James H. West(5).......................... 361,571 4.4% 361,571 *
1705 Sand Dollar Way
Vero Beach, FL 32963
Kelly S. McMakin(6)....................... 94,300 1.1% 94,300 *
15 Royal Palm Blvd
Vero Beach, FL 32960
James J. Pagano(7)........................ 55,500 * 55,500 *
8075 20th Street
Vero Beach, FL 32966
Steven R. Berrard (8)..................... -- -- 7,977,104 22.0%
110 S.E. 6th Street
Ft. Lauderdale, FL 33301
</TABLE>
77
<PAGE> 83
<TABLE>
<CAPTION>
PRIOR TO COMPLETION AS OF COMPLETION OF
OF THE MERGER THE MERGER(1)
----------------------- ------------------------
APPROXIMATE APPROXIMATE
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
------------------------------------ --------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Thomas C. Byrne (9)....................... -- -- 190,518 *
100 S.E. 3rd Avenue,
Fort Lauderdale, FL 33394
Gerald R. Geddis.......................... -- -- 3,402,005 9.4%
100 S.E. 3rd Avenue,
Fort Lauderdale, FL 33394
Albert J. Detz............................ -- -- 334,125 *
100 S.E. 3rd Avenue,
Fort Lauderdale, FL 33394
Steven J. Nevill.......................... -- -- 0 *
100 S.E. 3rd Avenue,
Fort Lauderdale, FL 33394
Adam D. Phillips (10)..................... -- -- 452,250 1.2%
100 S.E. 3rd Avenue
Ft. Lauderdale, FL 33394
Kenneth Royer............................. -- -- 47,031 *
21 Stoneleigh Drive
Lebanon, PA 17042
All Directors and
Executive Officers as a group (11)...... 3,277,974 36.9% 13,352,836 36.2%
</TABLE>
- -------------------------
* less than one percent
(1) The aggregate amounts and percentages of our common stock to be
beneficially owned by each named person or group as of completion of the
merger is based on an assumed exchange ratio of 1.35 shares of our common
stock to be issued for each share of Gerald Stevens common stock
outstanding at April 7, 1998.
(2) Includes 286,118 shares of our common stock owned jointly with Mr.
Williams' wife, 24,660 shares of our common stock held for the benefit of
Mr. Williams' children, 58,704 shares of our common stock owned by Equity
Resource Group of Indian River County, Inc., of which Mr. Williams is
President, director and majority owner, and 77,000 shares of our common
stock owned by Confidential Investment Services, Inc., of which Mr.
Williams is sole owner. Includes 300,000 shares of our common stock subject
to options which are exercisable within 60 days, of which 150,000 shares
are subject to options granted to Mr. Williams under the Management
Incentive Stock Plan and 150,000 shares are subject to options granted to
Mr. Williams under a non-plan agreement with us.
(3) Includes 637,000 shares held by Puttick Enterprises, of which Mr. Puttick
is President, director and owner.
(4) Includes 60,000 shares of our common stock subject to options granted under
the Nonemployee Directors' Stock Option Plan which are exercisable within
60 days of the date of this document.
(5) Includes 131,250 shares of our common stock subject to options which are
exercisable within 60 days of the date of this document, of which 56,250
shares are subject to options granted to
78
<PAGE> 84
Mr. West under the Management Incentive Stock Plan and 75,000 such shares
are subject to options granted to Mr. West under a non-plan agreement with
us.
(6) Includes 63,750 shares of our common stock subject to options which are
exercisable within 60 days of the date of this document, of which 33,750
shares are subject to options granted to Mr. McMakin under the Management
Incentive Stock Plan and 30,000 shares are subject to options granted to
Mr. McMakin under a non-plan agreement with us.
(7) Includes 50,000 shares of our common stock subject to options granted to
Mr. Pagano under a non-plan agreement with us which are exercisable within
60 days of the date of this document. 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 aggregate amount of our common stock deemed to be beneficially owned by
Mr. Berrard as of completion of the merger consists of 7,977,104 shares to
be owned by New River Capital Partners. Mr. Berrard controls and
beneficially owns his interests in New River Capital Partners indirectly
through other entities.
(9) The aggregate amount of our common stock to be beneficially owned by Mr.
Byrne as of completion of the merger consists of 190,518 shares to be owned
directly by him, but does not include any shares to be owned by New River
Capital Partners. Mr. Byrne beneficially owns a non-controlling interest in
New River Capital Partners.
(10) Mr. Phillips will own his shares of our common stock jointly with his
spouse.
(11) The shares shown for all directors and executive officers as a group
include 725,000 shares of our common stock which they have the right to
acquire within 60 days of the date of this document under options issued
under the terms of the Nonemployee Directors' Stock Option Plan, the
Management Incentive Stock Plan, or non-plan agreements with us. Our
directors and executive officers prior to the completion of the merger
consist of Messrs. Williams, Puttick, Mercer, Howell, West, McMakin and
Pagano. Our directors and executive officers as of the completion of the
merger will consist of Messrs. Williams, Berrard, Byrne, Geddis, Royer,
Detz, Nevill and Phillips.
DESCRIPTION OF FLORAFAX CAPITAL STOCK
GENERAL
The following description of our capital stock is a summary of the material
terms thereof and is qualified by reference to the provisions of our certificate
of incorporation and bylaws.
We have authorized capital stock consisting of 70,000,000 shares of our
common stock and 600,000 shares of our preferred stock, par value $10 per share.
As of April 7, 1999, we had 8,153,528 shares of common stock outstanding. No
shares of our preferred stock were outstanding on that date.
FLORAFAX COMMON STOCK
Subject to the prior rights of stockholders of our preferred stock, the
stockholders of our common stock:
- are entitled to such dividends as may be declared by our board of
directors out of funds legally available therefor;
- are entitled to one vote per share;
- have no preemptive or conversion rights;
- are not subject to, or entitled to the benefits of, any redemption or
sinking fund provision; and
79
<PAGE> 85
- are entitled upon liquidation to receive the remainder of our assets
after the payment of corporate debts and the satisfaction of the
liquidation preference of our preferred stock.
Voting is noncumulative. All shares of our common stock outstanding as of
April 7, 1999 are fully paid and non-assessable.
The transfer agent and registrar for our common stock is Registrar and
Transfer Company, Cranford, New Jersey.
FLORAFAX PREFERRED STOCK
Our certificate of incorporation authorizes us to issue up to 600,000
shares of preferred stock. Our board of directors is empowered, without approval
of the stockholders, to cause shares of preferred stock to be issued in one or
more series, with the number of shares of each series and the rights,
preferences and limitations of each series to be determined by it. Among the
specific matters that our board of directors may determine are the rate of
dividends, redemption and conversion prices and terms and amounts payable in the
event of liquidations and special voting rights. The board of directors' ability
to issue preferred stock on the terms it determines may be viewed as having an
anti-takeover effect.
APPOINTMENT OF AUDITORS
Since approval of the appointment of auditors is not a matter which is
required to be submitted to a vote of the stockholders, our board of directors
has appointed the firm of Ernst & Young LLP to audit our accounts for the 1999
fiscal year. However, in connection with the combination of our operations with
those of Gerald Stevens in the merger, we expect that Arthur Andersen LLP, who
currently serve as Gerald Stevens' independent auditors, will be appointed as
our independent auditor after completion of the merger.
Representatives of each of Ernst & Young LLP and Arthur Andersen LLP will
be present at the annual meeting and will have the opportunity to make a
statement if they desire to do so and to respond to appropriate questions.
ANNUAL REPORTS
We are including our Annual Report on Form 10-KSB for the fiscal year ended
August 31, 1998, as amended by Form 10-KSB/A filed by us with the Securities and
Exchange Commission, together with the required financial statements and
schedules, as Annexes D-1 and D-2, respectively, to this document.
PROXY SOLICITATION
We will pay the expenses of this proxy solicitation, except for the costs
of printing and mailing these proxy materials which will be shared between us
and Gerald Stevens. Expenses may include the charges and expenses of banks,
brokerage firms, and other custodians, nominees or fiduciaries for forwarding
proxies and proxy materials to beneficial owners of our common stock. We do not
intend to solicit proxies by mail, telephone, telegraph or personal interview by
our officers and employees. If we do solicit proxies in that manner, our
officers and employees will not be additionally compensated, but may be
reimbursed for their out-of-pocket expenses in connection with the solicitation.
We request brokers, nominees and other fiduciaries holding stock in their
names for others, or holding stock for others who have the right to give voting
instructions, to forward proxy materials to their principals and to request
authority for the execution of the proxy. We will reimburse these people for
their reasonable expenses.
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<PAGE> 86
OTHER MATTERS
Our board of directors knows of no matter other than those matters listed
in the Notice of Annual Meeting of Stockholders which will be brought before the
annual meeting for a vote of our stockholders. If any other matter properly
comes before the annual meeting for a stockholders' vote, the persons named in
the enclosed proxy will vote in their discretion on each such matter according
to their best judgment of what is in our interest.
The information contained in this document is to our best knowledge, and
the information contained herein with respect to the directors, nominees for
director, executive officers and principal stockholders is based upon
information which these individuals have provided to us.
It is important that all shares of stock be represented at the annual
meeting, regardless of the number of shares held by any individual stockholder.
Since this meeting is important to your investment in Florafax, we ask you to
sign, date and return the enclosed proxy promptly. For your convenience, we have
enclosed a return envelope requiring no additional postage if mailed within the
United States.
EXPERTS
Our Consolidated Financial Statements at August 31, 1998 and 1997, and for
each of the two fiscal years in the period ended August 31, 1998, included in
our Annual Report on Form 10-KSB as amended by our Form 10-KSB/A for our fiscal
year ended August 31, 1998 and included with this document as Annexes D-1 and
D-2 respectively, have been audited by Ernst & Young LLP, independent certified
public accountants, as set forth in their report appearing therein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Marketing Projects, Inc. at December 31, 1997
and for the year then ended, included in our Current Report on Form 8-K/A, and
included with this document as Annex D-5, have been audited by Ernst & Young
LLP, independent certified public accountants, as set forth in their report
appearing therein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Gerald Stevens, Inc., Eastern Floral and Gift
Shop, Inc. and subsidiary, Arizona Wholesale Floral Co. d/b/a Cactus Flower
Florists, Flower Franchising, Inc. d/b/a Royer's Flowers, J.J. Fallon Company,
Inc., National Flora, Phoebe Floral, Inc. and A.G.A. Flowers, Inc. included in
this registration statement have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements of Boesen the Florist, Inc., Maple Lee Flowers,
Inc., Maple Lee Farm 'N' Garden Center, Ltd., Dr. Delphinium Designs, Inc.,
Martina's Flowers & Gifts, Inc., Norton Group Inc. and Subsidiaries, and
Jennie's Flower Shop, Inc. included in the document have been audited by
PricewaterhouseCoopers LLP, independent certified public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving said reports.
The combined financial statements of The Exotic Gardens, Inc. and Kuhn
Flowers, Inc. included in the document have been audited by Adair, Fuller,
Witcher & Malcolm, P.A., certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
LEGAL MATTERS
Andrews & Kurth L.L.P. will issue an opinion about the legality of our
common stock to be issued in the merger. Akerman, Senterfitt & Eidson, P.A. will
issue an opinion about the material federal tax
81
<PAGE> 87
consequences of the merger for Gerald Stevens and its stockholders. Certain
attorneys employed by Akerman, Senterfitt & Eidson, P.A. own shares of common
stock of Gerald Stevens.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
We anticipate that the next annual meeting of stockholders will be held in
February 2000. In order for a stockholder's proposal to be considered for
inclusion in our proxy statement for that meeting, we must receive the proposal
no later than August 1, 1999. You should send any proposal to us to the
attention of our Corporate Secretary. The proposal must be in compliance with
then existing rules and regulations of the Securities and Exchange Commission
and applicable provisions of Delaware corporate law.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any reports, statements or other information we file at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's public reference rooms in New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Our filings with the Commission are also available to
the public from commercial document retrieval services and at the web site
maintained by the Commission at http://www.sec.gov.
We have filed a Registration Statement on Form S-4 to register with the
Commission the shares of our common stock to be issued to Gerald Stevens
stockholders in the merger. This document forms a part of that registration
statement. This document does not contain all the information you can find in
the registration statement or the exhibits to the registration statement.
The Commission is permitting us to disclose important information to you by
referring you to other documents included as Annexes to this document. Set forth
below is a list of documents included as Annexes to this document. The documents
in Annexes D-1 through D-6 contain important business and financial information
about us.
<TABLE>
<CAPTION>
FLORAFAX FILINGS WITH THE COMMISSION INCLUDED AS ANNEXES TO THIS
DOCUMENT PERIOD COVERED/DATE FILED
- ---------------------------------------------------------------- -------------------------------
<S> <C>
Annex D-1: Annual Report on Form 10-KSB.................... Year Ended August 31,1998
Annex D-2: Amendment No. 1 to the Annual Report on Form
10-KSB/A........................................ Year Ended August 31, 1998
Annex D-3: Quarterly Report on Form 10-QSB................. Quarter Ended November 30, 1998
Annex D-4: Amendment No. 1 to Quarterly Report on Form
10-QSB/A........................................ Quarter Ended November 30, 1998
Annex D-5: Current Report on Form 8-K/A.................... Dated August 11, 1998
Annex D-6: Current Report on Form 8-K...................... Dated December 9, 1998
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT TO VOTE
ON THE PROPOSALS TO BE SUBMITTED AT THE ANNUAL MEETING. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED
IN THIS DOCUMENT. THIS DOCUMENT IS DATED APRIL 12, 1999. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THIS DOCUMENT IS ACCURATE AS OF ANY OTHER
DATE, AND NEITHER THE MAILING OF THIS DOCUMENT NOR THE ISSUANCE OF OUR COMMON
STOCK IN THE MERGER WILL CREATE ANY IMPLICATION TO THE CONTRARY.
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<PAGE> 88
FLORAFAX
INDEX TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to Pro Forma Consolidated Financial
Statements................................................ PF-2
FLORAFAX
Pro Forma Consolidated Balance Sheet at November 30, 1998... PF-3
Pro Forma Consolidated Statement of Operations for the year
ended August 31, 1998..................................... PF-4
Pro Forma Consolidated Statement of Operations for the three
months ended November 30, 1998............................ PF-5
GERALD STEVENS
Pro Forma Consolidated Balance Sheet at December 31, 1998... PF-6
Pro Forma Consolidated Statement of Operations for the year
ended September 30, 1998.................................. PF-7
Consolidated Statement of Operations for the year ended
September 30, 1998 for 1998 Acquisitions.................. PF-8
Pro Forma Consolidated Statement of Operations for the three
months ended December 31, 1998............................ PF-9
Notes to Unaudited Pro Forma Consolidated Financial
Statements................................................ PF-10
</TABLE>
PF-1
<PAGE> 89
FLORAFAX
INTRODUCTION TO PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma consolidated financial statements of Florafax
present the pro forma consolidated balance sheet at November 30, 1998 and the
pro forma consolidated statements of operations for the fiscal year ended August
31, 1998 and the three months ended November 30, 1998. The pro forma
consolidated financial statements present two views as follows:
(1) to give effect to the proposed merger of Florafax with Gerald Stevens
in a transaction whereby their respective historical financial
statements will be combined using the pooling of interests method of
accounting ("Pro Forma Combined").
(2) to further adjust to give effect to the significant acquisitions
completed or probable of completion by Gerald Stevens and the private
placement of common stock completed by Gerald Stevens on October 1,
1998 ("Pro Forma As Adjusted").
The Florafax pro forma consolidated balance sheet at November 30, 1998
presents the pro forma financial position of Florafax as if (1) the merger had
been consummated on November 30, 1998 and (2) both the merger and the
significant acquisitions by Gerald Stevens during 1999 ("the 1999 Acquisitions")
had been consummated on November 30, 1998. The Florafax pro forma consolidated
statements of operations for the year ended August 31, 1998 and the three months
ended November 30, 1998 present the pro forma results of operations of Florafax
as if (1) the merger had been consummated at the beginning of the periods
presented and (2) the merger, the acquisition of significant businesses by
Gerald Stevens during 1998 ("the 1998 Acquisitions"), the 1999 Acquisitions, and
the private placement had been consummated at the beginning of the periods
presented.
The pro forma consolidated financial statements of Gerald Stevens present
the pro forma consolidated balance sheet at December 31, 1998 and the pro forma
consolidated statements of operations for the year ended September 30, 1998 and
the three months ended December 31, 1998. The Gerald Stevens pro forma
consolidated balance sheet at December 31, 1998 presents the pro forma financial
position of Gerald Stevens as if the 1999 Acquisitions had been consummated at
December 31, 1998. The Gerald Stevens pro forma consolidated statements of
operations for the year ended September 30, 1998 and the three months ended
December 31, 1998 presents the pro forma results of operations of Gerald Stevens
as if the 1998 Acquisitions, the 1999 Acquisitions and the private placement had
been consummated at the beginning of the periods presented.
The pro forma consolidated financial statements are based upon available
information and certain assumptions considered reasonable by management. The pro
forma consolidated financial statements do not reflect all of the potential cost
savings Florafax may have achieved had the Gerald Stevens merger and Gerald
Stevens acquisitions taken place at the beginning of the period presented nor do
they reflect the impact of additional corporate overhead costs that would have
been incurred had Gerald Stevens been in existence for the entire period
presented prior to its inception on May 7, 1998. Accordingly, these statements
are not indicative of the actual results of operations that might have occurred,
nor are they necessarily indicative of expected results in the future.
The pro forma consolidated financial statements should be read in
conjunction with Florafax's consolidated financial statements, management's
discussion, and other financial information included and incorporated by
reference in the Florafax Quarterly Report on Form 10-QSB/A for the quarter
ended November 30, 1998, the Florafax Annual Report on Form 10-KSB/A for the
year ended August 31, 1998, and the historical financial statements, managements
discussion, and other financial information of Gerald Stevens and the historical
financial statements of the significant acquisitions made by Gerald Stevens
contained elsewhere in this Proxy Statement/Prospectus.
PF-2
<PAGE> 90
FLORAFAX
PRO FORMA CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1998
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA AS ADJUSTED
------------------------------------------------- ------------------------
GERALD
GERALD MERGER STEVENS
FLORAFAX STEVENS TRANSACTION PRO FORMA FLORAFAX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL AS ADJUSTED
---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....... $ 3,273 $ 3,730 $ -- $ 7,003 $ 3,273 $ 2,000
Accounts receivable, net........ 2,077 5,849 -- 7,926 2,077 8,648
Inventories..................... -- 3,127 -- 3,127 -- 3,650
Prepaid expenses and other
assets........................ 398 435 -- 833 398 609
Deferred taxes, net of
allowance..................... 103 -- -- 103 103 --
------- ------- ------- ------- ------- -------
Total current assets.......... 5,851 13,141 -- 18,992 5,851 14,907
Property and equipment, net..... 2,039 4,413 -- 6,452 2,039 4,917
Intangible assets related to
acquired businesses, net...... 1,995 37,525 -- 39,520 1,995 66,643
Deferred tax asset, net......... 1,881 -- -- 1,881 1,881 --
Other assets.................... 209 731 -- 940 209 860
------- ------- ------- ------- ------- -------
Total assets.............. $11,975 $55,810 $ -- $67,785 $11,975 $87,327
======= ======= ======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................ $ 4,535 $ 2,848 $ -- $ 7,383 $ 4,535 $ 6,132
Accrued liabilities............. 1,298 4,330 -- 5,628 1,298 6,705
Current portion of long term
debt.......................... 80 -- -- 80 80 8
Income taxes payable............ -- -- -- -- -- --
Other current liabilities....... -- -- -- -- -- 20
------- ------- ------- ------- ------- -------
Total current liabilities....... 5,913 7,178 13,091 5,913 12,865
Long term debt.................. 1,000 122 4,000(b) 5,122 1,000 14,929
Deferred income taxes........... -- -- -- -- -- --
Other liabilities............... 132 300 -- 432 132 306
------- ------- ------- ------- ------- -------
Total liabilities............. 7,045 7,600 4,000 18,645 7,045 28,100
------- ------- ------- ------- ------- -------
Stockholders' equity
Common stock.................... 86 186 65(a) 337 86 199
Additional paid-in capital...... 10,296 49,975 (65)(a) 60,206 10,296 60,979
Treasury stock.................. (1,616) -- -- (1,616) (1,616) --
Unrealized gains on
investments................... -- -- -- -- -- --
Retained earnings............... (3,836) (1,951) (4,000)(b) (9,787) (3,836) (1,951)
------- ------- ------- ------- ------- -------
Total stockholders' equity.... 4,930 48,210 (4,000) 49,140 4,930 59,227
------- ------- ------- ------- ------- -------
Total Liabilities and
stockholders equity......... $11,975 $55,810 $ -- $67,785 $11,975 $87,327
======= ======= ======= ======= ======= =======
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------
MERGER
TRANSACTION PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....... $ -- $ 5,273
Accounts receivable, net........ -- 10,725
Inventories..................... -- 3,650
Prepaid expenses and other
assets........................ -- 1,007
Deferred taxes, net of
allowance..................... -- 103
------- --------
Total current assets.......... -- 20,758
Property and equipment, net..... -- 6,956
Intangible assets related to
acquired businesses, net...... -- 68,638
Deferred tax asset, net......... -- 1,881
Other assets.................... -- 1,069
------- --------
Total assets.............. $ -- $ 99,302
======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................ $ -- $ 10,667
Accrued liabilities............. -- 8,003
Current portion of long term
debt.......................... -- 88
Income taxes payable............ -- --
Other current liabilities....... -- 20
------- --------
Total current liabilities....... -- 18,778
Long term debt.................. 4,000(b) 19,929
Deferred income taxes........... -- --
Other liabilities............... -- 438
------- --------
Total liabilities............. 4,000 39,145
------- --------
Stockholders' equity
Common stock.................... 68(a) 353
Additional paid-in capital...... (68)(a) 71,207
Treasury stock.................. (1,616)
Unrealized gains on
investments................... --
Retained earnings............... (4,000)(b) (9,787)
------- --------
Total stockholders' equity.... (4,000) 60,157
------- --------
Total Liabilities and
stockholders equity......... $ -- $ 99,302
======= ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-3
<PAGE> 91
FLORAFAX
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA AS ADJUSTED
------------------------------------------------- ------------------------
GERALD
GERALD MERGER STEVENS
FLORAFAX STEVENS TRANSACTION PRO FORMA FLORAFAX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL AS ADJUSTED
---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales................... $ -- $ -- $ -- $ -- $ -- $71,671
Service & other revenue......... 13,391 -- -- 13,391 13,391 19,172
------- ------- ------- ------- ------- -------
Total revenue................. 13,391 -- -- 13,391 13,391 90,843
------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of product sales........... -- -- -- -- -- 32,543
Operating expense............... 6,163 809 -- 6,972 6,163 37,472
Contract Modification Fee....... 3,495 -- -- 3,495 3,495 --
Selling, general, and
administrative expenses....... 5,164 1,328 -- 6,492 5,164 16,640
------- ------- ------- ------- ------- -------
Total operating costs and
expenses...................... 14,822 2,137 -- 16,959 14,822 86,655
------- ------- ------- ------- ------- -------
Operating income (loss)....... (1,431) (2,137) -- (3,568) (1,431) 4,188
------- ------- ------- ------- ------- -------
Other
Interest expense................ (82) (1) (320)(g) (403) (82) (1,291)
Interest income................. 165 22 -- 187 165 118
Other income (expense), net..... 43 -- -- 43 43 707
------- ------- ------- ------- ------- -------
Total other................... 126 21 (320) (173) 126 (466)
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes....................... (1,305) (2,116) (320) (3,741) (1,305) 3,722
Provision (benefit) for income
taxes......................... (682) -- 682(d) -- (682) 1,798
------- ------- ------- ------- ------- -------
Net income (loss)............... $ (623) $(2,116) $(1,002) $(3,741) $ (623) $ 1,924
======= ======= ======= ======= ======= =======
Earnings (loss) per share:
Basic......................... $ (0.08) $ (0.21) $ (0.08)
Fully diluted................. $ (0.08) $ (0.21) $ (0.08)
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------
MERGER
TRANSACTION PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Revenue:
Product sales................... $ -- $ 71,671
Service & other revenue......... -- 32,563
------- --------
Total revenue................. -- 104,234
------- --------
Operating costs and expenses:
Cost of product sales........... -- 32,543
Operating expense............... -- 43,635
Contract Modification Fee....... -- 3,495
Selling, general, and
administrative expenses....... -- 21,804
------- --------
Total operating costs and
expenses...................... -- 101,477
------- --------
Operating income (loss)....... -- 2,757
------- --------
Other
Interest expense................ (320)(g) (1,693)
Interest income................. 283
Other income (expense), net..... 750
------- --------
Total other................... (320) (660)
------- --------
Income (loss) before income
taxes....................... (320) 2,097
Provision (benefit) for income
taxes......................... (128)(d) 988
------- --------
Net income (loss)............... $ (192) $ 1,109
======= ========
Earnings (loss) per share:
Basic......................... $ 0.03
Fully diluted................. $ 0.03
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-4
<PAGE> 92
FLORAFAX
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA COMBINED PRO FORMA AS ADJUSTED
------------------------------------------------- ------------------------
GERALD
GERALD MERGER STEVENS
FLORAFAX STEVENS TRANSACTION PRO FORMA FLORAFAX PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED HISTORICAL AS ADJUSTED
---------- ---------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales................... $ -- $15,431 $ -- $15,431 $ -- $19,720
Service & other revenue......... 3,755 1,570 -- 5,325 3,755 5,326
------- ------- ------- ------- ------- -------
Total revenue................. 3,755 17,001 -- 20,756 3,755 25,046
------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of product sales........... -- 6,909 -- 6,909 -- 8,826
Operating expense............... 1,338 7,796 -- 9,134 1,338 11,736
--
Selling, general, and
administrative expenses....... 1,808 2,136 -- 3,944 1,808 3,591
------- ------- ------- ------- ------- -------
Total operating costs and
expenses...................... 3,146 16,841 -- 19,987 3,146 24,153
------- ------- ------- ------- ------- -------
Operating income............ 609 160 -- 769 609 893
------- ------- ------- ------- ------- -------
Other
Interest expense................ (26) (85) (80)(c) (191) (26) (395)
Interest income................. 17 85 -- 102 17 93
Other income (expense), net..... (85) 55 -- (30) (85) 490
------- ------- ------- ------- ------- -------
Total other................. (94) 55 (80) (119) (94) 188
------- ------- ------- ------- ------- -------
Income (loss) before income
taxes..................... 515 215 (80) 650 515 1,081
Provision (benefit) for income
taxes......................... 228 50 (32)(d) 246 228 510
------- ------- ------- ------- ------- -------
Net income (loss)............... $ 287 $ 165 $ (48) $ 404 $ 287 $ 571
======= ======= ======= ======= ======= =======
Earnings (loss) per share:
Basic......................... $ 0.04 $ 0.02 $ 0.04
Fully diluted................. $ 0.03 $ 0.01 $ 0.03
<CAPTION>
PRO FORMA AS ADJUSTED
-------------------------
MERGER
TRANSACTION PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
<S> <C> <C>
Revenue:
Product sales................... $ -- $ 19,720
Service & other revenue......... -- 9,081
------- --------
Total revenue................. -- 28,801
------- --------
Operating costs and expenses:
Cost of product sales........... -- 8,826
Operating expense............... -- 13,074
-- --
Selling, general, and
administrative expenses....... -- 5,399
------- --------
Total operating costs and
expenses...................... -- 27,299
------- --------
Operating income............ -- 1,502
------- --------
Other
Interest expense................ (80)(c) (501)
Interest income................. 110
Other income (expense), net..... 405
------- --------
Total other................. (80) 14
------- --------
Income (loss) before income
taxes..................... (80) 1,516
Provision (benefit) for income
taxes......................... (32)(d) 706
------- --------
Net income (loss)............... $ (48) $ 810
======= ========
Earnings (loss) per share:
Basic......................... $ 0.02
Fully diluted................. $ 0.02
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-5
<PAGE> 93
GERALD STEVENS
PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 ACQUISITIONS GERALD
GERALD ----------------------------- STEVENS
STEVENS NATIONAL PRO FORMA PRO FORMA
HISTORICAL PHOEBE'S FLORA KUHN'S ADJUSTMENTS AS ADJUSTED
---------- -------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 3,730 $ 355 $ -- $ 908 $(17,727)(e) $ 2,000
14,734(d)
Accounts receivable, net............................... 5,849 471 1,515 813 -- 8,648
Inventories............................................ 3,127 180 -- 343 -- 3,650
Prepaid expenses and other assets...................... 435 112 12 50 -- 609
Deferred taxes, net of allowance....................... -- -- -- -- -- --
------- ------- ------- ------- -------- --------
Total current assets............................. 13,141 1,118 1,527 2,114 (2,993) 14,907
Property and equipment, net............................ 4,413 188 123 2,220 (2,027)(c) 4,917
Intangible assets related to acquired businesses,
net.................................................. 37,525 -- -- 228 29,280(e) 66,643
(390)(c)
Deferred tax asset, net................................ -- -- -- -- -- --
Other assets........................................... 731 25 32 72 -- 860
------- ------- ------- ------- -------- --------
Total assets..................................... $55,810 $ 1,331 $ 1,682 $ 4,634 $ 23,870 $ 87,327
======= ======= ======= ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable....................................... $ 2,848 $ 169 $ 2,371 $ 744 $ -- $ 6,132
Accrued liabilities.................................... 4,330 113 1,861 401 -- 6,705
Notes Payable.......................................... -- -- -- 2,417 (2,417)(c) --
Current portion of long term debt...................... -- 8 -- -- -- 8
Income taxes payable................................... -- -- -- -- -- --
Other current liabilities.............................. -- 12 -- 8 -- 20
------- ------- ------- ------- -------- --------
Total current liabilities........................ 7,178 302 4,232 3,570 (2,417) 12,865
Long term debt......................................... 122 73 -- -- 14,734(d) 14,929
Deferred income taxes.................................. -- -- -- -- -- --
Other liabilities...................................... 300 6 -- -- -- 306
------- ------- ------- ------- -------- --------
Total liabilities................................ 7,600 381 4,232 3,570 12,317 28,100
------- ------- ------- ------- -------- --------
Stockholders' equity
Common stock........................................... 186 83 -- 1 13(e) 199
(84)(e)
Additional paid-in capital............................. 49,975 60 -- 5,219 11,004(e) 60,979
(5,279)(e)
Treasury stock......................................... -- (148) -- -- 148(e) --
Retained earnings (deficit)............................ (1,951) 955 (2,550) (4,156) 5,751(e) (1,951)
------- ------- ------- ------- -------- --------
Total stockholders' equity....................... 48,210 950 (2,550) 1,064 11,553 59,227
------- ------- ------- ------- -------- --------
Total liabilities and stockholders' equity....... $55,810 $ 1,331 $ 1,682 $ 4,634 $ 23,870 $ 87,327
======= ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-6
<PAGE> 94
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 ACQUISITIONS GERALD
GERALD ------------------------------- STEVENS
STEVENS 1998 NATIONAL PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS PHOEBE'S FLORA KUHN'S ADJUSTMENTS AS ADJUSTED
---------- ------------ -------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales....................... $ -- $59,001 $ 3,750 $ -- $ 8,920 $ -- $ 71,671
Service & other revenue............. -- 6,455 427 10,023 2,267 -- 19,172
------- ------- ------- ------- ------- ------- --------
Total revenue................. -- 65,456 4,177 10,023 11,187 -- 90,843
------- ------- ------- ------- ------- ------- --------
Operating costs and expenses:
Cost of product sales............... -- 26,119 2,422 -- 4,002 -- 32,543
Operating expense................... 809 25,795 1,280 3,622 5,400 (1,608)(a) 37,472
2,174(b)
Selling, general, and administrative
expenses.......................... 1,328 10,710 291 2,828 1,483 -- 16,640
------- ------- ------- ------- ------- ------- --------
Total operating costs and
expenses.......................... 2,137 62,624 3,993 6,450 10,885 566 86,655
------- ------- ------- ------- ------- ------- --------
Operating income (loss)....... (2,137) 2,832 184 3,573 302 (566) 4,188
------- ------- ------- ------- ------- ------- --------
Other
Interest expense.................... (1) (301) (9) (67) (209) (704)(c) (1,291)
Interest income..................... 22 54 26 13 3 118
Other income (expense), net......... -- 452 41 -- 214 707
------- ------- ------- ------- ------- ------- --------
Total other................... 21 205 58 (54) 8 (704) (466)
------- ------- ------- ------- ------- ------- --------
Income (loss) before income
taxes....................... (2,116) 3,037 242 3,519 310 (1,270) 3,722
Provision (benefit) for income
taxes............................. -- 1,082 98(e) 1,408(e) 124(e) (914)(d) 1,798
------- ------- ------- ------- ------- ------- --------
Net income (loss)................... $(2,116) $ 1,955 $ 144 $ 2,111 $ 186 $ (356) $ 1,924
======= ======= ======= ======= ======= ======= ========
Earnings per share:
Basic............................. $ (0.21) $ 0.10
Fully diluted..................... $ (0.21) $ 0.10
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-7
<PAGE> 95
GERALD STEVENS
CONSOLIDATED STATEMENT OF OPERATIONS
1998 ACQUISITIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ROYERS BOESEN MAPLE DR. DEL CACTUS AGA EASTERN MARTINAS NORTONS
------- ------ ------ ------- ------ ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales................... $13,566 $4,898 $5,980 $3,293 $3,972 $10,936 $6,356 $1,662 $2,151
Service & other revenue......... 2,475 522 419 194 825 -- 476 179 270
------- ------ ------ ------ ------ ------- ------ ------ ------
Total Revenue............. 16,041 5,420 6,399 3,487 4,797 10,936 6,832 1,841 2,421
------- ------ ------ ------ ------ ------- ------ ------ ------
Operating costs and expenses:
Cost of product sales........... 4,026 2,133 2,333 1,129 1,410 8,323 2,560 845 839
Operating expense............... 9,101 2,277 1,936 1,430 2,292 428 3,791 602 1,176
Selling, general, and
administrative expenses....... 2,123 1,027 1,795 575 968 1,676 214 286 281
------- ------ ------ ------ ------ ------- ------ ------ ------
Total operating costs and
expenses...................... 15,250 5,437 6,064 3,134 4,670 10,427 6,565 1,733 2,296
------- ------ ------ ------ ------ ------- ------ ------ ------
Operating income (loss)... 791 (17) 335 353 127 509 267 108 125
------- ------ ------ ------ ------ ------- ------ ------ ------
Other
Interest expense................ (14) (23) (10) -- (20) (27) (51) (72) (3)
Interest income................. 42 -- -- -- 1 11 -- -- --
Other income (expense), net..... 89 -- 38 -- -- -- 147 5 31
------- ------ ------ ------ ------ ------- ------ ------ ------
Total other..................... 117 (23) 28 -- (19) (16) 96 (67) 28
------- ------ ------ ------ ------ ------- ------ ------ ------
Income before income
taxes................... 908 (40) 363 353 108 493 363 41 153
Provision for income taxes...... 368(e) (17) 130(e) 144 43(e) 159 111(e) -- 35
------- ------ ------ ------ ------ ------- ------ ------ ------
Net income...................... $ 540 $ (23) $ 233 $ 209 $ 65 $ 334 $ 252 $ 41 $ 118
======= ====== ====== ====== ====== ======= ====== ====== ======
<CAPTION>
1998
JENNIES FALLONS ACQUISITIONS
------- ------- ------------
<S> <C> <C> <C>
Revenue:
Product sales................... $3,697 $ 2,490 $59,001
Service & other revenue......... 421 674 6,455
------ ------- -------
Total Revenue............. 4,118 3,164 65,456
------ ------- -------
Operating costs and expenses:
Cost of product sales........... 1,412 1,109 26,119
Operating expense............... 1,743 1,019 25,795
Selling, general, and
administrative expenses....... 1,028 737 10,710
------ ------- -------
Total operating costs and
expenses...................... 4,183 2,865 62,624
------ ------- -------
Operating income (loss)... (65) 299 2,832
------ ------- -------
Other
Interest expense................ (35) (46) (301)
Interest income................. -- -- 54
Other income (expense), net..... 141 1 452
------ ------- -------
Total other..................... 106 (45) 205
------ ------- -------
Income before income
taxes................... 41 254 3,037
Provision for income taxes...... 20 89 1,082
------ ------- -------
Net income...................... $ 21 $ 165 $ 1,955
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-8
<PAGE> 96
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 ACQUISITIONS GERALD
GERALD ---------------------------- STEVENS
STEVENS 1998 NATIONAL PRO FORMA PRO FORMA
HISTORICAL ACQUISITIONS(f) PHOEBE'S FLORA KUHN'S ADJUSTMENTS AS ADJUSTED
---------- --------------- -------- -------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales......................... $15,431 $798 $1,022 $ -- $2,469 $ -- $19,720
Service & other revenue............... 1,570 105 181 2,816 654 -- 5,326
------- ---- ------ ------ ------ ----- -------
Total revenue................... 17,001 903 1,203 2,816 3,123 -- 25,046
------- ---- ------ ------ ------ ----- -------
Operating costs and expenses:
Cost of product sales................. 6,909 251 627 -- 1,039 -- 8,826
Operating expense..................... 7,796 448 326 1,401 1,589 (159)(a) 11,736
335(b)
Selling, general, and administrative
expenses............................ 2,136 146 78 919 312 -- 3,591
------- ---- ------ ------ ------ ----- -------
Total operating costs and expenses.... 16,841 845 1,031 2,320 2,940 176 24,153
------- ---- ------ ------ ------ ----- -------
Operating income (loss)......... 160 58 172 496 183 (176) 893
------- ---- ------ ------ ------ ----- -------
Other
Interest expense...................... (85) (4) (2) (10) (39) (255)(c) (395)
Interest income....................... 85 -- 6 2 -- 93
Other income (expense), net........... 55 4 1 417 13 490
------- ---- ------ ------ ------ ----- -------
Total other..................... 55 -- 5 409 (26) (255) 188
------- ---- ------ ------ ------ ----- -------
Income (loss) before income
taxes......................... 215 58 177 905 157 (431) 1,081
Provision (benefit) for income
taxes............................... 50 3 72 362 63 (40)(d) 510
------- ---- ------ ------ ------ ----- -------
Net income (loss)..................... $ 165 $ 55 $ 105 $ 543 $ 94 $(391) $ 571
======= ==== ====== ====== ====== ===== =======
Earnings per share:
Basic............................... $ 0.01 $ 0.03
Fully diluted....................... $ 0.01 $ 0.03
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements
PF-9
<PAGE> 97
FLORAFAX
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
1. HISTORICAL FINANCIAL STATEMENTS
The historical financial data presented in these pro forma consolidated
financial statements represents the financial position of Florafax at November
30, 1998 and their results of operations for the year ended August 31, 1998 and
the three months ended November 30, 1998, and the financial position of Gerald
Stevens at December 31, 1998 and their results of operations for the period from
May 7, 1998 (inception) to September 30, 1998 and the three month period ended
December 31, 1998. The historical financial data presented for Gerald Stevens'
1998 and 1999 Acquisitions represents the financial position of each acquired
business at December 31, 1998 and their results of operations for the year ended
September 30, 1998 and the three months ended December 31, 1998, except that the
results of operations of Arizona Wholesale Floral, Inc ("Cactus") and J.J.
Fallon Company, Inc ("Fallons") are presented for the year ended August 31,
1998, and June 30, 1998, respectively. Gerald Stevens' 1998 Acquisitions are
included in Gerald Stevens historical consolidated balance sheet at December 31,
1998 and in its historical consolidated statement of operations for the three
months ended December 31, 1998 from date of acquisition.
2. GERALD STEVENS ACQUISITIONS
During the period from October 1, 1998 to December 31, 1998, Gerald Stevens
completed the acquisition of thirteen retail florist businesses and also
acquired AGA Flowers, Inc. ("AGA"), a floral import business. Based upon
insignificance, three of the thirteen retail florist businesses acquired by
Gerald Stevens have not been included in the pro forma consolidated financial
statements. During the period from January 1, 1999 to April 7, 1999, Gerald
Stevens acquired or entered into probable agreements to acquire ten retail
florist businesses and also acquired National Flora, a floral order generator.
Based upon insignificance, eight of these retail florist businesses have not
been included in the pro forma consolidated financial statements. All acquired
businesses have been accounted for in the pro forma consolidated financial
statements using the purchase method of accounting. The pro forma consolidated
financial statements reflect Gerald Stevens preliminary allocations of purchase
prices, which will be subject to further adjustments as Gerald Stevens finalizes
the allocations of purchase prices in accordance with generally accepted
accounting principles.
PF-10
<PAGE> 98
FLORAFAX
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the Gerald Stevens acquisitions included in
the pro forma consolidated financial statements:
<TABLE>
<CAPTION>
ACQUISITION TANGIBLE INTANGIBLE
DATE CONSIDERATION ASSETS ASSETS LIABILITIES
----------- ------------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1998 ACQUISITIONS
Flower Franchising, Inc.
("Royers")........................ 10/1/98 $11,158 $ 4,797 $ 7,483 $ 1,122
Boesen the Florist, Inc.
("Boesen")........................ 10/1/98 5,150 1,619 4,131 600
Maple Lee Flowers, Inc. and Maple
Lee Farm 'N' Garden Center, Ltd.
("Maple")......................... 10/1/98 4,698 1,387 4,310 999
Dr.Delphinium Designs, Inc. ("Dr.
Del")............................. 10/1/98 3,102 545 2,894 337
Arizona Wholesale Floral, Inc.
("Cactus")........................ 10/1/98 3,000 542 3,217 759
AGA Flowers, Inc. ("AGA")........... 10/1/98 2,935 1,263 2,333 661
Eastern Floral & Gift Shop, Inc.
("Eastern")....................... 10/1/98 2,924 2,043 1,839 958
Martina's Flowers & Gifts, Inc.
("Martinas")...................... 10/1/98 1,948 366 1,909 327
Norton Group, Inc. & Subsidiaries
("Nortons")....................... 10/1/98 1,566 532 1,229 195
J.J. Fallon Company, Inc.
("Fallons")....................... 10/1/98 1,917 625 1,483 191
Jennie's Flower Shop, Inc.
("Jennies")....................... 12/7/98 3,575 531 3,343 299
------- ------- ------- -------
Total 1998 Acquisitions............. 41,973 14,250 34,171 6,448
1999 ACQUISITIONS
- ------------------------------------
National Flora...................... 3/3/99 19,727 1,682 22,277 4,232
Phoebe's............................ 3/31/99 2,817 1,331 1,867 381
The Exotic Gardens, Inc. and Kuhn
Flowers, Inc. ("Kuhn's)........... Pending 6,200 2,607 4,746 1,153
------- ------- ------- -------
Total 1999 Acquisitions............. 28,744 5,620 28,890 5,766
------- ------- ------- -------
Total Gerald Stevens Acquisitions... $70,717 $19,870 $63,061 $12,214
======= ======= ======= =======
</TABLE>
The purchase agreements for Eastern and Cactus provide that additional
consideration will be paid to the sellers contingent upon the occurrence of
certain specified future events. Since the outcome of these contingencies is not
presently determinable, no consideration has been recorded. Gerald Stevens
management believes that the amount of any contingent consideration determined
to be payable in the future will not be material.
3. PRO FORMA ADJUSTMENTS
BALANCE SHEET
a. To adjust common stock and additional paid in capital for the impact of the
exchange ratio on Gerald Stevens' historical shares outstanding and the issuance
of 1,259,630 shares (does not include 874,001 shares issued in connection with
the acquisition of eight insignificant businesses during the first quarter of
1999) in connection with the Gerald Stevens 1999 Acquisitions. The determination
of the adjustment
PF-11
<PAGE> 99
FLORAFAX
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
was based upon an exchange ratio of 1.35 shares of the Company's common stock
for each share of common stock of Gerald Stevens.
b. Represents estimated merger costs and associated borrowings under Gerald
Stevens revolving credit facility.
c. To adjust for real estate assets not acquired and related debt not assumed in
connection with Gerald Stevens acquisition of Kuhn's.
d. Represents borrowings under Gerald Stevens revolving credit facility related
to Acquisitions.
e. Represents preliminary adjustments to record (i) the consideration paid by
Gerald Stevens in connection with the purchases of the Gerald Stevens
Acquisitions, including repayment of assumed debt and liabilities, (ii) the
elimination of the historical stockholders' equity account balances of the
Gerald Stevens Acquisitions and (iii) the allocation of the Gerald Stevens
Acquisitions excess purchase prices over individual assigned values to
intangible goodwill.
STATEMENTS OF OPERATIONS
a. Adjustment to reduce historical compensation and benefits of certain former
owners and executives of the Gerald Stevens Acquisitions to amounts consistent
with employment arrangements entered into with these individuals.
b. Adjustment to recognize the amortization of goodwill resulting from the
Gerald Stevens retail florists and AGA acquisitions using an estimated life of
40 years, and its acquisitions of National Flora using an estimated life of 20
years. Management believes that 40 years and 20 years, respectively, are
reasonable lives for goodwill in light of the characteristics present in the
floral industry such as the significant number of years that the industry has
been in existence, recent industry growth and consumer trends in purchasing
flowers for many different occasions, and the long-term need for the timely
design and delivery of floral arrangements by local florists. In addition, the
Company has focused on acquiring progressive, well established companies that
have been in existence for many years.
c. To record interest on borrowings related to acquisitions under Gerald Stevens
revolving credit facility, net of interest reductions related to debt not
assumed or paid off at date of acquisition. Based upon current market rates, an
incremental borrowing rate of 8% was used to determine interest on the amounts
borrowed under the credit facility. A change of one-eighth of a percent would
result in a $19 thousand increase or reduction in the pro forma adjustment to
annual interest expense.
d. To adjust income taxes based on normalized rates in effect during the period
as if the entities had filed a consolidated tax return for the period presented.
e. To record pro forma provision for income taxes for entities which were S
corporations during the year ended August 31, 1998.
f. Represents the pro forma results of Jeanie's Flower Shop, Inc. from October
1, 1998 to December 7, 1998, the date of acquisition.
g. To record interest on borrowings related to estimated merger costs under
Gerald Stevens revolving credit facility, at an incremental borrowing rate of
8%. A change of one-eighth of a percent would result in a $5 thousand increase
or reduction in the pro forma adjustment to annual interest expense.
PF-12
<PAGE> 100
FLORAFAX
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
4. PRO FORMA FULLY DILUTED AND BASIC EARNINGS PER SHARE
Pro forma fully diluted and basic earnings per share are calculated based
on the weighted average shares outstanding during the year ended August 31, 1998
and the three months ended November 30, 1998, as well as giving effect to the
Merger as if these shares were outstanding at the beginning of the year,
excluding shares issued in connection with the acquisition of insignificant
businesses. The shares used to calculated pro forma fully diluted and basic
earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED 8/31/98 11/30/98
-------------------------- --------------------------
FULLY DILUTED BASIC FULLY DILUTED BASIC
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Average Shares Outstanding..................... 7,823,881 7,823,881 7,943,812 7,943,812
Projected Shares issued upon Merger............ 26,615,643 26,615,643 26,840,577 26,840,577
Common Stock Equivalents....................... 1,002,806 -- 1,070,547 --
---------- ---------- ---------- ----------
35,442,330 34,439,524 35,854,936 34,784,389
========== ========== ========== ==========
</TABLE>
PF-13
<PAGE> 101
FLORAFAX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GERALD STEVENS, INC.
Report of Independent Certified Public Accountants.......... F-4
Balance Sheets as of December 31, 1998 (unaudited) and
September 30, 1998........................................ F-5
Statements of Operations for the three months ended December
31, 1998 (unaudited) and for the period from inception
(May 7, 1998) to September 30, 1998....................... F-6
Statements of Stockholders' Equity for the three months
ended December 31, 1998 (unaudited) and for the period
from inception (May 7, 1998) to September 30, 1998........ F-7
Statements of Cash Flows for the three months ended December
31, 1998 (unaudited) and for the period from inception
(May 7, 1998) to September 30, 1998....................... F-8
Notes to Financial Statements............................... F-9
GERALD STEVENS ACQUISITIONS
FLOWER FRANCHISING, INC. T/A ROYER'S FLOWERS
Report of Independent Public Accountants.................... F-20
Balance Sheets as of September 30, 1998 and September 30,
1997...................................................... F-21
Statements of Income for the years ended September 30, 1998
and 1997.................................................. F-22
Statements of Stockholders' Equity for the years ended
September 30, 1998 and 1997............................... F-23
Statements of Cash Flows for the years ended September 30,
1998 and 1997............................................. F-24
Notes to Financial Statements............................... F-25
BOESEN THE FLORIST, INC.
Report of Independent Accountants........................... F-31
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-32
Statements of Operations for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-33
Statements of Stockholders' Equity for the nine month period
ended September 30, 1998 (unaudited) and the year ended
December 31, 1997......................................... F-34
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-35
Notes to Financial Statements............................... F-36
MAPLE LEE FLOWERS, INC.
Report of Independent Accountants........................... F-43
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-44
Statements of Operations for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-45
Statements of Stockholders' Equity for the nine month
periods ended September 30, 1998 (unaudited) and the year
ended December 31, 1997................................... F-46
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-47
Notes to Financial Statements............................... F-48
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
Report of Independent Accountants........................... F-52
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-53
Statements of Operations for the nine month period ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-54
Statements of Members' Equity for the nine month period
ended September 30, 1998 (unaudited) and the year ended
December 31, 1997......................................... F-55
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-56
Notes to Financial Statements............................... F-57
</TABLE>
F-1
<PAGE> 102
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
DR. DELPHINIUM DESIGNS, INC.
Report of Independent Accountants........................... F-61
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-62
Statements of Operations for the nine month period ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-63
Statements of Stockholders' Equity for the nine month period
ended September 30, 1998 (unaudited) and the year ended
December 31, 1997......................................... F-64
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-65
Notes to Financial Statements............................... F-66
ARIZONA WHOLESALE FLORAL, CO. DBA CACTUS FLORISTS
Report of Independent Public Accountants.................... F-71
Balance Sheet as of August 31, 1998......................... F-72
Statement of Operations for the year ended August 31,
1998...................................................... F-73
Statement of Stockholders' Deficit for the year ended August
31, 1998.................................................. F-74
Statement of Cash Flows for the year ended August 31,
1998...................................................... F-75
Notes to Financial Statements............................... F-76
A.G.A. FLOWERS, INC.
Report of Independent Certified Public Accountants.......... F-80
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-81
Statements of Operations and Accumulated Deficit for the
nine month periods ended September 30, 1998 and 1997
(unaudited) and the year ended December 31, 1997.......... F-82
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-83
Notes to Financial Statements............................... F-84
EASTERN FLORAL AND GIFT SHOP, INC. AND SUBSIDIARY
Report of Independent Certified Public Accountants.......... F-89
Consolidated Balance Sheet as of September 30, 1998......... F-90
Consolidated Statement of Income for the year ended
September 30, 1998........................................ F-91
Consolidated Statement of Shareholders' Investment for the
year ended September 30, 1998............................. F-92
Consolidated Statement of Cash Flows for the year ended
September 30, 1998........................................ F-93
Notes to Financial Statements............................... F-94
MARTINA'S FLOWERS & GIFTS, INC.
Report of Independent Accountants........................... F-98
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-99
Statements of Operations for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-100
Statements of Stockholders' Deficit for the nine month
period ended September 30, 1998 (unaudited) and the year
ended December 31, 1997................................... F-101
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-102
Notes to Financial Statements............................... F-103
NORTON GROUP, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-107
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997......................... F-108
Consolidated Statements of Operations for the nine month
periods ended September 30, 1998 and 1997 (unaudited) and
the year ended December 31, 1997.......................... F-109
</TABLE>
F-2
<PAGE> 103
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Consolidated Statements of Stockholders' Equity for the nine
month period ended September 30, 1998 (unaudited) and the
year ended December 31, 1997.............................. F-110
Consolidated Statements of Cash Flows for the nine month
periods ended September 30, 1998 and 1997 (unaudited) and
the year ended December 31, 1997.......................... F-111
Notes to Consolidated Financial Statements.................. F-112
JENNIE'S FLOWER SHOP, INC.
Report of Independent Accountants........................... F-118
Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997......................................... F-119
Statements of Operations for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-120
Statements of Stockholders' Equity for the nine month period
ended September 30, 1998 (unaudited) and the year ended
December 31, 1997......................................... F-121
Statements of Cash Flows for the nine month periods ended
September 30, 1998 and 1997 (unaudited) and the year ended
December 31, 1997......................................... F-122
Notes to Financial Statements............................... F-123
J.J. FALLON COMPANY, INC.
Report of Independent Public Accountants.................... F-128
Balance Sheets as of September 30, 1998 (unaudited) and June
30, 1998.................................................. F-129
Statement of Operations for the three months ended September
30, 1998 and 1997 (unaudited) and for the year ended June
30, 1998.................................................. F-130
Statement of Stockholders' Equity for the three months ended
September 30, 1998 (unaudited) and for the year ended June
30, 1998.................................................. F-131
Statement of Cash Flows for the three months ended September
30, 1998 and 1997 (unaudited) and for the year ended June
30, 1998.................................................. F-132
Notes to Financial Statements............................... F-133
PHOEBE FLORAL, INC.
Report of Independent Certified Public Accountants.......... F-137
Balance Sheet as of December 31, 1998 (unaudited) and
September 30, 1998........................................ F-138
Statements of Income for the three month periods ended
December 31, 1998 and 1997 (unaudited) and for the year
ended September 30, 1998.................................. F-139
Statements of Stockholders' Equity for the three month
period ended December 31, 1998 (unaudited) and the year
ended September 30, 1998.................................. F-140
Statements of Cash Flows for the three month periods ended
December 31, 1998 and 1997 (unaudited) and for the year
ended September 30, 1998.................................. F-141
Notes to Financial Statements............................... F-142
NATIONAL FLORA
Report of Independent Public Accountants.................... F-146
Balance Sheet as of December 31, 1998....................... F-147
Statement of Income and Proprietor's Capital for the year
ended December 31, 1998................................... F-148
Statement of Cash Flows for the year ended December 31,
1998...................................................... F-149
Notes to Financial Statements............................... F-150
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
Report of Independent Certified Public Accountants.......... F-152
Balance Sheets as of December 31, 1998 (unaudited) and
September 30, 1998 and September 30, 1997................. F-153
Combined Statements of Operations for the three month
periods ended December 31, 1998 and 1997 (unaudited), and
the years ended September 30, 1998 and September 30,
1997...................................................... F-154
Combined Statements of Stockholders' Equity for the three
months ended December 31, 1998 (unaudited) and for the
years ended September 30, 1998 and 1997................... F-155
Combined Statements of Cash Flows for the three month
periods ended December 31, 1998 and 1997 (unaudited), and
the years ended September 30, 1998 and 1997............... F-156
Notes to Financial Statements............................... F-157
</TABLE>
F-3
<PAGE> 104
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
Gerald Stevens, Inc.:
We have audited the accompanying balance sheet of Gerald Stevens, Inc. (a
Delaware corporation) as of September 30, 1998, and the related statements of
operations, stockholders' equity and cash flows for the period from inception
(May 7, 1998) to September 30, 1998. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gerald Stevens, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
period from inception (May 7, 1998) to September 30, 1998 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
December 31, 1998 (except with
respect to the matters discussed
in Notes 9 and 10, as to which
the date is March 26, 1999).
F-4
<PAGE> 105
GERALD STEVENS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $6,688,234 $ 3,730,068
Accounts receivable, net of allowance for uncollectible
accounts of $0 and $571,253 (unaudited), as of
September 30, 1998 and December 31, 1998,
respectively........................................... -- 5,848,685
Other receivables......................................... 72,173 --
Inventories............................................... -- 3,127,277
Interest receivable....................................... 22,134 --
Other current assets...................................... -- 435,340
---------- -----------
Total current assets.............................. 6,782,541 13,141,370
---------- -----------
PROPERTY AND EQUIPMENT, net................................. 43,510 4,413,314
---------- -----------
OTHER ASSETS:
Intangible assets, net.................................... 1,520,140 37,524,444
Advance to company subsequently acquired.................. 113,327 --
Deferred financing costs, net............................. 18,889 261,176
Other..................................................... 7,548 469,204
---------- -----------
Total other assets................................ 1,659,904 38,254,824
---------- -----------
Total assets...................................... $8,485,955 $55,809,508
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 183,686 $ 2,848,083
Accrued expenses.......................................... 633,620 4,329,793
---------- -----------
Total current liabilities......................... 817,306 7,177,876
---------- -----------
LONG-TERM LIABILITIES:
Long-term debt............................................ -- 121,730
Other long-term liabilities............................... -- 300,013
---------- -----------
Total long-term liabilities....................... -- 421,743
---------- -----------
Total liabilities................................. 817,306 7,599,619
---------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares
authorized, 10,003,916 and 18,622,328 (unaudited)
shares issued and outstanding as of September 30, 1998
and December 31, 1998, respectively.................... 100,039 186,223
Additional paid-in capital................................ 9,737,526 50,224,934
Less -- subscriptions receivable.......................... (52,500) (250,000)
Accumulated deficit....................................... (2,116,416) (1,951,268)
---------- -----------
Total stockholders' equity........................ 7,668,649 48,209,889
---------- -----------
Total liabilities and stockholders' equity........ $8,485,955 $55,809,508
========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-5
<PAGE> 106
GERALD STEVENS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
FROM INCEPTION THREE MONTHS
(MAY 7, 1998) TO ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1998
---------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUE:
Product sales, net........................................ $ -- $15,431,265
Service and other revenue................................. -- 1,569,531
----------- -----------
Total revenues.................................... -- 17,000,796
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of product sales..................................... -- 6,909,023
Salaries and benefits..................................... 328,916 5,927,549
Operating expenses........................................ -- 1,434,403
Selling, general and administrative....................... 1,327,952 2,136,744
Depreciation and amortization............................. 480,571 433,268
----------- -----------
Total operating costs and expenses................ 2,137,439 16,840,987
----------- -----------
Operating (loss) income........................... (2,137,439) 159,809
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 22,134 84,566
Interest expense.......................................... (1,111) (84,891)
Other income.............................................. -- 55,764
----------- -----------
Total other income................................ 21,023 55,439
----------- -----------
(Loss) income before provision for income taxes... (2,116,416) 215,248
PROVISION FOR INCOME TAXES.................................. -- 50,100
----------- -----------
Net (loss) income................................. $(2,116,416) $ 165,148
=========== ===========
BASIC (LOSS) INCOME PER SHARE............................... $ (0.21) $ 0.01
=========== ===========
DILUTED (LOSS) INCOME PER SHARE............................. $ (0.21) $ 0.01
=========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING................... 10,003,916 18,320,907
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING................. 10,003,916 18,478,753
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE> 107
GERALD STEVENS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (MAY 7, 1998) TO SEPTEMBER 30, 1998 AND
THE THREE MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT TOTAL
---------- -------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders........ 9,528,363 $ 95,284 $ 9,242,281 $ (52,500) $ -- $ 9,285,065
Issuance of common stock in acquisition..... 475,553 4,755 495,245 -- -- 500,000
Net loss for the period from inception (May
7, 1998) to September 30, 1998............ -- -- -- -- (2,116,416) (2,116,416)
---------- -------- ----------- --------- ----------- -----------
BALANCE, September 30, 1998................. 10,003,916 100,039 9,737,526 (52,500) (2,116,416) 7,668,649
Issuance of common stock in acquisitions
(Unaudited)............................... 4,036,829 40,369 19,671,028 -- -- 19,711,397
Proceeds from sale of common stock, net
(Unaudited)............................... 4,581,583 45,815 20,816,380 (197,500) -- 20,664,695
Net income for the three months ended
December 31, 1998 (Unaudited)............. -- -- -- -- 165,148 165,148
---------- -------- ----------- --------- ----------- -----------
BALANCE, December 31, 1998 (Unaudited)...... 18,622,328 $186,223 $50,224,934 $(250,000) $(1,951,268) $48,209,889
========== ======== =========== ========= =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-7
<PAGE> 108
GERALD STEVENS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE
FROM INCEPTION THREE MONTHS
(MAY 7, 1998) TO ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1998
---------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(2,116,416) $ 165,148
Adjustments to reconcile net loss to net cash used in
operating activities--
Provision for uncollectible accounts................... -- 34,400
Interest expense....................................... 1,111 61,666
Depreciation and amortization.......................... 479,460 433,268
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................. -- (2,156,085)
Inventories.......................................... -- 412,723
Other receivables.................................... (72,173) 72,173
Interest receivable.................................. (22,134) 22,134
Other current assets................................. -- 78,660
Other assets......................................... (6,437) 6,344
Accounts payable..................................... 183,686 (935,603)
Accrued expenses..................................... 633,620 1,069,726
Other long-term liabilities.......................... -- 141,013
----------- ------------
Net cash used in operating activities............. (919,283) (594,433)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (44,221) (747,410)
Advance to company subsequently acquired.................. (113,327) --
Collection of amounts due from former owners of subsidiary
acquired............................................... -- 1,300,000
Payments for acquisitions, net of cash acquired........... (1,500,000) (23,054,795)
----------- ------------
Net cash used in investing activities............. (1,657,548) (22,502,205)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock to founders........ 9,285,065 --
Proceeds from issuance of common stock, net............... -- 20,612,195
Proceeds from stock subscription.......................... -- 52,500
Payment of long-term debt................................. -- (222,270)
Payment of commitment fee on credit facility.............. (20,000) (303,953)
Proceeds from credit facility............................. -- 16,000,000
Payment of credit facility................................ -- (16,000,000)
----------- ------------
Net cash provided by financing activities......... 9,265,065 20,138,472
----------- ------------
Net increase (decrease) in cash................... 6,688,234 (2,958,166)
CASH EQUIVALENTS, beginning of period....................... -- 6,688,234
----------- ------------
CASH EQUIVALENTS, end of period............................. $ 6,688,234 $ 3,730,068
=========== ============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Issuance of common stock for acquisitions................. $ 500,000 $ 19,711,397
=========== ============
Interest paid............................................. -- 24,854
Income taxes paid......................................... -- 277,759
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-8
<PAGE> 109
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
1. GENERAL
Gerald Stevens, Inc., (the "Company") was formed on May 7, 1998 to become a
branded retailer and consumer marketer of flowers, floral-related merchandise
and gifts. Through September 30, 1998, the Company was in the development stage,
had no revenue and all efforts of the Company had been directed to developing a
business strategy, raising capital, and acquiring leading retail flower shops
and other floral related businesses. The Company's ability to continue as a
going concern will be largely dependent upon its ability to successfully acquire
and integrate retail and other floral related businesses. The Company has a
fiscal year-end of September 30. Effective October 1, 1998, the Company
commenced its operations upon the completion of its acquisition of ten operating
flower businesses and, as a result, emerged from the development stage. There
can be no assurance that the Company will successfully establish profitable
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of December 31, 1998, and the results of its operations and cash
flows for the three months ended December 31, 1998. The results of operations
and cash flows for the three months ended December 31, 1998 are not necessarily
indicative of the results of operations or cash flows which may be reported for
fiscal year 1999.
SEASONALITY
Sales of floral products have historically been seasonal, concentrated
primarily in the first and second calendar quarters as a result of holidays such
as Valentine's Day and Mother's Day. In particular, a significant portion of
annual revenue is expected to be derived from sales of floral products for
Valentine's Day.
In contrast to the first and second calendar quarters, sales of floral
products are significantly lower in the third and fourth calendar quarters.
These quarters have relatively few flower-giving holidays. We expect to
experience quarterly fluctuations in operating results due to the factors
discussed above and other factors. These factors include additional selling,
general and administrative expenses to acquire and support new business and the
timing and magnitude of capital expenditures.
Accordingly, the results of operations for the three-month period ended
December 31, 1998 are not necessarily indicative of the results of operations or
cash flows which may be reported for fiscal 1999.
CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of
September 30, 1998, all cash equivalents on hand were interest-bearing.
F-9
<PAGE> 110
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
The Company records depreciation using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Office equipment, furniture and fixtures................. 5-10 years
Computer hardware and software........................... 4-5 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets at September 30, 1998 consist of the fair value allocated
to letters of intent of an acquired business (see Note 6). Intangible assets at
December 31, 1998 consists of goodwill recorded in connection with acquisitions
accounted for under the purchase method of accounting (see Note 6).
Upon completion of the acquisitions, the value assigned to the underlying
letters of intent was included as a component of the purchases price for the
acquired business. The resultant goodwill will be amortized over a period of 40
years which management believes is a reasonable life in light of the
characteristics present in the floral industry such as the significant number of
years that the industry has been in existence, the continued trends by consumers
in purchasing flowers for many different occasions, and the stable nature of the
customer base.
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be evaluated
for possible impairment.
DEFERRED FINANCING COSTS
Deferred financing costs consist of amounts incurred in connection with
obtaining a credit facility. The company records amortization using the
straight-line basis over the term of the financing agreement (18 months).
Accumulated amortization as of September 30, 1998 was $1,111 and $42,778 as of
September 30, 1998, and December 31, 1998, respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The asset and liability approach prescribed by SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the financial reporting and the
tax bases of assets and liabilities. At September 30, 1998, the Company had
deferred tax assets of approximately $800,000, which has been fully offset by a
valuation allowance, consisting primarily of start-up costs capitalized for tax
purposes and net operating loss carryforwards.
The provision for income taxes for the three months ended December 31, 1998
is comprised of:
<TABLE>
<S> <C>
Federal provision........................................... $ --
State provision............................................. 50,100
-------
Total............................................. $50,100
=======
</TABLE>
F-10
<PAGE> 111
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
The Company's effective federal tax rate is 0% due to the use of net
operating loss carryforwards to fully offset the federal tax provision.
EARNINGS PER SHARE
Basic and diluted earnings per share in the accompanying statements of
operations are based upon the weighted average shares actually outstanding
during the period. The impact of common stock equivalents has not been included
for the period ended September 30, 1998, as they are anti-dilutive, in
accordance with provisions of SFAS No. 128, "Earnings Per Share."
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," requires an entity to
report comprehensive income and its components for fiscal years beginning after
December 15, 1997. Comprehensive income is a measure of all changes in equity of
an enterprise that result from transactions and other economic events in a
period other than transactions with owners. Comprehensive income (loss) is equal
to net income (loss).
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires an entity to disclose certain information regarding its
operating segments for fiscal years beginning after December 15, 1998. The
composition of the Company's business is changing. Accordingly, the Company will
evaluate the need for segment disclosures when it implements the new standard in
Fiscal 2000.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. The Company believes that this statement will not have a
material effect on the Company's accounting for computer software development or
acquisition.
SOP 98-5, "Reporting on the Costs of Start-up Activities," requires the
immediate expensing of current start-up costs as well as existing costs
previously capitalized for fiscal years beginning after December 15, 1998. The
Company has no capitalized start-up costs as of September 30, 1998 or December
31, 1998.
F-11
<PAGE> 112
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following as of September 30, 1998:
<TABLE>
<S> <C>
Office equipment, furniture and fixtures.................... $ 16,702
Computer hardware and software.............................. 27,519
--------
44,221
Less -- Accumulated depreciation............................ (711)
--------
$ 43,510
========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consisted of the following as of September 30, 1998:
<TABLE>
<S> <C>
Accrued professional fees................................... $501,547
Accrued salaries and benefits............................... 95,421
Accrued other............................................... 36,652
--------
$633,620
========
</TABLE>
5. STOCKHOLDERS' EQUITY
On August 11, 1998, New River Capital Partners, L.P. ("New River"), a
limited partnership whose managing general partner is a partnership controlled
by Mr. Steven R. Berrard and whose administrative general partner is a
corporation controlled by Mr. Thomas C. Byrne, purchased 5,684,755 shares of
common stock for an aggregate purchase price of $5,500,000 or $0.97 per share.
Messrs. Berrard and Byrne are also directors of the Company. Also on August 11,
1998, Mr. Gerry Geddis, the Company's President and Chief Executive Officer,
purchased 2,445,478 shares of common stock for an aggregate purchase price of
$2,366,000 or $1.05 per share.
In August and September 1998, certain of the Company's employees and
certain other investors purchased 1,398,130 shares of stock for an aggregate
purchase price of $1,471,565 or $1.05 per share.
All stockholders have entered into a stockholders agreement ("Stockholders
Agreement") that contains, among other things, a voting agreement which provides
that a majority of the directors of the Company will be designated by New River.
The Stockholders Agreement also contains restrictions on the transferability of
the common stock. The restrictions include a bar on transfers, which terminates
at the earlier of October 1, 2000 or at such time as the Company becomes public
and, in the event the Company becomes a public company prior to October 1, 2000,
a right of first refusal in favor of the Company for stock sales in excess of
$500,000 until October 1, 2000.
In October 1998, the Company issued 4,581,583 shares of common stock at a
price of $4.75 per share in a private placement. Proceeds totaled approximately
$20,869,000, net of $894,000 of underwriting fees and expenses. Individuals who
purchased shares in the private placement have agreed to give the Company a
right of first refusal, prior to transferring such shares, until the earlier of
the date that the Company becomes a public company or August 31, 2000. As of
December 31, 1998, the Company had stock options outstanding for 616,961 shares
of common stock (which includes options for 215,850 shares granted in connection
with acquisitions) at exercise prices ranging from $1.05 to $6.00 per share.
F-12
<PAGE> 113
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
6. ACQUISITIONS
On July 31, 1998, the Company acquired all of the assets of International
Floral Network, Inc. ("IFN"), a Florida corporation, for $1.5 million in cash
and 475,553 shares of common stock valued at $500,000 or $1.05 per share. IFN's
assets consisted solely of the right to acquire 33 retail floral chains pursuant
to non-binding letters of intent with these chains. The Company allocated the
aggregate consideration of approximately $2 million to the nine letters of
intent it intended to pursue. Prior to yearend, the Company ceased discussions
with one of these entities at which time the unamortized allocated portion of
the consideration of $479,860 was charged to amortization expense. Eight of
these retail floral chains were subsequently acquired by the Company in
transactions accounted for under the purchase method of accounting in October
1998. Intangible assets consist of $1,520,140 related to the IFN transaction.
Included in other assets as of September 30, 1998 is approximately $113,000
which represents a bridge payment to a retail floral chain subsequently
acquired. Upon acquisition, such amount was applied towards the purchase price
of the acquisition.
During the fourth quarter of calendar 1998, the Company acquired several
businesses. The acquisitions were accounted for under the purchase method of
accounting and accordingly the post-acquisition results of operations of the
acquired businesses have been included in the Company's results of operations
for the three months ended December 31, 1998.
The following table sets forth businesses acquired during the three months
ended December 31, 1998, and the consideration paid. Consideration for these
acquisitions consisted of cash, stock, and debt paid on behalf of former owners.
The total consideration amounts below reflect certain working capital
adjustments called for in the acquisition agreements. Not included in the total
consideration below are stock options which were granted subsequent to September
30, 1998 in connection with the acquisitions. All of the sellers of the acquired
businesses who received shares of the Company's common stock have entered into
stockholder agreements that contain terms similar to the terms of the
stockholder agreements signed by individuals who became stockholders in August
and September 1998.
<TABLE>
<CAPTION>
DATE OF TOTAL
NAME OF BUSINESS ACQUISITION CASH STOCK CONSIDERATION
- ---------------- ------------------------ -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Eastern Floral & Gift Shop,
Inc............................ October 1, 1998 $ 2,924 $ -- $ 2,924
The Norton Group, Inc............ October 1, 1998 548 1,018 1,566
Arizona Wholesale Floral Company
(d/b/a Cactus Flowers)......... October 1, 1998 1,800 1,200 3,000
Dr. Delphinium Designs, Inc...... October 1, 1998 880 2,222 3,102
Boesen the Florist, Inc.......... October 1, 1998 2,485 2,665 5,150
J.J. Fallon Company, Inc......... October 1, 1998 1,117 800 1,917
Martina's, Inc................... October 1, 1998 1,168 780 1,948
Flower Franchising, Inc. (d/b/a
Royer's Flower Shops).......... October 1, 1998 6,334 4,824 11,158
A.G.A. Flowers, Inc.............. October 1, 1998 1,468 1,467 2,935
Jennie's Flower Shop, Inc........ December 7, 1998 2,000 1,575 3,575
Connell Flower Shop.............. November 24, 1998 870 850 1,720
Maple Lee Flowers, Inc. and Maple
Lee Farm 'n' Garden Center
Ltd............................ October 1, 1998 2,539 2,159 4,698
Flowers in Woodcroft............. December 1, 1998 210 -- 210
Alan Preuss Florists, Inc........ December 29, 1998 150 150 300
------- ------- -------
$24,493 $19,710 $44,203
======= ======= =======
</TABLE>
F-13
<PAGE> 114
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
The preliminary purchase price allocation for businesses acquired under the
purchase method of accounting is as follows:
<TABLE>
<S> <C>
Cash acquired............................................... $ 1,324,000
Accounts receivable......................................... 3,727,000
Inventory................................................... 3,540,000
Other current assets........................................ 1,814,000
Property plant and equipment................................ 3,840,000
Intangible assets........................................... 36,220,000
Other assets................................................ 468,000
Accrued expenses............................................ (2,627,000)
Accounts payable............................................ (3,600,000)
Long-term debt.............................................. (344,000)
Other liabilities........................................... (159,000)
-----------
$44,203,000
===========
</TABLE>
As part of the Company's purchase agreement with Arizona Wholesale Floral
Company ("Cactus"), the Company may be required to make an additional payment of
up to $300,000 based upon the performance of four existing stores and a
superstore to be opened by Cactus in the fourth quarter of 1998.
As part of the Company's purchase agreement with Eastern Floral & Gift
Shop, Inc., the Company may be required to make an additional payment of up to
$280,000 based upon an existing agreement with Amway Corporation.
Key employees of each of the acquired companies have agreed to enter into
2-year employment agreements with the Company effective as of the closing date
of each respective acquisition. The annual salaries range from $20,000 to
$150,000. In addition, some of the employment agreements provide for the
employee to receive a bonus beginning in the Company's 1999 calendar year of up
to 20% of the base salary depending on certain performance targets. The
employment agreements can be terminated earlier by either the employee or the
Company. The employment agreements include noncompete clauses of up to two years
after the employment period.
In addition, the former owner of each of the acquired companies have agreed
to noncompete agreements, effective as of the closing of the acquisition,
ranging from 2 to 5 years.
The pro forma results of operations, assuming each of the above
transactions was consummated as of the beginning of the period presented are as
follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTH
PERIOD ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Revenue..................................................... $17,904,000
===========
Net income.................................................. $ 263,000
===========
Net income per share --
Basic..................................................... $ 0.01
===========
Diluted................................................... $ 0.01
===========
</TABLE>
F-14
<PAGE> 115
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
In December 1998, the Company entered into various letters of intent,
subject to certain customary conditions, to acquire various retail flower shops.
To the extent consummated, these pending acquisitions will be accounted for
under the purchase method of accounting.
7. STOCK OPTION PLAN
The Company approved a stock option plan (the "Plan") on May 20, 1998,
authorizing the issuance of stock options for up to 4,000,000 shares of common
stock. The number of shares of stock issuable pursuant to the options
outstanding (whether vested or not) cannot exceed 10 percent of the outstanding
shares of stock.
The purchase price of each share of common stock subject to an option is
determined by the Board of Directors and stated in each option agreement, and
will not be less than 100 percent of the fair market value of a share of the
common stock on the date the option is granted. The options have a term of ten
years from the date of grant and are non-qualified. The options vest in
increments of 25% per year over a four-year period on the yearly anniversary of
the grant date.
On August 18, 1998, 150,000 options were granted with an exercise price of
the then fair market value of $1.05. From October 1, 1998 to December 31, 1998,
a total of 468,111 options were granted at fair market value exercise prices of
$4.75 or $6.00, with 1,150 of these options subsequently cancelled during the
period. As of September 30, 1998 and December 31, 1998, none of the options
granted were exercisable. The weighted average remaining contractual life of the
options as of September 30, 1998 and December 31, 1998 is approximately 10 years
and 9.75 years, respectively.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements.
Pro forma information regarding net income is required by SFAS No. 123,
"Accounting for Stock-Based Compensation," which also requires that the
information be determined as if the Company had accounted for its employee stock
options granted 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. The following assumptions were used in the valuation:
average expected life 6 years, expected volatility 0.80, risk free interest rate
4.7% and no dividends. The weighted average fair value of options granted during
the year was $1.05.
For purposes of pro forma disclosures of net loss, the estimated fair value
of the options is amortized to expense over the options' vesting period,
resulting in pro forma compensation expense of approximately $3,000 for the
period from May 7, 1998 (inception) to September 30, 1998. The Company's pro
forma net loss for the period from May 7, 1998 (inception) to September 30, 1998
was $2,790,161.
The occurrence of certain events may terminate the unvested options,
including, but not limited to, termination of employment, as defined in the
Plan.
Pursuant to the Plan, in the event of certain defined transactions after
the effective date of the Plan, the number and kinds of shares for the purchase
of which options may be granted under the Plan will be adjusted proportionately
by the Company. In addition, the number and kind of shares for which options are
outstanding shall be adjusted proportionately so that the proportionate interest
of the holder of the option immediately following such event will be the same as
immediately prior to such event.
F-15
<PAGE> 116
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
8. COMMITMENTS AND CONTINGENCIES
A. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
officers and executives. The agreements expire on dates ranging until 2000 and
also include noncompete provisions. The aggregate minimum annual commitments
under these agreements are $2,491,128 and $1,945,012 for the years ended
December 31, 1999 and 2000, respectively.
B. SERVICES AGREEMENT
On May 7, 1998, the Company entered into a services agreement with SB
Management Corp. ("SBMC"), a corporation controlled by Mr. Steven R. Berrard,
that provides services to the general partner of New River pursuant to which
SBMC agreed to provide certain management services to and incur certain expenses
on behalf of the Company, with the cost of such items to be reimbursed by the
Company to SBMC. The Company is to reimburse SBMC for a proportionate share of
any SBMC officer's salary, bonuses, and compensation if that employee spends
more than 50% of his time rendering services to the Company not to exceed
$200,000. One hundred percent of all out-of-pocket costs and fees paid to
advisors in connection with services to the Company are to be reimbursed in an
amount not to exceed $500,000 prior to the initial private placement of capital
stock. After the initial private placement of capital stock, there is no limit
on the amount charged to the Company for out-of-pocket costs and fees paid to
advisors. The agreement may be terminated at any time by the Company or SBMC
upon thirty days prior written notice.
As of September 30, 1998, SBMC had incurred approximately $540,000 of
expenses on behalf of the Company which is included in selling, general, and
administrative expenses in the Company's statement of operations. These expenses
included payment of certain of the Company's employees' salaries and travel
expenses. As of September 30, 1998, $506,000 of this amount had been paid. The
remaining $34,000 is included in accrued expenses in the accompanying balance
sheet and was subsequently paid on November 25, 1998.
In addition, SBMC leases office space which is also occupied by certain
employees of the Company. SBMC does not allocate any of the rent expense for
this space to the Company. The approximate annual rent expense to SBMC is
$61,000.
C. DUTIES
As a result of an investigation concerning the alleged dumping of flowers
in the U.S. market by foreign growers, the U.S. Department of Commerce began
assessing importers a duty based on the import value of certain flowers from
certain growers. The Company currently estimates and remits the estimated
assessment based on the most current information available. The final assessment
is subject to determination by the U.S. Department of Commerce and may result in
additional charges or refunds.
F-16
<PAGE> 117
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
D. OPERATING LEASES
On August 1, 1998, the Company entered into a lease agreement for its
office space through August 2002. The total future minimum annual lease payments
under the agreement as of September 30, 1998 are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 51,000
2000..................................................... 53,000
2001..................................................... 55,000
2002..................................................... 38,000
---------
$ 197,000
=========
</TABLE>
The Company incurred rental expense totaling approximately $8,000 during
the period ended September 30, 1998.
E. CONSULTING AGREEMENTS
On October 1, 1998, the Company entered into a two-year consulting
agreement with a former owner of an acquired company to provide various
services. The agreement provides for an annual fee of $50,000.
F. SERVICES AGREEMENT
On October 1, 1998, the Company entered into a service agreement with a
Colombian farm (the "Provider") to provide services to A.G.A. Flowers, Inc., an
acquired subsidiary of the Company. The agreement provides for compensation to
the Provider in the amount of $6,000 per month, plus any out-of-pocket costs
incurred by the Provider in providing services to the Company. The agreement
terminates March 31, 1999 but may be terminated earlier by the Company upon
thirty days prior written notice.
G. SUPPLY AGREEMENT
On October 1, 1998, the Company entered into a five-year supply agreement
with flower farms (the "Farms") which are affiliated with two of the Company's
stockholders. The agreement requires that the Farms provide to the Company on a
consignment basis a certain percentage of their flowers. The Farms must produce
and deliver a minimum number of stems for the Company during the growing year
("Growing Year") commencing on October 1, 1998 and running until September 30,
1999. Each July, during the term of the agreement, the parties will meet to
establish the Minimum Stem Obligation for each species for the upcoming Growing
Year.
The Company has no obligation to pay for any flowers it receives from the
Farms unless and until such flowers are sold by the Company.
H. PLAN OF MERGER
In December 1998, the Company entered into a definitive merger agreement
with Florafax International, Inc., a company that 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. Depending
upon the average closing sales price, each share of the Company's common stock
outstanding
F-17
<PAGE> 118
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
immediately prior to the merger will be converted into the right to receive
between 1.25 and 1.35 shares of Florafax International, Inc. common stock.
Consummation of the merger is dependent upon shareholder approval among other
things.
I. 401(k) PLAN
On December 1, 1998, the Company adopted a 401(k) Plan, effective January
1, 1999. All employees who have met minimum age and length of service
requirements are eligible to participate. Employer matching contributions are
fifty percent of the first three percent of compensation contributed by the
employee to the plan and generally require year-end employment and 1,000 hours
worked during the calendar year. An additional contribution is made at the
discretion of the Company.
9. CREDIT FACILITY
The Company entered into an 18-month senior secured revolving credit
facility (the "Credit Facility") with a bank on September 30, 1998 with
borrowings up to $20 million and which includes a letter of credit facility of
up to $3 million for the issuance of standby letters of credit. This line of
credit is used to finance acquisitions and for other, general corporate
purposes. Cash borrowings bear interest at either the Eurodollar market rate
plus a percentage ranging from 100 basis points to 225 basis points (Eurodollar
at September 30, 1998 was 5.375%) or, at the Company's option, the greater of
the Federal funds rate plus 50 basis points or the Prime rate ("adjusted base
rate loan"). The Federal funds rate and Prime rate were 6% and 8.25%,
respectively, at September 30, 1998. The percentage over the Eurodollar market
rate is based on the Company's financial performance as measured by a total
funded debt ratio (as defined in the Credit Facility).
For Eurodollar-based loans, principal and interest payments are due at the
end of the chosen Eurodollar instrument term, or if the applicable period is
greater than three months, then interest is due at the end of each three-month
interval and at the end of the applicable period. For adjusted base rate loans,
the interest is due quarterly and the principal is due upon demand.
The Credit Facility is secured by all of the assets of the Company,
including a pledge of the stock of each of the Company's subsidiaries. As of
September 30, 1998, no amounts were drawn on the Credit Facility. In addition,
the Credit Facility agreement provides for an unused facility fee ranging from
25 basis points to 50 basis points on an annual basis depending on the extent of
the Company's ratio of total funded debt ratio (as defined in the Credit
Facility).
Restrictive covenants contained in the Company's Credit Facility may limit
the Company's ability to finance future acquisitions, new locations and other
expansion of operations. These covenants also require the Company to maintain
certain ownership interests by New River and others, to achieve specific
financial ratios and may require the Company to obtain bank consent prior to
completing our proposed acquisitions.
In connection with the attainment of the Credit Facility, the Company
agreed to pay a $250,000 underwriting fee, $20,000 of which has been paid as of
September 30, 1998. The remaining balance was paid in October 1998.
F-18
<PAGE> 119
GERALD STEVENS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE THREE MONTHS ENDED DECEMBER 31, 1998 ARE UNAUDITED)
In October 1998, the Company borrowed $16,000,000 on its revolving credit
facility to fund the cash portion of the purchase price for acquisitions. These
amounts were subsequently repaid in October 1998 with proceeds from the private
placement.
On March 16, 1999, the Company and its primary lender amended its bank
credit facility to increase the size of the credit facility from $20,000,000 to
$40,000,000.
10. SUBSEQUENT EVENTS
A. ACQUISITIONS
From January 1, 1999 through March 26, 1999, Gerald Stevens acquired or has
entered into probable agreements to acquire ten retail florist businesses and
also acquired National Flora, a floral order generation business, for total
consideration of $44,542,462, consisting of $28,281,608 in cash and 2,133,631
shares of Gerald Stevens common stock.
The following table represents the total purchase price, the cash and stock
portion of the purchase price, the number of shares issued and the share price
for the business acquisitions discussed above:
<TABLE>
<CAPTION>
PURCHASE PRICE
------------------------- SHARE
COMPANY TOTAL CASH STOCK SHARES PRICE
------- ----------- ----------- ----------- ----------- ------
<S> <C> <C> <C> <C> <C>
Phoebe's.......................... $ 2,816,622 $ 2,194,770 $ 621,852 73,159 $ 8.50
National Flora.................... 19,727,200 9,952,200 9,775,000 1,150,000 8.50
Kuhn's............................ 6,200,000 5,580,000 620,000 36,471 17.00
Other Acquisitions................ 15,798,640 10,554,638 5,244,002 874,001 6.00
----------- ----------- ----------- -----------
Total 1999 Acquisitions...... $44,542,462 $28,281,608 $16,260,854 $ 2,133,631
=========== =========== =========== ===========
* includes businesses Gerald Stevens has probable agreements to acquire.
</TABLE>
B. STOCK OPTIONS
Subsequent to December 31, 1998, the Company issued options for 425,259
shares of common stock at an exercise price of $8.50 per share and cancelled
5,500 options previously issued.
F-19
<PAGE> 120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Flower Franchising, Inc.:
We have audited the accompanying balance sheets of Flower Franchising, Inc. (a
Pennsylvania Corporation) as of September 30, 1998 and 1997, and the related
statements of income, 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 financial statements referred to above present fairly, in
all material respects, the financial position of Flower Franchising, Inc. as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Lancaster, Pa.,
December 29, 1998.
F-20
<PAGE> 121
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 766,607 $ 797,128
Trade receivables, less allowance for doubtful accounts of
$40,000 in 1998 and 1997................................ 793,218 768,842
Due from officers......................................... -- 52,529
Due from stockholders..................................... 1,300,000 --
Inventories............................................... 701,243 573,444
Other current assets...................................... 21,221 93,910
----------- -----------
Total current assets.................................... 3,582,289 2,285,853
----------- -----------
PROPERTY AND EQUIPMENT:
Land...................................................... -- 335,138
Buildings................................................. -- 1,483,238
Equipment and fixtures.................................... 1,871,639 1,773,619
Trucks.................................................... 994,292 940,471
Leasehold improvements.................................... 628,867 625,751
----------- -----------
3,494,798 5,158,217
Less-Accumulated depreciation............................. (2,533,131) (3,141,249)
----------- -----------
Net property and equipment.............................. 961,667 2,016,968
----------- -----------
OTHER ASSETS................................................ 253,095 150,334
----------- -----------
Total assets............................................ $ 4,797,051 $ 4,453,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,600,000 $ 102,804
Payable to Internet Services, L.P......................... -- 41,894
Accounts payable and accrued expenses..................... 578,263 411,983
Accrued payroll and payroll taxes......................... 413,471 439,642
Accrued corporate taxes................................... 128,242 21,867
----------- -----------
Total current liabilities............................... 2,719,976 1,018,190
----------- -----------
LONG-TERM LIABILITIES:
Deferred gain on sale of assets........................... 563,596 --
Long-term debt, less current maturities................... -- 250,648
----------- -----------
Total long-term liabilities............................. 563,596 250,648
----------- -----------
Total liabilities....................................... 3,283,572 1,268,838
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, voting $1 par value; authorized 100,000
shares; issued and outstanding 11,979 in 1998 and 11,458
in 1997................................................. 11,979 11,458
Common stock, nonvoting class A, no par value; authorized
500,000 shares; issued and outstanding 94,879 in 1998
and 89,617 in 1997...................................... 361,418 198,414
Common stock, nonvoting class B, no par value; authorized
250,000 shares; no shares issued and outstanding........ -- --
Additional paid-in capital................................ 31,734 13,383
Retained earnings......................................... 1,108,348 2,961,062
----------- -----------
Total stockholders' equity.............................. 1,513,479 3,184,317
----------- -----------
Total liabilities and stockholders' equity.............. $ 4,797,051 $ 4,453,155
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 122
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUE:
Product sales (net of discounts of $283,797 for 1998 and
$256,096 for 1997)..................................... $13,566,055 $12,913,231
Service and other revenue................................. 2,474,907 2,480,346
----------- -----------
Total revenue.......................................... 16,040,962 15,393,577
----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of product sales..................................... 4,025,921 4,016,121
Operating expenses........................................ 9,101,597 8,549,153
Selling, general and administrative....................... 2,123,149 1,690,255
----------- -----------
Total operating expenses............................... 15,250,667 14,255,529
----------- -----------
Operating income....................................... 790,295 1,138,048
----------- -----------
INTEREST INCOME (EXPENSE):
Interest income........................................... 42,248 35,183
Interest expense.......................................... (13,669) (50,843)
----------- -----------
Net interest income (expense).......................... 28,579 (15,660)
----------- -----------
GAIN ON SALE OF PROPERTY AND EQUIPMENT...................... 106,490 37,387
(LOSS) INCOME FROM EQUITY INVESTMENT IN LIMITED
PARTNERSHIP............................................... (16,598) 26,157
----------- -----------
Net income............................................. $ 908,766 $ 1,185,932
=========== ===========
PRO FORMA:
Net income............................................. $ 908,766
Pro forma income tax provision (Note 13)............... 368,050
-----------
Pro forma net income................................... $ 540,716
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 123
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NONVOTING ADDITIONAL RETAINED
VOTING CLASS A PAID-IN CAPITAL EARNINGS TOTAL
------- --------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1996...... $11,276 $139,629 $ 7,408 $ 2,323,541 $ 2,481,854
Proceeds from issuance of 182
shares voting common stock.... 182 -- 5,975 -- 6,157
Proceeds from issuance of 2,172
shares nonvoting class A
common stock.................. -- 58,785 -- -- 58,785
Net income...................... -- -- -- 1,185,932 1,185,932
Distribution to stockholders.... -- -- -- (548,411) (548,411)
------- -------- ------- ----------- -----------
Balance at September 30, 1997... 11,458 198,414 13,383 2,961,062 3,184,317
Proceeds from issuance of 521
shares voting common stock.... 521 -- 18,351 -- 18,872
Proceeds from issuance of 5,262
shares nonvoting class A
common stock.................. -- 163,004 -- -- 163,004
Net income...................... -- -- -- 908,766 908,766
Distribution to stockholders.... -- -- -- (2,761,480) (2,761,480)
------- -------- ------- ----------- -----------
Balance at September 30, 1998... $11,979 $361,418 $31,734 $ 1,108,348 $ 1,513,479
======= ======== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE> 124
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30
------------------------
1998 1997
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 908,766 $1,185,932
Adjustments to reconcile net income to net cash provided
by operating activities-
Depreciation and amortization.......................... 436,643 405,890
Deferred compensation expense.......................... -- 19,824
Gain on sale of property and equipment................. (106,490) (37,387)
Loss on disposal of property and equipment............. 24,700 --
Change in accrual for loss on sublease................. -- (32,234)
Loss (income) from equity investment in limited
partnership........................................... 16,598 (26,157)
(Increase) decrease in-
Trade receivables.................................... (24,376) 84,133
Inventories.......................................... (127,799) (36,175)
Other assets......................................... 46,283 30,571
Increase (decrease) in-
Accounts payable and accrued expenses................ 246,484 (49,970)
----------- ----------
Net cash provided by operating activities......... 1,420,809 1,544,427
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to equity investment........................ (30,852) --
Proceeds from sale of property and equipment.............. 1,664,755 25,825
Purchases of property and equipment....................... (357,512) (305,232)
Acquisition of customer lists and covenants............... (105,300) (44,000)
----------- ----------
Net cash provided by (used in) investing
activities..................................... 1,171,091 (323,407)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in due from officers.................. 52,529 (48,389)
Proceeds from short-term borrowings....................... 1,455,302 41,894
Proceeds from issuance of common stock.................... 181,876 64,942
Principal payments on long-term debt...................... (250,648) (402,804)
Distribution to stockholders.............................. (4,061,480) (568,411)
----------- ----------
Net cash used in financing activities............. (2,622,421) (912,768)
----------- ----------
NET (DECREASE) INCREASE IN CASH............................. (30,521) 308,252
CASH, BEGINNING OF YEAR..................................... 797,128 488,876
----------- ----------
CASH, END OF YEAR........................................... $ 766,607 $ 797,128
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest................................ $ 8,342 $ 50,843
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 125
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BACKGROUND
NATURE OF BUSINESS
Flower Franchising, Inc. (the "Company") is engaged in the retail sale of
flowers and flower arrangements. The Company operates 14 locations in the
Central Pennsylvania market under the name Royer's Flowers. The Company also
operates the sale of flowers within 21 grocery stores in the Central
Pennsylvania market. The Company grants credit to customers, substantially all
of whom are Central Pennsylvania local residents and businesses. The Company is
a closely-held subchapter "S" corporation, the stock of which is held by five
related individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES
Inventories are stated generally on an average cost method. Cost is
determined by the first-in, first-out method for substantially all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated
principally on a straight-line basis over the estimated useful lives of the
assets which generally range from 10 to 19 years for buildings and leasehold
improvements and 3 to 10 years for machinery and equipment. Depreciation expense
was $397,550 and $385,402 for the fiscal years ending September 30, 1998 and
1997, respectively.
OTHER ASSETS
Loan origination fees, customer lists, and non-compete agreements are
included in the accompanying balance sheets as other assets. Loan origination
fees are being amortized over the term of the loan, customer lists are being
amortized over a maximum of 19 months, and noncompete agreements are being
amortized over three years, the life of the agreements.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended September 30, 1998 and 1997 was $721,698 and
$503,355, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. The Company maintains cash balances at one financial
institution located in Lebanon, Pennsylvania. These accounts are insured by the
Federal Depository Insurance Corporation up to $100,000. At September 30, 1998
and 1997, the Company's uninsured cash balances are $746,730 and $911,156,
respectively. The Company believes no
F-25
<PAGE> 126
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
significant concentration of credit risk exists with respect to these cash
balances. In addition, historically, the Company has not experienced significant
losses with respect to its receivables.
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
SERVICE AND OTHER INCOME
Service and other income includes rebates and commissions received for
orders placed through FTD and TeleFlora, delivery services and telephone
charges.
INCOME TAXES
Since October 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed under sections of federal and Pennsylvania income tax law,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata share of the Company's items of income,
deduction, loss and credits. Therefore, these statements do not include any
provision for corporate income taxes.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
3. DUE FROM OFFICERS AND STOCKHOLDERS
The Company had a receivable of $50,000 due on demand from its officers as
of September 30, 1997. Interest accrued at a rate of 6.07% per annum. At
September 30, 1997, accrued interest was $2,529. This receivable was collected
during fiscal year 1998.
The Company has a receivable of $1,300,000 due from five of its
stockholders as of September 30, 1998. This receivable relates to an advance on
the working capital adjustment during fiscal year 1998 related to the sale of
the Company (see Note 14). This receivable was paid in December 1998.
F-26
<PAGE> 127
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. OTHER ASSETS
Other assets at September 30, 1998 and 1997 were comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Loan origination fees, net of accumulated amortization of
$5,134 in 1998 and $17,262 in 1997........................ $ -- $ 5,134
Customer lists and noncompete agreements, net of
amortization of $33,958 in 1998 and $7,566 in 1997........ 107,079 36,434
Required federal income tax deposit......................... 105,605 82,609
Investment in limited partnership........................... 40,411 26,157
-------- --------
$253,095 $150,334
======== ========
</TABLE>
5. LINE OF CREDIT AND LONG-TERM DEBT
The Company has an approved unsecured line of credit with Lebanon Valley
National Bank in the amount of $500,000 at September 30, 1998 and 1997. During
fiscal 1998 and 1997, interest was charged at the bank's prime rate less .5% and
the bank's prime rate, respectively. At September 30, 1998 and 1997, there was
no amount outstanding on this line of credit.
Long-term debt at September 30, 1998 and 1997 was composed of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Note payable to Lebanon Valley Farmers Bank, due 30 days
from date of settlement at a variable interest rate of one
month Libor rate, plus 240 basis points. The borrowing is
secured by first lien security interest in all business
assets except titled vehicles............................. $1,600,000 $ --
Mortgage payable to Lebanon Valley National Bank, due in
monthly principal installments of $8,567 plus interest
adjusted to the Bank's prime rate, not to exceed 8%; until
March 2001. The borrowing is secured by the Company's
land, buildings, and improvements, and personal
property.................................................. -- 353,452
---------- --------
Subtotal.................................................... 1,600,000 353,452
Less -- Current maturities.................................. 1,600,000 102,804
---------- --------
Long-term portion........................................... $ -- $250,648
========== ========
</TABLE>
The proceeds from the $1,600,000 note payable were used to distribute the
retained earnings of the Company to stockholders prior to the sale of the
Company to Gerald Stevens, Inc. (see Note 14). This note was paid off on October
1, 1998 in connection with the sale.
6. RETIREMENT PLAN
Effective January 1, 1994, the Company adopted a defined contribution plan
covering substantially all employees completing one year of service. Matching
employer contributions are discretionary and are set annually by the Company.
Employee contributions are withheld from payroll through a 401(k) deduction. For
the years ended September 30, 1998 and 1997, the Company's matching percentage
was
F-27
<PAGE> 128
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3%, and the expense was $87,957 and $90,682, respectively. The defined
contribution plan was terminated in September 1998 due to the pending sale of
the Company.
7. DEFERRED COMPENSATION ARRANGEMENT
In February 1994, the Company established an incentive (Phantom Stock) plan
to provide deferred compensation to certain key employees who contribute to the
success of the Company. Deferred compensation is based on the growth of sales
and net profits of Flower Franchising, Inc. The amount charged to expense for
the years ended September 30, 1998 and 1997 was $33,365 and $19,824,
respectively. The Phantom Stock plan was fully paid out and terminated during
fiscal 1998 in preparation for the sale to Gerald Stevens, Inc.
8. STOCK OPTIONS
The Company granted options to purchase shares of voting common stock and
nonvoting class A common stock to certain officers under a Stock Option Plan
approved by the Board of Directors. The options were granted at the estimated
market value of the underlying shares on the date of grant. Activity in this
plan is summarized below:
<TABLE>
<CAPTION>
VOTING NONVOTING CLASS A
----------------------- ------------------------
NO. OF PRICE NO. OF PRICE
SHARES PER SHARE SHARES PER SHARE
------ -------------- ------ ---------------
<S> <C> <C> <C> <C>
Outstanding at October 1, 1996............. 265 $20.10-$23.860 2,172 $ 27.065
Granted.................................. 208 $ 36.854 2,492 $ 29.483
Exercised................................ (182) $ 33.831 (2,172) $ 27.065
---- ------
Outstanding at September 30, 1997.......... 291 $20.10-$36.854 2,492 $ 29.483
Granted.................................. 230 $ 40.403 2,770 $ 32.322
Exercised................................ (521) $20.10-$40.403 (5,262) $29.483-$32.322
---- -------------- ------
Outstanding at September 30, 1998.......... -- --
</TABLE>
The voting common stock options expire in the years 2002 and 2003. The
nonvoting class A options were granted in April of the respective year and
expired on October 1 of the following year. In connection with the sale to
Gerald Stevens, Inc., all stock options were exercised as of September 30, 1998.
9. ACQUISITIONS
The Company purchased the assets of two flower shops during both fiscal
1998 and 1997. The aggregate purchase prices were $184,300 and $44,000 during
fiscal 1998 and 1997, respectively, for certain assets, licenses and noncompete
agreements.
10. LEASE COMMITMENTS
The Company leases certain facilities from related parties and from
unrelated lessors. All leases are operating leases. Total rent paid to related
parties for the years ended September 30, 1998 and 1997 was $480,689 and
$531,037, respectively. During the years ended September 30, 1998 and 1997,
rentals under all lease obligations were $794,220 and $801,533, respectively.
Certain of these leases contain renewal
F-28
<PAGE> 129
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
options or provide for escalations above required minimum lease payments based
upon the movement of the consumer price index.
Minimum lease payments under these lease obligations at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
UNRELATED RELATED
PARTY PARTY TOTAL
--------- ---------- ----------
<S> <C> <C> <C>
1999.................................................... $ 32,640 $ 651,157 $ 683,797
2000.................................................... 32,640 652,887 685,527
2001.................................................... 26,222 652,887 679,109
2002.................................................... 18,636 654,790 673,426
2003.................................................... 18,636 645,268 663,904
Thereafter.............................................. 125,017 2,715,271 2,840,288
-------- ---------- ----------
$253,791 $5,972,260 $6,226,051
======== ========== ==========
</TABLE>
11. RELATED PARTY TRANSACTION
On September 17, 1998, the Company entered into a sale-leaseback
transaction of land and buildings of six of its properties to two stockholders
of the Company. The total sale price was $1,646,048 resulting in a gain of
$91,889 and a deferred gain of $563,596. The leases have a term of five years
with an aggregate annual rental of $137,100. The deferred gain will be amortized
straight line over the lease term. In connection with the sale, a built-in gains
tax was incurred in the amount of $109,801.
In September 1998 the Company cancelled the Chairman's
non-compete/consulting agreement, in connection with the sale.
12. INVESTMENT IN LIMITED PARTNERSHIP
The Company has a 99% limited partnership interest in Internet Services,
L.P. ("Internet"). The Company accounts for this investment by the equity method
of accounting. Internet is in the business of managing, operating, selling and
disposing of an information management business offering access to a computer
based network for the retail sale and delivery of flowers. The Company
contributed certain tangible and intangible personal property to Internet, which
was fully depreciated in the Company's balance sheet. Partnership net income or
loss is allocated to the partners of Internet in accordance with the provisions
of the Partnership Agreement. During fiscal years 1998 and 1997, the Company
recognized a $16,598 loss and $26,157 profit, respectively, from this
investment. The Company contributed $25,000 to Internet during fiscal 1998 and
has a net receivable due of $5,852, which is included in the investment. There
were no distributions of cash to the Company. The Company had a payable due to
Internet for $41,894, at September 30, 1997, which includes principal and
accrued interest.
13. SUBSEQUENT EVENT
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the stockholders received an aggregate of $7.8
million through a combination of cash and stock of the Purchaser.
F-29
<PAGE> 130
FLOWER FRANCHISING, INC.
T/A ROYER'S FLOWERS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Since the Purchaser is a C Corporation for Federal and state income tax
purposes, the Company also became taxable as a C Corporation effective October
1, 1998. Accordingly, the accompanying statement of operations for the year
ended September 30, 1998 presents a pro forma income tax provision and pro forma
net income as they would have been reported had the Company been subject to
Federal and state income taxes. The pro forma effective income tax rate of 40.5%
exceeds the Federal statutory rate due to the impact of state income taxes.
F-30
<PAGE> 131
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Boesen the Florist, Inc.
Des Moines, Iowa
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Boesen the Florist, Inc. (the
"Company") at December 31, 1997, and the results of its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
June 29, 1998
Miami, Florida
F-31
<PAGE> 132
BOESEN THE FLORIST, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 40,972 $ --
Accounts receivable, net of allowance for uncollectible
accounts of $111,700 and $26,700, respectively......... 408,176 192,629
Inventories............................................... 177,702 329,972
Prepaid expenses.......................................... 30,446 11,863
Other current assets...................................... 24,703 20,196
---------- ----------
Total current assets................................... 681,999 554,660
Cash surrender value of life insurance...................... 161,602 --
Deferred taxes.............................................. 137,493 158,346
Property and equipment, net................................. 558,151 524,521
Intangible assets........................................... 3,996 --
---------- ----------
Total assets........................................... $1,543,241 $1,237,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $ -- $ 5,107
Accounts payable.......................................... 260,154 289,392
Accrued expenses.......................................... 289,624 113,634
Current portion of long-term debt......................... 83,909 83,162
---------- ----------
Total current liabilities.............................. 633,687 491,295
Long-term debt, net of current portion...................... 183,466 107,479
Accrued pension cost........................................ 185,942 195,158
---------- ----------
Total liabilities...................................... 1,003,095 793,932
---------- ----------
Stockholders' equity:
Common stock, $100 par value, 2,000 shares authorized, 192
shares issued and outstanding.......................... 19,200 19,200
Retained earnings......................................... 520,946 424,395
---------- ----------
Total stockholders' equity............................. 540,146 443,595
---------- ----------
Total liabilities and stockholders' equity............. $1,543,241 $1,237,527
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 133
BOESEN THE FLORIST, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $4,700,595 $3,485,753 $3,682,628
Other operating revenue............................ 566,937 377,473 332,234
---------- ---------- ----------
5,267,532 3,863,226 4,014,862
---------- ---------- ----------
Costs and other charges:
Costs of products sold........................... 2,022,440 1,474,964 1,584,927
Operating expenses............................... 2,207,699 1,635,107 1,704,441
Selling, general and administrative expenses..... 648,815 503,959 882,201
---------- ---------- ----------
4,878,954 3,614,030 4,171,569
---------- ---------- ----------
Income (loss) from operations.................... 388,578 249,196 (156,707)
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (37,680) (27,124) (13,398)
---------- ---------- ----------
Income (loss) before income taxes................ 350,898 222,072 (170,105)
Provision (benefit) for income taxes............. 153,628 97,712 (73,554)
---------- ---------- ----------
Net income (loss).................................. $ 197,270 $ 124,360 $ (96,551)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 134
BOESEN THE FLORIST, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996................... 192 $19,200 $323,676 $342,876
Net income........................................ -- -- 197,270 197,270
--- ------- -------- --------
Balance as of December 31, 1997................... 192 19,200 520,946 540,146
Net loss (unaudited).............................. -- -- (96,551) (96,551)
--- ------- -------- --------
Balance as of September 30, 1998
(unaudited)..................................... 192 $19,200 $424,395 $443,595
=== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 135
BOESEN THE FLORIST, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 197,270 $ 124,360 $ (96,551)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization................. 57,269 52,128 49,941
Increase in allowance for uncollectible
accounts.................................... 20,278 20,009 40,357
Increase in deferred income taxes............. (17,467) (41,016) (20,853)
Changes in operating assets and liabilities:
Accounts receivable........................... (54,654) 107,379 175,190
Inventories................................... (64,728) (37,694) (152,270)
Prepaid expenses.............................. (8,243) 14,071 18,583
Other current assets.......................... (13,150) (49,681) 4,507
Accounts payable.............................. (2,784) 30,408 29,238
Accrued expenses.............................. 105,430 (12,476) (175,990)
Accrued pension cost.......................... 25,108 19,867 9,216
Cash surrender value of life insurance........ -- -- 161,602
--------- --------- ---------
Net cash provided by operating activities... 244,329 227,355 42,970
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............... (70,788) (70,373) (12,315)
(Increase) decrease in cash surrender value of
life insurance................................ (4,892) (4,349) --
--------- --------- ---------
Net cash used in investing activities....... (75,680) (74,722) (12,315)
--------- --------- ---------
Cash flows from financing activities:
(Decrease) increase in bank overdraft............ (51,630) (51,630) 5,107
Repayments of long-term debt..................... (76,047) (56,324) (76,734)
--------- --------- ---------
Net cash used in financing activities....... (127,677) (107,954 (71,627)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 40,972 44,679 (40,972)
Cash and cash equivalents at beginning of period... -- -- 40,972
--------- --------- ---------
Cash and cash equivalents at end of period......... $ 40,972 $ 44,679 $ --
========= ========= =========
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 42,728 $ 33,060 $ 15,758
========= ========= =========
Cash paid for income taxes....................... $ 32,887 $ 16,239 $ 21,018
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 136
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Boesen the Florist, Inc. (the "Company") sells plants, flowers and related
items to a diverse customer base throughout the Des Moines, Iowa metropolitan
area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the estimated useful lives
of property and equipment and allowance for doubtful accounts. Actual results
could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory consists of cut flowers, plants, arrangements and wrapping
supplies.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed principally using accelerated methods. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for betterments
and major improvements are capitalized. The carrying amounts of assets sold or
retired and related accumulated depreciation are removed from the accounts in
the year of disposal and any resulting gains or losses are included in the
statement of operations.
F-36
<PAGE> 137
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
OTHER OPERATING REVENUE
Other operating revenue includes rebates and commissions received for
orders placed through FTD, delivery services and service charges.
INCOME TAXES
The Company accounts for income taxes under the assets and liability method
whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the time periods in which the differences are
expected to affect taxable income. A valuation allowance against deferred tax
assets is required if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
PENSION PLAN
The Company has a noncontributory defined benefit pension plan covering
substantially all of its full-time employees. Benefits are based upon a
percentage of average compensation multiplied by years of service. The Company's
funding policy is to make the minimum, annual contributions required by
applicable regulations. Plan assets consist of an annuity contract. There are no
significant non-benefit liabilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130, No.
131 and No. 132 and their applicability to the Company.
F-37
<PAGE> 138
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. BUY-SELL AGREEMENT
The Company entered into an agreement with each of its stockholders
requiring the purchase of stock upon the death, disability, termination of
employment, bankruptcy of a stockholder or the bankruptcy of the Company. The
present agreed upon price is $3,100 per share which may be changed from time to
time. The payment terms are dependent upon which event triggers the operation of
the arrangement.
4. DISCRETIONARY BONUSES
The Company pays discretionary bonuses to its officers. The amounts of
these bonuses charged to selling, general and administrative expenses were
$201,778, $201,778 and $475,592 for the year ended December 31, 1997 and for the
nine-month periods ended September 30, 1997 and 1998, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Land................................................ $ 111,214 $ 111,214
Building and improvements........................... 10-39 937,398 942,288
Equipment........................................... 5-7 151,638 151,638
Other equipment..................................... 5 137,661 137,661
Vehicles............................................ 5 91,605 88,472
---------- ----------
1,429,516 1,431,273
Less: accumulated depreciation...................... (871,365) (906,752)
---------- ----------
$ 558,151 $ 524,521
========== ==========
</TABLE>
F-38
<PAGE> 139
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Notes Payable to a bank, monthly installments of $5,037 of
principal and interest at Prime rate plus 1.25%, due May
2000, collateralized by all real estate and all personal
property. The note also contains certain restrictions on
dividends, stockholder compensation, and capital
expenditures.............................................. $127,587 $ 87,911
Notes Payable to a bank, monthly installments of $3,123 of
principal and interest at a variable rate of 3.0% above
the four week average of the three year United States
Treasury Note, due November 2001, collateralized by all
real estate and all personal property, and personally
guaranteed by the stockholders. The note also contains
certain restrictions on dividends, stockholder
compensation, and capital expenditures.................... 123,026 102,730
Note payable to a bank, monthly installments of $331 of
principal and interest at 11.19%, due October 2000,
collateralized by the underlying asset.................... 9,356 --
Note payable to a bank, monthly installments of $383 of
principal and interest at 9.0%, due September 1999,
collateralized by the underlying asset.................... 7,406 --
-------- --------
267,375 190,641
Less: current portion of long-term debt................... (83,909) (83,162)
-------- --------
$183,466 $107,479
======== ========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998........................................................ $ 83,909
1999........................................................ 91,483
2000........................................................ 60,516
2001........................................................ 31,467
--------
Total....................................................... $267,375
========
</TABLE>
7. REVOLVING LINE OF CREDIT AND LETTERS OF CREDIT
The Company has a revolving line of credit (the "Revolver") that allows for
borrowings of up to $150,000 at December 31, 1997 and September 30, 1998.
Advances under this Revolver bear interest at one percent over the bank's prime
rate (9.5% and 9.25% at December 31, 1997 and September 30, 1998, respectively).
Interest is payable monthly and the principal balance is due on demand. No
amounts were outstanding at December 31, 1997 or at September 30, 1998. The
Revolver is collateralized by all assets of the Company and is guaranteed by the
Company's stockholders.
F-39
<PAGE> 140
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into a letter of credit agreement (the "Letter of
Credit") which secures the payment of certain amounts due to a former
stockholder. The Letter of Credit totaled approximately $196,000 and $171,000 at
December 31, 1997 and September 30, 1998, respectively. Any amounts drawn on the
Letter of Credit bears interest at 2.0% above the bank's prime rate and are
payable in monthly installments over the remaining term of the agreement. The
Letter of Credit will expire on May 23, 2002, and is collateralized by all
assets of the Company and is guaranteed by the Company's stockholders.
This agreement contain certain restrictions on dividends, stockholder
compensation and capital expenditures.
8. PROVISION FOR INCOME TAXES
The components of the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal................................................... $122,118
State..................................................... 48,977
--------
171,095
--------
Deferred:
Federal................................................... (12,467)
State..................................................... (5,000)
--------
(17,467)
--------
$153,628
========
</TABLE>
Deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred tax assets:
Accrued pension cost........................................ $ 77,947
Allowance for uncollectible accounts........................ 46,825
Depreciation................................................ 1,554
Intangible assets........................................... 11,167
--------
Deferred income tax asset, net.............................. $137,493
========
</TABLE>
9. LEASE COMMITMENTS
The Company leases two store facilities under separate lease agreements.
These agreements expire in October 1998 and December 1999 and require the
Company to pay the property taxes. The lease expiring in October 1998 provides
for a lien on all personal property at the store location and was renewed
subsequent to December 31, 1997 for an additional five years with the annual
rent being adjusted for the increase in the cost of living. The lease expiring
in December 1999 has an option to renew for one
F-40
<PAGE> 141
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
additional five year period with the annual rent being adjusted for increases in
the cost of living. In addition, the Company leases one store facility on a
month-to-month basis at the rate of $700 per month.
Rent expense for the year ended December 31, 1997 and for the nine-month
periods ended September 30, 1997 and 1998 was approximately $43,000, $31,000 and
$33,000, respectively.
Minimum future lease commitments under these operating leases at December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 34,312
1999........................................................ 34,312
2000........................................................ 20,240
2001........................................................ 20,240
2002........................................................ 20,240
Thereafter.................................................. 18,553
--------
Total minimum lease payments.............................. $147,897
========
</TABLE>
10. COMMITMENTS
The Company has agreed to purchase two shares of its stock for $3,100 per
share, including interest at 6%, payable in monthly installments. Final payment
will be due on December 1, 2002.
11. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is a guarantor on three notes payable by the current
stockholders of the Company to the previous principal stockholder of the
Company. These notes aggregated to $370,465 and $315,854 at December 31, 1997
and September 30, 1998, respectively, and are payable in monthly installments,
including interest at 6%, with the final payments due December 1, 2002. The
Company's exposure to credit loss in the event of nonperformance by the other
parties to the financial guarantees is represented by the contractual amount of
those instruments. The Company did not require collateral or other security for
these financial guarantees.
12. DEFINED BENEFIT PENSION PLAN
Net pension cost for the Company's defined benefit pension plan consisted
of the following:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Service cost................................................ $ 37,251
Interest cost on the projected benefit obligation........... 58,698
Actual return on plan assets................................ (89,479)
Net amortization of transition liability and net loss....... 22,780
---------
Net periodic pension cost................................. $ 29,250
=========
</TABLE>
F-41
<PAGE> 142
BOESEN THE FLORIST, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the plan funded status and amounts recognized in the
accompanying balance sheet consisted of the following:
<TABLE>
<S> <C>
Actuarial present value of benefit obligation:
Vested benefits........................................... $(605,775)
=========
Accumulated benefits...................................... $(638,506)
=========
Projected benefits........................................ $(870,999)
Plan assets at fair value................................. 945,970
---------
Projected benefit obligation less than (in excess of) plan
assets................................................. 74,971
---------
Unrecognized net gain..................................... (276,122)
Unrecognized prior service cost........................... 4,667
Unrecognized transition obligation........................ 10,542
---------
Accrued pension cost, included on balance sheet........ $(185,942)
=========
</TABLE>
At December 31, 1997, the assumptions used by the Company in the
determination of pension plan information consisted of the following:
<TABLE>
<S> <C>
Discount rate............................................... 7.25%
Rate of increase in compensation levels..................... 5.6%
Expected long-term rate of return on plan assets............ 8.0%
</TABLE>
13. SUBSEQUENT EVENT (UNAUDITED)
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $5.2
million through a combination of cash and stock of the Purchaser.
F-42
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Maple Lee Flowers, Inc.
Worthington, Ohio
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Maple Lee Flowers, Inc. (the
"Company") at December 31, 1997 and the results of its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
June 26, 1998
Miami, Florida
F-43
<PAGE> 144
MAPLE LEE FLOWERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 94,884 $ 44,083
Trade accounts receivable, net of allowance for
uncollectible accounts of $6,506 as of September 30,
1998................................................... 490,227 320,302
Receivable from related party............................. 177,436 236,181
Other receivables......................................... 23,312 --
Inventories............................................... 296,843 442,095
Other current assets...................................... 21,773 39,194
---------- ----------
Total current assets................................... 1,104,475 1,081,855
Property and equipment, net................................. 420,133 304,095
Cash surrender value of life insurance policies............. 146,142 --
Other assets................................................ 59,449 1,100
---------- ----------
Total assets........................................... $1,730,199 $1,387,050
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 199,174 $ 237,933
Accrued expenses.......................................... 165,313 201,915
---------- ----------
Total current liabilities.............................. 364,487 439,848
Other long-term liabilities................................. 656 --
---------- ----------
Total liabilities...................................... 365,143 439,848
---------- ----------
Stockholders' equity:
Common stock, no par value, 3,150 shares authorized,
issued and outstanding................................. 15,000 15,000
Retained earnings......................................... 1,350,056 932,202
---------- ----------
Total stockholders' equity............................. 1,365,056 947,202
---------- ----------
Total liabilities and stockholders' equity............. $1,730,199 $1,387,050
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE> 145
MAPLE LEE FLOWERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $5,200,784 $3,729,022 $3,797,333
Other operating revenue............................ 398,767 253,382 273,228
---------- ---------- ----------
5,599,551 3,982,404 4,070,561
---------- ---------- ----------
Costs and other charges:
Costs of products sold........................... 1,960,022 1,363,733 1,364,073
Operating expenses............................... 1,395,283 1,943,929 2,206,052
Selling, general and administrative expenses..... 1,700,180 196,364 195,978
---------- ---------- ----------
5,055,485 3,504,026 3,766,103
---------- ---------- ----------
Income from operations........................... 544,066 478,378 304,458
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (2,834) (1,960) (190)
Other, net....................................... 40,950 41,551 35,777
---------- ---------- ----------
38,116 39,591 35,587
---------- ---------- ----------
Net income......................................... $ 582,182 $ 517,969 $ 340,045
========== ========== ==========
Pro forma data (unaudited) (Note 8):
Net income before pro forma income taxes......... $ 582,182 $ 517,969 $ 340,045
Pro forma provision for income taxes relating to
S corporation................................. 197,982 176,109 115,615
---------- ---------- ----------
Pro forma net income............................. $ 384,200 $ 341,860 $ 224,430
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE> 146
MAPLE LEE FLOWERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON COMMON RETAINED
STOCK STOCK EARNINGS TOTAL
--------- ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996................ 3,150 $15,000 $1,058,830 $1,073,830
Net income..................................... -- -- 582,182 582,182
Distributions.................................. -- -- (290,956) (290,956)
----- ------- ---------- ----------
Balance as of December 31, 1997................ 3,150 15,000 1,350,056 1,365,056
Net income (unaudited)......................... -- -- 340,045 340,045
Distributions (unaudited)...................... -- -- (757,899) (757,899)
----- ------- ---------- ----------
Balance as of September 30, 1998 (unaudited)... 3,150 $15,000 $ 932,202 $ 947,202
===== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 147
MAPLE LEE FLOWERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 582,182 $ 517,969 $ 340,045
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 181,423 149,889 113,417
Allowance for uncollectible accounts.......... 6,506
Changes in operating assets and liabilities:
Trade accounts receivable..................... (8,610) 160,577 163,419
Receivable from related party................. (122,684) (84,948) (58,745)
Other receivables............................. 21,252 15,823 23,312
Inventories................................... (23,090) (138,478) (145,252)
Other current and non-current assets.......... (15,067) (122,860) 21,667
Accounts payable.............................. (35,686) (118,784) 38,759
Accrued expenses.............................. (50,326) (146,612) 36,602
Other long-term liabilities................... (9,070) -- (656)
--------- --------- ---------
Net cash provided by operating activities... 520,324 232,576 539,074
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment..... -- -- 26,884
Purchase of property and equipment............... (30,613) (16,762) (24,263)
Increase in cash surrender value of life
insurance..................................... (28,157) (28,157) (23,296)
--------- --------- ---------
Net cash used in investing activities....... (58,770) (44,919) (20,675)
--------- --------- ---------
Cash flows from financing activities:
Distributions to stockholders.................... (290,956) (80,000) (569,200)
Proceeds from revolving line of credit........... 125,000 25,000 --
Repayments of revolving line of credit........... (225,000) (125,000) --
--------- --------- ---------
Net cash used in financing activities....... (390,956) (180,000) (569,200)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 70,598 7,657 (50,801)
Cash and cash equivalents at beginning of period... 24,286 24,286 94,884
--------- --------- ---------
Cash and cash equivalents at end of period......... $ 94,884 $ 31,943 $ 44,083
========= ========= =========
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 2,834 $ 1,960 $ 1,064
========= ========= =========
Supplemental disclosure of non-cash investing and
financing activities:
Distributions for other assets................... $ -- $ -- $ 19,261
========= ========= =========
Distributions for cash surrender value of life
insurance..................................... $ -- $ -- $ 169,438
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 148
MAPLE LEE FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Maple Lee Flowers, Inc. (the "Company") is a retail flower and gift shop
and a grower of blooming flowers and plants, servicing the central Ohio region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the estimated useful lives
of property and equipment and allowance for doubtful accounts. Actual results
could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory consists of cut flowers, blooming and foliage plants and
hard goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed principally using accelerated methods. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for betterments
and major improvements are capitalized. The carrying amounts of assets sold or
retired and related accumulated depreciation are removed from the accounts in
the year of disposal and any resulting gains or losses are included in the
statement of operations.
F-48
<PAGE> 149
MAPLE LEE FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
OTHER OPERATING REVENUE
Other operating revenue includes rebates and commissions received for
orders placed through FTD, delivery services and service charges.
INCOME TAXES
The Company is a Subchapter S Corporation as defined by the Internal
Revenue Code. Under Subchapter S provisions, the Company generally does not pay
federal or state income taxes on its taxable income. Under these provisions,
taxable income of the Company is reflected by the stockholders on their personal
tax returns. Accordingly, the accompanying financial statements do not reflect a
provision for income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
F-49
<PAGE> 150
MAPLE LEE FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Building and improvements.............................. 5 - 19 $ 1,790,963 $ 1,790,963
Office Equipment....................................... 5 - 7 442,877 467,137
Vehicles............................................... 5 66,075 21,472
----------- -----------
2,299,915 2,279,572
Less: accumulated depreciation......................... (1,879,782) (1,975,477)
----------- -----------
$ 420,133 $ 304,095
=========== ===========
</TABLE>
4. REVOLVING LINE OF CREDIT
The Company had a revolving line of credit that expired in February 1998
(the "Revolver") that allowed for borrowings of up to $400,000 at December 31,
1997. Advances under this Revolver bore interest at the bank's prime rate.
Interest was payable monthly and the principal balance was due on demand. There
were no outstanding borrowings on the Revolver at December 31, 1997. The
Revolver was personally guaranteed by one of the stockholders of the Company and
was collateralized by substantially all the assets of the Company.
5. LEASE COMMITMENTS
The Company leases vehicles under operating leases. Minimum future lease
commitments under the operating leases at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 57,879
1999........................................................ 32,456
2000........................................................ 23,144
2001........................................................ 10,241
2002........................................................ 3,445
--------
Total minimum lease payments $127,165
========
</TABLE>
Rent expense for the year ended December 31, 1997 and for the nine-month
periods ended September 30, 1997 and 1998 was approximately $82,000, $61,414 and
$63,067, respectively.
6. PROFIT SHARING PLAN
The Company has established a defined contribution plan for all employees
who have completed 6 months of service prior to the start of the plan year,
1,000 hours of service, and are at least 18 years of age. Contributions are
determined, at management's discretion, based upon gross compensation paid to
participants. The employees' vested percentage is based on years of service;
100% vesting occurs after 7 years of service based upon the initial date of
participation. The Company recorded an expense in the amount of $111,000,
$82,946 and $64,682 for the year ended December 31, 1997 and for the nine-month
periods ended September 30, 1997 and 1998, respectively.
F-50
<PAGE> 151
MAPLE LEE FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company sells blooming and foliage plants to Maple Lee Farm 'n' Garden
Center, Ltd. (the "Garden Center"). The Garden Center is owned in part by
stockholders of the Company. During the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998, the Company recorded
approximately $107,000, $97,739 and $102,334, respectively, of sales to the
Garden Center. At December 31, 1997 and September 30, 1998, the Company has
accounts receivable from the Garden Center related to these sales of $177,436
and $236,181, respectively.
The Company leases office space from family members of one of its
stockholders. Rental expense for these leases totaled approximately $240,000,
$177,750 and $200,550 for the year ended December 31, 1997 and for the
nine-month periods ended September 30, 1997 and 1998, respectively.
8. SUBSEQUENT EVENT (UNAUDITED)
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $4.3
million through a combination of cash and stock of the Purchaser.
The Purchaser is a C corporation. As such, the accompanying statements of
operations include a pro forma provision for income taxes of $197,982, $176,109
and $115,615 for the year ended December 31, 1997 and the nine-month periods
ended September 30, 1997 and 1998, respectively.
F-51
<PAGE> 152
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Maple Lee Farm 'n' Garden Center, Ltd.
Delaware, Ohio
In our opinion, the accompanying balance sheet and the related statements
of operations, members' equity and of cash flows present fairly, in all material
respects, the financial position of Maple Lee Farms 'n' Garden Center, Ltd. (the
"Company") at December 31, 1997, and the results of its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
June 26, 1998
Miami, Florida
F-52
<PAGE> 153
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,723 $ 3,974
Accounts receivable....................................... 13,843 3,515
Inventories............................................... 96,801 130,303
Other current assets...................................... 1,100 4,479
-------- --------
Total current assets................................... 141,467 142,271
Property and equipment, net................................. 37,832 40,914
Other assets................................................ 4,240 3,262
-------- --------
Total assets........................................... $183,539 $186,447
======== ========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 10,226 $ 41,681
Payables to related party................................. 177,436 236,181
Accrued expenses.......................................... 5,875 24,072
Current portion of long-term debt......................... 8,491 9,091
Revolving line of credit.................................. 100,000 --
-------- --------
Total current liabilities.............................. 302,028 311,025
Long-term debt, net of current portion...................... 23,753 16,871
-------- --------
Total liabilities...................................... 325,781 327,896
-------- --------
Members' equity:
Paid in capital........................................... 30,000 30,000
Accumulated deficit....................................... (172,242) (171,449)
-------- --------
Total members' equity.................................. (142,242) (141,449)
-------- --------
Total liabilities and members' equity.................. $183,539 $186,447
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 154
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $565,707 $442,310 $586,917
-------- -------- --------
Costs and other charges:
Costs of products sold........................... 314,624 232,104 289,642
Operating expenses............................... 239,645 181,925 220,611
Selling general and administrative expenses...... 73,053 50,303 71,878
-------- -------- --------
627,322 464,332 582,131
-------- -------- --------
(Loss) income from operations.................... (61,615) (22,022) 4,786
-------- -------- --------
Other income (expense):
Interest expense, net............................ (11,943) (8,946) (6,444)
Other, net....................................... 668 333 2,451
-------- -------- --------
(11,275) (8,613) (3,993)
-------- -------- --------
Net (loss) income.................................. $(72,890) $(30,635) $ 793
======== ======== ========
Pro forma data (unaudited) (Note 8):
(Loss) income before pro forma income taxes...... $(72,890) $(30,635) $ 793
Pro forma (benefit) provision for income taxes
relating to limited liability corporation..... (13,223) (4,595) 119
-------- -------- --------
Pro forma net (loss) income...................... $(59,667) $(26,040) $ 674
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 155
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
------- ----------- ---------
<S> <C> <C> <C>
Balances as of December 31, 1996......................... $30,000 $ (99,352) $ (69,352)
Net loss................................................. -- (72,890) (72,890)
------- --------- ---------
Balance as of December 31, 1997.......................... 30,000 (172,242) (142,242)
Net income (unaudited)................................... -- 793 793
------- --------- ---------
Balance as of September 30, 1998
(unaudited)............................................ $30,000 $(171,449) $(141,449)
======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<PAGE> 156
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(72,890) $(30,635) $ 793
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation................................ 16,419 12,821 11,067
Changes in operating assets and liabilities:
Accounts receivable........................... (7,760) (58) 10,328
Inventories................................... (36,923) (65,363) (33,502)
Other assets.................................. 204 (4,145) (3,379)
Accounts payable.............................. 670 10,192 31,449
Payables to related party..................... 122,684 84,948 58,751
Accrued expenses.............................. 3,312 768 18,197
-------- -------- ---------
Net cash provided by operating activities... 25,716 8,528 93,704
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment..... -- -- 3,266
Purchase of property and equipment............... (11,358) (11,358) (16,437)
-------- -------- ---------
Net cash used in investing activities....... (11,358) (11,358) (13,171)
-------- -------- ---------
Cash flows from financing activities:
Contributions from members....................... -- -- --
Proceeds from revolving line of credit........... -- -- --
Repayments of long-term debt..................... (7,707) (5,711) (106,282)
Proceeds from long-term debt..................... -- -- --
-------- -------- ---------
Net cash used in financing activities....... (7,707) (5,711) (106,282)
-------- -------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... 6,651 (8,541) (25,749)
Cash and cash equivalents at beginning of period... 23,072 23,072 29,723
-------- -------- ---------
Cash and cash equivalents at end of period......... $ 29,723 $ 14,531 $ 3,974
======== ======== =========
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 11,943 $ 8,946 $ 6,444
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 157
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Maple Lee Farm 'n' Garden Center, Ltd. (the "Company"), was established in
1996 in response to the growing interest in plants and gardening. The Company is
engaged primarily in the sale of plants and complementing garden giftware and
greeting cards in the central Ohio region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the estimated useful lives
of property and equipment and allowance for doubtful accounts. Actual results
could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory mainly consists of cut flowers, blooming and foliage
plants, and hard goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed principally using accelerated methods. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for betterments
and major improvements are capitalized. The carrying amounts of assets sold or
retired and related accumulated depreciation are removed from the accounts in
the year of disposal and any resulting gains or losses are included in the
statement of operations.
F-57
<PAGE> 158
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
INCOME TAXES
The Company is a Limited Liability Corporation. Under provisions for
Limited Liability Corporations, the Company generally does not pay federal or
state income taxes on its taxable income. The members are liable for such income
taxes on their respective share of the Company's taxable income. Accordingly,
the accompanying financial statements do not reflect a provision for income
taxes.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Building and improvements........................... 7-15 $ 38,992 $ 44,496
Office equipment.................................... 5-7 21,722 26,251
-------- --------
60,714 70,747
Less: accumulated depreciation...................... (22,882) (29,833)
-------- --------
$ 37,832 $ 40,914
======== ========
</TABLE>
F-58
<PAGE> 159
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to a bank, monthly installments of $916
including principal and interest at 8.75%, due May 2001,
collateralized by Company assets.......................... $32,244 $25,962
------- -------
32,244 25,962
Less: current portion of long-term debt..................... (8,491) (9,091)
------- -------
$23,753 $16,871
======= =======
</TABLE>
Annual maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 8,491
1999........................................................ 9,265
2000........................................................ 10,109
2001........................................................ 4,379
-------
$32,244
=======
</TABLE>
5. REVOLVING CREDIT LOAN
The Company has a revolving line of credit (the "Revolver"), that allows
for borrowings of up to $100,000. The Revolver is collateralized by
substantially all the assets of the Company. The interest rate on the Revolver
as of December 31, 1997 and September 30, 1998 was 8.5%. Outstanding borrowings
of $100,000 at December 31, 1997, are due on demand.
6. PROFIT SHARING PLAN
The Company has established a defined contribution plan for all employees
who have completed 6 months of service prior to the start of the plan year,
1,000 hours of service, and are at least 18 years of age. Contributions are
determined, at management's discretion, based upon gross compensation paid to
participants. The employees' vested percentage is based on years of service;
100% vesting occurs after 7 years of service based upon the initial date of
participation. Contributions of approximately $2,000, $900 and $1,440 were made
by the Company during the year ended December 31, 1997 and the nine-month
periods ended September 30, 1997 and 1998, respectively.
7. RELATED PARTY TRANSACTIONS
The Company buys blooming and foliage plants from Maple Lee Flowers Inc.
("Maple Lee"). Maple Lee is owned in part by members of the Company. Included in
cost of sales in the statement of operations for the year ended December 31,
1997 and for the nine-month periods ended September 30, 1997 and 1998 are
purchases from Maple Lee of approximately $107,000, $97,739, and $102,334,
respectively. At December 31, 1997 and at September 30, 1998, the Company has
accounts payable to Maple Lee related to these purchases of $177,436 and
$236,181, respectively.
The Company leases office space from family members of one of its members.
Rental expense for these leases totaled approximately $65,000, $48,600, and
$50,400 for the year ended December 31, 1997 and for the nine-month periods
ended September 30, 1997 and 1998, respectively.
F-59
<PAGE> 160
MAPLE LEE FARM 'N' GARDEN CENTER, LTD.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENT (UNAUDITED)
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received $400,000 of cash from the
Purchaser.
The Purchaser is a C corporation. As such, the accompanying statements of
operations include a pro forma provision (benefit) for income taxes of
$(13,223), $(4,595) and $119 for the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998, respectively.
F-60
<PAGE> 161
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Dr. Delphinium Designs, Inc.
Dallas, Texas
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Dr. Delphinium Designs, Inc. (the
"Company") at December 31, 1997, and the results of its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
June 29, 1998
Miami, Florida
F-61
<PAGE> 162
DR. DELPHINIUM DESIGNS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $145,113 $ 87,936
Accounts receivable....................................... 115,565 68,008
Inventories............................................... 17,562 41,956
Investments............................................... 57,237 --
Prepaid and other current assets.......................... -- 53,560
-------- --------
Total current assets................................... 335,477 251,460
Property and equipment, net................................. 328,968 275,068
Other assets................................................ 56,305 18,722
-------- --------
Total assets........................................... $720,750 $545,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $188,893 $ 81,280
Accrued expenses.......................................... 52,090 92,046
Current portion of long-term capital leases............... 31,419 33,902
Current portion of long-term debt......................... 7,388 --
Dividends payable......................................... 4,320 --
Income taxes payable...................................... 12,500 69,590
-------- --------
Total current liabilities.............................. 296,610 276,818
Long-term capital leases.................................... 85,894 59,751
Long-term debt.............................................. -- --
-------- --------
Total liabilities...................................... 382,504 336,569
-------- --------
Stockholders' equity:
Common stock, no par value, 1,000,000 shares authorized,
1,000 shares issued and outstanding.................... 1,000 1,000
Unrealized holding gain on investments.................... 4,550 --
Retained earnings......................................... 332,696 207,681
-------- --------
Total stockholders' equity............................. 338,246 208,681
-------- --------
Total liabilities and stockholders' equity............. $720,750 $545,250
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE> 163
DR. DELPHINIUM DESIGNS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $2,976,883 $2,161,217 $2,476,543
Other operating revenue............................ 163,950 116,855 147,103
---------- ---------- ----------
3,140,833 2,278,072 2,623,646
---------- ---------- ----------
Costs and other charges:
Costs of products sold........................... 1,085,005 780,342 824,068
Operating expenses............................... 1,302,062 950,049 1,078,455
Selling, general and administrative expenses..... 485,016 361,009 450,772
---------- ---------- ----------
2,872,083 2,091,400 2,353,295
---------- ---------- ----------
Income from operations........................... 268,750 186,672 270,351
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (23,839) (27,721) (4,439)
---------- ---------- ----------
Income before income taxes....................... 244,911 158,951 265,912
Provision for income taxes....................... 91,640 58,158 109,590
---------- ---------- ----------
Net income......................................... $ 153,271 $ 100,793 $ 156,322
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-63
<PAGE> 164
DR. DELPHINIUM DESIGNS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
SHARES OF HOLDING
COMMON COMMON GAIN ON RETAINED
STOCK STOCK INVESTMENTS EARNINGS TOTAL
--------- ------ ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996...... 1,000 $1,000 $ 2,358 $ 274,999 $ 278,357
Net income........................... -- -- -- 153,271 153,271
Unrealized holding gain on
investments........................ -- -- 2,192 -- 2,192
Distributions........................ -- -- -- (95,574) (95,574)
----- ------ ------- --------- ---------
Balance as of December 31, 1997...... 1,000 1,000 4,550 332,696 338,246
Net income (unaudited)............... -- -- -- 156,322 156,322
Unrealized holding gain on
investments (unaudited)............ -- -- (4,550) -- (4,550)
Distributions (unaudited)............ -- -- -- (281,337) (281,337)
----- ------ ------- --------- ---------
Balance as of September 30, 1998
(unaudited)........................ 1,000 $1,000 $ -- $ 207,681 $ 208,681
===== ====== ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 165
DR. DELPHINIUM DESIGNS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $153,271 $ 100,793 $156,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 69,234 50,161 82,782
Bad debt expense.............................. -- -- 7,965
Changes in operating assets and liabilities:
Accounts receivable........................... (20,522) 19,893 39,592
Inventories................................... 3,947 (14,667) (24,394)
Prepaid and other current assets.............. -- -- (53,560)
Other assets.................................. 28,831 9,343 37,583
Accounts payable.............................. (5,864) (84,402) (107,613)
Accrued expenses.............................. (14,400) (6,439) 39,956
Income taxes payable.......................... (3,044) 2,614 57,090
-------- --------- --------
Net cash provided by operating activities... 211,453 77,296 235,723
-------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment............... (25,060) (13,287) (28,882)
(Purchase of) Proceeds from investments.......... (1,319) (1,319) 52,687
-------- --------- --------
Net cash (used in) provided by investing
activities................................ (26,379) (14,606) 23,805
-------- --------- --------
Cash flows from financing activities:
Distributions to stockholders.................... (91,254) (60,697) (285,657)
Repayments of long-term debt..................... (26,205) (22,007) (7,388)
Repayments of long-term capital leases........... (31,187) (28,145) (23,660)
-------- --------- --------
Net cash used in financing activities....... (148,646) (110,849) (316,705)
-------- --------- --------
Net increase in cash and cash equivalents.......... 36,428 (48,159) (57,177)
Cash and cash equivalents at beginning of period... 108,685 108,685 145,113
-------- --------- --------
Cash and cash equivalents at end of period......... $145,113 $ 60,526 $ 87,936
======== ========= ========
Supplemental disclosure of cash flows information:
Cash paid for interest........................... $ 26,683 $ 20,000 $ 13,918
======== ========= ========
Cash paid for income taxes....................... $ 73,702 $ 55,544 $ 52,500
======== ========= ========
Supplemental disclosure of non-cash investing and
financing activities:
Dividend declared and not paid................... $ 4,320 $ 4,320 $ --
======== ========= ========
Lease assets additions and related obligations... $148,500 $ 148,500 $ --
======== ========= ========
</TABLE>
During 1997, the Company transferred two vehicles with a net book value of
$141,000 to a stockholder of the Company in exchange for a note receivable
of $49,000 and the assumption of the related notes payable of $92,000.
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 166
DR. DELPHINIUM DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Dr. Delphinium Designs, Inc. ("the Company") was incorporated on October 4,
1989 and operates as a retailer of cut-flowers and plants selling principally to
the community of Dallas, Texas and surrounding suburbs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Such estimates consist primarily of the
estimated useful lives of property and equipment and allowance for doubtful
accounts. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventories consist of cut flowers and hard goods.
INVESTMENT SECURITIES
The Company owns investment securities which are classified as available
for sale. Investment securities available for sale are recorded at fair value.
Unrealized holding gains and losses on securities available for sale are
included as a separate component of stockholders' equity in the balance sheet
until these gains or losses are realized. The cost of investment securities sold
is determined by the specific identification method. If a security has a decline
in fair value that is other than temporary, the security will be written down to
its fair value by recording a loss in operations.
F-66
<PAGE> 167
DR. DELPHINIUM DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed principally using accelerated methods. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for betterments
and major improvements are capitalized. The carrying amounts of assets sold or
retired and related accumulated depreciation are removed from the accounts in
the year of disposal and any resulting gains or losses are included in the
statement of operations.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
OTHER OPERATING REVENUE
Other operating revenue includes delivery services and service charges.
INCOME TAXES
The Company accounts for income taxes under the assets and liability method
whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the time periods in which the differences are
expected to affect taxable income. A valuation allowance against deferred tax
assets is required if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
F-67
<PAGE> 168
DR. DELPHINIUM DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
RECLASSIFICATIONS
Certain items in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Building and improvements........................... 20 $ 221,860 $ 232,785
Computer equipment.................................. 5-7 121,821 133,330
Furniture and fixtures.............................. 7 34,589 26,971
Vehicles............................................ 5 290,407 228,328
--------- ---------
668,677 621,414
Less: accumulated depreciation...................... (339,709) (346,346)
--------- ---------
$ 328,968 $ 275,068
========= =========
</TABLE>
4. REVOLVING LINE OF CREDIT
The Company had a revolving line of credit (the "Revolver") which allowed
for borrowings of up to $28,500. Advances under this Revolver bore interest at
10.5%. Interest was payable monthly and the principal balance was due on demand.
The Revolver expired in July 1998 and was not renewed. There were no outstanding
borrowings at December 31, 1997. The Revolver was personally guaranteed by one
of the stockholders of the Company and was uncollateralized.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to a bank, monthly installments of $434
including principal and interest at 7%, due May 1999,
collateralized by the underlying asset.................... $ 7,388 $--
------- ---
7,388 --
Less: current portion of long-term debt................... (7,388) --
------- ---
$ -- $--
======= ===
</TABLE>
F-68
<PAGE> 169
DR. DELPHINIUM DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM CAPITAL LEASES
During 1997, the Company entered into two capital leases for five delivery
vans. The capital lease agreements are between the Company and a stockholder of
the Company. Minimum future lease commitments under these obligations are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
1998........................................................ $ 42,000 $ 10,500
1999........................................................ 42,000 42,000
2000........................................................ 42,000 42,000
2001........................................................ 13,468 13,468
-------- --------
Total minimum lease payments................................ 139,468 107,968
Less: amount representing interest.......................... (22,155) (14,315)
-------- --------
Present value of net minimum lease payments................. 117,313 93,653
Less: current portion of long-term capital leases........... (31,419) (33,902)
-------- --------
$ 85,894 $ 59,751
======== ========
</TABLE>
7. PROVISION FOR INCOME TAXES
The components of the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal................................................... $80,486
State..................................................... 11,154
-------
91,640
-------
Deferred:
Federal................................................... --
State..................................................... --
-------
--
-------
$91,640
=======
</TABLE>
F-69
<PAGE> 170
DR. DELPHINIUM DESIGNS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASE COMMITMENTS
The Company leases office space under an operating lease. Minimum future
lease commitments under this operating lease at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 84,000
1999........................................................ 84,000
2000........................................................ 84,000
2001........................................................ 84,000
2002........................................................ 84,000
--------
Total minimum lease payments.............................. $420,000
========
</TABLE>
Rent expense for the year ended December 31, 1997 and for the nine-month
periods ended September 30, 1997 and 1998 was approximately $102,000, $94,000
and $103,000, respectively.
9. RELATED PARTY TRANSACTIONS
During 1997, the Company sold a recreational vehicle to an officer of the
Company for $95,641. The recreational vehicle had been acquired by the Company
during 1996.
10. SUBSEQUENT EVENT (UNAUDITED)
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $3.1
million through a combination of cash and stock of the Purchaser.
F-70
<PAGE> 171
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Arizona Wholesale Floral Co.
dba Cactus Flower Florists:
We have audited the accompanying balance sheet of Arizona Wholesale Floral Co.
dba Cactus Flower Florists (an Arizona corporation) as of August 31, 1998, and
the related statements of operations, stockholders' deficit and cash flows for
the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Arizona Wholesale Floral Co.
dba Cactus Flower Florists as of August 31, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
December 16, 1998.
F-71
<PAGE> 172
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
BALANCE SHEET
AUGUST 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 17,282
Accounts receivable, net of allowance for doubtful
accounts of $6,914..................................... 50,967
Inventories............................................... 267,010
Prepaid and other current assets.......................... 15,912
---------
Total current assets................................... 351,171
PROPERTY AND EQUIPMENT, net................................. 156,411
OTHER ASSETS, net........................................... 14,478
---------
Total assets........................................... $ 522,060
=========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 70,184
Current portion of capital lease obligation............... 8,609
Accounts payable.......................................... 426,867
Accrued expenses.......................................... 125,301
---------
Total current liabilities.............................. 630,961
CAPITAL LEASE OBLIGATION, less current portion.............. 23,326
---------
Total liabilities...................................... 654,287
---------
STOCKHOLDERS' DEFICIT:
Voting Class A common stock, $1 par value; 500,000 shares
authorized, 2,500 shares issued and outstanding........ 2,500
Nonvoting Class B common stock, $1 par value; 500,000
shares authorized, 2,500 shares issued and
outstanding............................................ 2,500
Additional paid-in capital................................ 226,469
Accumulated deficit....................................... (363,696)
---------
Total stockholders' deficit............................ (132,227)
---------
Total liabilities and stockholders' deficit............ $ 522,060
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE> 173
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C>
REVENUE:
Product sales............................................. $3,971,601
Service and other revenue................................. 825,388
----------
4,796,989
OPERATING COSTS AND EXPENSES:
Cost of product sales..................................... 1,410,589
Operating expenses........................................ 2,291,715
Selling, general and administrative expenses.............. 968,127
----------
Operating income....................................... 4,670,431
----------
OPERATING INCOME............................................ 126,558
INTEREST EXPENSE............................................ (19,737)
INTEREST INCOME............................................. 1,006
----------
Net income before pro forma income taxes............... 107,827
PRO FORMA INCOME TAX PROVISION (NOTE 9)..................... 43,066
----------
Pro forma net income after tax......................... $ 64,761
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE> 174
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
STATEMENT OF STOCKHOLDERS' DEFICIT
AUGUST 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
VOTING NONVOTING PAID-IN ACCUMULATED
CLASS A CLASS B CAPITAL DEFICIT TOTAL
------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, August 31, 1997.............. $ 5,000 $ -- $226,469 $(405,176) $(173,707)
Conversion of common stock into
voting and nonvoting classes..... (2,500) 2,500 -- -- --
Net income.......................... -- -- -- 107,827 107,827
Distributions to stockholders....... -- -- -- (66,347) (66,347)
------- ------ -------- --------- ---------
BALANCE, August 31, 1998.............. $ 2,500 $2,500 $226,469 $(363,696) $(132,227)
======= ====== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE> 175
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 107,827
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 61,657
(Increase) decrease in:
Accounts receivable, net............................. 26,020
Inventories.......................................... (131,706)
Other current assets................................. (12,145)
Increase (decrease) in:
Accounts payable..................................... 76,622
Accrued expenses..................................... 34,039
---------
Net cash provided by operating activities......... 162,314
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (35,680)
Acquisition of customer lists............................. (18,023)
---------
Net cash used in investing activities............. (53,703)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................... (45,060)
Distribution to stockholders.............................. (66,347)
---------
Net cash used in financing activities............. (111,407)
---------
NET DECREASE IN CASH........................................ (2,796)
CASH, beginning of year..................................... 20,078
---------
CASH, end of year........................................... $ 17,282
=========
SUPPLEMENTAL DISCLOSURES OF CASH INFORMATION:
Cash payments for interest................................ $ 19,737
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE> 176
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
1. BACKGROUND
NATURE OF BUSINESS
Arizona Wholesale Floral Co. (the Company) is engaged in the retail sale of
flowers and flower arrangements. The Company operates four locations in the
Phoenix area under the name Cactus Flower Florists. The Company grants credit to
customers, substantially all of whom are Phoenix residents and businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
INVENTORIES
The Company values inventories, which consist of merchandise held for
resale, on an average cost basis. Cost is determined by utilizing the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance and repairs are
charged against income as incurred. Expenditures for major renewals,
replacements and betterments, which extend the assets' useful life, are
capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Equipment held under capital lease.......................... 5 years
Delivery vehicles........................................... 5 years
</TABLE>
Property and equipment consisted of the following as of August 31, 1998:
<TABLE>
<S> <C>
Equipment held under capital lease.......................... $ 44,919
Delivery vehicles........................................... 253,465
--------
298,384
Less -- accumulated depreciation............................ 141,973
--------
$156,411
========
</TABLE>
OTHER ASSETS
Acquired customer lists are included in the accompanying balance sheet as
other assets and are amortized over five years (see Note 5).
F-76
<PAGE> 177
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SERVICE AND OTHER REVENUE
Service and other revenue includes rebates and commissions received for
orders placed through FTD and TeleFlora, delivery services and telephone
charges. Revenue is recognized at the time the related sale or service occurs.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended August 31, 1998 was $262,995.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade and other receivables. The Company
has not experienced significant losses with respect to its receivables.
INCOME TAXES
The Company, with the consent of its stockholders, has elected to be
recognized as an S corporation under the appropriate federal and state tax
codes. In lieu of corporate income taxes, the stockholders of an S corporation
are taxed on their proportionate share of the Company's taxable income. As a
result, the recognition of current and deferred income taxes is not needed in
the accompanying financial statements. See Note 9 for further discussion.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. LONG-TERM DEBT AND CAPITAL LEASE
Long-term debt consisted of the following at August 31, 1998:
<TABLE>
<S> <C>
Term loan payable to a bank in 35 monthly installments of
approximately $649, plus interest at a rate of 9.5%....... $13,977
Various financing agreements with GMAC with interest payable
at varying rates. Payment terms are for three to five
years..................................................... 56,207
-------
Current portion of long-term debt........................... $70,184
=======
</TABLE>
In October 1998, the Company retired all outstanding debt. Accordingly, the
debt is classified as current in the accompanying balance sheet.
The Company also leases certain telephone equipment under a capital lease
agreement expiring November 2001. The capital lease agreement provides for
repayment over five years with monthly principal and interest payments of
approximately $1,045.
F-77
<PAGE> 178
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum payments for the capital lease are as follows at August 31,
1998:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999........................................................ $12,539
2000........................................................ 12,539
2001........................................................ 12,539
2002........................................................ 3,135
-------
Total minimum lease payments................................ 40,752
Less -- amount representing interest........................ 8,817
-------
31,935
Less -- current maturity.................................... 8,609
-------
Long-term obligation........................................ $23,326
=======
</TABLE>
4. RETIREMENT PLAN
Effective February 1, 1998, the Company adopted a defined contribution
retirement plan (the Plan) covering all employees age 18 and over who have been
employed for at least one year with 1,000 hours of service. The Company may make
a matching contribution to each participant based on the participant's elective
deferrals in a percentage set by the Company prior to the end of each Plan year.
Employee contributions are limited to a maximum of 15% of the employee's gross
compensation. Plan participant's interest in employer matching contributions
vest over a period of four years. Subsequent to year end, the Company terminated
the Plan and fully vested all participants with account balances in the Plan
effective September 12, 1998. Prior to the Plan's termination but subsequent to
August 31, 1998, the Company made a discretionary contribution of $11,065.
5. ACQUISITIONS
In September 1997, the shareholders of the Company purchased all of the
stock of a flower shop for approximately $18,000 in cash. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired based upon the fair value at
the date of acquisition. Substantially all of the assets acquired consist of the
acquired flower shop's customer list. As such, the entire purchase price has
been allocated to the customer list. The asset is included in other assets,
presented net of accumulated amortization of $3,605.
6. LEASE COMMITMENTS
The Company leases certain facilities, equipment and vehicles from related
and unrelated parties. Future minimum lease payments under these operating
leases are as follows for the years ending August 31:
<TABLE>
<S> <C>
1999........................................................ $102,377
2000........................................................ 63,137
--------
$165,514
========
</TABLE>
Rental expense for the year ended August 31, 1998, consists of $225,765 to
unrelated parties and $87,300 to related parties (see Note 8).
F-78
<PAGE> 179
ARIZONA WHOLESALE FLORAL CO.
dba CACTUS FLOWER FLORISTS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDERS' EQUITY
Effective August 1, 1998, the Company amended its Articles of Incorporation
and converted its common stock into two classes. Each existing issued share of
common stock was exchanged for one-half (1/2) share of Class A voting common
stock (Class A Common) and one-half (1/2) share of Class B nonvoting common
stock (Class B Common). No additional common stock was issued in the conversion.
Each share of Class A Common entitles the holder to one vote. With the exception
of the varying voting privileges, the rights of Class A Common and Class B
Common are identical. Any dividends paid or distributed by the Company shall be
paid or distributed ratably to the holders of Class A Common and Class B Common.
In the event of any liquidation, dissolution or winding up of the Company
(Liquidation Event), whether voluntary or involuntary, after payments of the
debts and other liabilities of the Company, the holders of Class A Common and
Class B Common are entitled to share ratably in the remaining assets of the
Company.
8. RELATED PARTIES
The Company leases certain facilities from S&F Investment Company, an
entity under common ownership, on a month-to-month basis. S&F Investment Company
is also a partner in Bell Scottsdale LLC, a joint venture to construct a retail
complex. The Company intends to lease space from the building being constructed
by Bell Scottsdale LLC once complete.
9. SUBSEQUENT EVENT
Subsequent to August 31, 1998, the stockholders of the Company (the
Stockholders) entered into an agreement with an unrelated party (the Purchaser)
to sell all of the assets and liabilities of the Company. In consideration, the
Stockholders received an aggregate of $3 million through a combination of cash
and stock of the Purchaser.
The Purchaser is a C corporation. As such, the accompanying statement of
operations includes a pro forma income tax provision of $43,066 to reflect the
Company's income tax expense at an effective rate of 39.9% (federal tax and
state tax, net of federal benefit) for the year.
F-79
<PAGE> 180
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
A.G.A. Flowers, Inc.:
We have audited the accompanying balance sheet of A.G.A. Flowers, Inc. (a
Florida corporation) as of December 31, 1997, and the related statements of
operations and accumulated deficit and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of A.G.A. Flowers, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
September 25, 1998.
F-80
<PAGE> 181
A.G.A. FLOWERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including a pledged certificate
of deposit of $17,716 in 1997 and $10,198 (unaudited)
in 1998)............................................... $ 361,507 $ 337,419
Accounts receivable, net of allowance for uncollectible
accounts of $341,650 in 1997 and $381,978 (unaudited)
in 1998................................................ 1,059,664 664,334
Other receivables......................................... 84,518 14,354
Inventories............................................... 26,844 15,973
Prepaid expenses.......................................... 82,662 65,534
Deferred income taxes..................................... 60,000 60,000
---------- ----------
Total current assets................................... 1,675,195 1,157,614
PROPERTY AND EQUIPMENT, net................................. 81,492 94,247
OTHER ASSETS................................................ 11,170 11,170
---------- ----------
Total assets........................................... $1,767,857 $1,263,031
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable, including amounts due to related parties
of $260,530 in 1997 and $124,600 (unaudited) in 1998... $ 573,202 $ 367,162
Accrued expenses............................................ 190,686 198,173
Income taxes payable........................................ 40,000 95,955
Current portion of long-term debt........................... 360,000 --
---------- ----------
Total current liabilities.............................. 1,163,888 661,290
---------- ----------
LONG-TERM DEBT, less current portion........................ 45,000 --
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDER'S EQUITY:
Common stock, $1 par value, 10,000 shares authorized, 800
shares issued and outstanding in 1997 and 1998
(unaudited)............................................ 800 800
Additional paid-in capital................................ 699,000 699,000
Accumulated deficit....................................... (140,831) (98,059)
---------- ----------
Total shareholder's equity............................. 558,969 601,741
---------- ----------
Total liabilities and shareholder's equity............. $1,767,857 $1,263,031
========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-81
<PAGE> 182
A.G.A. FLOWERS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
SALES, net........................................... $10,425,302 $7,988,495 $8,499,141
COST OF SALES........................................ 7,903,146 6,060,395 6,480,223
----------- ---------- ----------
Gross profit.................................... 2,522,156 1,928,100 2,018,918
----------- ---------- ----------
OPERATING EXPENSES:
General and administrative......................... 1,118,432 817,556 792,672
Selling............................................ 500,010 384,198 466,586
Warehouse and shipping............................. 394,488 298,274 309,984
Depreciation and amortization...................... 27,176 22,035 17,163
----------- ---------- ----------
Total operating expenses........................ 2,040,106 1,522,063 1,586,405
----------- ---------- ----------
INCOME FROM OPERATIONS............................... 482,050 406,037 432,513
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income.................................... 36,104 34,011 9,350
Interest expense................................... (45,926) (35,683) (16,707)
----------- ---------- ----------
Total other income (expense).................... (9,822) (1,672) (7,357)
----------- ---------- ----------
Income before provision for income taxes........ 472,228 404,365 425,156
PROVISION FOR INCOME TAXES........................... 101,600 88,000 145,000
----------- ---------- ----------
Net income...................................... 370,628 316,365 280,156
Cash dividends.................................. -- -- (237,384)
ACCUMULATED DEFICIT, beginning of year............... (511,459) (511,459) (140,831)
----------- ---------- ----------
ACCUMULATED DEFICIT, end of year..................... $ (140,831) $ (195,094) $ (98,059)
=========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-82
<PAGE> 183
A.G.A. FLOWERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $370,628 $316,365 $280,156
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization...................... 27,176 22,035 17,163
Provision (benefit) for deferred taxes............. 21,600 37,300 (13,700)
Provision for uncollectible accounts............... 180,306 137,911 84,309
Changes in assets and liabilities:
(Increase) decrease in accounts receivable....... (213,256) (53,848) 311,021
(Increase) decrease in other receivables......... (26,133) (15,034) 70,164
(Increase) decrease in inventories............... (54) 18,914 10,871
(Increase) decrease in prepaid expenses.......... (55,879) (46,464) 17,128
Decrease in other assets......................... 40 -- --
Increase (decrease) in accounts payable.......... 88,012 (93,846) (206,040)
Increase in accrued expenses..................... 2,562 10,627 7,487
Increase in income taxes payable................. 40,000 30,700 69,655
-------- -------- --------
Net cash provided by operating activities..... 435,002 364,660 648,214
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................. (19,450) (11,003) (29,918)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt.................. (710,000) (545,000) (405,000)
Draws on revolving loan agreement..................... 410,000 310,000 --
Cash dividends........................................ -- -- (237,384)
-------- -------- --------
Net cash used in financing activities......... (300,000) (235,000) (642,384)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS...................................... 115,552 118,657 (24,088)
CASH AND CASH EQUIVALENTS, beginning of period.......... 245,955 245,955 361,507
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period................ $361,507 $364,612 $337,419
======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Interest paid......................................... $ 48,959 $ 41,872 $ 18,702
======== ======== ========
Income taxes paid..................................... $ 40,000 $ 20,000 $ 59,100
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-83
<PAGE> 184
A.G.A. FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO THE
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 ARE UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
A.G.A. Flowers, Inc., (the "Company"), was organized in 1991 and is engaged
in the import and wholesale distribution of fresh cut flowers from Colombia and
Ecuador to wholesalers located principally on the eastern seaboard of the United
States and Canada.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998, and the results of its operations and cash
flows for the nine months ended September 30, 1997 and 1998. The results of
operations and cash flows for the nine months ended September 30, 1998 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the year ended December 31, 1998.
b. CASH AND CASH EQUIVALENTS
Cash equivalents include investments with original maturities of three
months or less.
c. REVENUE RECOGNITION
Nearly all inventories are received on a consignment basis. As the
inventories are sold, the Company remits a certain percentage of the sale price,
less certain costs, to the vendor. At that time, revenue and the related costs
are recognized.
d. INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out method ("FIFO") and consist primarily of fresh cut flowers.
e. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization and are depreciated using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Office furniture and equipment.............................. 5 years
Warehouse fixtures and coolers.............................. 10 years
Vehicle..................................................... 3 years
Leasehold improvements...................................... 5 years
</TABLE>
f. 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 reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the period reported. Actual results
could differ from those estimates.
F-84
<PAGE> 185
A.G.A. FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
g. INCOME TAXES
The Company accounts for income taxes under the asset and liability
approach which requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial reporting and the tax bases of assets and liabilities.
h. FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade accounts receivable. The Company places its temporary cash investments
with financial institutions of high quality. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000. At December 31, 1997 and
September 30, 1998, the Company's uninsured cash balances totaled $196,282 and
$172,805, respectively. In the opinion of management, concentrations of credit
risk with respect to trade account receivables are limited due to the large
number of customers comprising the Company's customer base and their dispersion
across different geographic areas.
Management believes the carrying amount of cash and cash equivalents,
accounts receivable, accounts payable and debt approximate fair value at
December 31, 1997 and September 30, 1998.
i. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires an entity to report comprehensive income and its
components for fiscal years beginning after December 15, 1997. The Company
believes SFAS No. 130 does not have a material effect on the information already
disclosed in the Company's financial statements as comprehensive income is equal
to net income or loss.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," requires an entity to expense
all software development costs incurred in the preliminary project stage,
training costs and data conversion costs for fiscal years beginning after
December 15, 1998. The Company believes that this statement will not have a
material effect on the Company's accounting for computer software development or
acquisition.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires the
immediate expensing of current start-up costs as well as existing costs
previously capitalized for fiscal years beginning after December 15, 1998. The
Company has no capitalized start-up costs as of December 31, 1997 or September
30, 1998.
F-85
<PAGE> 186
A.G.A. FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Office furniture and equipment.............................. $ 310,703 $ 337,208
Warehouse fixtures and coolers.............................. 167,195 169,800
Leasehold improvements...................................... 100,720 101,528
Vehicle..................................................... 9,545 9,545
--------- ---------
588,163 618,081
Less -- accumulated depreciation and amortization........... (506,671) (523,834)
--------- ---------
$ 81,492 $ 94,247
========= =========
</TABLE>
4. RELATED PARTIES
The Company makes substantial purchases from two suppliers which are
related to it through common ownership and control. Management believes that
these purchases are made in the regular course of business and on terms similar
to those offered by unrelated suppliers. Purchases from these related suppliers
totaled $2,831,000, $1,774,038 and $1,679,797 for the periods ended December 31,
1997 and September 30, 1997 and 1998, respectively. These suppliers were owed
$260,530 and $124,600 as of December 31, 1997 and September 30, 1998,
respectively. Beginning October 1997, the president's salary was paid by these
suppliers.
In May 1998, one of the suppliers borrowed $200,000 under a loan agreement
with the Company. Interest was payable monthly at 7.87% and the principal was
due on demand. The supplier paid off the loan in September 1998.
At December 31, 1997 and September 30, 1998, the Company had a receivable
of $63,379 and $-0-, respectively, from another supplier under common ownership.
5. BANK DEBT
At December 31, 1997, the Company had a $105,000 loan outstanding to a
bank, payable in quarterly installments of $15,000 plus interest at the rate of
1.75% over the bank's prime rate (8.5% at December 31, 1997). The loan was
collateralized by substantially all of the Company's assets and had an original
maturity of July 1, 1999. As of September 1998, the Company had paid-off the
outstanding balance.
The Company also has a revolving loan agreement in the principal amount of
$600,000 with the same bank. Advances ($300,000 at December 31, 1997 and $-0- at
September 30, 1998) against this facility are based on a percentage of qualified
accounts receivable. This loan bears interest at the rate of 1.75% over the
bank's prime rate (8.5% at December 31, 1997). The agreement is collateralized
by the Company's accounts receivable and matures on July 1, 1999. Principal
payments are determined on a monthly basis based on the level of eligible
accounts receivable.
At December 31, 1997 and September 30, 1998, the Company had an unused
$10,000 letter of credit which is maintained as security for performance under
the Company's lease agreement. The letter of credit is collateralized by a
pledged certificate of deposit.
F-86
<PAGE> 187
A.G.A. FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company had another unused $25,000 letter of
credit which serves as collateral on bonds, issued by an insurance company, for
import duties.
6. INCOME TAXES
The provision for income taxes reflected in the accompanying financial
statements consists of the following:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED
ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1997 1997 1998
------------ -------- ---------
<S> <C> <C> <C>
Current income tax expense............................... $ 80,000 $50,700 $158,700
Deferred income tax provision (benefit):
Allowance for uncollectible accounts................... (32,400) (7,800) (13,700)
Depreciation........................................... 4,000 (4,900) --
Utilization of net operating losses.................... 50,000 50,000 --
-------- ------- --------
Provision for income taxes.......................... $101,600 $88,000 $145,000
======== ======= ========
</TABLE>
The current income tax expense for the year ended December 31, 1997 and the
period ended September 30, 1997 does not recompute at the statutory rate
primarily due to the utilization of available loss carryforwards totaling
$147,000. No additional Federal income tax loss carryforwards are available for
periods after December 31, 1997.
At December 31, 1997 and September 30, 1998, the Company had net deferred
tax assets of approximately $70,000, resulting primarily from the allowance for
uncollectible accounts, tax/book basis differences of property and equipment and
expenses recorded for financial reporting purposes.
7. COMMITMENTS AND CONTINGENCIES
The Company occupies warehouse and office space under a two-year lease
which expired in August 1998. In July 1998, the Company signed an addendum to
the lease which extended the lease until August 2001. The lease agreement, as
amended, provides for minimum annual rental payments as follows:
<TABLE>
<S> <C>
1998........................................................ $128,069
1999........................................................ 131,460
2000........................................................ 136,712
2001........................................................ 87,540
--------
$483,781
========
</TABLE>
As a result of an investigation concerning the alleged dumping of flowers
in the U.S. market by foreign growers, the U.S. Department of Commerce began
assessing importers a duty based on the import value of certain flowers from
certain growers. The Company currently estimates and remits the estimated
assessment based on the most current information available. During 1997, $37,177
was estimated as the assessment and charged to operations. The final assessment
for the years 1991 through 1997 is subject to determination by the U.S.
Department of Commerce and may result in additional charges or refunds.
F-87
<PAGE> 188
A.G.A. FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. 401(k) PLAN
In 1998, the Company started a 401(k) plan (the "Plan") which covers
substantially all employees. The Plan allows for discretionary employer
contributions. Employer contributions for the nine months ended September 30,
1998 were $11,830.
9. STOCK OPTION
In October 1995, the president of the Company was granted an option to
purchase 20% of the Company's common stock for $50,834, the fair value of the
common stock at December 31, 1995. Pursuant to the grant, the book value of the
Company at December 31, 1995 approximated its fair value on that date. The
option expires on December 31, 2000.
10. SALE OF COMPANY
On September 22, 1998, the Company entered into an agreement to be
purchased by an unaffiliated entity for $2.9 million. Prior to the purchase, the
president's option to purchase 20% of the Company's stock was terminated.
F-88
<PAGE> 189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Eastern Floral & Gift Shop, Inc.
We have audited the accompanying consolidated balance sheet of Eastern Floral &
Gift Shop, Inc. and subsidiary (a Michigan Corporation) as of September 30,
1998, and the related statements of income, shareholders' investment and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eastern Floral & Gift Shop,
Inc. and subsidiary as of September 30, 1998, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Grand Rapids, Michigan,
February 25, 1999.
F-89
<PAGE> 190
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 161,259
Accounts receivable, less allowance for doubtful accounts
of $10,350............................................. 502,828
Inventories, less reserve of $15,700...................... 671,508
Prepaid expenses.......................................... 15,573
Deferred tax asset........................................ 182,000
----------
Total Current Assets.............................. 1,533,168
----------
PROPERTY, PLANT AND EQUIPMENT:
Office equipment.......................................... 173,562
Store fixtures............................................ 202,257
Leasehold improvements.................................... 855,855
----------
1,231,674
Less -- Accumulated depreciation.......................... (842,236)
----------
389,438
----------
OTHER ASSETS:
Cash surrender value of life insurance, net of related
policy loans of $229,809, face value $2,740,441........ 527,276
Other..................................................... 1,775
----------
529,051
----------
$2,451,657
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 462,766
Accrued expenses and taxes:
Compensation and payroll taxes......................... 195,098
Income taxes........................................... 91,906
Deferred compensation.................................. 500,000
Other.................................................. 108,075
----------
Total Current Liabilities......................... 1,357,845
----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share:
Authorized 50,000 shares issued and outstanding 46,207
shares................................................ 46,207
Retained earnings......................................... 1,047,605
----------
Total Stockholders' Equity........................ 1,093,812
----------
$2,451,657
==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated statement.
F-90
<PAGE> 191
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
SALES:
Product sales............................................. $6,355,883
Service and other......................................... 476,642
----------
Total sales....................................... 6,832,525
COST OF GOODS SOLD.......................................... 2,559,557
----------
Gross profit.............................................. 4,272,968
----------
OPERATING EXPENSE:
Compensation.............................................. 3,133,342
Other..................................................... 657,908
Selling, general and administrative....................... 214,269
----------
Total operating expenses.......................... 4,005,519
----------
Operating income.......................................... 267,449
----------
OTHER INCOME (EXPENSE):
Forgiveness of deferred compensation...................... 169,700
Interest expense.......................................... (57,439)
Equity interest in partnership............................ (37,092)
Other income.............................................. 20,717
----------
95,886
----------
EARNINGS BEFORE PROVISION FOR INCOME TAXES.................. 363,335
PROVISION FOR INCOME TAXES.................................. (110,500)
----------
NET INCOME.................................................. $ 252,835
==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated statement.
F-91
<PAGE> 192
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDER'S
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
BALANCE, September 30, 1997................................. $46,207 $ 794,770 $ 840,977
NET INCOME.................................................. -- 252,835 252,835
------- ---------- ----------
BALANCE, September 30, 1998................................. $46,207 $1,047,605 $1,093,812
======= ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated statement.
F-92
<PAGE> 193
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 252,835
Adjustments to reconcile net income to net cash provided
by operating activities:
Forgiveness of deferred compensation................... (169,700)
Depreciation........................................... 64,132
Deferred income taxes.................................. 41,298
Changes in operating assets and liabilities:
Accounts receivable.................................... 71,724
Inventories............................................ (32,847)
Prepaid expenses....................................... (1,295)
Accounts payable....................................... (78,900)
Accrued expenses and taxes............................. 92,395
Other non-current...................................... (25,231)
-----------
Net cash provided by operating activities......... 214,411
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loss from sale of property, plant & equipment............. (1,198)
Additions to property, plant & equipment.................. (37,289)
Liquidation of partnership................................ 334,592
Notes receivable.......................................... 34,600
-----------
Net cash provided by investing activities......... 330,705
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt.......................................... (3,475,684)
Issuance of debt.......................................... 2,966,000
-----------
Net cash used by financing activities............. (509,684)
-----------
INCREASE IN CASH............................................ 35,432
CASH, beginning of the period............................... 125,827
-----------
CASH, end of the period..................................... $ 161,259
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................... 57,317
Income taxes........................................... 8,340
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of this consolidated statement.
F-93
<PAGE> 194
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(1) NATURE OF BUSINESS
Eastern Floral & Gift Shop, Inc. ("the Company") was incorporated in 1965
and currently operates out of three locations in West Michigan. The Company's
principal business activity is retail sales of floral arrangements and gifts.
The Company grants credit to both corporate and personal customers in the normal
course of business, substantially all of whom are located in the West Michigan
area.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of its wholly
owned subsidiary, Eastern Floral & Gift Shop of Holland, Inc. which was acquired
on March 1, 1995. All material intercompany transactions and balances have been
eliminated.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost as determined at the date
of acquisition. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets. Useful lives for property, plant and
equipment are as follows:
<TABLE>
<CAPTION>
DESCRIPTION 1998
- ----------- ----------
<S> <C>
Office equipment............................................ 3-10 years
Store fixtures.............................................. 5-10 years
Leasehold improvements...................................... 5-20 years
</TABLE>
INVENTORY
Inventory is valued at lower of cost or market, with cost determined on a
first-in, first-out basis.
(3) PROFIT-SHARING PLAN
The Company maintains a defined contribution profit-sharing plan which
covers substantially all employees. Contributions are made at the sole
discretion of the Board of Directors. In order to be eligible to participate, an
employee must be twenty-one years of age and have completed one year of service
with the Company. Contributions by the Company to the Plan totaled $42,800 for
the year ended September 30, 1998.
(4) 401(k) PLAN
The Company maintains a contributory employee's investment plan also known
as a 401(k) Plan which covers substantially all employees. An employee must be
twenty-one years of age and have completed one year of service in order to be
eligible to participate in the Plan. Contributions to the Plan
F-94
<PAGE> 195
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by the Company are made at the sole discretion of the Board of Directors.
Matching contributions by the Company to the Plan totaled $12,284 for the year
ended September 30, 1998.
(5) NOTES PAYABLE
Under a line of credit agreement with a bank, the Company has available
borrowings limited to $550,000 of which there were no outstanding borrowings at
September 30, 1998. Interest under this agreement is at the bank's prime rate
which was 8.5% at September 30, 1998. The agreement is secured by accounts
receivable, inventory and equipment.
(6) DEFERRED COMPENSATION PLAN
The Company has entered into a deferred compensation and salary
continuation agreement with a key employee calling for ten annual payments of
$66,200 beginning at the retirement or death of the employee and subject to
increases in the Consumer Price Index. The shareholder has reached retirement
age, and increases to the deferred liability reflect changes in the Consumer
Price Index.
The liability has been accrued each year using the present value method.
The associated deferred interest portion of this liability has been calculated
using an interest rate of four percent. The Company has purchased life insurance
policies which it intends to use to finance this liability.
In November 1998, the majority shareholder was paid $500,000 in full
settlement of the deferred compensation plan. Payment was made by transfer of
certain life insurance policies to the majority shareholder. The effect of this
transaction is the recognition of a gain of $169,700 included in other income at
September 30, 1998.
(7) OPERATING LEASES
At September 30, 1998, the Company is obligated under long-term operating
leases for certain buildings and equipment which contain provisions for renewal
options.
The Company leases certain delivery equipment from a partnership which is
controlled by the majority shareholder. The lessee is obligated under annual
operating leases to pay all insurance, fees, and maintenance expenses. Rental
expense under this lease amounted to $163,407 for the year ended September 30,
1998. Also, see related party transactions.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of September 30, 1998.
<TABLE>
<S> <C>
1999........................................................ $86,953
2000........................................................ 74,194
2001........................................................ 50,359
2002........................................................ 43,084
2003........................................................ 43,084
Thereafter.................................................. 213,501
</TABLE>
Total minimum lease payments do not include contingent rentals that may be
paid under two retail store leases. Contingent rentals are based on a percentage
of gross sales, as defined, in excess of specified amounts.
F-95
<PAGE> 196
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of rental expense under all operating leases
for the year ended September 30, 1998:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Minimum rentals............................................. $260,538
Contingent rentals.......................................... 40,819
--------
Total............................................. $301,357
========
</TABLE>
(8) INCOME TAXES
The provision for income taxes includes amounts for deferred income taxes
resulting from items (principally deferred compensation) reported for income tax
purposes in a period different from that for financial statement purposes.
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Currently payable........................................... $ 69,100
Deferred.................................................... 41,400
--------
$110,500
========
</TABLE>
The following table represents a reconciliation of income taxes at the
United States statutory rate with the effective tax rate as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Provision for income taxes at federal statutory rates....... $123,600
Non-taxable cash surrender value increases.................. (14,000)
Other....................................................... 900
--------
Total............................................. $110,500
========
</TABLE>
The tax effects and types of temporary differences that give rise to
significant components of the deferred tax asset at September 30, 1998 are
presented below:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Deferred Tax Asset:
Deferred compensation..................................... $160,000
Other..................................................... 24,000
--------
Total............................................. 184,000
--------
Deferred Tax Liabilities:
Other..................................................... (2,000)
--------
Total............................................. $182,000
========
</TABLE>
(9) RELATED PARTY TRANSACTIONS
The Company's majority shareholder also owns a controlling interest in a
partnership from which the Company leases certain delivery equipment as outlined
in Note 7. Prices are comparable to those that would be paid to third parties.
F-96
<PAGE> 197
EASTERN FLORAL & GIFT SHOP, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUBSEQUENT EVENTS
In October 1998, the shareholders of the Company sold all of the Company's
outstanding shares to Gerald Stevens, Inc. for approximately $2.9 million.
Gerald Stevens, Inc. is a holding company of several retail floral companies.
Since Gerald Stevens is a C Corporation for Federal and state income tax
purposes, the accompanying statements of operations present a pro forma income
tax provision and pro forma net income as they would have been reported had the
Company been subject to Federal and state income taxes. The pro forma effective
income tax rate of 40% exceeds the Federal statutory rate due to the impact of
state income taxes.
In November 1998, the Company transferred certain life insurance policies
to employees covered by those policies, net of related notes payable. Other life
insurance policies were cashed out, the proceeds of which were paid to the
employees covered under those policies, net of related notes payable. (See Note
6 for additional description). These transactions will result in a tax liability
of approximately $95,000 in the period subsequent to September 30, 1998.
Accordingly, this liability has not been recorded as of September 30, 1998.
F-97
<PAGE> 198
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Martina's Flowers & Gifts, Inc.
Dallas, Texas
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of Martina's Flowers & Gifts, Inc.
(the "Company") at December 31, 1997, and the results of its operations and its
cash flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
December 23, 1998
Miami, Florida
F-98
<PAGE> 199
MARTINA'S FLOWERS & GIFTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 89,777 $ 87,278
Due from officer.......................................... 58,454 --
Inventories............................................... 99,040 141,957
Other current assets...................................... 2,461 2,455
---------- ----------
Total current assets................................... 249,732 231,690
Property and equipment, net................................. 146,618 133,956
---------- ----------
Total assets........................................... $ 396,350 $ 365,646
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft............................................ $ 26,546 $ 36,859
Accounts payable.......................................... 137,824 124,739
Accrued expenses.......................................... 152,477 79,578
Due to officer............................................ -- 110,610
Revolving line of credit.................................. 45,000 44,574
Current portion of long-term debt......................... 60,145 60,145
---------- ----------
Total current liabilities.............................. 421,992 456,505
Long-term debt, net of current portion...................... 770,576 720,343
---------- ----------
Total liabilities...................................... 1,192,568 1,176,848
---------- ----------
Commitments (Note 7)
Stockholders' deficit:
Common stock, no par value, 10,000 shares authorized;
1,000 shares issued.................................... 1,000 1,000
Retained deficit.......................................... (177,218) (192,202)
---------- ----------
(176,218) (191,202)
---------- ----------
Less: Treasury stock, at cost, 660 shares in 1997 and
1998................................................... (620,000) (620,000)
---------- ----------
Total stockholders' deficit............................ (796,218) (811,202)
---------- ----------
Total liabilities and stockholders' deficit............ $ 396,350 $ 365,646
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE> 200
MARTINA'S FLOWERS & GIFTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $1,673,325 $1,157,140 $1,146,468
Other operating revenue............................ 186,231 136,707 130,159
---------- ---------- ----------
1,859,556 1,293,847 1,276,627
---------- ---------- ----------
Costs and other charges:
Costs of products sold........................... 800,476 523,701 567,700
Operating expenses............................... 666,584 513,917 449,846
Selling, general and administrative expenses..... 226,900 142,731 201,824
---------- ---------- ----------
1,693,960 1,180,349 1,219,370
---------- ---------- ----------
Income from operations........................... 165,596 113,498 57,257
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (74,805) (78,279) (74,676)
Other............................................ 7,743 6,128 2,435
---------- ---------- ----------
(67,062) (72,151) (72,241)
---------- ---------- ----------
Net income (loss).................................. $ 98,534 $ 41,347 $ (14,984)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE> 201
MARTINA'S FLOWERS & GIFTS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COST OF
SHARES OF COMMON STOCK COMMON
------------------------ COMMON STOCK IN RETAINED
ISSUED IN TREASURY STOCK TREASURY DEFICIT TOTAL
-------- ------------- ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1996.................... 1,000 (660) $1,000 $(620,000) $(256,803) $(875,803)
Net income................ -- -- -- -- 98,534 98,534
Distributions............. -- -- -- -- (18,949) (18,949)
----- ------------- ------ --------- --------- ---------
Balance as of December 31,
1997.................... 1,000 (660) 1,000 (620,000) (177,218) (796,218)
Net loss (unaudited)...... -- -- -- -- (14,984) (14,984)
----- ------------- ------ --------- --------- ---------
Balance as of September
30, 1998 (unaudited).... 1,000 (660) $1,000 $(620,000) $(192,202) $(811,202)
===== ============= ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE> 202
MARTINA'S FLOWERS & GIFTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $ 98,534 $ 41,347 $ (14,984)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation.................................. 24,812 4,418 12,662
Changes in operating assets and liabilities:
Accounts receivable........................... 28,799 7,280 2,499
Inventories................................... (16,450) (41,578) (42,917)
Other current assets.......................... 4,429 -- 6
Accounts payable.............................. 16,955 29,258 (13,085)
Accrued expenses.............................. (58,641) (28,497) (72,899)
-------- --------- ---------
Net cash provided by (used in) operating
activities............................... 98,438 12,228 (128,718)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............... (20,043) (3,101) --
-------- --------- ---------
Net cash used in investing activities....... (20,043) (3,101) --
-------- --------- ---------
Cash flows from financing activities:
(Decrease) increase in bank overdraft............ (19,876) 37,855 10,313
Distributions to stockholders.................... (18,949) (26,794) --
(Payments to) proceeds from officer, net......... (58,454) 106,393 169,064
Repayments of long-term debt..................... (26,116) (126,581) (50,233)
Proceeds from revolving line of credit, net...... 45,000 -- (426)
-------- --------- ---------
Net cash (used in) provided by financing
activities............................... (78,395) (9,127) 128,718
-------- --------- ---------
Net change in cash and cash equivalents............ -- -- --
Cash and cash equivalents at beginning of period... -- -- --
-------- --------- ---------
Cash and cash equivalents at end of period......... $ -- $ -- $ --
======== ========= =========
Supplemental disclosure of cash flows information:
Cash paid for interest........................ $ 93,807 $ 83,477 $ 85,471
======== ========= =========
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
During 1997, approximately $134,000 of a note receivable and note payable
to the same related party were cancelled in a non-cash transaction.
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE> 203
MARTINA'S FLOWERS & GIFTS, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Martina's Flowers & Gifts, Inc. ("the Company") was incorporated under the
laws of the state of Georgia in July 1979. The Company is located in Augusta,
Georgia and sells fresh flowers, giftware and silk arrangements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Such estimates consist primarily of the
estimated useful lives of property and equipment. Actual results could differ
from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventories consist of cut flowers and hard goods.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed principally using accelerated methods. Expenditures for repairs
and maintenance are charged to expense as incurred. Expenditures for betterments
and major improvements are capitalized. The carrying amounts of assets sold or
retired and related accumulated depreciation are removed from the accounts in
the year of disposal and any resulting gains or losses are included in the
statement of operations.
F-103
<PAGE> 204
MARTINA'S FLOWERS & GIFTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
OTHER OPERATING REVENUE
Other operating revenue includes delivery services and service charges.
INCOME TAXES
The Company accounts for income taxes under the assets and liability method
whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the time periods in which the differences are
expected to affect taxable income. A valuation allowance against deferred tax
assets if, based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
F-104
<PAGE> 205
MARTINA'S FLOWERS & GIFTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Building and improvements........................... 7 - 31.5 $ 71,729 $ 71,729
Computer equipment.................................. 5 44,723 44,723
Furniture and fixtures.............................. 5 - 10 72,984 72,984
Vehicles............................................ 3 - 7 184,497 184,497
--------- ---------
373,933 373,933
Less: accumulated depreciation...................... (227,315) (239,977)
--------- ---------
$ 146,618 $ 133,956
========= =========
</TABLE>
4. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit (the "Revolver") that allows for
borrowings of up to $45,000. Advances under this Revolver bear interest at two
percent above the bank's prime rate (10.5% and 10.25% at December 31, 1997 and
September 30, 1998, respectively). Interest is payable monthly and the principal
balance is due September 1998, subject to annual renewals. The Revolver is
collateralized by substantially all of the assets of the Company.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to stockholder, monthly installments of $5,000
including principal and interest at 7.5% annually, due
August 2007, non-collateralized........................... $454,561 $424,559
Note payable to stockholder, monthly installments of $2,880
including principal and interest at 7.75% annually, due
September 2012, non-collateralized........................ 302,507 295,522
Other....................................................... 73,653 60,407
-------- --------
830,721 780,488
Less: current portion of long-term debt................... (60,145) (60,145)
-------- --------
$770,576 $720,343
======== ========
</TABLE>
F-105
<PAGE> 206
MARTINA'S FLOWERS & GIFTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 60,145
1999........................................................ 63,718
2000........................................................ 58,558
2001........................................................ 58,298
2002........................................................ 57,132
Thereafter.................................................. 532,870
--------
$830,721
========
</TABLE>
6. INCOME TAXES
Income taxes have not been provided for in the accompanying financial
statements due to net operating loss carryforwards available to the Company. At
December 31, 1997, the Company had remaining unutilized net operating loss
carryforwards of approximately $117,000 for federal and state income tax
purposes. The losses are available for a fifteen year period and will begin to
expire beginning in 2007. The net deferred tax asset of approximately $39,000
has been fully reserved for by an offsetting valuation allowance in the same
amount.
7. LEASE COMMITMENTS
The Company leases office space under an operating lease. Minimum future
lease commitments under this operating lease at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ $ 58,000
1999........................................................ 60,000
2000........................................................ 61,000
2001........................................................ 63,000
2002........................................................ 32,000
--------
Total minimum lease payments.............................. $274,000
========
</TABLE>
Rent expense for the year ended December 31, 1997 and for the nine-month
periods ended September 30, 1997 and 1998 was approximately $59,000, $51,000 and
$43,000, respectively.
8. SUBSEQUENT EVENT
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $1.9
million through a combination of cash and stock of the Purchaser.
F-106
<PAGE> 207
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Norton Group, Inc. and Subsidiaries
Ypsilanti, Michigan
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Norton
Group, Inc. and Subsidiaries (the "Company") at December 31, 1997, and the
results of its operations and its cash flows for the year ended December 31,
1997, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
December 23, 1998
Miami, Florida
F-107
<PAGE> 208
NORTON GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 76,449 $ 64,999
Accounts receivable, net of allowance for uncollectible
accounts of $2,000 for 1997 and 1998................... 64,932 23,282
Inventories............................................... 299,026 329,530
Investments............................................... 82,115 --
Prepaid expenses.......................................... 12,177 --
Refundable federal income tax............................. 7,300 --
Current maturities of notes receivable.................... 26,642 --
-------- --------
Total current assets................................... 568,641 417,811
-------- --------
Property and equipment, net................................. 74,396 109,844
Notes receivable, less current maturities................... 137,269 --
Goodwill, net of accumulated amortization of $3,888 and
$4,343, respectively...................................... 20,349 19,894
Cash surrender value of life insurance...................... 21,008 --
Other....................................................... 1,863 4,532
-------- --------
Total assets........................................... $823,526 $552,081
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $141,095 $103,415
Income taxes payable...................................... 34,055 50,044
Current portion of long-term debt......................... 23,266 6,241
Revolving line of credit.................................. 8,443 3,339
-------- --------
Total current liabilities.............................. 206,859 163,039
Long-term debt, net of current portion...................... 253,917 27,154
Deferred income taxes....................................... 25,800 3,500
-------- --------
Total liabilities...................................... 486,576 193,693
-------- --------
Stockholders' equity:
Common stock, $1 par value, 50,000 shares authorized, 100
shares issued and outstanding.......................... 100 100
Stock subscription receivable............................. (100) --
Additional paid-in capital................................ 10,000 10,000
Unrealized holding gain on investments.................... 7,014 --
Retained earnings......................................... 319,936 348,288
-------- --------
336,950 358,388
-------- --------
$823,526 $552,081
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-108
<PAGE> 209
NORTON GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $1,936,934 $1,293,363 $1,507,187
Other operating revenue............................ 227,675 182,711 225,145
---------- ---------- ----------
2,164,609 1,476,074 1,732,332
---------- ---------- ----------
Costs and other charges:
Cost of products sold............................ 736,437 516,628 618,224
Operating expenses............................... 1,064,426 749,666 861,961
Selling, general and administrative expenses..... 253,140 191,073 219,450
---------- ---------- ----------
2,054,003 1,457,367 1,699,635
---------- ---------- ----------
Income from operations........................... 110,606 18,707 32,697
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (1,408) (1,862) (3,210)
Other............................................ 22,903 13,739 22,065
---------- ---------- ----------
21,495 11,877 18,855
---------- ---------- ----------
Income before income taxes....................... 132,101 30,584 51,552
Provision for income taxes....................... 16,300 3,700 23,200
---------- ---------- ----------
Net income....................................... $ 115,801 $ 26,884 $ 28,352
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-109
<PAGE> 210
NORTON GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
SHARES OF STOCK ADDITIONAL HOLDING
COMMON COMMON SUBSCRIPTION PAID-IN GAIN ON RETAINED
STOCK STOCK RECEIVABLE CAPITAL INVESTMENTS EARNINGS TOTAL
--------- ------ ------------ ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31,
1996............... 100 $ 100 $(100) $10,000 $ -- $204,135 $214,135
Net income........... -- -- -- -- -- 115,801 115,801
Unrealized holding
gain on
investments........ -- -- -- -- 7,014 -- 7,014
--------- ------ ----- ------- ------- -------- --------
Balance as of
December 31,
1997............... 100 100 (100) 10,000 7,014 319,936 336,950
Net income
(unaudited)........ -- -- -- -- -- 28,352 28,352
Capital contribution
(unaudited)........ -- -- 100 -- -- -- 100
Unrealized holding
gain on investments
(unaudited)........ -- -- -- -- (7,014) -- (7,014)
--------- ------ ----- ------- ------- -------- --------
Balance as of
September 30, 1998
(unaudited)........ 100 $ 100 $ -- $10,000 $ -- $348,288 $358,388
========= ====== ===== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-110
<PAGE> 211
NORTON GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $115,801 $26,884 $ 28,352
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 11,793 9,301 9,957
(Loss) gain on sale of property and equipment... 3,528 -- (2,500)
Gain on sale of investments..................... -- -- (6,634)
Deferred income taxes........................... 7,600 8,600 (22,300)
Loss from assets transferred to and liabilities
assumed from officer.......................... -- -- 28,219
Changes in operating assets and liabilities:
Accounts receivable............................. (517) 24,696 41,650
Inventories..................................... (48,673) (59,147) (30,504)
Prepaid expenses................................ (12,177) -- 12,177
Refundable federal income tax................... (4,660) 2,640 7,300
Other assets.................................... -- (11,932) (2,669)
Accounts payable................................ 10,529 26,683 (37,680)
Income taxes payable............................ 18,037 8,719 15,989
-------- ------- --------
Net cash provided by operating activities..... 101,261 36,444 41,357
-------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment, net........... (19,395) (15,528) (42,450)
Cash surrender value of life insurance............. (5,245) (5,245) --
Purchases of investments, net...................... (30,852) (9,378) --
Proceeds from notes receivable..................... 23,849 15,597 14,867
-------- ------- --------
Net cash used in investing activities......... (31,643) (14,554) (27,583)
-------- ------- --------
Cash flows from financing activities:
Repayments of short-term debt...................... (15,000) (15,000) --
Repayments of long-term debt....................... (20,126) (4,344) (20,220)
Capital contribution............................... -- -- 100
Borrowings under revolving line of credit, net..... 8,443 -- (5,104)
-------- ------- --------
Net cash used in financing activities......... (26,683) (19,344) (25,224)
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents........................................ 42,935 2,546 (11,450)
Cash and cash equivalents at beginning of period..... 33,514 33,514 76,449
-------- ------- --------
Cash and cash equivalents at end of period........... $ 76,449 $36,060 $ 64,999
======== ======= ========
Supplemental disclosure of cash flows information:
Cash paid for interest.......................... $ 25,876 $19,347 $ 18,123
======== ======= ========
Cash paid for income taxes...................... $ -- $ -- $ 41,200
======== ======= ========
Non-cash unrealized holding gain on
investments................................... $ 7,014 $12,521 $ (7,014)
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-111
<PAGE> 212
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Norton Group, Inc. and Subsidiaries (the "Company") is a retailer in the
business of selling floral arrangements, plants and gift items. The Company's
four stores are located in Michigan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of Norton Group,
Inc. and its subsidiaries Norton and Son, Inc. and Durant's Floral Company. All
significant intercompany transactions have been eliminated.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the estimated useful lives
of property and equipment and allowance for uncollectible accounts. Actual
results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenues when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory consists of cut flowers, plants and gift items.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful live of the assets. Expenditures for repairs and maintenance are charged
to expense as incurred. Expenditures for betterments and major
F-112
<PAGE> 213
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
improvements are capitalized. The carrying amounts of assets sold or retired and
related accumulated depreciation are removed from the accounts in the year of
disposal and any resulting gains or losses are included in the statement of
operations.
INVESTMENTS
The Company owns investment securities which are classified as available
for sale. Investment securities available for sale are recorded at fair value.
Unrealized holding gains and losses on securities available for sale are
included as a separate component of stockholders' equity in the balance sheet
until these gains or losses are realized. The cost of investment securities sold
is determined by the specific identification method. If a security has a decline
in fair value that is other than temporary, the security will be written down to
its fair value by recording a loss in operations
INCOME TAXES
The Company accounts for income taxes under the assets and liability method
whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the time periods in which the differences are
expected to affect taxable income. A valuation allowance against deferred tax
assets is required if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
GOODWILL
Goodwill resulted from the acquisition of Durant's Flowers, Inc. on August
1, 1991 and is being amortized on a straight-line basis over a period of 40
years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. This
statement is effective for fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
F-113
<PAGE> 214
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Furniture and fixtures............................... 5 - 17 $180,268 $193,294
Leasehold improvements............................... 31 51,120 83,044
-------- --------
231,388 276,338
Less: accumulated depreciation....................... (156,992) (166,494)
-------- --------
$ 74,396 $109,844
======== ========
</TABLE>
4. NOTES RECEIVABLE
Notes receivable, including amounts receivable within one year, consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Land contract receivable from Norton Development Co., an
affiliated company, 11% annual interest, monthly payments
including interest of $1,812.............................. $ 82,034
Land contract receivable from Norton Development Co., an
affiliated company, 11% annual interest, monthly payments
including interest of $1,801.............................. 81,877
--------
163,911
Less: current maturities.................................... (26,642)
--------
$137,269
========
</TABLE>
During 1998, the notes receivable were canceled in a non-cash transaction
(see Note 10).
5. INVESTMENTS
At December 31, 1997 and September 30, 1998, substantially all of the
Company's investments were classified as available for sale. The difference
between the cost and fair market value of those securities is shown as a
separate component of stockholders' equity.
The amortized cost and fair values of investment securities at December 31,
1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Mutual funds....................................... $69,146 $7,014 $-- $76,160
FTD stock.......................................... 5,955 -- -- 5,955
------- ------ --- -------
$75,101 $7,014 $-- $82,115
======= ====== === =======
</TABLE>
At December 31, 1997, the Company maintained an equity investment in the
Floral Transworld Delivery (FTD) organization of $5,955 in order to participate
in that system.
F-114
<PAGE> 215
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, the investments were distributed to a stockholder of the
Company in a non-cash transaction (see Note 10).
6. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit (the "Revolver") that allows for
borrowings of up to $50,000. Advances under this Revolver bear interest at two
percent over the bank's prime rate (10.5% and 10.25% at December 31, 1997 and
September 30, 1998, respectively). Interest is payable monthly and the principal
balance is due on demand. The Revolver expires in January 1999 and is subject to
annual renewals. There were outstanding borrowings of $8,443 and $3,339 at
December 31, 1997 and September 30, 1998, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to WCD Flowers, Inc., 9.5% annual interest,
monthly payments of $3,133 including interest, secured by
personal guaranty of officer. Matures October 1, 2006..... $225,374 $ --
Note payable to Norton Development Co., an affiliated
company, 7% annual interest, monthly payments of $612
including interest, unsecured. Matures September 26,
2004...................................................... 51,809 33,395
-------- -------------
277,183 33,395
Less: current portion of long-term debt..................... (23,266) (6,241)
-------- -------------
$253,917 $ 27,154
======== =============
</TABLE>
During 1998, the note payable to WCD Flowers, Inc. was assumed by a
stockholder of the Company in a non-cash transaction (see Note 10).
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 23,266
1999........................................................ 25,406
2000........................................................ 27,747
2001........................................................ 30,975
2002........................................................ 33,413
Thereafter.................................................. 136,376
--------
$277,183
========
</TABLE>
F-115
<PAGE> 216
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PROVISION FOR INCOME TAXES
The components of the provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal................................................... $ 8,700
-------
Deferred:
Federal................................................... 7,600
-------
$16,300
=======
</TABLE>
At December 31, 1997, the significant components of the net deferred tax
liability were as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation.............................................. $ 4,300
Installment sale income................................... 21,500
-------
Deferred tax liability.................................... $25,800
=======
</TABLE>
During 1997, the Company utilized net operating loss carryforwards of
approximately $45,000.
9. LEASE COMMITMENTS
The Company leases office space and store facilities under separate
operating lease agreements (see Note 10). Minimum future lease commitments under
these operating leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1998........................................................ $115,000
1999........................................................ 81,000
2000........................................................ 81,000
2001........................................................ 81,000
2002........................................................ 81,000
Thereafter.................................................. 155,000
--------
Total minimum lease payments.............................. $594,000
========
</TABLE>
Rent expense for the year ended December 30, 1997 and the nine-month
periods ended September 30, 1997 and 1998 was approximately $128,000, $96,000
and $98,000, respectively.
10. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997 and the nine-month periods ended
September 30, 1997 and 1998, Norton and Son, Inc. rented its facilities from
Norton Development Company, an affiliated partnership. Total rent expense for
the year ended December 31, 1997 and for the nine-month periods ended September
30, 1997 and 1998 was approximately $57,000, $43,000 and $44,000, respectively.
F-116
<PAGE> 217
NORTON GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1997 and the nine-month periods ended
September 30, 1997 and 1998, Norton and Son, Inc. charged Norton Development
Company for management, accounting and computer services. The total amount
charged for these services during the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998 was approximately $14,000,
$9,000 and $7,000, respectively.
During 1998, the Company distributed certain assets to a stockholder of the
Company and the stockholder assumed a note payable, as presented in the
following table:
<TABLE>
<S> <C>
Assets distributed:
Notes receivable.......................................... $149,044
Investments............................................... 81,735
Cash surrender value of life insurance.................... 21,008
--------
251,787
Liabilities assumed:
Note payable.............................................. 223,568
--------
$ 28,219
========
</TABLE>
The excess of $28,219 is presented as a component of selling, general and
administrative expenses in the accompanying statement of operations for the
nine-month period ended September 30, 1998.
11. SUBSEQUENT EVENT
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $1.6
million through a combination of cash and stock of the Purchaser.
F-117
<PAGE> 218
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Jennie's Flower Shop, Inc.
Tampa, Florida
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Jennie's Flower Shop, Inc. (the
"Company") at December 31, 1997, and the results its operations and its cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
December 23, 1998
Miami, Florida
F-118
<PAGE> 219
JENNIE'S FLOWER SHOP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 8,429
Accounts receivable, net of allowance for uncollectible
accounts of $44,987 and $39,587, respectively.......... 248,833 163,351
Inventories............................................... 119,809 117,454
Investments............................................... 214,407 49,114
Other current assets...................................... 38,459 --
-------- --------
Total current assets................................... 621,508 338,348
Cash surrender value of life insurance...................... 79,374 --
Property and equipment, net................................. 234,460 240,463
Other assets................................................ 2,903 713
-------- --------
Total assets........................................... $938,245 $579,524
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft............................................ $137,291 $ --
Accounts payable.......................................... 137,978 142,822
Accrued expenses.......................................... 51,105 33,126
Notes payable to stockholders............................. 137,572 --
Revolving line of credit.................................. 151,702 161,523
Current portion of long-term debt......................... 42,483 13,142
-------- --------
Total current liabilities.............................. 658,131 350,613
Long-term debt, net of current portion...................... 27,451 32,315
Deferred taxes.............................................. -- 800
-------- --------
Total liabilities...................................... 685,582 383,728
-------- --------
Stockholders' equity:
Common stock, $1 par value, 7,000 shares authorized, 100
shares issued and outstanding.......................... 100 100
Additional paid-in capital................................ 25,032 25,032
Unrealized holding gain on investments.................... 47,193 12,140
Retained earnings......................................... 180,338 158,524
-------- --------
Total stockholders' equity............................. 252,663 195,796
-------- --------
Total liabilities and stockholders' equity............. $938,245 $579,524
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE> 220
JENNIE'S FLOWER SHOP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net sales.......................................... $3,703,212 $2,743,058 $2,737,056
Other operating revenue............................ 443,696 485,598 463,061
---------- ---------- ----------
4,146,908 3,228,656 3,200,117
---------- ---------- ----------
Costs and other charges:
Costs of products sold........................... 1,485,069 1,107,800 1,034,718
Operating expenses............................... 1,805,403 1,789,642 1,726,995
Selling, general and administrative expenses..... 1,004,435 461,315 484,813
---------- ---------- ----------
4,294,907 3,358,757 3,246,526
---------- ---------- ----------
Loss from operations............................. (147,999) (130,101) (46,409)
---------- ---------- ----------
Other income (expense):
Interest expense, net............................ (11,556) (8,487) (31,744)
Other income, net................................ 140,485 70,343 71,274
---------- ---------- ----------
128,929 61,856 39,530
---------- ---------- ----------
Loss before income taxes......................... (19,070) (68,245) (6,879)
Provision for income taxes....................... 17,645 12,244 14,935
---------- ---------- ----------
Net loss........................................... $ (36,715) $ (80,489) $ (21,814)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE> 221
JENNIE'S FLOWER SHOP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF UNREALIZED
SHARES OF ADDITIONAL HOLDING (LOSS)
COMMON COMMON PAID-IN GAIN ON RETAINED
STOCK STOCK CAPITAL INVESTMENTS EARNINGS TOTAL
--------- ------ ---------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1996..................... 100 $100 $25,032 $ (4,514) $217,053 $237,671
Net loss................... -- -- -- -- (36,715) (36,715)
Unrealized holding gain on
investments.............. -- -- -- 51,707 -- 51,707
--- ---- ------- -------- -------- --------
Balance as of December 31,
1997..................... 100 100 25,032 47,193 180,338 252,663
Net loss (unaudited)....... -- -- -- -- (21,814) (21,814)
Unrealized holding loss on
investments
(unaudited).............. -- -- -- (35,053) -- (35,053)
--- ---- ------- -------- -------- --------
Balance as of September 30,
1998 (unaudited)......... 100 $100 $25,032 $ 12,140 $158,524 $195,796
=== ==== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-121
<PAGE> 222
JENNIE'S FLOWER SHOP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(36,715) $(80,489) $(21,814)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................ 28,926 17,374 25,032
Increase (decrease) in allowance for uncollectible
accounts.............................................. 19,000 19,000 (5,400)
Loss on disposal of property and equipment.............. 12,559 -- 9,275
Changes in operating assets and liabilities:
Accounts receivable..................................... 77,004 87,014 90,882
Inventories............................................. (9,916) (5,370) 2,355
Other assets............................................ (344) 44,465 40,649
Accounts payable........................................ (10,660) (802) 4,844
Accrued expenses........................................ 8,401 74,282 (21,843)
Income taxes payable.................................... -- (2,677) 3,864
-------- -------- --------
Net cash provided by operating activities............. 88,255 152,797 127,844
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (92,081) (29,866) (40,310)
Proceeds from sale of investments......................... 397,310 -- 130,240
Purchases of investments.................................. (366,640) (51,713) --
Increase in cash surrender value of life insurance........ (72,578) -- 79,374
-------- -------- --------
Net cash used in (provided by) investing activities... (133,989) (81,579) 169,304
-------- -------- --------
Cash flows from financing activities:
(Decrease) increase in bank overdraft..................... (70,321) (46,080) (137,291)
Borrowings from stockholders.............................. 137,572 -- (137,572)
Repayments of revolving line of credit, net............... (10,000) (43,109) (34,849)
Proceeds from short-term debt............................. -- 9,443 16,029
Proceeds from long-term debt.............................. 37,050 8,528 4,164
Repayments of long-term debt.............................. (48,567) -- --
Increase in deferred taxes................................ -- -- 800
-------- -------- --------
Net cash provided by (used in) financing activities... 45,734 (71,218) (288,719)
-------- -------- --------
Net increase in cash and cash equivalents................... -- -- 8,429
Cash and cash equivalents at beginning of period............ -- -- --
-------- -------- --------
Cash and cash equivalents at end of period.................. $ -- $ -- $ 8,429
======== ======== ========
Supplemental disclosure of cash flows information:
Cash paid for interest................................ $ 19,034 $ 17,320 $ 33,488
======== ======== ========
Cash paid for income taxes............................ $ 37,684 $ -- $ --
======== ======== ========
Non-cash unrealized holding gain (loss) on
investments........................................ $ 51,707 $ (681) $(35,053)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-122
<PAGE> 223
JENNIE'S FLOWER SHOP, INC.
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
Jennie's Flower Shop, Inc. (the "Company") was incorporated in the state of
Florida in 1978. The Company is a retail flower and gift shop and a grower of
blooming flowers and plants servicing the Tampa, Florida region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates consist primarily of the estimated useful lives
of property and equipment and allowance for doubtful accounts. Actual results
could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The financial statements and all related footnote information for the
nine-month periods ended September 30, 1997 and 1998, respectively, are
unaudited and reflect all normal and recurring adjustments which are in the
opinion of management, necessary for a fair presentation of the financial
position, operating results and cash flows for the interim period. The results
of operation for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results to be achieved for the 1998 fiscal year.
REVENUE RECOGNITION
The Company recognizes revenue when inventory is shipped.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with maturities of three
months or less when purchased to be cash equivalents. The Company places its
temporary cash investments with high credit quality financial institutions. At
times, such investments may be in excess of the F.D.I.C. insurance limits. The
Company has not experienced any loss to date on these investments.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The inventory consists of cut flowers, blooming and foliage plants and
hard goods.
INVESTMENTS
The Company owns investment securities which are classified as available
for sale. Investment securities available for sale are recorded at fair value.
Unrealized holding gains and losses on securities available for sale are
included as a separate component of stockholders' equity in the balance sheet
until these gains or losses are realized. The cost of investment securities sold
is determined by the specific identification method. If a security has a decline
in fair value that is other than temporary, the security will be written down to
its fair value by recording a loss in operations.
F-123
<PAGE> 224
JENNIE'S FLOWER SHOP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets. Expenditures for repairs and maintenance are charged
to expense as incurred. Expenditures for betterments and major improvements are
capitalized. The carrying amounts of assets sold or retired and related
accumulated depreciation are removed from the accounts in the year of disposal
and any resulting gains or losses are included in the statement of operations.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. Historically, the Company has not experienced significant
losses with respect to its receivables.
OTHER OPERATING REVENUE
Other operating revenue includes rebates and commissions received for
orders placed through FTD, delivery services and service charges.
INCOME TAXES
The Company accounts for income taxes under the assets and liability method
whereby deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the time periods in which the differences are
expected to affect taxable income. A valuation allowance against deferred tax
assets is required if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
("SFAS No. 130") which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates
F-124
<PAGE> 225
JENNIE'S FLOWER SHOP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
certain disclosures that are no longer useful. This statement is effective for
fiscal years beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131 and No. 132 and their applicability to the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES DECEMBER 31, SEPTEMBER 30,
(IN YEARS) 1997 1998
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements.............................. 5 - 20 $ 153,672 $ 152,387
Furniture and fixtures.............................. 7 43,526 47,569
Computer equipment.................................. 5 52,085 51,512
Vehicles............................................ 5 105,292 128,452
--------- ---------
354,575 379,920
Less: accumulated depreciation (120,115) (139,457)
--------- ---------
$ 234,460 $ 240,463
========= =========
</TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ --------------
(UNAUDITED)
<S> <C> <C>
Note payable to a bank, monthly installments of $4,712 of
principal and interest at 10.13%, due August 1998,
collateralized by Company assets.......................... $ 34,056 $ --
Note payable to a bank, monthly installments of $433 of
principal and interest at 7.25%, due October 2001,
collateralized by the underlying asset.................... 17,021 13,587
Note payable to a bank, monthly installments of $463 of
principal and interest at 7.75%, due July 2001,
collateralized by the underlying asset.................... 18,857 14,329
Note payable to a bank, monthly installments of $450 of
principal and interest at 7.75%, due July 2002,
collateralized by the underlying asset.................... -- 17,541
-------- --------
69,934 45,457
Less: current portion of long-term debt................ (42,483) (13,142)
-------- --------
$ 27,451 $ 32,315
======== ========
</TABLE>
F-125
<PAGE> 226
JENNIE'S FLOWER SHOP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1998........................................................ $42,483
1999........................................................ 9,154
2000........................................................ 9,827
2001........................................................ 8,470
-------
Total..................................................... $69,934
=======
</TABLE>
5. REVOLVING LINE OF CREDIT
The Company has a revolving line of credit (the "Revolver") that allows for
borrowings of up to $175,000 at December 31, 1997 and September 30, 1998.
Advances under this Revolver bear interest at one percent over the bank's prime
rate (9.5% and 9.25% at December 31, 1997 and September 30, 1998, respectively).
Interest is payable quarterly and the principal balance is due on demand. There
were outstanding borrowings of $151,702 and $116,853 at December 31, 1997 and
September 30, 1998, respectively. The Revolver is collateralized by
substantially all the assets of the Company.
6. NOTES PAYABLE TO STOCKHOLDERS
During 1997, the Company borrowed $137,572 from two of its stockholders.
The notes bear interest at 7.5%. Principal and accrued interest are payable on
demand.
7. LEASE COMMITMENTS
The Company leases office space and office equipment under operating
leases. Minimum future lease commitments under these operating leases at
December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $43,000
1999........................................................ 37,000
2000........................................................ 19,000
-------
Total minimum lease payments................................ $99,000
=======
</TABLE>
Rent expense, including rent on the related party lease (see Note 9), for
the year ended December 31, 1997 and for the nine-month periods ended September
30, 1997 and 1998 was approximately $193,000, $142,000 and $128,000,
respectively.
8. INCOME TAXES
The provision for income taxes in the accompanying financial statements
differs from the statutory rates due to certain permanent differences primarily
related to the non-deductability of certain officers life insurance premiums for
income tax purposes.
9. EMPLOYEE BENEFITS
The Company has established a qualified 401(k) plan covering substantially
all employees. Contributions made by employees are matched at the Company's
discretion, and the Company has the option of making additional contributions.
Contributions of approximately $4,400, $3,300 and $4,500
F-126
<PAGE> 227
JENNIE'S FLOWER SHOP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were made by the Company during the year ended December 31, 1997 and the
nine-month periods ended September 30, 1997 and 1998, respectively.
10. RELATED PARTY TRANSACTIONS
The Company purchases inventory from a corporation related through common
ownership and provides labor, materials, and supplies to this corporation.
Purchases from this related party totaled approximately $749,000, $584,000 and
$604,000 for the year ended December 31, 1997 and for the nine-month periods
ended September 30, 1997 and 1998, respectively. Charges for labor, materials,
and supplies to this related party totaled approximately $112,000, $35,000 and
$13,000 for the year ended December 31, 1997 and for the nine-month periods
ended September 30, 1997 and 1998, respectively.
The Company leases its premises from one of the stockholders of the Company
and from a corporation related through common ownership on a month-to-month
basis. Rent expense related to these leases for the year ended December 31, 1997
and for the nine-month periods ended September 30, 1997 and 1998 was
approximately $152,000, $114,000 and $114,000, respectively.
11. SUBSEQUENT EVENT
On October 1, 1998, the stockholders of the Company (the "Stockholders")
sold the stock of the Company to an unrelated third party (the "Purchaser"). In
consideration for the stock, the Stockholders received an aggregate of $3.6
million through a combination of cash and stock of the Purchaser.
F-127
<PAGE> 228
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
J.J. Fallon Company, Inc.
We have audited the accompanying balance sheet of J.J. Fallon Company, Inc.
d/b/a Fallon's Creative Flowers (a North Carolina corporation) as of June 30,
1998, and the related statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J.J. Fallon Company, Inc. d/b/a
Fallon's Creative Flowers as of June 30, 1998, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
January 22, 1999.
F-128
<PAGE> 229
J.J. FALLON COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
-------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $180,049 $ 30,192
Accounts receivable, net of allowance for doubtful
accounts of $14,000.................................... 153,434 182,206
Inventories............................................... 234,868 269,650
Prepaid and other current assets.......................... 11,685 2,689
-------- --------
Total current assets.............................. 580,036 484,737
-------- --------
Property and equipment --
Furniture and fixtures................................. 116,478 116,478
Equipment and machinery................................ 245,842 253,386
Vehicles............................................... 122,442 132,192
Leasehold improvements................................. 310,961 318,608
-------- --------
795,723 820,664
Less -- Accumulated depreciation.......................... (674,323) (693,224)
-------- --------
121,400 127,440
-------- --------
Intangible assets, net of accumulated amortization of
$19,900................................................... 43,427 42,476
Deferred tax benefit........................................ 27,310 31,839
-------- --------
Total assets...................................... $772,173 $686,492
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $456,341 $413,145
Accounts payable.......................................... 43,229 28,518
Accrued expenses.......................................... 33,629 43,504
Income taxes payable...................................... 35,782 9,091
-------- --------
Total current liabilities......................... 568,981 494,258
-------- --------
Long-term debt.............................................. 2,535 --
-------- --------
Total liabilities................................. 571,516 494,258
-------- --------
Stockholders' equity:
Preferred stock, $1 par; 400,000 shares authorized,
300,000 shares issued and outstanding.................. 300,000 300,000
Common stock, $1 par value; 400,000 shares authorized, 78
shares issued and outstanding.......................... 78 78
Accumulated deficit....................................... (99,421) (107,844)
-------- --------
Total stockholders' equity........................ 200,657 192,234
-------- --------
$772,173 $686,492
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-129
<PAGE> 230
J.J. FALLON COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1998 1998 1997
------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenue:
Product sales.................................. $2,489,406 $ 561,147 $ 519,236
Service and other revenue...................... 674,398 134,211 153,884
---------- ---------- ----------
3,163,804 695,358 673,120
---------- ---------- ----------
Operating costs and expenses:
Cost of product sales.......................... 1,109,288 236,453 225,735
Operating expenses............................. 1,018,755 348,937 309,586
General and administrative expenses............ 736,991 116,460 87,255
---------- ---------- ----------
Operating expenses..................... 2,865,034 701,850 622,576
---------- ---------- ----------
Operating income (loss).......................... 298,770 (6,492) 50,544
Interest and other expenses...................... (45,775) (6,460) (8,869)
Other income..................................... 806 -- --
---------- ---------- ----------
Income (loss) before income taxes................ 253,801 (12,952) 41,675
Income taxes..................................... 88,745 (4,529) 14,572
---------- ---------- ----------
Net income (loss)...................... $ 165,056 $ (8,423) $ 27,103
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-130
<PAGE> 231
J.J. FALLON COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1998 AND
THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK PREFERRED STOCK DEFICIT TOTAL
------------ --------------- ----------- --------
<S> <C> <C> <C> <C>
Balance, June 30, 1997........................ $78 $300,000 $(264,477) $ 35,601
Net income............................... 0 0 165,056 165,056
--- -------- --------- --------
Balance, June 30, 1998........................ 78 300,000 (99,421) 200,657
Net loss (unaudited)..................... 0 0 (8,423) (8,423)
--- -------- --------- --------
Balance, September 30, 1998 (unaudited)....... $78 $300,000 $(107,844) $192,234
=== ======== ========= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-131
<PAGE> 232
J.J. FALLON COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
FOR THE YEAR MONTHS ENDED MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1998 1998 1997
------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $165,056 $ (8,423) $ 27,103
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization............... 48,006 19,852 19,851
(Benefit) provisions for deferred taxes..... -- (4,529) 14,572
(Increase) decrease in:
Accounts receivable, net.................. 9,554 (28,772) (281)
Inventories............................... (53,368) (34,782) (30,536)
Prepaid and other current assets.......... (1,487) 8,996 (3,224)
Deferred tax provision.................... 50,798 -- --
Increase (decrease) in:
Accounts payable.......................... (102,836) (14,711) 13,438
Accrued expenses.......................... 8,803 (16,816) (45,913)
Income taxes payable...................... 24,520 -- --
-------- -------- --------
Net cash provided by (used in)
operating activities............ 149,046 (79,185) (4,990)
-------- -------- --------
Cash flows from investing activities -- Purchases
of property and equipment...................... (19,216) (24,941) (39,821)
-------- -------- --------
Cash flows from financing activities -- Principal
payments on long-term debt..................... (74,931) (45,731) (13,927)
-------- -------- --------
Net increase in cash............................. 54,899 (149,857) (58,738)
Cash, beginning of period........................ 125,150 180,049 125,151
-------- -------- --------
Cash, end of period.............................. $180,049 $ 30,192 $ 66,413
======== ======== ========
Supplemental disclosures of cash information:
Cash payments for interest..................... $ 43,689 $ 6,360 $ 8,869
======== ======== ========
Cash payments for taxes........................ $ 13,427 $ 41,835 $ 0
======== ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-132
<PAGE> 233
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1998 ARE UNAUDITED)
1. BACKGROUND:
NATURE OF BUSINESS
J.J. Fallon Company, Inc. (the Company) is a C Corporation incorporated in
the state of North Carolina. The Company is engaged in the retail sale of
flowers, flower arrangements, and gifts, operating four locations in the Raleigh
area under the name Fallon's Creative Flowers. The Company grants credit to
corporate and personal customers in the normal course of business, substantially
all of whom are located in North Carolina.
ACQUISITION OF COMPANY
In October, 1998, the stockholders of the Company sold all the Company's
outstanding shares to Gerald Stevens, Inc. for approximately $1.9 million less
debt of approximately $448,000 and redemption of preferred stock of $300,000.
Gerald Stevens, Inc. is a holding company of several retail floral companies
located throughout the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited interim financial
statements of the Company contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998, and the statements of its operations and cash
flows for the three months ended September 30, 1998. The results of operations
and cash flows for the three months ended September 30, 1998 are not necessarily
indicative of the results of operations or cash flows which may be reported for
fiscal year 1999.
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
Service and other revenue includes rebates and commissions received for
orders placed through FTD and AFS, delivery services and rental charges. Revenue
is recognized at the time the related sale or service occurs.
INVENTORIES
The Company values inventories, which consist of merchandise held for
resale, on an average cost basis. Cost is determined by utilizing the first-in,
first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Maintenance and repairs are
charged against income as incurred. Expenditures for major renewals,
replacements and betterments, which extend the assets' useful life, are
capitalized.
F-133
<PAGE> 234
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Furniture and Fixtures...................................... 5 to 7 years
Equipment and Machinery..................................... 5 to 7 years
Vehicles.................................................... 3 to 5 years
Leasehold Improvements...................................... 5 to 10 years
</TABLE>
Depreciation of office equipment is recorded as general and administrative
expense. All other depreciation is recorded as operating expense.
INTANGIBLE ASSETS
Goodwill is included in the accompanying balance sheet as other assets and
is amortized on a straight-line basis over 17 years.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended June 30, 1998 was $118,982.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of trade and other receivables. No single
customer comprises more than 10% of revenues. The Company has not experienced
significant losses with respect to its receivables.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
(SFAS No. 130) which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. Management
believes that this standard will not result in significantly greater disclosure
than what is already contained in these financial statements.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. This statement is effective for financial statements for periods
beginning after December 15, 1997.
F-134
<PAGE> 235
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM DEBT:
Long-term debt consists of the following at June 30, 1998:
<TABLE>
<S> <C>
Note payable to preferred stockholder, payable in 111
monthly installments of $2,500 plus 7% fixed interest..... $262,147
Notes payable to a bank, payable in monthly installments of
$4,500 with renewal provisions at two year increments and
variable interest at prime plus 2%. This note is
collateralized by the Company's assets.................... 186,485
Vehicle loans with a bank with interest payable at varying
rates.
Remaining payment terms are between one and two years..... 10,244
--------
Total long-term debt........................................ 458,876
Current portion of long-term debt........................... 456,341
--------
Non-current portion of long-term debt....................... $ 2,535
========
The current portion of long-term debt includes all balances
paid in full in connection with the subsequent acquisition
by Gerald Stevens, Inc. (Note 1)
</TABLE>
5. STOCKHOLDERS' EQUITY:
Preferred stock is convertible upon demand to common stock at a ratio of
one preferred share to one common share.
6. LEASE COMMITMENTS:
The Company leases its retail stores and warehouses under operating leases.
Future minimum lease payments under these leases are as follows for the years
ending June 30:
<TABLE>
<S> <C>
1999........................................................ $ 93,334
2000........................................................ 87,155
2001........................................................ 62,950
2002........................................................ 24,000
2003........................................................ 18,000
--------
$285,439
========
</TABLE>
Rental expense for the year ended June 30, 1998 was $119,901.
7. INCOME TAXES:
The provision for income taxes includes amounts for deferred income taxes,
resulting primarily from utilization of a net operating loss carryforward and
fixed asset depreciation reported for income tax purposes in a period different
from that for financial statement purposes.
The provision for income taxes consists of the following for the year ended
June 30, 1998:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -------
<S> <C> <C> <C>
State............................................. $14,810 $ 3,595 $18,405
Federal........................................... 23,137 47,203 70,340
------- ------- -------
$37,947 $50,798 $88,745
======= ======= =======
</TABLE>
F-135
<PAGE> 236
J.J. FALLON COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following represents a reconciliation of federal income taxes at the
United States statutory rate with the effective rate as follows for the year
ended June 30, 1998:
<TABLE>
<S> <C>
Provision for income taxes at federal statutory rate........ $86,292
Impact of net operating loss carryforward................... (11,747)
Deduction for state tax expense............................. (6,258)
Other....................................................... 2,053
-------
$70,340
=======
</TABLE>
8. SUBSEQUENT EVENTS:
In December, 1998, the Company entered into a purchase agreement to acquire
a florist in Durham, North Carolina under the name Flowers in Woodcroft. In
accordance with the terms of the agreement, the Company purchased the assets and
tradename Flowers in Woodcroft for $210,000.
F-136
<PAGE> 237
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Phoebe Floral, Inc.:
We have audited the accompanying balance sheet of Phoebe Floral, Inc. (a
Pennsylvania Corporation) as of September 30, 1998, and the related statements
of income, stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Phoebe Floral, Inc. as of
September 30, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Lancaster, Pa.,
February 26, 1999.
F-137
<PAGE> 238
PHOEBE FLORAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 355,161 $ 541,771
Trade receivables, less allowance for doubtful accounts of
$19,000................................................. 470,603 240,386
Inventories............................................... 180,000 226,846
Note receivable from shareholder.......................... 85,000 --
Other current assets...................................... 27,096 28,422
---------- ----------
Total current assets............................... 1,117,860 1,037,425
---------- ----------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 286,561 271,301
Furniture and fixtures.................................... 244,483 236,890
Leasehold improvements.................................... 495,552 487,167
---------- ----------
1,026,596 995,358
Less -- Accumulated depreciation.......................... (838,904) (826,253)
---------- ----------
Net property and equipment.............................. 187,692 169,105
---------- ----------
OTHER ASSETS................................................ 25,526 25,503
---------- ----------
Total assets............................................ $1,331,078 $1,232,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 7,788 $ 13,149
Accounts payable and accrued expenses..................... 168,440 138,295
Accrued payroll and payroll taxes......................... 49,846 122,446
Accrued corporate taxes................................... 41,265 24,017
Customer deposits......................................... 22,500 16,855
Dividends payable......................................... -- 55,000
Other current liabilities................................. 11,626 9,294
---------- ----------
Total current liabilities............................... 301,465 379,056
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities................... 73,477 73,477
Deferred gain on sale of assets........................... 6,317 6,695
---------- ----------
Total long-term liabilities............................. 79,794 80,172
---------- ----------
Total liabilities....................................... 381,259 459,228
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, voting $10 par value; authorized 10,000
shares; 8,200 shares issued and 2,930 shares
outstanding............................................. 82,000 82,000
Common stock, nonvoting, $1 par value; authorized 10,000
shares; issued and outstanding 600 shares............... 600 600
Additional paid-in capital................................ 59,712 59,712
Retained earnings......................................... 955,067 778,053
---------- ----------
1,097,379 920,365
Less cost of common stock held in treasury, 5,270 shares.... (147,560) (147,560)
---------- ----------
Total stockholders' equity.............................. 949,819 772,805
---------- ----------
Total liabilities and stockholders' equity.............. $1,331,078 $1,232,033
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-138
<PAGE> 239
PHOEBE FLORAL, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
REVENUE:
Product sales (net of discounts of $44,049
(unaudited), $45,195 (unaudited) and $158,451 for
the three-months ended December 31, 1998 and 1997
and the year ended September 30, 1998,
respectively)...................................... $1,022,072 $1,076,076 $3,749,791
Service and other revenue............................. 181,288 160,793 427,183
---------- ---------- ----------
Total revenue...................................... 1,203,360 1,236,869 4,176,974
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of product sales................................. 626,758 622,842 2,422,482
Operating expenses.................................... 326,344 330,843 1,279,552
Selling, general and administrative................... 78,567 80,145 290,791
---------- ---------- ----------
Total operating expenses........................... 1,031,669 1,033,830 3,992,825
---------- ---------- ----------
Operating income...................................... 171,691 203,039 184,149
---------- ---------- ----------
Interest income....................................... 6,293 5,376 25,936
Interest expense...................................... (2,013) (2,047) (8,770)
Other income.......................................... 1,043 -- 40,652
---------- ---------- ----------
Net income......................................... $ 177,014 $ 206,368 $ 241,967
========== ========== ==========
PRO FORMA:
Net income............................................ $ 177,014 $ 206,368 $ 241,967
Pro forma income tax provision (Note 10).............. 71,691 83,579 97,997
---------- ---------- ----------
Pro forma net income.................................. $ 105,323 $ 122,789 $ 143,970
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-139
<PAGE> 240
PHOEBE FLORAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------- TREASURY ADDITIONAL RETAINED
VOTING NONVOTING STOCK PAID-IN CAPITAL EARNINGS TOTAL
------- --------- --------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997...... $88,000 $ -- $(147,560) $54,312 $656,086 $650,838
Exchange of 600 shares of voting
shares into nonvoting
shares........................ (6,000) 600 -- 5,400 -- --
Net income...................... -- -- -- -- 241,967 241,967
Distribution to stockholders.... -- -- -- -- (120,000) (120,000)
------- ---- --------- ------- -------- --------
Balance at September 30, 1998... 82,000 600 (147,560) 59,712 778,053 772,805
Net income (Unaudited).......... -- -- -- -- 177,014 177,014
------- ---- --------- ------- -------- --------
Balance at December 31, 1998
(Unaudited)................... $82,000 $600 $(147,560) $59,712 $955,067 $949,819
======= ==== ========= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE> 241
PHOEBE FLORAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS MONTHS FOR THE YEAR
ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1997 1998
------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $177,014 $206,368 $241,967
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation....................................... 12,651 22,464 72,882
Gain on sale of property and equipment............. -- -- (32,828)
Amortization of deferred gain on sale of property
and equipment.................................... (378) -- (880)
(Increase) decrease in --
Trade receivables................................ (230,217) (270,076) (37,136)
Inventories...................................... 46,846 50,836 (6,010)
Notes receivable to officer...................... (85,000) -- --
Other assets..................................... 1,303 -- (9,914)
Increase (decrease) in --
Accounts payable and accrued expenses............ (25,207) 8,413 (42,997)
Customer deposits................................ 5,645 (3,056) (8,701)
Other current liabilities........................ 2,332 (7,825) 1,185
-------- -------- --------
Net cash provided by operating activities..... (95,011) 7,124 177,568
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment....... -- -- 105,509
Purchases of property and equipment................ (31,238) (2,715) (10,433)
-------- -------- --------
Net cash provided by investing activities..... (31,238) (2,715) 95,076
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt............... (5,361) (7,312) (25,158)
Dividends to stockholders.......................... (55,000) -- (65,000)
-------- -------- --------
Net cash used in financing activities......... (60,361) (7,312) (90,158)
-------- -------- --------
NET INCREASE IN CASH.................................... (186,610) (2,903) 182,486
CASH, BEGINNING OF PERIOD............................... 541,771 359,285 359,285
-------- -------- --------
CASH, END OF PERIOD..................................... $355,161 $356,382 $541,771
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest......................... $ 2,013 $ 2,047 $ 7,870
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE> 242
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BACKGROUND:
NATURE OF BUSINESS
Phoebe Floral, Inc. (the "Company") is engaged in the retail sale of
flowers and flower arrangements. The Company operates one location in Allentown,
Pennsylvania. The Company grants credit to customers, substantially all of whom
are Lehigh Valley area residents and businesses. The Company is a closely-held
subchapter "S" corporation, the stock of which is held by three individuals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
INVENTORIES
Inventories are stated generally on an average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated
principally on a straight-line basis over the estimated useful lives of the
assets which generally range from 10 to 15 years for leasehold improvements and
3 to 10 years for machinery and equipment and 5 to 7 years for furniture and
fixtures. Maintenance and repairs are charged to expense as incurred.
Depreciation expense was $72,882 for the fiscal year ended September 30, 1998.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for the year ended September 30, 1998 was $94,433.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments, trade and
other receivables. The Company maintains cash balances at two financial
institutions located in Allentown, Pennsylvania. These accounts are insured by
the Federal Depository Insurance Corporation up to $100,000. At September 30,
1998, the Company's uninsured cash balances are $335,201. The Company believes
no significant concentration of credit risk exists with respect to these cash
balances. In addition, historically, the Company has not experienced significant
losses with respect to its receivables.
REVENUE RECOGNITION
Revenue is recognized at the time of sale. Sales returns, which are not
significant, are recorded in the period of return.
F-142
<PAGE> 243
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SERVICE AND OTHER REVENUE
Service and other revenue includes rebates and commissions received for
orders placed through AFS, FTD and TeleFlora, delivery services and telephone
charges.
INCOME TAXES
Since October 1, 1991, the Company, with the consent of its stockholders,
elected to be taxed under sections of federal and Pennsylvania income tax law,
which provide that, in lieu of corporation income taxes, the stockholders
separately account for their pro rata share of the Company's items of income,
deduction, loss and credits. Therefore, these statements do not include any
provision for corporate income taxes.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
3. OTHER ASSETS:
Other assets at September 30, 1998 was comprised of the following:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Security deposit............................................ $10,000
Fiscal year tax deposit..................................... 12,391
Investment in limited partnership........................... 1,600
Other investments........................................... 1,512
-------
$25,503
=======
</TABLE>
The Company owns 50 units of a limited partnership, which has an adjusted
market value of $1,600.
4. LONG-TERM DEBT:
Long-term debt at September 30, 1998 was comprised of the following:
<TABLE>
<S> <C>
Note payable, other -- 10%; payable in monthly installments
of $500, including interest through September 1999. A
final payment of principal of $56,778 with interest is due
October 1999.............................................. $57,084
Note Payable, Bank -- 7.0%; payable in monthly installments
of $833, plus interest through February 1999. This note is
collateralized by a first lien on accounts receivable,
inventory, furniture, fixtures and equipment.............. 3,333
Notes payable, other -- weighted average interest rate of
8.51%, payable in monthly installments through November
2001. Certain automobiles are pledged as collateral for
these notes............................................... 26,209
-------
Total long-term debt.............................. 86,626
Less -- Current portion..................................... (13,149)
-------
Long-term portion........................................... $73,477
=======
</TABLE>
F-143
<PAGE> 244
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999........................................................ $13,149
2000........................................................ 66,445
2001........................................................ 6,436
2002........................................................ 596
-------
$86,626
=======
</TABLE>
The Company has a revolving line of credit available in the amount of
$100,000. There were no outstanding borrowings at September 30, 1998. This line
of credit matures annually on January 30th. Interest under this line of credit
is to be charged monthly at the national (floating) prime rate (8.5% at
September 30, 1998). This line of credit is collateralized by a first lien on
the accounts receivable, inventory, furniture, fixtures and equipment.
5. RETIREMENT PLAN:
The Company amended its profit sharing plan on May 26, 1994 in order to
convert the plan to a 401(k) plan. The plan covers substantially all employees
with more than one year of service. Contributions to the plan are based on a 50%
match of the employee's contributions, up to 6% of the employee's compensation.
It is the Company's policy to match the employee's contributions each month. The
Company recorded expense under this plan of $20,368 for the fiscal year ended
September 30, 1998.
6. TREASURY STOCK:
The Company has 5,270 shares of treasury stock as of September 30, 1998.
The treasury stock is recorded at cost.
7. PROPERTY DISPOSITION:
During the fiscal year ended September 30, 1998, the Company entered into a
sale-leaseback transaction of land and buildings to an unaffiliated third party.
The total selling price was $105,509 resulting in a gain of $33,708 and a
deferred gain of $7,575. The lease has a term of five years with an aggregate
annual rental of $1,800. The recognized gain is included in other income in the
accompanying statement of income. The deferred gain will be amortized straight
line over the lease term.
8. LEASE COMMITMENTS:
The Company leases certain facilities and autos from related parties and
from unrelated lessors. All leases are operating leases. Total rent paid to
related parties for the fiscal year ended September 30, 1998 was $126,600.
During the fiscal year ended September 30, 1998 rent expense under all lease
obligations was $145,183. The related party lease provides for escalations above
required minimum lease payments based upon the movement of the consumer price
index.
F-144
<PAGE> 245
PHOEBE FLORAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Minimum lease payments under these lease obligations at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
UNRELATED RELATED
PARTY PARTY TOTAL
--------- -------- --------
<S> <C> <C> <C>
1999............................................ $16,468 $128,420 $144,888
2000............................................ 6,352 128,420 134,772
2001............................................ 1,800 -- 1,800
2002............................................ 1,800 -- 1,800
2003............................................ 450 -- 450
------- -------- --------
$26,870 $256,840 $283,710
======= ======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS:
During the fiscal year ended September 30, 1998, a former division of the
Company was incorporated. The newly incorporated entity, Treehouse Wholesale,
Inc. ("Treehouse"), purchases flowers and gifts from vendors and resells them to
Phoebe Floral, Inc. The Company and Treehouse have 83% common ownership.
Purchases from Treehouse for the fiscal year ended September 30, 1998 were
$158,253. The Company has a payable of $1,893 due to Treehouse as of September
30, 1998, which is included in accounts payable and accrued expenses in the
accompanying balance sheet.
10. SUBSEQUENT EVENT:
On January 5, 1999, the stockholders of the Company (the "Stockholders")
entered into a letter of intent to sell the business to an unrelated third party
(the "Purchaser"). In consideration for the sale, the Stockholders will receive
a combination of cash and stock of the Purchaser.
Since the Purchaser is a C Corporation for Federal and state income tax
purposes, the operations of the Company will also become taxable as a C
Corporation effective at the date of purchase. Accordingly, the accompanying
statement of income for the fiscal year ended September 30, 1998 presents an
unaudited pro forma income tax provision and pro forma net income as they would
have been reported had the Company been subject to Federal and state income
taxes. The pro forma effective income tax rate of 40.5% exceeds the Federal
statutory rate due to the impact of state income taxes.
11. NOTE RECEIVABLE FROM SHAREHOLDER (UNAUDITED)
As of December 31, 1998, a note receivable with an interest rate of 8% was
due from a shareholder of the Company. This note was paid off January 29, 1999.
F-145
<PAGE> 246
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mr. Cory Holbrook:
We have audited the accompanying balance sheet of National Flora (a
proprietorship) as of December 31, 1998 and the related statements of income and
proprietor's capital and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Flora as of December
31, 1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
February 9, 1999
F-146
<PAGE> 247
NATIONAL FLORA
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 100
Accounts receivable....................................... 1,515,188
Prepaid expenses.......................................... 11,667
----------
Total current assets.............................. 1,526,955
PROPERTY, PLANT AND EQUIPMENT:
Furniture and equipment................................... 291,747
Accumulated depreciation.................................. (168,536)
----------
123,211
OTHER ASSETS................................................ 32,053
----------
$1,682,219
==========
LIABILITIES AND PROPRIETOR'S CAPITAL
CURRENT LIABILITIES:
Bank overdraft............................................ $ 98,993
Accounts payable.......................................... 2,272,667
Accrued liabilities....................................... 1,860,863
----------
Total current liabilities......................... 4,232,523
PROPRIETOR'S DEFICIT........................................ (2,550,304)
----------
$1,682,219
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-147
<PAGE> 248
NATIONAL FLORA
STATEMENT OF INCOME AND PROPRIETOR'S CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
NET REVENUES................................................ $10,060,226
OPERATING EXPENSES:
Advertising............................................... 3,851,843
General and administrative................................ 3,098,863
Depreciation.............................................. 65,060
-----------
7,015,766
-----------
INCOME FROM OPERATIONS...................................... 3,044,460
OTHER INCOME (EXPENSE):
Gain from disposition of assets........................... 416,517
Interest expense.......................................... (54,038)
Interest income........................................... 11,432
-----------
373,911
-----------
NET INCOME.................................................. 3,418,371
PROPRIETOR'S DEFICIT, beginning of year..................... (1,765,788)
WITHDRAWALS................................................. (4,202,887)
-----------
PROPRIETOR'S DEFICIT, end of year........................... $(2,550,304)
===========
PRO FORMA PRESENTATION OF PROVISION FOR INCOME TAXES:
NET INCOME................................................ $ 3,418,371
PRO FORMA PROVISION FOR INCOME TAXES...................... 1,367,348
-----------
PRO FORMA NET INCOME AFTER INCOME TAXES................... $ 2,051,023
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-148
<PAGE> 249
NATIONAL FLORA
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $3,418,371
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation........................................... 65,060
Gain on disposition of assets.......................... (416,517)
Changes in --
Accounts receivable.................................... (332,682)
Prepaid and other assets............................... (32,079)
Accounts payable and other accrued liabilities......... 668,854
----------
Net cash provided by operating activities......... 3,371,007
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of the building........................ 1,352,893
Purchases of property and equipment....................... (89,485)
----------
Net cash provided by investing activities......... 1,263,408
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft............................................ 98,993
Repayments of notes payable............................... (640,702)
Withdrawals............................................... (4,202,887)
----------
Net cash used in financing activities............. (4,744,596)
----------
NET DECREASE IN CASH........................................ (110,181)
CASH, beginning of year..................................... 110,281
----------
CASH, end of year........................................... $ 100
==========
SUPPLEMENTAL DISCLOSURE OF CASH EXPENDITURES FOR THE YEAR
ENDED DECEMBER 31, 1998:
Interest paid.......................................... $ 58,808
==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-149
<PAGE> 250
NATIONAL FLORA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF OPERATIONS
National Flora (the Company or Proprietorship), a sole proprietorship, is
primarily a marketing organization. The Company offers customers located
primarily in the United States the opportunity to place flowers-by-wire orders
directly with the Company through a toll free number. A typical flowers-by-wire
transaction processed by the Company occurs as follows: (1) a customer orders
flowers through a toll free number; (2) customer information is collected by the
Company; (3) transaction information is submitted to a clearing house used by
the Company; (4) delivery information is submitted to a sending florist selected
by the Company; (5) the clearing house collects the floral fees, deducts a
transaction fee, and allocates the remaining funds to the Company and the
sending florist.
REVENUE RECOGNITION
The financial statements of the Company are presented in accordance with
generally accepted accounting principles. Revenues earned by the Company and
associated direct costs are recorded when flowers are delivered by the sending
florist.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over their
useful lives using either the double declining balance method or the
straight-line method. Estimated useful lives range from three to fifteen years.
Maintenance and repairs are charged to expense as incurred. Expenditures,
which improve or extend the life of existing property and equipment, are
capitalized.
INCOME TAXES
The financial statements do not include a provision for income taxes
because the Proprietorship does not incur federal or state income taxes.
Instead, income from the Proprietorship and the proprietor's income and expenses
from other sources are included in the proprietor's individual federal income
tax return, and are taxed based on his personal tax strategies.
USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to
the reporting of assets and liabilities and related disclosures to prepare these
financial statements in conformity with the accrual basis of accounting. Actual
results may differ from those estimates.
ADVERTISING
The Company expenses advertising costs, which consist primarily of Yellow
Page advertisements, at the time the advertisements are first displayed.
2. LEASE COMMITMENTS:
During 1998, the Company leased furniture and equipment under noncancelable
operating leases ranging in length from three to five years.
F-150
<PAGE> 251
NATIONAL FLORA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company sold its land and building and began leasing the
property from the new owners under an operating lease agreement. The lease
agreement calls for monthly payments of $11,667 over a term of 60 months. The
agreement includes an option to renew for another 60 months with monthly
payments of $14,000.
In 1998, the Company signed an operating lease agreement to lease computer
equipment. The lease agreement calls for monthly payments of $4,496 over a term
of 36 months.
Rental expense with respect to operating leases was $100,023 for the year
ended December 31, 1998.
Minimum lease payments required by operating lease agreements are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1999...................................................... $234,138
2000...................................................... 227,279
2001...................................................... 166,977
2002...................................................... 140,000
2003...................................................... 116,667
--------
$885,061
========
</TABLE>
3. CONTINGENCIES:
The Company has been sued for breach of contract and related torts arising
out of a clearinghouse contract entered into between the Company and the
plaintiff. The plaintiff is also seeking a judgment as to the ownership of
certain software licensed to the Company through a wholly owned subsidiary of
the plaintiff.
The Company has filed a cross-complaint for breach of contract arising out
of the Company's repudiation of a written agreement amending the clearinghouse
contract. The Company is also seeking declaratory relief on the software license
issue. This matter is currently set for trial on March 29, 1999.
The plaintiff is seeking approximately $400,000 in alleged damages, costs
and attorneys fees. The Company is seeking a comparable amount in its
cross-complaint. Management believes that the resolution of this lawsuit will
not materially affect the financial position or results of operations of the
Company.
From time to time, the Company is party to various other contingent
liabilities resulting from litigation and claims incident to the ordinary course
of business. Management believes that the probable resolution of such
contingencies will not materially affect the financial position or results of
operations of the Company.
4. SUBSEQUENT EVENTS:
On January 11, 1999, the proprietor signed a nonbinding letter of intent to
sell all of the assets of the Company to Gerald Stevens, Inc. (the "Purchaser").
The Purchaser is a C corporation. As such, the accompanying statement of
operations includes a pro forma income tax provision of $1,367,348 to reflect
the Company's income tax expense at an effective rate of 40% (federal tax and
state tax, net of federal benefit) for the year.
F-151
<PAGE> 252
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
The Exotic Gardens, Inc. and Kuhn Flowers, Inc.
We have audited the accompanying combined balance sheets of The Exotic
Gardens, Inc. and Kuhn Flowers, Inc. as of September 30, 1998 and 1997, and the
related combined statements of operations, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Companies' 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 audits 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Exotic
Gardens, Inc. and Kuhn Flowers, Inc. as of September 30, 1998 and 1997, and the
combined results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
ADAIR, FULLER, WITCHER & MALCOM, P.A.
Certified Public Accountants
Fort Lauderdale, Florida
February 17, 1999
F-152
<PAGE> 253
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------
1998 1998 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................... $ 908,055 $ 659,779 $ 154,786
Accounts receivable less allowance for doubtful accounts
of $293,872, $267,431 and $174,498................... 812,283 560,567 624,658
Inventories............................................. 343,152 343,152 336,599
Prepaid and other current assets........................ 50,052 66,682 32,220
---------- ---------- ----------
TOTAL CURRENT ASSETS............................ 2,113,542 1,630,180 1,148,263
PROPERTY AND EQUIPMENT, NET -- Note C..................... 2,220,421 2,259,407 2,497,664
OTHER ASSETS
Intangible assets, net.................................. 228,076 232,059 219,379
Other assets............................................ 71,728 71,728 76,777
---------- ---------- ----------
TOTAL OTHER ASSETS.............................. 299,804 303,787 296,156
---------- ---------- ----------
TOTAL ASSETS.................................. $4,633,767 $4,193,374 $3,942,083
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................ $ 744,307 $ 486,101 $ 467,206
Accrued expenses........................................ 401,075 303,291 286,196
Deferred income......................................... 0 0 20,833
Notes payable -- Note D................................. 2,416,671 2,486,671 2,543,099
Current obligations under capital leases................ 7,543 10,546 17,075
---------- ---------- ----------
TOTAL CURRENT LIABILITIES....................... 3,569,596 3,286,609 3,334,409
LONG-TERM DEBT
Obligations under capital leases........................ 0 0 10,546
---------- ---------- ----------
TOTAL LIABILITIES............................... 3,569,596 3,286,609 3,344,955
COMMITMENTS AND CONTINGENCIES -- Notes G and H
STOCKHOLDERS' EQUITY
Common stock - Note F................................... 900 900 900
Additional paid-in capital.............................. 5,218,941 5,218,941 5,093,941
Accumulated deficit..................................... (4,155,670) (4,313,076) (4,497,713)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY...................... 1,064,171 906,765 597,128
---------- ---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $4,633,767 $4,193,374 $3,942,083
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-153
<PAGE> 254
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Product sales............................... $2,468,695 $2,451,715 $ 8,919,635 $ 8,798,680
Service and other revenue................... 654,073 660,512 2,266,914 2,096,283
---------- ---------- ----------- -----------
TOTAL REVENUE....................... 3,122,768 3,112,227 11,186,549 10,894,963
OPERATING COSTS AND EXPENSES
Cost of product sales....................... 1,038,926 1,095,266 4,001,562 3,777,734
Operating expenses.......................... 1,589,038 1,463,288 5,399,964 5,457,685
Selling, general, and administrative
expenses................................. 311,818 451,204 1,482,972 1,531,471
---------- ---------- ----------- -----------
TOTAL OPERATING
COST AND EXPENSES................. 2,939,782 3,009,758 10,884,498 10,766,890
---------- ---------- ----------- -----------
OPERATING INCOME.................... 182,986 102,469 302,051 128,073
OTHER INCOME (EXPENSE)
Interest expense............................ (38,935) (51,593) (209,027) (261,540)
Interest income............................. 0 700 2,967 3,955
Other income (expense), net................. 13,355 16,647 213,646 107,970
---------- ---------- ----------- -----------
TOTAL OTHER
INCOME (EXPENSE).................. (25,580) (34,246) 7,586 (149,615)
---------- ---------- ----------- -----------
NET INCOME (LOSS)................... 157,406 $ 68,223 309,637 $ (21,542)
========== ===========
PRO FORMA INCOME TAX PROVISION................ $ 62,962 123,855
---------- -----------
PRO FORMA NET INCOME AFTER INCOME TAX......... $ 94,444 $ 185,782
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-154
<PAGE> 255
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996..................... $900 $4,643,941 $(4,026,171) $ 618,670
Net (loss) for the year ended September 30,
1997.......................................... 0 0 (21,542) (21,542)
Dividend to Stockholders........................ 0 0 (450,000) (450,000)
Capital contributed by Stockholders............. 0 450,000 0 450,000
---- ---------- ----------- ----------
Balance, September 30, 1997..................... 900 5,093,941 (4,497,713) 597,128
Net income for the year ended September 30,
1998.......................................... 0 0 309,637 309,637
Dividend to Stockholders........................ 0 0 (125,000) (125,000)
Capital contributed by Stockholders............. 0 125,000 0 125,000
---- ---------- ----------- ----------
Balance, September 30, 1998..................... 900 5,218,941 (4,313,076) 906,765
---- ---------- ----------- ----------
Net income for the three months ended December
31, 1998 (Unaudited).......................... 0 0 157,406 157,406
---- ---------- ----------- ----------
Balance, December 31, 1998 (Unaudited).......... $900 $5,218,941 $(4,155,670) $1,064,171
==== ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-155
<PAGE> 256
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------
1998 1997 1998 1997
----------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss)...................................... $157,406 $ 68,223 $309,637 $( 21,542)
Adjustments to reconcile net (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization................ 42,969 43,948 209,553 232,826
(Gain) Loss on disposal of assets............ 0 0 (2,859) 27,675
Disposal of obsolete assets.................. 0 0 58,400 0
Provision for doubtful accounts.............. 26,441 43,205 92,933 102,559
Changes in operating assets and liabilities:
Accounts receivable........................ (278,157) (479,658) (28,842) (41,295)
Merchandise inventory...................... 0 10 (6,553) 121,373
Prepaid expenses and other current
assets.................................. 16,630 ( 20,609) (34,462) 39,662
Deposits and other assets.................. 0 3,871 (16,618) 16,798
Accounts payable........................... 258,206 270,703 18,895 (29,878)
Accrued expenses........................... 97,784 (9,156) (3,738) (130,709)
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES............................ 321,279 (79,463) 596,346 317,469
INVESTING ACTIVITIES
Proceeds from sale of assets.................... 0 0 13,205 701,743
Purchase of property and equipment.............. 0 (9,100) (31,055) (41,196)
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES............................ 0 (9,100) (17,850) 660,547
-------- --------- -------- ---------
FINANCING ACTIVITIES
Principal payments on notes payable............. (70,000) (21,428) (56,428) (936,883)
Dividends paid to stockholders.................. (125,000) (450,000)
Contributions received from stockholders........ 125,000 450,000
Repayment of capital lease obligation........... (3,003) (5,083) (17,075) (15,887)
Repayment of stockholder loan................... 0 0 0 (18,608)
-------- --------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES...................................... (73,003) (26,511) (73,503) (971,378)
-------- --------- -------- ---------
NET INCREASE (DECREASE) IN CASH................... 248,276 (115,074) 504,993 6,638
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 248,276 (115,074) 504,993 6,638
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............................. 659,779 154,786 154,786 148,148
-------- --------- -------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD................................... $908,055 $ 39,712 $659,779 $ 154,786
======== ========= ======== =========
Supplemental Disclosure of Cash Flow Information
Interest Paid................................... $ 45,300 $ 51,593 $209,457 $ 271,674
======== ========= ======== =========
Supplemental Disclosure of Non-Cash Investing and
Financing Activities
Prorata share of losses from an investment in a
real estate limited partnership.............. $ 0 $ 0 $ 2,351 $ 1,310
======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-156
<PAGE> 257
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997 IS UNAUDITED)
SEPTEMBER 30, 1998
A. NATURE OF BUSINESS
The accompanying combined financial statements include the accounts of The
Exotic Gardens, Inc. ("Exotic") and Kuhn Flowers, Inc. ("Kuhn") both of which
are Florida corporations. Exotic was formed in 1990 to acquire and operate a
retail florist that has been operating in the State of Florida since 1927. The
shareholders of Exotic also own Kuhn, another retail florist that has been
operating in the State of Florida since 1947. Consequently, Exotic and Kuhn are
affiliated by common ownership.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash
The Companies maintain most of their cash balances at a large national
financial institution located in Jacksonville, Florida. The balances are insured
by the Federal Deposit Insurance Corporation up to $100,000. At December 31,
1998, and September 30, 1998 and 1997, the Companies had cash balances of
approximately $861,795 and $513,826 and $25,014, respectively, in excess of this
insured amount.
Allowance for Doubtful Accounts
The Companies provide an allowance for doubtful accounts based upon their
estimate of the accounts receivable that may be uncollectible.
Merchandise Inventory
Merchandise inventory is valued at the lower of average cost or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the estimated useful lives of the improvements or the term of the
related leases. The estimated useful lives of property and equipment are as
follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5-39
Machinery and equipment..................................... 5-7
Furniture and fixtures...................................... 5-7
Autos and trucks............................................ 5
Leasehold improvements...................................... 3-5
Capitalized Software........................................ 5
</TABLE>
Investments
Other assets include a real estate limited partnership investment of Exotic
that is accounted for on the equity method whereby the initial cost is increased
or decreased by Exotic's prorata share of the partnerships' income or loss,
capital contributions or distributions.
F-157
<PAGE> 258
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets consist principally of goodwill that represents the
excess of the cost over the fair market value of net assets acquired by Kuhn
prior to March 23, 1990, that is being amortized on the straight-line method
over forty (40) years. In August 1998, Kuhn acquired certain intangible assets
valued at $25,000 in connection with the purchase of a store in Jacksonville,
Florida. These assets are being amortized on the straight-line method over five
(5) years. In 1995, Kuhn acquired a covenant not to compete for $10,000 in
connection with the acquisition of one of its stores. The covenant is being
amortized on the straight-line method over three (3) years.
Income Taxes
The Companies and their shareholders have elected for the Companies to be
treated as S Corporations for income tax purposes. Under this election, all
profits and losses are directly attributable to the shareholders with no
resulting tax effect to the corporation, and shareholder distributions are
reductions of retained earnings. Accordingly, there is no income tax provision
recorded in the accompanying financial statements.
The accompanying combined statements of operations for the year ended
September 30, 1998 and the three months ended December 31, 1998 include pro
forma income tax provisions of $123,855 and $62,962, respectively to reflect the
Companies' income tax expense at an effective rate of 40% (federal tax and state
tax, net of federal benefit) for the period.
Advertising Costs
Costs incurred for producing and communicating advertising are expensed
when incurred. Advertising expense was $181,371 and $266,354 for the three
months ended December 31, 1998, and 1997, respectively, and $633,404 and
$983,152 for the years ended September 30, 1998, and 1997, respectively.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
The Companies have reclassified certain 1997 amounts to conform to the 1998
presentation. These reclassifications have no effect on net income.
F-158
<PAGE> 259
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998, and September 30, 1998 and
1997, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------
1998 1998 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 598,714 $ 598,714 $ 636,714
Buildings......................................... 1,995,536 1,995,536 1,997,927
Equipment......................................... 638,723 638,723 625,100
Autos and trucks.................................. 197,740 197,740 248,910
Furniture and fixtures............................ 134,438 134,438 167,138
Leasehold improvements............................ 419,260 419,260 415,803
Capitalized software.............................. 10,484 10,484 10,484
---------- ---------- ----------
Total property and equipment...................... 3,994,895 3,994,895 4,102,076
Less accumulated depreciation..................... 1,774,474 1,735,488 1,604,412
---------- ---------- ----------
Property and equipment, net....................... $2,220,421 $2,259,407 $2,497,664
========== ========== ==========
</TABLE>
D. NOTES PAYABLE
Notes payable as of December 31, 1998, and September 30, 1998 and 1997,
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -----------------------
1998 1998 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage note payable -- trust, interest at prime rate
less .375% (7.375% and 7.875% and 8.125% at December 31,
1998, and September 30, 1998 and 1997, respectively)
interest payable quarterly, collateralized by land and
building with a book value of $2,026,794 and guaranteed
by the stockholders. Renewable every year at the option
of the lender........................................... $2,416,671 $2,416,671 $2,416,671
$250,000 line of credit, interest at prime rate (8.125%
and 8.50% at September 30, 1998 and 1997, respectively)
payable monthly, collateralized by equipment and other
personal property and guaranteed by the stockholders.
The note is due and payable on demand................... 0 70,000 126,428
---------- ---------- ----------
Total notes payable -- all current.............. $2,416,671 $2,486,671 $2,543,099
========== ========== ==========
</TABLE>
Mortgage note payable -- trust, represents an amount due to the trust that
sold Exotic to the current shareholders. The trust is related but not controlled
by Exotic's stockholders. Exotic incurred interest expense of $38,935, $51,593,
$209,027 and $261,540 to the trust during the three months ended December 31,
1998 and 1997, and the years ended September 30, 1998 and 1997, respectively.
The note is renewable every year at the option of the lender and is therefore
reported as a current liability in the accompanying financial statements.
The agreement with the trust has certain restrictions. The principal
restrictions relate to payment of dividends, not issuing additional stock,
limitation on investments, loans and borrowings, and limitation on salaries of
the stockholders. Management believes that Exotic is in compliance with the
covenants.
F-159
<PAGE> 260
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E. RELATED PARTY TRANSACTIONS
During the three months ended December 31, 1998 and 1997, and the years
ended September 30, 1998 and 1997, the Companies purchased $45,774, $30,462,
$214,008 and $187,444 of insurance, respectively, from a company related by
common ownership. During part of the year ended September 30, 1997, Exotic
leased part of the space of one of its retail florist locations to a company
partially owned by one of the stockholders. The location was sold in May 1997.
F. STOCKHOLDERS' EQUITY
Exotic has 500 authorized shares of $1 par value common stock of which 400
shares are issued and outstanding. Kuhn has 7,500 shares of $1 par value common
stock of which 500 shares are issued and outstanding.
G. COMMITMENTS AND CONTINGENCIES
Operating Leases
Exotic has entered into various operating leases for vehicles, one of its
stores and a warehouse. Kuhn has entered into various operating leases for
vehicles and for its stores in Western Jacksonville, Ponte Vedra and St.
Augustine. The store lease for Exotic expired and is currently being renewed on
a month-to-month basis. The warehouse lease grants Exotic the right to renew the
lease on the same terms and conditions for an additional five-year term.
The following is a schedule of noncancelable future minimum lease payments
required under the operating leases that expire in more than twelve months:
<TABLE>
<S> <C>
1999........................................................ $230,042
2000........................................................ 164,576
2001........................................................ 67,123
2002........................................................ 51,940
2003........................................................ 35,192
--------
$548,873
========
</TABLE>
Rental expense for all operating leases in effect was $111,019 and $106,679
for the three months ended December 31, 1998 and 1997, respectively, and
$361,115 and $332,981 for the years ended September 30, 1998 and 1997,
respectively.
Sale of Orlando Store
Kuhn sold its Orlando store in November 1996. The sale included related
receivables, fixtures and furnishings, and inventory, but does not include the
land and building. A gain of $28,983 was recorded on the disposition of the
assets. In connection with the sale, Kuhn agreed not to compete within a twenty-
five mile area of the store for a period of five years. This covenant, valued at
$25,000, has been recorded as deferred income and is being recognized on a
straight-line basis over five years. In connection with the sale, the acquirer
also executed an agreement to pay Kuhn $40,000 plus interest at 7%. The acquirer
has not made any payments and management is currently investigating what actions
should be taken. However, they are confident that the entire balance will be
repaid. The outstanding balance of this loan is $45,347, $44,480 and $42,380 as
of December 31, 1998, and September 30, 1998 and 1997, respectively.
F-160
<PAGE> 261
THE EXOTIC GARDENS, INC. AND KUHN FLOWERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management has separately listed the real estate for sale. Based on the
listing price and management's expected selling price, less related selling
expenses, the carrying amount of the land and building has been reduced by
providing a valuation allowance of $150,000. This allowance was recorded by
charging $50,000 against income from operations in 1998 and $100,000 in 1995.
Litigation
In 1991, the trustee of a trust controlled by previous stockholders of the
old Exotic Gardens, Inc. filed an action against Exotic and its secretary
treasurer alleging various matters regarding Exotic converting certain funds
belonging to the Trust when Exotic exercised collateral assignments in 1990 of
two insurance policies it held on the lives of the settlor of the Trust. Exotic
and the secretary treasurer prevailed at trial in 1995. In 1998 the matter was
settled and Exotic received $140,000. Such amount was offset substantially by
the payment of legal costs and other expenses.
Exotic has sued a company for violation of Exotic's statutory trademark and
common law protections. The defendant filed various counterclaims against
Exotic, which have been subsequently dismissed. Settlement negotiations have
been unsuccessful. Exotic's suit is currently set for trial and is expected to
be tried in the second quarter of 1999. It is premature to ascertain the
likelihood of success or reasonably estimate Exotic's potential recovery.
However, any amounts ultimately awarded will be credited to earnings in the year
received.
H. SUBSEQUENT EVENT
The shareholders have held preliminary discussions regarding the potential
sale of certain assets of the companies. However, as of the date of these
financial statements no terms have been finalized.
Since the proposed purchaser is a C Corporation for Federal and state
income tax purposes, the accompanying statements of operations present a pro
forma income tax provision and pro forma net income as they would have been
reported had the Company been subject to Federal and state income taxes. The pro
forma effective income tax rate of 40% exceeds the Federal statutory rate due to
the impact of state income taxes.
F-161
<PAGE> 262
ANNEX A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 9, 1998 (this
"Agreement"), by and among FLORAFAX INTERNATIONAL, INC., a Delaware corporation
("Red Cannon"), RED CANNON ACQUISITION CORP., a Delaware corporation and
wholly-owned subsidiary of Red Cannon ("Mergersub"), and GERALD STEVENS, INC., a
Delaware corporation (the "Company").
WITNESSETH:
WHEREAS, upon the terms and subject to the conditions of this Agreement and
in accordance with the General Corporation Law of the State of Delaware
("Delaware Law"), the parties desire to enter into a business combination
transaction pursuant to which Mergersub will be merged with and into the Company
(the "Merger");
WHEREAS, the Board of Directors of the Company has determined that the
Merger is fair to, and in the best interests of, the Company and its
stockholders, has unanimously adopted resolutions approving the Merger, this
Agreement and the transactions contemplated by this Agreement, and has
unanimously determined to recommend approval and adoption of this Agreement and
the Merger by the stockholders of the Company;
WHEREAS, the Board of Directors of Red Cannon has determined that the
Merger is fair to, and in the best interests of, Red Cannon and its
stockholders, and has unanimously adopted resolutions approving the Merger, this
Agreement and the transactions contemplated by this Agreement, and has
unanimously determined to recommend approval of the issuance of shares of common
stock, par value $0.01 per share, of Red Cannon ("Red Cannon Common Stock")
pursuant to the Merger by the stockholders of Red Cannon;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a pooling-of-interests business combination.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with Delaware Law, at the Effective
Time (as defined in Section 1.3), Mergersub shall be merged with and into the
Company, with the Company being the surviving corporation in the Merger (the
"Surviving Corporation") and thereby becoming a wholly-owned subsidiary of Red
Cannon, and the separate corporate existence of Mergersub shall cease.
Section 1.2. Closing. Unless this Agreement shall have been terminated
and the transactions herein contemplated shall have been abandoned pursuant to
Section 9.1 and subject to the satisfaction or waiver of the conditions set
forth in Article VIII, the closing of the Merger (the "Closing") will take place
at a date and time determined by the parties as promptly as practicable (and in
any event within
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<PAGE> 263
two (2) business days) after satisfaction or waiver of the conditions precedent
set forth in Article VIII at the offices of Akerman, Senterfitt & Eidson, P.A.,
450 E. Las Olas Boulevard, Fort Lauderdale, Florida, unless another date, time
or place is agreed to in writing by the parties hereto.
Section 1.3. Effective Time. As promptly as practicable after the
satisfaction or, if permissible, waiver of the conditions set forth in Article
VIII, the parties hereto shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") with the Secretary of State
of the State of Delaware in such form as required by, and executed in accordance
with the relevant provisions of, Delaware Law (the date and time of such filing,
or such later date or time as set forth therein, being the "Effective Time").
Section 1.4. Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in Section 259 of the Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, except as otherwise provided herein, all property, rights, privileges,
powers and franchises of the Company and Mergersub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Mergersub
shall become the debts, liabilities and duties of the Surviving Corporation.
Section 1.5. Certificate of Incorporation and By-Laws of the Surviving
Corporation. At the Effective Time, the Certificate of Incorporation and the
By-Laws of the Company, as in effect immediately prior to the Effective Time,
shall be the Certificate of Incorporation and the By-Laws of the Surviving
Corporation thereafter, unless and until amended in accordance with their terms
and as provided by law, provided, however, that the name of the Surviving
Corporation shall be changed to "GSI, Inc."
Section 1.6. Directors and Officers of the Surviving Corporation. At the
Effective Time, the directors of the Surviving Corporation shall be Steven R.
Berrard, Thomas C. Byrne, Gerald R. Geddis and Andrew W. Williams, and the
officers of the Surviving Corporation shall be the persons who are the officers
of the Company immediately prior to the Effective Time, each to hold a
directorship or office in accordance with the Certificate of Incorporation and
By-Laws of the Surviving Corporation, until their respective successors have
been duly elected and qualified.
Section 1.7. Certificate of Incorporation of Red Cannon. At the Effective
Time, subject to the approval of Red Cannon stockholders, the Certificate of
Incorporation of Red Cannon shall be amended to change the name of Red Cannon to
"Gerald Stevens, Inc." and to increase the amount of authorized shares of Red
Cannon Common Stock to 250,000,000 shares. Red Cannon shall file a Certificate
of Amendment with the Secretary of State of the State of Delaware in such form
as required by, and executed in accordance with the relevant provisions of,
Delaware Law.
Section 1.8. By-Laws of Red Cannon. At the Effective Time, the By-Laws of
Red Cannon in effect as of the date hereof shall remain as the By-Laws of Red
Cannon, except for such amendments as the Company may approve of.
Section 1.9. Directors and Officers of Red Cannon. At the Effective Time,
the directors and officers of Red Cannon, other than Andrew W. Williams in his
capacity as a director, shall be removed without cause and Steven R. Berrard,
Thomas C. Byrne, Gerald R. Geddis and Kenneth Royer shall be appointed to the
Board of Directors of Red Cannon. Should the Board of Directors of Red Cannon be
expanded to seven or more members within one year following the Effective Time,
Andrew W. Williams shall have the right to nominate one of such additional
directors, who shall be reasonably acceptable to the other directors. Subject to
the Company's approval, prior to the Effective Time, one or more additional
directors may be nominated for election or appointment to the Board of Directors
of Red Cannon, as necessary, to comply with applicable law or regulations of The
Nasdaq Small Cap Market ("Nasdaq"). The officers of the Company immediately
prior to the Effective Time shall become the officers of Red Cannon at the
Effective Time, and James H. West shall become the President of the Red
A-2
<PAGE> 264
Cannon Division of Red Cannon. Each shall hold a directorship and/or office in
accordance with the Certificate of Incorporation and By-Laws of Red Cannon, as
amended, until their respective successors have been duly elected and qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
Section 2.1. Conversion of Securities. At the Effective Time, by virtue
of the Merger and without any action on the part of the Company, Mergersub or
the stockholders of the Company or Mergersub:
(a) Each share of common stock, par value $0.01 per share, of the
Company ("Company Common Stock") issued and outstanding immediately prior
to the Effective Time (other than (i) any shares of Company Common Stock to
be canceled pursuant to Section 2.1(b) and (ii) shares of Company Common
Stock for which dissenter's rights of appraisal are duly asserted and
perfected in accordance with Delaware Law) shall be converted, subject to
Section 2.2(d), into the right to receive a number of shares of common
stock, par value $0.01 per share, of Red Cannon ("Red Cannon Common Stock")
equal to the Exchange Ratio (as defined below); provided, however, that if
between the date of this Agreement and the Effective Time the outstanding
shares of Company Common Stock or Red Cannon Common Stock shall have been
changed or reclassified into a different number of shares or a different
class, by reason of any stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares, the Exchange
Ratio shall be correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or
exchange of shares. Nothing stated in the immediately preceding sentence
shall be construed as providing the holders of Company Common Stock or the
holders of Red Cannon Common Stock any preemptive or antidilutive rights
other than in the case of a stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares occurring
between the date of this Agreement and the Effective Time. At the Effective
Time, all shares of Company Common Stock issued and outstanding immediately
prior thereto shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each certificate
previously evidencing any such shares shall thereafter represent the right
to receive, upon the surrender of such certificate in accordance with the
provisions of Section 2.2, certificates evidencing such number of whole
shares of Red Cannon Common Stock into which such Company Common Stock was
converted in accordance with the Exchange Ratio and any cash in lieu of
fractional shares of Red Cannon Common Stock paid in consideration therefor
pursuant to Section 2.2(d). The holders of such certificates previously
evidencing such shares of Company Common Stock outstanding immediately
prior to the Effective Time shall cease to have any rights with respect to
such shares of Company Common Stock except as otherwise provided herein or
by law.
(b) Each share of Company Common Stock (if any) held in the treasury
of the Company, owned by Red Cannon, or owned by any direct or indirect
wholly-owned subsidiary of Red Cannon or of the Company, immediately prior
to the Effective Time shall automatically be canceled and extinguished
without any conversion thereof and no payment shall be made with respect
thereto.
(c) Each share of common stock of Mergersub issued and outstanding at
the Effective Time shall be converted into one share of the common stock,
$0.01 par value per share, of the Surviving Corporation.
For purposes of this Section 2.1, the following terms shall have the
meanings set forth below:
"Average Trading Price" means the average daily closing sales price of a
share of Red Cannon Common Stock as quoted on Nasdaq, for the 45 consecutive
trading days immediately preceding the
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<PAGE> 265
third trading day (including such third trading day) prior to the Red Cannon
Meeting (as defined in Section 6.3). For purposes of this Agreement, reference
shall be made to The Wall Street Journal to determine such quotations, or such
other authoritative source as mutually agreed by Red Cannon and the Company.
"Exchange Ratio" means (A) 1.25 if the Average Trading Price is less than
$5.00, (B) 1.30 if the Average Trading Price is greater than or equal to $5.00
but less than $6.50, and (C) 1.35 if the Average Trading Price is greater than
or equal to $6.50.
Section 2.2. Exchange of Certificates.
(a) Exchange Agent. At the Effective Time, Red Cannon shall deposit,
or shall cause to be deposited, with a transfer agent or other bank or
trust company as may be designated by Red Cannon, subject to the reasonable
approval of the Company (the "Exchange Agent"), for the benefit of the
holders of shares of Company Common Stock, for exchange in accordance with
this Article II, through the Exchange Agent, (i) certificates evidencing
the shares of Red Cannon Common Stock issuable pursuant to Section 2.1 in
exchange for outstanding shares of Company Common Stock and (ii) upon the
request of the Exchange Agent, cash in an amount sufficient to make any
cash payment in lieu of fractional shares of Red Cannon Common Stock
pursuant to Section 2.2(d) (such certificates for shares of Red Cannon
Common Stock, together with any dividends or distributions to which such
holders may be entitled with respect thereto pursuant to Section 2.2(c),
and cash in lieu of fractional shares of Red Cannon Common Stock being
hereafter collectively referred to as the "Exchange Fund"). The Exchange
Agent shall, pursuant to irrevocable instructions, deliver the Red Cannon
Common Stock contemplated to be issued pursuant to Section 2.1 out of the
Exchange Fund to holders of shares of Company Common Stock. Except as
contemplated by Section 2.2(e) hereof, the Exchange Fund shall not be used
for any other purpose. Any interest, dividends or other income earned on
the investment of cash or other property held in the Exchange Fund shall be
for the account of Red Cannon. Red Cannon shall pay all expenses and fees
of the Exchange Agent.
(b) Exchange Procedures. Red Cannon shall instruct the Exchange Agent
to mail, within five (5) business days after the Effective Time, to each
holder of record of a certificate or certificates which immediately prior
to the Effective Time evidenced outstanding shares of Company Common Stock
(the "Certificates") (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Red
Cannon may reasonably specify) and (ii) instructions to effect the
surrender of the Certificates in exchange for the certificates evidencing
shares of Red Cannon Common Stock and cash (if any). Upon surrender of a
Certificate for cancellation to the Exchange Agent together with such
letter of transmittal, duly executed, and such other customary documents as
may be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive in exchange therefor (A)
certificates evidencing that number of whole shares of Red Cannon Common
Stock that such holder has the right to receive in accordance with the
Exchange Ratio in respect of the shares of Company Common Stock formerly
evidenced by such Certificate, (B) any dividends or other distributions to
which such holder is entitled pursuant to Section 2.2(c), and (C) cash in
lieu of fractional shares of Red Cannon Common Stock to which such holder
is entitled pursuant to Section 2.2(d) (the shares of Red Cannon Common
Stock, and the dividends, distributions and cash described in clauses (A),
(B) and (C) being, collectively, the "Merger Consideration"), and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of shares of Company Common Stock that is not
registered in the transfer records of the Company, the Merger Consideration
with respect thereto may be issued and paid in accordance with this Article
II to a transferee if the Certificate evidencing such shares of Company
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<PAGE> 266
Common Stock is presented to the Exchange Agent, accompanied by all
documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid or by the
transferee requesting such payment paying to the Exchange Agent any such
transfer tax. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to
evidence only the right to receive upon such surrender the Merger
Consideration with respect thereto.
(c) Distributions with Respect to Unexchanged Shares of Red Cannon
Common Stock. No dividends or other distributions declared or made after
the Effective Time with respect to Red Cannon Common Stock with a record
date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Red Cannon Common
Stock represented thereby and no cash payment in lieu of fractional shares
of Red Cannon Common Stock shall be paid to any such holder pursuant to
Section 2.2(d), until the holder of such Certificate shall surrender such
Certificate. Upon such surrender, there shall be paid to the person or
entity (hereinafter, any person or entity being referred to as a "Person")
in whose name the certificates representing the shares of Red Cannon Common
Stock into which such Certificates were converted and registered, all
dividends and other distributions payable in respect of such Red Cannon
Common Stock on a date after, and in respect of a record date after, the
Effective Time.
(d) Fractional Shares. No fraction of a share of Red Cannon Common
Stock shall be issued in the Merger and any such fractional share interest
shall not entitle the owner thereof to vote or to any other rights of a
stockholder of Red Cannon. In lieu of any such fractional shares, each
holder of Company Common Stock upon surrender of a Certificate for exchange
pursuant to this Section 2.2 shall be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) the
per share closing sales price of Red Cannon Common Stock as quoted on
Nasdaq on the date of the Effective Time (or, if shares of Red Cannon
Common Stock are not quoted on Nasdaq on the Effective Time, the first date
of trading of such Red Cannon Common Stock on Nasdaq after the Effective
Time) by (ii) the fractional interest to which such holder would otherwise
be entitled based on the applicable Exchange Ratio (after taking into
account all shares of Company Common Stock then held of record by such
holder).
(e) Termination of Exchange Fund. Any portion of the Exchange Fund
that remains undistributed to the holders of Company Common Stock for six
(6) months after the Effective Time shall be delivered to Red Cannon, upon
demand, and any holders of Company Common Stock who have not theretofore
complied with this Article II shall thereafter look only to Red Cannon for
the Merger Consideration to which they are entitled pursuant to this
Article II.
(f) No Liability. None of Red Cannon, the Company or the Surviving
Corporation shall be liable to any holder of shares of Company Common Stock
for any such shares of Red Cannon Common Stock (or dividends or
distributions with respect thereto) from the Exchange Fund delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) Withholding Rights. Red Cannon or the Exchange Agent shall be
entitled to deduct and withhold from the Merger Consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as Red Cannon or the Exchange Agent is required
to deduct and withhold with respect to the making of such payment under the
Code or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld by Red Cannon or the Exchange Agent, such
withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Company Common Stock in
respect of which such deduction and withholding was made by Red Cannon or
the Exchange Agent.
(h) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
holder of record thereof claiming such Certificate to be lost,
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stolen or destroyed and, if required by Red Cannon the posting by such
Person of a bond in such reasonable amount as Red Cannon may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Red Cannon Common Stock, any
cash in lieu of fractional shares and any unpaid dividends and
distributions on shares of Red Cannon Common Stock deliverable in respect
thereof, pursuant to this Agreement.
Section 2.3. Stock Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed, and there shall be no further
recordation of transfers of shares of the Company Common Stock thereafter on the
stock transfer books of the Company. On or after the Effective Time, any
Certificates presented to the Exchange Agent or Red Cannon in accordance with
Section 2.2(b) shall be converted into the Merger Consideration.
Section 2.4. Stock Options. At the Effective Time, the Company's
obligations with respect to each outstanding Company Stock Option (as defined in
Section 3.3) to purchase shares of Company Common Stock, as amended in the
manner described in the following sentence, shall be assumed by Red Cannon. The
Company Stock Options so assumed by Red Cannon shall continue to have, and be
subject to, the same terms and conditions as set forth in the stock option plans
and agreements pursuant to which such Company Stock Options were issued and any
other agreements evidencing such options, as in effect immediately prior to the
Effective Time, except that from and after the Effective Time each such Company
Stock Option shall be exercisable for that number of whole shares of Red Cannon
Common Stock equal to the product of the number of shares of Company Common
Stock covered by such option immediately prior to the Effective Time multiplied
by the Exchange Ratio and rounded up to the nearest whole number of shares of
Red Cannon Common Stock, with an exercise price per share equal to the exercise
price per share of such option immediately prior to the Effective Time divided
by the Exchange Ratio; provided, however, that in the case of any option to
which Section 421 of the Code applies by reason of its qualification under any
of the requirements of Section 421 of the Code, the option price, the number of
shares purchasable pursuant thereto and the terms and conditions of exercise
thereof shall be determined in order to comply with Section 424(a) of the Code.
Red Cannon shall (i) reserve for issuance the number of shares of Red Cannon
Common Stock that will become issuable upon the exercise of such Company Stock
Options pursuant to this Section 2.4, (ii) promptly after the Effective Time
issue to each holder of an outstanding Company Stock Option a document
evidencing the assumption by Red Cannon of the Company's obligations with
respect thereto under this Section 2.4, and (iii) promptly after the Effective
Time, prepare and file a registration statement on Form S-8 (or any successor or
other appropriate forms) with respect to the shares of Red Cannon Common Stock
subject to such Company Stock Options and maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
contained therein) for so long as such options remain outstanding and cause such
shares to be approved for quotation on Nasdaq. Nothing in this Agreement shall
accelerate the exercisability or affect the schedule of vesting with respect to
the Company Stock Options or, except as set forth on Schedule 4.2, the Red
Cannon Stock Options (as defined in Section 4.2).
Section 2.5. Dissenters' Rights. Notwithstanding any provisions of this
Agreement to the contrary, shares of Company Common Stock which are issued and
outstanding immediately prior to the Effective Time and which are held by a
Company stockholder who has not approved of the Merger by written consent or by
vote at the Company Special Meeting (as defined in Section 5.2) and, with
respect to which, appraisal rights shall have been duly demanded and perfected
in accordance with Section 262 of Delaware Law ("Dissenting Shares") shall not
be converted into a right to receive Red Cannon Common Stock in accordance with
Section 2.1 hereof. The holders of Dissenting Shares shall be entitled only to
such rights as are granted by Section 262 of Delaware Law. Each holder of
Dissenting Shares who becomes entitled to payment for such Dissenting Shares
pursuant to Section 262 of Delaware Law shall receive payment therefor from the
Surviving Corporation in accordance with Delaware Law;
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provided, however, that (i) if any such holder of Dissenting Shares shall have
failed to establish its entitlement to appraisal rights as provided in Section
262 of Delaware Law, (ii) if any such holder of Dissenting Shares shall have
effectively withdrawn its demand for appraisal of such Dissenting Shares or lost
its right to appraisal and payment for its Dissenting Shares under Section 262
of Delaware Law, or (iii) if neither any holder of Dissenting Shares nor the
Surviving Corporation shall have filed a petition demanding a determination of
the value of all Dissenting Shares within the time provided in Section 262 of
Delaware Law, such holder shall forfeit the right to appraisal of such
Dissenting Shares and each such Dissenting Share shall be treated as if such
Share had been converted, as of the Effective Time, into a right to receive,
subject to the provisions of Section 2.1 and 2.2 hereof, the Merger
Consideration with respect thereto, without interest thereon.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Red Cannon that:
Section 3.1. Organization and Good Standing. Each of the Company and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated or
organized and has the requisite corporate power and authority to carry on its
business as now being conducted. Each of the Company and its subsidiaries is
duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary, other than in
such jurisdictions where the failure to be so qualified or licensed or to be in
good standing (individually or in the aggregate) would not have a Company
Material Adverse Effect (as defined in Section 8.3(b)). The Company has
delivered to Red Cannon complete and correct copies of its Certificate of
Incorporation and By-Laws and the certificates of incorporation and by-laws (or
similar organizational documents) of its subsidiaries, in each case as amended
to the date hereof.
Section 3.2. Subsidiaries. Schedule 3.2 lists each subsidiary of the
Company, together with its jurisdiction of incorporation or organization. Except
as set forth on Schedule 3.2, all the outstanding shares of capital stock of
each such subsidiary have been validly issued and are fully paid and
nonassessable and are owned by the Company or by another subsidiary of the
Company, free and clear of all pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens").
Except for the capital stock of its subsidiaries set forth on Schedule 3.2, the
Company does not own, directly or indirectly, any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity.
Section 3.3. Capital Structure. The authorized capital stock of the
Company consists of forty million (40,000,000) shares of Company Common Stock.
At the close of business on December 7, 1998, (i) 18,536,038 shares of Company
Common Stock were issued and outstanding, (ii) no shares of Company Common Stock
were held by the Company in its treasury, (iii) 514,500 shares of Company Common
Stock were reserved for issuance upon the exercise of outstanding stock options
("Company Stock Options") granted pursuant to the Company Stock Option Plan and
(iv) approximately 3,500,000 shares of Company Common Stock were reserved for
issuance upon the closing of certain acquisitions of floral and gift businesses
in accordance with Schedule 5.1. Except as set forth above, as of the date of
this Agreement, no shares of capital stock or other voting securities of the
Company were issued, reserved for issuance or outstanding. A list of the
stockholders of the Company as of the date of this Agreement is set forth on
Schedule 3.3(a). A list of the names of the holders of all outstanding Company
Stock Options, with the respective amounts of shares, exercise prices, vesting
dates and expiration dates thereof, as of the date of this Agreement is set
forth on Schedule 3.3(b), and a copy of the Company Stock Option Plan is
attached thereto. All outstanding shares of capital stock of the Company are,
and all shares which
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may be issued pursuant to the Company Stock Options will be, when issued against
payment therefor in accordance with the terms thereof, duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights. There
are no bonds, debentures, notes or other indebtedness of the Company having the
right to vote (or convertible into securities having the right to vote) on any
matters on which stockholders of the Company may vote. Except as set forth
above, as of the date of this Agreement, there are no securities, options,
warrants, calls, rights, commitments, agreements, arrangements or undertakings
of any kind to which the Company or any of its subsidiaries is a party or by
which any of them is bound, obligating the Company or any of its subsidiaries to
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock or other voting securities of the Company or of any of
its subsidiaries, or obligating the Company or any of its subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right,
commitment, agreement, arrangement or undertaking. As of the date hereof, there
are no outstanding contractual obligations which require or will require or
obligate the Company or any of its subsidiaries to repurchase, redeem or
otherwise acquire any shares of capital stock of the Company or any of its
subsidiaries.
Section 3.4. Authority; Noncontravention. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and, subject
to approval of this Agreement by the holders of a majority of the outstanding
shares of the Company Common Stock, to consummate the transactions contemplated
by this Agreement. The execution and delivery of this Agreement by the Company
and the consummation by the Company of the transactions contemplated by this
Agreement have been duly authorized by all necessary corporate action, subject
to approval of this Agreement by the holders of a majority of the outstanding
shares of the Company Common Stock. This Agreement has been duly executed and
delivered by the Company and constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' generally and general equitable principles.
Except as set forth on Schedule 3.4, the execution and delivery of this
Agreement by the Company does not, and performance of the Company's obligations
hereunder will not, conflict with, or result in any violation of, or constitute
a default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any Lien upon any
of the properties or assets of the Company or any of its subsidiaries under, any
provision of (a) the Certificate of Incorporation or By-laws of the Company or
any provision of the comparable charter or organizational documents of any of
its subsidiaries, (b) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise,
or license to which the Company or any of its subsidiaries is a party or by
which their respective properties or assets are bound, or (c) subject to the
governmental filings and other matters referred to in the following sentence,
any (A) statute, law, ordinance, rule or regulation or (B) judgment, order or
decree applicable to the Company or any of its subsidiaries or their respective
properties or assets, other than, in the case of clause (b) and clause (c), any
such conflicts, violations, defaults, rights, losses or Liens that individually
or in the aggregate would not (x) have a Company Material Adverse Effect, (y)
impair in any material respect the ability of the Company to perform its
obligations under this Agreement, or (z) prevent or materially delay the
consummation of any of the transactions contemplated by this Agreement. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any federal, state or local government or any court, tribunal,
administrative agency or commission or other governmental authority or agency,
domestic or foreign (a "Governmental Authority"), is required by or with respect
to the Company or any of its subsidiaries in connection with the execution,
delivery and performance of this Agreement by the Company, except for: (i) the
filing of a premerger notification and report form by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), as may be required in connection with this Agreement and the transactions
contemplated by this Agreement; (ii) the filing of the Certificate of Merger
with the Secretary of State of the State of Delaware and appropriate documents
with the relevant authorities of other states in which the Company is qualified
to
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do business; (iii) the consents set forth on Schedule 3.4; and (iv) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings the failure of which to be obtained or made would not, individually or
in the aggregate, have a Company Material Adverse Effect or prevent or
materially delay the consummation of any of the transactions contemplated by
this Agreement.
Section 3.5. Information Supplied; Financial Statements. None of the
information supplied or to be supplied by the Company specifically for inclusion
in (i) the registration statement on Form S-4 to be filed with the Securities
and Exchange Commission (the "SEC") by Red Cannon in connection with the
issuance of Red Cannon Common Stock in the Merger (as amended or supplemented
from time to time, the "Registration Statement") will, at the time the
Registration Statement is filed with the SEC, at any time it is amended or
supplemented and at the time it becomes effective under the Securities Act of
1933, as amended (the "Securities Act"), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary or make the statements therein, in light of the circumstances under
which they are made, not misleading, and (ii) the joint proxy statement to be
filed with the SEC (as amended or supplemented from time to time, the "Proxy
Statement") relating to (a) the approval by the stockholders of Red Cannon at
the Red Cannon Meeting (as defined in Section 6.3) of (1) the issuance of Red
Cannon Common Stock pursuant to the Merger and the other transactions
contemplated by this Agreement, (2) the amendment to the Certificate of
Incorporation of Red Cannon as contemplated by Section 1.7 of this Agreement,
(3) the election of new directors to the Board of Directors of Red Cannon as
contemplated by Section 1.9 of this Agreement, and (4) the ratification of the
appointment of Arthur Andersen, LLP as independent auditors for Red Cannon, and
(b) the approval by the stockholders of the Company at the Company Special
Meeting (as defined in Section 5.2) of the Merger and the other transactions
contemplated by this Agreement, will, at the date such Proxy Statement is first
mailed to the stockholders of Red Cannon and the Company, and at the time of the
Red Cannon Meeting and the Company Special Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. No representation is
made by the Company in this Section 3.5 with respect to statements made or
incorporated by reference in the Registration Statement or in the Proxy
Statement based on information supplied by Red Cannon or Mergersub specifically
for inclusion or incorporation by reference in the Registration Statement or the
Proxy Statement. The financial statements of each of the businesses acquired by
the Company underlying the pro forma financial statements set forth on Schedule
3.5, and included therein, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the period
involved (except as may be indicated therein) and fairly present, in all
material respects taken as a whole for all of the acquired businesses, the
results of operations of each of such acquired businesses for the indicated
periods then ended (subject, in the case of unaudited statements, to normal
audit adjustments).
Section 3.6. Absence of Certain Changes or Events. Except as set forth on
Schedule 3.6, since September 30, 1998, the Company has conducted its business
only in the ordinary course, and there has not been: (i) any material adverse
change in the business, assets, results of operations, customer and employee
relations, or business prospects of the Company and its subsidiaries, taken as a
whole; (ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock; (iii) any split, combination or reclassification of any
of its capital stock or any issuance or the authorization of any issuance of any
other securities in respect of, in lieu of or in substitution for shares of its
capital stock; (iv) any granting by the Company or any of its subsidiaries to
any officer of the Company or any of its subsidiaries of any increase in
compensation, except in the ordinary course of business consistent with prior
practice or as required under existing employment agreements; (v) any granting
by the Company or any of its subsidiaries to any officer of any increase in
severance or termination pay; (vi) an entry by the Company or any of its
subsidiaries into any employment, severance or termination agreement with any
officer; (vii) any
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damage, destruction or loss, whether or not covered by insurance, that has had
or is likely to have a Company Material Adverse Effect; (viii) any change in
accounting methods, principles or practices by the Company materially affecting
its assets, liabilities or business, except insofar as may have been required by
a change in generally accepted accounting principles; or (ix) any adoption or
amendment in any material respect by the Company or any of its subsidiaries of
any bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement or understanding in each case maintained or
contributed to, or required to be maintained or contributed to, by the Company
or its subsidiaries for the benefit of any current or former employee, officer
or director of the Company or any of its subsidiaries (each, a "Company Benefit
Plan" and, collectively, "Company Benefit Plans").
Section 3.7. Litigation. There is no suit, action or proceeding pending
or, to the Company's knowledge, threatened against the Company or any of its
subsidiaries challenging the acquisition by Red Cannon or Mergersub of any
shares of the Company Common Stock or any provision of this Agreement or seeking
to restrain or prohibit the consummation of the Merger, or that, individually or
in the aggregate, could reasonably be expected to have a Company Material
Adverse Effect, nor is there any judgment, decree, injunction, rule or order of
any Governmental Authority or arbitrator outstanding against the Company or any
of its subsidiaries having, or which could reasonably be expected to have, any
such Company Material Adverse Effect.
Section 3.8. Compliance with Laws; Permits. The Company and its
subsidiaries are in compliance with all applicable statutes, laws, ordinances,
regulations, rules, judgments, decrees and orders of any Governmental Authority
applicable to its business or operations, except for instances of possible
noncompliance that, individually or in the aggregate, would not have a Company
Material Adverse Effect. Each of the Company and its subsidiaries has in effect
all federal, state, local and foreign governmental approvals, authorizations,
certificates, filings, franchises, licenses, notices, permits and rights
("Permits"), necessary for it to own, lease or operate its properties and assets
and to carry on its business as now conducted, and there has occurred no default
under any such Permit, except for the absence of Permits and for defaults under
Permits which, individually or in the aggregate, would not have a Company
Material Adverse Effect. None of such Permits is or will be impaired or in any
way affected by the execution and delivery of this Agreement, or consummation of
the transactions contemplated hereby, provided that the consents or filings
referred to in Section 3.4 are obtained or made prior to the Closing.
Section 3.9. Environmental Matters. Except as set forth in Schedule 3.9
or as would not have a Company Material Adverse Effect:
(a) The Company and its subsidiaries is, and at all times has been, in
full compliance with, and has not been and is not in violation of or liable
under, any environmental law.
(b) Neither the Company nor its subsidiaries has any basis to expect
any actual or threatened order, notice, or other communication from (i) any
governmental body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any facilities from which the
Company or its subsidiaries conducts its businesses, of any actual or
potential violation or failure to comply with any environmental law, or of
any actual or threatened obligation to undertake or bear the cost of any
environmental, health, and safety liabilities with respect to any of such
facilities or any other properties or assets (whether real, personal, or
mixed) in which the Company or its subsidiaries has had an interest, or
with respect to any property or facility at or to which hazardous materials
were generated, manufactured, refined, transferred, imported, used, or
processed by the Company or its subsidiaries, or from which hazardous
materials have been transported, treated, stored, handled, transferred,
disposed, recycled, or received.
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(c) There are no pending or, to the knowledge of the Company,
threatened claims, encumbrances, or other restrictions of any nature,
resulting from any environmental, health, and safety liabilities or arising
under or pursuant to any environmental law, with respect to or affecting
any of the facilities of the Company or its subsidiaries or any other
properties and assets (whether real, personal, or mixed) in which the
Company or its subsidiaries has or had an interest.
(d) The Company or its subsidiaries has no basis to expect, nor has
the Company or its subsidiaries received, any citation, directive, inquiry,
notice, order, summons, warning, or other communication that relates to
hazardous activity, hazardous materials, or any alleged, actual, or
potential violation or failure to comply with any environmental law, or of
any alleged, actual, or potential obligation to undertake or bear the cost
of any environmental, health, and safety liabilities with respect to any of
the facilities of the Company or its subsidiaries or any other properties
or assets (whether real, personal, or mixed) in which the Company or its
subsidiaries had an interest, or with respect to any property or facility
to which hazardous materials generated, manufactured, refined, transferred,
imported, used, or processed by the Company or its subsidiaries, have been
transported, treated, stored, handled, transferred, disposed, recycled, or
received.
(e) To the knowledge of the Company, there are no hazardous materials
present on or in the environment at any of the facilities of the Company or
its subsidiaries or at any geologically or hydrologically adjoining
property, including any hazardous materials contained in barrels,
aboveground or underground storage tanks, landfills, land deposits, dumps,
equipment (whether moveable or fixed) or other containers, either temporary
or permanent, and deposited or located in land, water, sumps, or any other
part of such facilities or such adjoining property, or incorporated into
any structure therein or thereon.
(f) Neither the Company nor its subsidiaries has permitted or
conducted, or is aware of, any hazardous activity conducted at facilities
of the Company or its subsidiaries or any other properties or assets
(whether real, personal, or mixed) in which the Company or its subsidiaries
has or had an interest except in full compliance with all applicable
environmental laws.
Section 3.10. Benefit Plan Compliance.
(a) Schedule 3.10 contains a list and brief description of all
"employee pension benefit plans" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(sometimes referred to herein as "Company Pension Plans"), "employee
welfare benefit plans" (as defined in Section 3(1) of ERISA) and all other
Benefit Plans maintained, or contributed to, or required to be contributed
to, by, or with respect to which there is any accrued, contingent,
secondary or other liability of, the Company or any of its subsidiaries or
any other Person that, together with the Company, is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code (the Company and
each such other Person, a "Company Commonly Controlled Entity") for the
benefit of any current or former employees, officers or directors of any
Company Commonly Controlled Entity. The Company will make available to Red
Cannon true, complete and correct copies of (i) each Company Benefit Plan
(or, in the case of any unwritten Company Benefit Plans, descriptions
thereof), (ii) the most recent annual report on Form 5500 filed with the
Internal Revenue Service with respect to each Company Benefit Plan (if any
such report was required), (iii) the most recent summary plan description
for each Company Benefit Plan for which such summary plan description is
required, and (iv) where applicable, each trust agreement and group annuity
contract relating to any Company Benefit Plan. To the Company's knowledge,
each Company Benefit Plan has been administered in all material respects in
accordance with its terms and is in compliance with the applicable
provisions of ERISA, the Code, all other applicable laws and all applicable
collective bargaining agreements except where the failure to comply would
not be reasonably expected to result in a Company Material Adverse Effect.
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(b) All Company Pension Plans have been the subject of determination
letters from the Internal Revenue Service, or have filed a timely
application therefor, to the effect that such Company Pension Plans are
qualified and exempt from federal income taxes under Section 401(a) and
501(a), respectively, of the Code, and no such determination letter has
been revoked nor has any such Company Pension Plan been amended since the
date of its most recent determination letter or application therefor in any
respect that would adversely affect its qualification or materially
increase its costs, except where there would not reasonably be a Company
Material Adverse Effect.
(c) Except as set forth on Schedule 3.10, no Company Pension Plan is
subject to Title IV of ERISA or Section 412 of the Code.
(d) No Company Benefit Plan is a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
(e) With respect to any Company Benefit Plan that is an employee
welfare benefit plan, (i) no such Company Benefit Plan is funded through a
"welfare benefits fund," as such term is defined in Section 419(e) of the
Code, (ii) each such Company Benefit Plan that is a "group health plan," as
such term is defined in Section 5000(b)(1) of the Code, complies
substantially with the applicable requirements of Section 4980B(f) of the
Code, and (iii) no such Company Benefit Plan provides post-termination
employment benefits, except as otherwise required by Section 4980B of the
Code.
(f) No employee, director or independent contractor of the Company or
any of its subsidiaries will be entitled to any additional compensation or
benefits or any acceleration of the time of payment or vesting of any
compensation or benefits under any Company Benefit Plan, including, without
limitation, the Company Stock Option Plan, as a result of the transactions
contemplated by this Agreement.
(g) Except as set forth on Schedule 3.10, neither the Company or any
of its subsidiaries nor any Person acting on behalf of the Company or any
of its subsidiaries has, in contemplation of any corporate transaction
involving Red Cannon, issued any written communication to, or otherwise
made or entered into any legally binding commitment with, any employees of
the Company or of any of its subsidiaries to the effect that, following the
date hereof, (i) any benefits or compensation provided to such employees
under existing Company Benefit Plans or under any other plan or arrangement
will be enhanced, (ii) any new plans or arrangements providing benefits or
compensation will be adopted, (iii) any Company Benefit Plans will be
continued for any period of time, or (iv) any plans or arrangements
provided by Red Cannon or Mergersub will be made available to such
employees.
Section 3.11. Taxes. As used in this Section 3.11, "Taxes" shall include
all federal, state, local and foreign income, property, sales, payroll, employee
withholding, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, including any interest, penalties or additions with respect
thereto. The Company and each of its subsidiaries, and each affiliated,
consolidated, combined or unitary group of which the Company or any of its
subsidiaries is or has been a member (an "Affiliated Company Group"), has filed
timely all material tax returns and reports required to be filed by the Company,
its subsidiaries or any Affiliated Company Group (or requests for extensions
have been filed timely), each such tax return is true and correct in all
material respects and has been prepared in material compliance with all
applicable laws and regulations, and the Company and each of its subsidiaries
has paid (or the Company or any Affiliated Company Group has paid on their
behalf) all Taxes required to be paid by it and them in accordance with such tax
returns. The financial statements to be supplied by the Company to be contained
in the Registration Statement will reflect an adequate reserve for all material
Taxes payable by the Company and its subsidiaries for all taxable periods and
portions thereof through the date of such financial statements. Except as set
forth on Schedule 3.11, as of the date hereof, no material deficiency or
proposed adjustment which has not been settled or otherwise
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resolved for any Taxes has been asserted or assessed by any taxing authority
against the Company or any of its subsidiaries or any Affiliated Company Group.
Except as set forth on Schedule 3.11, the Company and each of its subsidiaries
has not consented to extend the time in which any Taxes may be assessed or
collected by any taxing authority. None of the assets or properties of the
Company or any of its subsidiaries is subject to any material tax lien except
for Taxes not yet due and payable. Except as set forth on Schedule 3.11, neither
the Company nor any of its subsidiaries is a party to or bound by any material
tax allocation or tax sharing agreement and has no current or potential material
obligation to indemnify any other Person with respect to Taxes, and is not
otherwise obligated to make payments of Taxes with respect to the activities of
any other Person. Since January 1, 1994, no material claim has been made by a
taxing authority in a jurisdiction where the Company or any of its subsidiaries
do not file tax returns that the Company or any such subsidiary is or may be
subject to Taxes assessed by such jurisdiction. As of the date hereof, the
federal income tax returns of the Company and each of its subsidiaries
consolidated in such returns have been examined or audited by the Internal
Revenue Service for all years through December 31, 1994, and the Company has not
received notice of any proposed tax audit. True, correct and complete copies of
all federal and state income tax returns filed by or with respect to the Company
and each of its subsidiaries for the past three years have been made available
to Red Cannon.
Section 3.12. No Excess Parachute Payments. Neither the Company nor any
of its affiliates has made any payments, is obligated to make any payments, or
is a party to any agreement that could obligate it to make any payments that
will not be deductible under Section 280G of the Code (or any corresponding
provision of state, local or foreign law).
Section 3.13. Contracts.
(a) Schedule 3.13 sets forth as of the date hereof (x) a list of all
material written and oral contracts, agreements or arrangements to which
the Company or any of its subsidiaries is a party or by which the Company
or such subsidiary or any of their respective assets is bound and (y) the
following types of written and oral arrangements (all such written or oral
agreements, arrangements or commitments as are required to be set forth on
Schedule 3.13, collectively the "Designated Contracts"), which schedule
further identifies each of the Designated Contracts which contain change of
control provisions:
(i) each partnership, joint venture or similar agreement of the
Company or any of its subsidiaries with another Person;
(ii) each contract or agreement under which the Company or any of
its subsidiaries have created, incurred, assumed or guaranteed (or may
create, incur, assume or guarantee) indebtedness of more than two
hundred fifty thousand dollars ($250,000) in principal amount or under
which the Company or any of its subsidiaries have imposed (or may
impose) a security interest or lien on any of their respective assets,
whether tangible or intangible securing indebtedness in excess of two
hundred fifty thousand dollars ($250,000);
(iii) each contract or agreement to which the Company or any of its
subsidiaries is a party which involves an obligation or commitment to
pay or be paid an amount in excess of one million dollars ($1,000,000)
per year;
(iv) each contract or agreement which involves or contributes to
the Company or any of its subsidiaries aggregate annual remuneration
which is expected to exceed 5% of the Company's and its subsidiaries'
pro forma projected consolidated annual revenue for the twelve months
ending December 31, 1998;
(v) each contract or agreement relating to employment or consulting
which provides for annual compensation in excess of one hundred thousand
dollars ($100,000) and each
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severance, termination, confidentiality, non-competition or
indemnification agreement or arrangement with any of the directors,
officers, consultants or employees of the Company or any of its
subsidiaries;
(vi) each contract or agreement to which the Company or any of its
subsidiaries or affiliates is a party limiting, in any material respect,
the right of the Company or any of its subsidiaries prior to the
Effective Time, or the Surviving Corporation or any of its subsidiaries
or affiliates at or after the Effective Time (a) to engage in, or to
compete with any Person in, any business, including each contract or
agreement containing exclusivity provisions restricting the geographical
area in which, or the method by which, any business may be conducted by
the Company or any of its subsidiaries or affiliates prior to the
Effective Time, or the Surviving Corporation or any of its subsidiaries
or affiliates after the Effective Time or (b) to solicit any customer or
client;
(vii) all contracts or agreements between the Company or any of its
subsidiaries, and any Person controlling, controlled by or under common
control with the Company;
(viii) all other contracts or agreements which are material to the
Company and its subsidiaries taken as a whole, or the conduct of their
respective business, other than those made in the ordinary course of
business or those which are terminable by the Company or any of its
subsidiaries upon no greater than sixty (60) days prior notice and
without penalty or other adverse consequence.
(b) All the Designated Contracts are valid, subsisting, in full force
and effect, binding upon the Company or one of its subsidiaries in
accordance with their terms, and to the knowledge of the Company binding
upon the other parties thereto in accordance with their terms. The Company
and its subsidiaries have paid in full or accrued all amounts now due from
them under the Designated Contracts and have satisfied in full or provided
for all of their liabilities and obligations under the Designated Contracts
which are presently required to be satisfied or provided for, and are not
(with or without notice or lapse of time or both) in default in any
material respect under any of the Designated Contracts nor to the knowledge
of the Company is any other party to any such Designated Contract (with or
without notice or lapse of time or both) in default in any material respect
thereunder, except for any defaults that could not be reasonably expected
to have a Company Material Adverse Effect.
Section 3.14. Voting Requirements. The affirmative vote of the holders of
a majority of the outstanding shares of Company Common Stock approving the
Merger and other transactions contemplated by this Agreement is the only vote of
the holders of any class or series of the Company's capital stock necessary to
approve the Merger and other transactions contemplated by this Agreement.
Section 3.15. Real Estate.
(a) The Company and each of its subsidiaries does not own any real
property or any interest therein except as set forth on Schedule 3.15(a)
(the "Owned Properties"), which Schedule sets forth the location of the
Owned Properties. With respect to each such parcel of Owned Property,
except as set forth on Schedule 3.15(a): (i) the Company has good and
marketable title to the parcel of Owned Property, free and clear of any
Lien other than (y) Liens for real estate taxes not yet due and payable, or
(z) recorded easements, covenants, encumbrances and other restrictions
which do not materially impair the current use or occupancy of the property
subject thereto, and any matters that would be disclosed by an accurate and
current survey of each of the other parcels of the Owned Properties which
would not materially impair the current use or occupancy of the property so
surveyed; (ii) there are no pending or threatened condemnation proceedings,
suits or administrative actions relating to the Owned Properties materially
affecting adversely the current use, occupancy or value thereof; (iii) the
legal descriptions for the parcels of Owned Property contained
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in the deeds thereof describe such parcels fully and adequately, and the
Owned Properties are not located within any flood plain (such that a
mortgagee would require a mortgagor to obtain flood insurance) for which
any permits or licenses necessary to the use thereof have not been
obtained; (iv) there are no outstanding options or rights of first refusal
to purchase the parcels of Owned Property, or any portion thereof or
interest therein; and (v) there are no parties (other than the Company and
its subsidiaries) in possession of the parcels of Owned Property except
pursuant to written leases entered into by the Company or a subsidiary
thereof with respect thereto in the capacity as landlord.
(b) Schedule 3.15(b) sets forth a list of all material leases,
licenses or similar agreements to which the Company or its subsidiaries is
a party, which are for the use or occupancy of real estate owned by a third
party and which are material to the operations or the business of the
Company and its subsidiaries taken as a whole ("Leases")(copies of which
have previously been furnished to Red Cannon), in each case, setting forth
(A) the lessor and lessee thereof, and (B) the street address of each
property covered thereby (the "Leased Premises"). The Leases are in full
force and effect and have not been amended, and neither the Company or its
subsidiaries nor, to the knowledge of the Company, any other party thereto
is in material default or material breach under any such Lease. No event
has occurred which, with the passage of time or the giving of notice or
both, would cause a breach of or default under any of such Leases, except
for breaches or defaults which in the aggregate could not reasonably be
expected to have a Company Material Adverse Effect.
Section 3.16. Good Title to, Condition and Adequacy of Assets. Except as
set forth on Schedule 3.16, the Company and its subsidiaries have good title to
all of their respective Assets (as hereinafter defined), free and clear of any
Liens or restrictions on use. The Assets constitute, in the aggregate, all of
the assets and properties necessary for the conduct of the business of the
Company and its subsidiaries in the manner in which and to the extent to which
such business is currently being conducted. All vehicles, machinery, equipment,
tools, supplies, leasehold improvements, furniture and fixtures constituting
part of the Assets and which are used by or located on the premises of the
Company or its subsidiaries, and which are currently in use or necessary for the
business and operations of the Company or its subsidiaries, are in operating
condition, normal wear and tear excepted. For purposes of this Agreement, the
term "Assets" means all of the properties and assets owned by the Company and
its subsidiaries as of the date hereof, whether personal or mixed, tangible or
intangible, wherever located.
Section 3.17. Labor and Employment Matters. Schedule 3.17 sets forth the
name, address, and social security number of each of the executive officers of
the Company and its subsidiaries. The current rate of compensation of each of
the executive officers of the Company and its subsidiaries has been previously
provided to Red Cannon. Neither the Company nor any of its subsidiaries is a
party to or bound by any collective bargaining agreement or any other agreement
with a labor union. There is no pending or threatened labor dispute, strike or
work stoppage which affects or which may affect the business of the Company or
any of its subsidiaries. As of the date hereof, the Company is not aware that
any officer, key employee or group of employees has any plans to terminate his
or their employment with the Company or any of its subsidiaries as a result of
the Merger or otherwise.
Section 3.18. Insurance. Schedule 3.18 sets forth a list of all insurance
policies maintained as of the date hereof by the Company and its subsidiaries.
There are valid and enforceable policies of insurance covering the respective
properties, assets and businesses of the Company and its subsidiaries against
risks of the nature normally insured against by entities in the same or similar
lines of business and in coverage amounts typically and reasonably carried by
such entities. Such policies are in full force and effect, and all premiums due
thereon have been paid. None of such policies will lapse or terminate as a
result of the transactions contemplated by this Agreement. The Company has not
failed to give, in a timely manner, any notice required under any of such
policies to preserve its material rights thereunder.
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Section 3.19. Related Party Transactions. Except as set forth on Schedule
3.19, none of the officers or directors of the Company, and no Person owning of
record or beneficially more than 5% of the Company Common Stock, or any members
of their immediate families, has been a party to any transaction, or series of
similar transactions, with the Company or any of its subsidiaries, in which the
amount involved exceeds sixty thousand dollars ($60,000) per annum, and in which
any such Persons had or will have a direct or indirect material interest.
Section 3.20. Names; Prior Acquisitions. All names under which the
Company and its subsidiaries do business as of the date hereof are specified on
Schedule 3.20. Except as set forth on Schedule 3.20, neither the Company nor any
of its subsidiaries has changed its name or used any assumed or fictitious name,
or been the surviving entity in a merger, acquired any business or changed its
principal place of business or chief executive office, within the past year.
Section 3.21. State Takeover Statutes. The Board of Directors of the
Company has approved the Merger and this Agreement, and such approval is
sufficient to render inapplicable to this Agreement, the Merger and the other
transactions contemplated by this Agreement, the provisions of Section 203 of
the Delaware Law, to the extent, if any, such provisions of such Section 203
would otherwise be applicable to this Agreement, the Merger and the other
transactions contemplated by this Agreement. Less than 500 residents of the
State of Florida are employees of the Company and its subsidiaries, so as to
render inapplicable to this Agreement, the Merger and the other transactions
contemplated by this Agreement, the provisions of Section 607.0903 of the
Florida Business Corporation Act, to the extent, if any, such provisions of such
Section 607.0903 would otherwise be applicable to this Agreement, the Merger and
the other transactions contemplated by this Agreement.
Section 3.22. Brokers. No broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company,
except that the Company has retained Allen & Company as a financial advisor. A
true and correct copy of the Company's retainer agreement with Allen & Company
has been delivered to Red Cannon.
Section 3.23. Accounting Matters. Neither the Company nor any of its
affiliates has taken or agreed to take any action, or knows of any
circumstances, that (without regard to any action taken or agreed to be taken by
Red Cannon or any of its affiliates) would prevent Red Cannon from accounting
for the business combination to be effected by the Merger as a pooling of
interests.
Section 3.24. Tax Matters. Neither the Company nor any of its affiliates
has taken or agreed to take any action, or knows of any circumstances, that
(without regard to any action taken or agreed to be taken by Red Cannon or any
of its affiliates) would prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a)(2)(E) of the Code.
Section 3.25. Ownership of Company Common Stock. As of the date hereof,
except for the voting proxies granted to Red Cannon as described in Section 5.6
and the persons listed on Schedule 3.25, no person nor any of the Company's
affiliates or associates (as such terms are defined under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (i) beneficially owns,
directly or indirectly, or (ii) is party to any agreement, arrangement or
understanding providing for the acquisition, holding, voting or disposition of,
in each case, shares of capital stock of the Company or any securities
convertible into or exercisable or exchangeable for capital stock of the Company
which in the aggregate represent 10% or more of the outstanding shares of the
Company Common Stock after giving effect to the conversion, exercise or exchange
of all such securities beneficially owned by the Company and its affiliates and
associates which are convertible into or exercisable or exchangeable for capital
stock of the Company.
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Section 3.26. Year 2000 Compliance. The software and hardware operated by
the Company and its subsidiaries (but not necessarily those operated or provided
by vendors) are capable of providing or are being tested, and, if necessary,
will be adapted or replaced to provide uninterrupted millennium functionality to
record, store, process and present calendar dates falling on or after January 1,
2000 and date-dependent data in substantially the same manner and with the same
functionality as such software records, stores, processes and presents such
calendar dates and date-dependent data as of the date hereof, except for the
failure to have such capability which would not, individually or in the
aggregate, be reasonably likely to have a Company Material Adverse Effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF RED CANNON
Red Cannon hereby represents and warrants to the Company that:
Section 4.1. Organization and Good Standing. Each of Red Cannon and its
subsidiaries, including Mergersub, is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it was
incorporated or organized and has the requisite corporate power and authority to
carry on its business as now being conducted. Each of Red Cannon and its
subsidiaries, including Mergersub, is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the nature of its business
or the ownership or leasing of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed or to be in good standing (individually or in the
aggregate) would not have a Red Cannon Material Adverse Effect (as defined in
Section 8.2(b)). Red Cannon has delivered to the Company complete and correct
copies of the Certificate of Incorporation and ByLaws of Red Cannon and its
subsidiaries, including Mergersub, in each case as amended to the date hereof.
Mergersub is controlled by Red Cannon within the meaning of Section 368(a)(2)(E)
of the Code.
Section 4.2. Capital Structure. The authorized capital stock of Red
Cannon consists 70,000,000 shares of Red Cannon Common Stock and 600,000 shares
of preferred stock, par value $10.00 per share ("Red Cannon Preferred Stock").
At the close of business on December 7, 1998, (i) 8,003,602 shares of Red Cannon
Common Stock were issued and outstanding, (ii) 519,975 shares of Red Cannon
Common Stock were held by Red Cannon in its treasury, (iii) 936,500 shares of
Red Cannon Common Stock were reserved for issuance upon the exercise of
outstanding stock options ("Red Cannon Stock Options") granted pursuant to Red
Cannon's various stock option plans and otherwise, (iv) 348,706 shares of Common
Stock were reserved for issuance upon the exercise of outstanding and vested
warrants, and (v) no shares of Red Cannon Preferred Stock were issued or
outstanding. A list of the names of the holders of all outstanding Red Cannon
Stock Options and of all outstanding warrants to purchase shares of Red Cannon
Common Stock, with the respective amounts of shares, exercise prices, vesting
dates, acceleration provisions and expiration dates thereof, as of the date of
this Agreement is set forth on Schedule 4.2, and copies of all of Red Cannon's
Stock Option Plans are attached thereto. All outstanding shares of capital stock
of Red Cannon are, and all shares which may be issued pursuant to outstanding
options and warrants will be, when issued in accordance with the terms thereof,
duly authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of Red Cannon having the right to vote (or convertible into securities having
the right to vote) on any matters on which stockholders of Red Cannon may vote.
Except as set forth above, as of the date of this Agreement, there are no
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which Red Cannon or any of its
subsidiaries is a party or by which any of them is bound, obligating Red Cannon
or any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting securities
of Red Cannon or of any of its subsidiaries, or obligating Red Cannon or any of
its subsidiaries to issue, grant, extend or enter into any such security,
option, warrant, call, right,
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commitment, agreement, arrangement or undertaking. As of the date of this
Agreement, there are not any outstanding contractual obligations which require
or will require or obligate Red Cannon or any of its subsidiaries to repurchase,
redeem or otherwise acquire any shares of capital stock of Red Cannon or any of
its subsidiaries.
Section 4.3. Authority; Noncontravention. Red Cannon and Mergersub have
the requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement by Red Cannon and Mergersub have been
duly authorized by all necessary corporate action on the part of Red Cannon and
Mergersub, respectively. This Agreement has been duly executed and delivered by
Red Cannon and Mergersub and constitutes a valid and binding obligation of Red
Cannon and Mergersub, enforceable against Red Cannon and Mergersub in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights generally
and general equitable principles. Except as set forth on Schedule 4.3, the
execution and delivery of this Agreement does not, and the consummation of the
transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
constitute a default (with or without notice or lapse of time, or both) under,
or give rise to a right of termination, cancellation or acceleration of any
obligation or to loss of a material benefit under, or result in the creation of
any Lien upon any of the properties or assets of Red Cannon or any of its
subsidiaries under, any provision of (a) the Certificate of Incorporation or
By-laws of Red Cannon or any provision of the comparable charter or
organizational documents of any of its subsidiaries, (b) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise, or license applicable to Red Cannon
or any of its subsidiaries or their respective properties or assets, or (c)
subject to the governmental filings and other matters referred to in the
following sentence, any (A) statute, law, ordinance, rule or regulation or (B)
judgment, order or decree to which Red Cannon or any of its subsidiaries is a
party or by which their respective properties or assets are bound, other than,
in the case of clause (b) and clause (c), any such conflicts, violations,
defaults, rights, losses or Liens that individually or in the aggregate would
not (x) have a Red Cannon Material Adverse Effect, (y) impair in any material
respect the ability of Red Cannon or Mergersub to perform its obligations under
this Agreement, or (z) prevent or materially delay the consummation of any of
the transactions contemplated by this Agreement. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Governmental
Authority, is required by or with respect to Red Cannon or any of its
subsidiaries in connection with the execution, delivery and performance of this
Agreement by Red Cannon or Mergersub, except for: (i) the filing of a premerger
notification and report form by Red Cannon under the HSR Act; (ii) the filing
with the SEC of the Registration Statement, the Proxy Statement and such reports
under the Exchange Act as may be required in connection with this Agreement and
the transactions contemplated by this Agreement; (iii) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware; (iv)
the filing of the Certificate of Amendment with the Secretary of State of the
State of Delaware; and (v) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be obtained or made would not, individually or in the aggregate, have a Red
Cannon Material Adverse Effect or prevent or materially delay the consummation
of any of the transactions contemplated by this Agreement.
Section 4.4. SEC Documents and Financial Statements. Red Cannon has filed
all required reports, schedules, forms, statements and other documents with the
SEC on a timely basis since September 1, 1996 (the "Red Cannon SEC Documents").
As of their respective dates, the Red Cannon SEC Documents complied as to form
in all material respects with the requirements of Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such Red Cannon SEC Documents, and none of the Red
Cannon SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated
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therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Except to the extent
that information contained in any Red Cannon SEC Document has been revised or
superseded by a later- filed Red Cannon SEC Document, filed and publicly
available prior to the date of this Agreement, as of the date of this Agreement,
none of the Red Cannon SEC Documents contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The financial statements of Red
Cannon included in the Red Cannon SEC Documents complied as of their respective
dates of filing with the SEC as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles (except, in the case of unaudited statements, as permitted
by Form 10-Q or 8-K) applied on a consistent basis during the period involved
(except as may be indicated in the notes thereto) and fairly present the
consolidated financial position, results of operations and cash flows as at the
dates and for the periods then ended (subject, in the case of unaudited
statements, to normal audit adjustments). Except as set forth in the financial
statements of Red Cannon included in the Red Cannon SEC Documents and except for
liabilities and obligations incurred in the ordinary course of business
consistent with past practice, since August 31, 1998, neither Red Cannon nor any
of its subsidiaries has incurred any material liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) required by
generally accepted accounting principles to be set forth on a consolidated
balance sheet of Red Cannon and its consolidated subsidiaries or in the notes
thereto or that has had or is reasonably likely to have a Red Cannon Material
Adverse Effect.
Section 4.5. Information Supplied. None of the information supplied or to
be supplied by Red Cannon specifically for inclusion or incorporation by
reference in (i) the Registration Statement will, at the time the Registration
Statement is filed with the SEC, at any time it is amended or supplemented and
at the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading, and (ii) the Proxy
Statement will, at the date such Proxy Statement is first mailed to the
stockholders of the Company and Red Cannon, and at the time of the Red Cannon
Meeting (as defined in Section 6.3) and the Company Special Meeting (as defined
in Section 5.2), contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading. No representation is made by Red Cannon in this Section
4.5 with respect to statements made or incorporated by reference in the
Registration Statement or the Proxy Statement based on information supplied by
the Company specifically for inclusion or incorporation by reference in the
Registration Statement or the Proxy Statement.
Section 4.6. Absence of Certain Changes or Events. Except as disclosed in
the Red Cannon SEC Documents filed and publicly available prior to the date of
this Agreement, and except as expressly contemplated by this Agreement, since
the date of the most recent audited financial statements included in such Red
Cannon SEC Documents, Red Cannon has conducted its business only in the ordinary
course, and there has not been: (i) any material adverse change in the business,
results of operations, or business prospects of Red Cannon and its subsidiaries
taken as a whole; (ii) any declaration, setting aside or payment of any dividend
or other distribution (whether in cash, stock or property) with respect to any
of Red Cannon's capital stock; (iii) any split, combination or reclassification
of any of its capital stock or any issuance or the authorization of any
insurance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock; (iv) any granting by Red Cannon or any of its
subsidiaries to any officer of Red Cannon or any of its subsidiaries of any
increase in compensation, except in the ordinary course of business consistent
with prior practice or as required under existing employment agreements; (v) any
granting by Red Cannon or any of its subsidiaries to any officer of any increase
in
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severance or termination pay; (vi) an entry by Red Cannon or any of its
subsidiaries into any employment, severance or termination agreement with any
officer; (vii) any damage, destruction or loss, whether or not covered by
insurance, that has had or is likely to have a Red Cannon Material Adverse
Effect; (viii) any change in accounting methods, principles or practices by Red
Cannon materially affecting its assets, liabilities or business, except insofar
as may have been required by a change in generally accepted accounting
principles; or (ix) except as set forth on Schedule 4.6, any adoption or
amendment in any material respect by Red Cannon or any of its subsidiaries of
any bonus, pension, profit sharing, deferred compensation, incentive
compensation, stock ownership, stock purchase, stock option, phantom stock,
retirement, vacation, severance, disability, death benefit, hospitalization,
medical or other plan, arrangement or understanding in each case maintained or
contributed to, or required to be maintained or contributed to, by Red Cannon or
its subsidiaries for the benefit of any current or former employee, officer or
director of Red Cannon or any of its subsidiaries (each, a "Red Cannon Benefit
Plan" and, collectively, "Red Cannon Benefit Plans").
Section 4.7. Litigation. Except as disclosed in the Red Cannon SEC
Documents filed and publicly available prior to the date of this Agreement,
there is no suit, action or proceeding pending or, to Red Cannon's knowledge,
threatened against Red Cannon or any of its subsidiaries challenging the
acquisition by Red Cannon or Mergersub of any shares of Company Common Stock or
any provision of this Agreement or seeking to restrain or prohibit the
consummation of the Merger, or that, individually or in the aggregate, could
reasonably be expected to have a Red Cannon Material Adverse Effect, nor is
there any judgment, decree, injunction, rule or order of any Governmental
Authority or arbitrator outstanding against Red Cannon or any of its
subsidiaries having, or which could reasonably by expected to have, a Red Cannon
Material Adverse Effect.
Section 4.8. Compliance With Laws. Except as disclosed in the Red Cannon
SEC Documents filed and publicly available prior to the date of this Agreement,
Red Cannon and its subsidiaries are in compliance with all applicable statutes,
laws, ordinances, regulations, rules, judgments, decrees and orders of any
Governmental Authority applicable to its business or operations, except for
instances of possible noncompliance that, individually or in the aggregate,
would not have a Red Cannon Material Adverse Effect. Each of Red Cannon and its
subsidiaries has in effect all Permits, necessary for it to own, lease or
operate its properties and assets and to carry on its business as now conducted,
and there has occurred no default under any such Permit, except for the lack of
Permits and for defaults under Permits which, individually or in the aggregate,
would not have a Red Cannon Material Adverse Effect. None of such Permits is or
will be impaired or in any way affected by the execution and delivery of this
Agreement, or the consummation of the transactions contemplated hereby.
Section 4.9. Environmental Matters. Except as set forth in Schedule 4.9
or as would not have a Red Cannon Material Adverse Effect:
(a) Red Cannon and its subsidiaries is, and at all times has been, in
full compliance with, and has not been and is not in violation of or liable
under, any environmental law.
(b) Neither Red Cannon nor its subsidiaries has any basis to expect
any actual or threatened order, notice, or other communication from (i) any
governmental body or private citizen acting in the public interest, or (ii)
the current or prior owner or operator of any facilities from which Red
Cannon or its subsidiaries conducts its businesses, of any actual or
potential violation or failure to comply with any environmental law, or of
any actual or threatened obligation to undertake or bear the cost of any
environmental, health, and safety liabilities with respect to any of such
facilities or any other properties or assets (whether real, personal, or
mixed) in which Red Cannon or its subsidiaries has had an interest, or with
respect to any property or facility at or to which hazardous materials were
generated, manufactured, refined, transferred, imported, used, or processed
by Red Cannon or its subsidiaries, or from which hazardous materials have
been transported, treated, stored, handled, transferred, disposed,
recycled, or received.
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(c) There are no pending or, to the knowledge of Red Cannon,
threatened claims, encumbrances, or other restrictions of any nature,
resulting from any environmental, health, and safety liabilities or arising
under or pursuant to any environmental law, with respect to or affecting
any of the facilities of Red Cannon or its subsidiaries or any other
properties and assets (whether real, personal, or mixed) in which Red
Cannon or its subsidiaries has or had an interest.
(d) Red Cannon or its subsidiaries has no basis to expect, nor has Red
Cannon or its subsidiaries received, any citation, directive, inquiry,
notice, order, summons, warning, or other communication that relates to
hazardous activity, hazardous materials, or any alleged, actual, or
potential violation or failure to comply with any environmental law, or of
any alleged, actual, or potential obligation to undertake or bear the cost
of any environmental, health, and safety liabilities with respect to any of
the facilities of Red Cannon or its subsidiaries or any other properties or
assets (whether real, personal, or mixed) in which Red Cannon or its
subsidiaries had an interest, or with respect to any property or facility
to which hazardous materials generated, manufactured, refined, transferred,
imported, used, or processed by Red Cannon or its subsidiaries, have been
transported, treated, stored, handled, transferred, disposed, recycled, or
received.
(e) To the knowledge of Red Cannon, there are no hazardous materials
present on or in the environment at any of the facilities of Red Cannon or
its subsidiaries or at any geologically or hydrologically adjoining
property, including any hazardous materials contained in barrels,
aboveground or underground storage tanks, landfills, land deposits, dumps,
equipment (whether moveable or fixed) or other containers, either temporary
or permanent, and deposited or located in land, water, sumps, or any other
part of such facilities or such adjoining property, or incorporated into
any structure therein or thereon.
(f) Neither Red Cannon or its subsidiaries has permitted or conducted,
or is aware of, any hazardous activity conducted at facilities of Red
Cannon or its subsidiaries or any other properties or assets (whether real,
personal, or mixed) in which Red Cannon or its subsidiaries has or had an
interest except in full compliance with all applicable environmental laws.
Section 4.10. Benefit Plan Compliance.
(a) Schedule 4.10 contains a list and brief description of all
"employee pension benefit plans" as defined in Section 3(2) of ERISA
(sometimes referred to herein as "Red Cannon Pension Plans"), "employee
welfare benefit plans" as defined in Section 3(1) of ERISA and all other
Red Cannon Benefit Plans maintained, or contributed to, or required to be
contributed to, by, or with respect to which there is any accrued,
contingent, secondary or other liability of, Red Cannon or any of its
subsidiaries or any other Person that, together with Red Cannon, is treated
as a single employer under Section 414(b), (c), (m) or (o) of the Code (Red
Cannon and each such other Person, a "Red Cannon Commonly Controlled
Entity") for the benefit of any current or former employees, officers or
directors of any Red Cannon Commonly Controlled Entity. Red Cannon has
delivered or made available to the Company true, complete and correct
copies of (i) each Red Cannon Benefit Plan (or, in the case of any
unwritten Red Cannon Benefit Plans, descriptions thereof), (ii) the most
recent annual report on Form 5500 filed with the Internal Revenue Service
with respect to each Red Cannon Benefit Plan (if any such report was
required), (iii) the most recent summary plan description for each Red
Cannon Benefit Plan for which such summary plan description is required,
and (iv) where applicable, each trust agreement and group annuity contract
relating to any Red Cannon Benefit Plan. To the knowledge of Red Cannon,
each Red Cannon Benefit Plan has been administered in all material respects
in accordance with its terms and is in compliance with the applicable
provisions of ERISA, the Code, all other applicable laws and all applicable
collective bargaining agreements except where the failure to comply would
not be reasonably expected to result in a Red Cannon Material Adverse
Effect.
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(b) All Red Cannon Pension Plans have been the subject of
determination letters from the Internal Revenue Service, or have filed a
timely application therefor, to the effect that such Red Cannon Pension
Plans are qualified and exempt from federal income taxes under Section
401(a) and 501(a), respectively, of the Code, and no such determination
letter has been revoked nor has any such Red Cannon Pension Plan been
amended since the date of its most recent determination letter or
application therefor in any respect that would adversely affect its
qualification or materially increase its costs, except where there would
not reasonably be a Red Cannon Material Adverse Effect.
(c) Except as set forth on Schedule 4.10, no Red Cannon Pension Plan
is subject to Title IV of ERISA or Section 412 of the Code.
(d) No Red Cannon Benefit Plan is a "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA.
(e) With respect to any Red Cannon Benefit Plan that is an employee
welfare benefit plan, (i) no such Red Cannon Benefit Plan is funded through
a "welfare benefits fund," as such term is defined in Section 419(e) of the
Code, (ii) each such Red Cannon Benefit Plan that is a "group health plan,"
as such term is defined in Section 5000(b)(1) of the Code, complies
substantially with the applicable requirements of Section 4980B(f) of the
Code, and (iii) no such Red Cannon Benefit Plan provides post-termination
employment benefits, except as otherwise required by Section 4980B of the
Code.
(f) Except with respect to the certain of Red Cannon Stock Options as
indicated on Schedule 4.2 and severance benefits as indicated on Schedule
4.10, no employee, director or independent contractor of Red Cannon or any
of its subsidiaries will be entitled to any additional compensation or
benefits or any acceleration of the time of payment or vesting of any
compensation or benefits under any Red Cannon Benefit Plan as a result of
the transactions contemplated by this Agreement.
(g) Except as set forth on Schedule 4.10, neither Red Cannon or any of
its subsidiaries nor any Person acting on behalf of Red Cannon or any of
its subsidiaries has, in contemplation of any corporate transaction
involving Red Cannon, issued any written communication to, or otherwise
made or entered into any legally binding commitment with, any employees of
Red Cannon or of any of its subsidiaries to the effect that, following the
date hereof, (i) any benefits or compensation provided to such employees
under existing Red Cannon Benefit Plans or under any other plan or
arrangement will be enhanced, (ii) any new plans or arrangements providing
benefits or compensation will be adopted, (iii) any Red Cannon Benefit
Plans will be continued for any period of time, or (iv) any plans or
arrangements provided by Red Cannon or Mergersub will be made available to
such employees.
Section 4.11. Taxes. As used in this Section 4.11, "Taxes" shall include
all federal, state, local and foreign income, property, sales, payroll, employee
withholding, excise and other taxes, tariffs or governmental charges of any
nature whatsoever, including any interest, penalties or additions with respect
thereto. Red Cannon and each of its subsidiaries, and each affiliated,
consolidated, combined or unitary group of which Red Cannon or any of its
subsidiaries is or has been a member (an "Affiliated Red Cannon Group"), has
filed timely all material tax returns and reports required to be filed by Red
Cannon, its subsidiaries or any Affiliated Red Cannon Group (or requests for
extensions have been filed timely), each such tax return is true and correct in
all material respects and has been prepared in material compliance with all
applicable laws and regulations, and Red Cannon and each of its subsidiaries has
paid (or Red Cannon or an Affiliated Red Cannon Group has paid on their behalf)
all Taxes required to be paid by it and them in accordance with such tax
returns. The most recent financial statements supplied by Red Cannon to be
contained in the Registration Statement reflect an adequate
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reserve for all material Taxes payable by Red Cannon and its subsidiaries for
all taxable periods and portions thereof through the date of such financial
statements. Except as set forth on Schedule 4.11, as of the date hereof, no
material deficiency or proposed adjustment which has not been settled or
otherwise resolved for any Taxes has been asserted or assessed by any taxing
authority against Red Cannon or any of its subsidiaries or any Affiliated Red
Cannon Group. Except as set forth on Schedule 4.11, Red Cannon and each of its
subsidiaries has not consented to extend the time in which any Taxes may be
assessed or collected by any taxing authority. None of the assets or properties
of Red Cannon or any of its subsidiaries is subject to any material tax lien
except for Taxes not yet due and payable. Except as set forth on Schedule 4.11,
neither Red Cannon nor any of its subsidiaries is a party to or bound by any
material tax allocation or tax sharing agreement and has no current or potential
material obligation to indemnify any other Person with respect to Taxes, and is
not otherwise obligated to make payments of Taxes with respect to the activities
of any other Person. Since January 1, 1998, no material claim has been made by a
taxing authority in a jurisdiction where Red Cannon or any of its subsidiaries
do not file tax returns that Red Cannon or any such subsidiary is or may be
subject to Taxes assessed by such jurisdiction. As of the date hereof, the
federal income tax returns of Red Cannon and each of its subsidiaries
consolidated in such returns have been examined or audited by the Internal
Revenue Service for all years through August 31, 1995, and Red Cannon has not
received notice of any proposed tax audit. True, correct and complete copies of
all federal and state income tax returns filed by or with respect to Red Cannon
and each of its subsidiaries for the past three years have been made available
to Red Cannon.
Section 4.12. No Excess Parachute Payments. Neither Red Cannon nor any of
its affiliates has made any payments, is obligated to make any payments, or is a
party to any agreement that could obligate it to make any payments that will not
be deductible under Section 280G of the Code (or any corresponding provision of
state, local or foreign law).
Section 4.13. Contracts. Neither Red Cannon nor any of its subsidiaries
is a party to or bound by, and neither they nor their properties are subject to,
any contracts, agreements or arrangements required to be disclosed in its most
recently filed Form 10-K, 10-Q or 8-K under the Exchange Act which has not been
filed as an exhibit to one or more of the Red Cannon SEC Documents filed and
publicly available prior to the date of this Agreement ("Red Cannon Designated
Contracts"). Red Cannon and its subsidiaries have satisfied in full or provided
for all of their liabilities and obligations under the Red Cannon Designated
Contracts which are presently required to be satisfied or provided for, and are
not (with or without notice or lapse of time or both) in default in any material
respect under any of the Red Cannon Designated Contracts nor to the knowledge of
Red Cannon is any other party to any such Red Cannon Designated Contract (with
or without notice or lapse of time or both) in default in any material respect
thereunder, except for any defaults that could not reasonably be expected to
have a Red Cannon Material Adverse Effect.
Section 4.14. Voting Requirements. The affirmative vote of the holders of
a majority of the total shares of Red Cannon Common Stock represented in person
or by proxy and entitled to vote at the Red Cannon Meeting is required for
approval of each of (i) the issuance of Red Cannon Common Stock pursuant to this
Agreement, (ii) the election of new directors to the Board of Directors of Red
Cannon as contemplated by Section 1.9 of this Agreement, and (iii) the
ratification of the appointment of new independent auditors for Red Cannon as
contemplated by Section 6.3 of this Agreement. The affirmative vote of the
holders of a majority of the shares of Red Cannon Common Stock outstanding and
entitled to vote at the Red Cannon Meeting is required to approve the amendment
to the Certificate of Incorporation of Red Cannon as contemplated by Section 1.7
of this Agreement. Except as set forth in this Section 4.14, there are no other
votes of the holders of any class or series of Red Cannon's capital stock
necessary to approve the transactions contemplated by this Agreement under
Delaware Law and the rules of Nasdaq.
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Section 4.15. Real Estate.
(a) The Company and each of its subsidiaries does not own any real
property or any interest therein except as set forth on Schedule 4.15(a)
(the "Owned Properties"), which Schedule sets forth the location of the
Owned Properties. With respect to each such parcel of Owned Property,
except as set forth on Schedule 4.15(a): (i) Red Cannon has good and
marketable title to the parcel of Owned Property, free and clear of any
Lien other than (y) Liens for real estate taxes not yet due and payable, or
(z) recorded easements, covenants, encumbrances and other restrictions
which do not materially impair the current use or occupancy of the property
subject thereto, and any matters that would be disclosed by an accurate and
current survey of each of the other parcels of the Owned Properties which
would not materially impair the current use or occupancy of the property so
surveyed; (ii) there are no pending or threatened condemnation proceedings,
suits or administrative actions relating to the Owned Properties materially
affecting adversely the current use, occupancy or value thereof; (iii) the
legal descriptions for the parcels of Owned Property contained in the deeds
thereof describe such parcels fully and adequately, and the Owned
Properties are not located within any flood plain (such that a mortgagee
would require a mortgagor to obtain flood insurance) for which any permits
or licenses necessary to the use thereof have not been obtained; (iv) there
are no outstanding options or rights of first refusal to purchase the
parcels of Owned Property, or any portion thereof or interest therein; and
(v) there are no parties (other than Red Cannon and its subsidiaries) in
possession of the parcels of Owned Property except pursuant to written
leases entered into by Red Cannon or a subsidiary thereof with respect
thereto in the capacity as landlord.
(b) Schedule 4.15(b) sets forth a list of all material leases,
licenses or similar agreements to which Red Cannon or its subsidiaries is a
party, which are for the use or occupancy of real estate owned by a third
party and which are material to the operations or the business of Red
Cannon and its subsidiaries taken as a whole ("Leases")(copies of which
have previously been furnished to Red Cannon), in each case, setting forth
(A) the lessor and lessee thereof, and (B) the street address of each
property covered thereby (the "Leased Premises"). The Leases are in full
force and effect and have not been amended, and neither Red Cannon or its
subsidiaries nor, to the knowledge of Red Cannon, any other party thereto
is in material default or material breach under any such Lease. No event
has occurred which, with the passage of time or the giving of notice or
both, would cause a breach of or default under any of such Leases, except
for breaches or defaults which in the aggregate could not reasonably be
expected to have a Red Cannon Material Adverse Effect.
Section 4.16. Good Title to, Condition and Adequacy of Assets. Except as
set forth on Schedule 4.16, Red Cannon and its subsidiaries have good title to
all of their respective Assets (as hereinafter defined), free and clear of any
Liens or restrictions on use. The Assets constitute, in the aggregate, all of
the assets and properties necessary for the conduct of the business of Red
Cannon and its subsidiaries in the manner in which and to the extent to which
such business is currently being conducted. All vehicles, machinery, equipment,
tools, supplies, leasehold improvements, furniture and fixtures constituting
part of the Assets and which are used by or located on the premises of Red
Cannon or its subsidiaries, and which are currently in use or necessary for the
business and operations of Red Cannon or its subsidiaries, are in operating
condition, normal wear and tear excepted. For purposes of this Agreement, the
term "Assets" means all of the properties and assets owned by Red Cannon and its
subsidiaries as of the date hereof, whether personal or mixed, tangible or
intangible, wherever located.
Section 4.17. Labor and Employment Matters. Schedule 4.17 sets forth the
name, address, and social security number of each of the officers and key
employees of Red Cannon and its subsidiaries. The current rate of compensation
of each of the officers and key employees of Red Cannon and its subsidiaries has
been previously provided to the Company. Neither Red Cannon nor any of its
subsidiaries is a party to or bound by any collective bargaining agreement or
any other agreement with a labor union. There is no pending or threatened labor
dispute, strike or work stoppage which affects or
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which may affect the business of Red Cannon or any of its subsidiaries. As of
the date hereof, except in accordance with Section 1.9 hereof, Red Cannon is not
aware that any officer, key employee or group of employees has any plans to
terminate his or their employment with Red Cannon or any of its subsidiaries as
a result of the Merger or otherwise.
Section 4.18. Insurance. Schedule 4.18 sets forth a list of all insurance
policies maintained as of the date hereof by Red Cannon and its subsidiaries.
There are valid and enforceable policies of insurance covering the respective
properties, assets and businesses of Red Cannon and its subsidiaries against
risks of the nature normally insured against by entities in the same or similar
lines of business and in coverage amounts typically and reasonably carried by
such entities. Such policies are in full force and effect, and all premiums due
thereon have been paid. None of such policies will lapse or terminate as a
result of the transactions contemplated by this Agreement. Red Cannon has not
failed to give, in a timely manner, any notice required under any of such
policies to preserve its material rights thereunder.
Section 4.19. Related Party Transactions. Except as set forth on Schedule
4.19, none of the officers or directors of Red Cannon or any of its
subsidiaries, and no Person owning of record or beneficially more than 5% of Red
Cannon Common Stock, or any members of their immediate families, has been a
party to any transaction, or series of similar transactions, with Red Cannon or
any of its subsidiaries, in which the amount involved exceeds sixty thousand
dollars ($60,000) per annum, and in which any such Persons had or will have a
direct or indirect material interest.
Section 4.20. Names; Prior Acquisitions. All names under which Red Cannon
and its subsidiaries do business as of the date hereof are specified on Schedule
4.20. Except as set forth on Schedule 4.20, neither Red Cannon nor any of its
subsidiaries has changed its name or used any assumed or fictitious name, or
been the surviving entity in a merger, acquired any business or changed its
principal place of business or chief executive office, within the past year.
Section 4.21. State Takeover Statutes. The Board of Directors of Red
Cannon has approved stock issuance pursuant to this Agreement and the Red Cannon
Voting Agreement (as defined in Section 6.7), and such approval is sufficient to
render inapplicable to this Agreement, the Merger and the other transactions
contemplated by this Agreement, the provisions of Section 203 of the Delaware
Law, to the extent, if any, such provisions of Section 203 would otherwise be
applicable to this Agreement, the Merger and the other transactions contemplated
by this Agreement. Less than 500 residents of the State of Florida are employees
of Red Cannon and its subsidiaries, so as to render inapplicable to this
Agreement, the Merger and the other transactions contemplated by this Agreement,
the provisions of Section 607.0903 of the Florida Business Corporation Act, to
the extent, if any, such provisions of such Section 607.0903 would otherwise be
applicable to this Agreement, the Merger and the other transactions contemplated
by this Agreement.
Section 4.22. Brokers. No broker, investment banker, financial advisory
or other Person, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions contemplated
by this Agreement based upon arrangements made by or on behalf of Red Cannon,
except that Red Cannon has retained ABN AMRO as a financial advisor. A true and
correct copy of Red Cannon's retainer agreement with ABN AMRO has been delivered
to the Company.
Section 4.23. Accounting Matters. Neither Red Cannon nor any of its
affiliates has taken or agreed to take any action that (without regard to any
action taken or agreed to be taken by the Company or any of its affiliates)
would prevent Red Cannon from accounting for the business combination to be
effected by the Merger as a pooling of interests.
Section 4.24. Tax Matters. Neither Red Cannon nor any of its affiliates
has taken or agreed to take any action, or knows of any circumstances, that
(without regard to any action taken or agreed to be taken by the Company or any
of its affiliates) would prevent the Merger from qualifying as a reorganization
within the meaning of Section 368(a)(2)(E) of the Code.
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Section 4.25. Ownership of Red Cannon Common Stock. As of the date
hereof, except for the voting proxies granted to the Company as described in
Section 6.7 and the persons listed on Schedule 4.25, no person nor any of Red
Cannon's affiliates or associates (as such terms are defined under the Exchange
Act), (i) beneficially owns, directly or indirectly, or (ii) is party to any
agreement, arrangement or understanding providing for the acquisition, holding,
voting or disposition of, in each case, shares of capital stock of Red Cannon or
any securities convertible into or exercisable or exchangeable for capital stock
of Red Cannon, which in the aggregate represent 10% or more of the outstanding
shares of Red Cannon Common Stock after giving effect to the conversion,
exercise or exchange of all such securities beneficially owned by Red Cannon and
its affiliates and associates which are convertible into or exercisable or
exchangeable for capital stock of Red Cannon.
Section 4.26. Interim Operations of Mergersub. Mergersub was formed
solely for the purpose of engaging in a business combination transaction with
the Company and has engaged in no other business activities and has conducted
its operations only as contemplated hereby.
Section 4.27. Year 2000 Compliance. The software and hardware operated by
Red Cannon and its subsidiaries (but not necessarily that operated or provided
by vendors) are capable of providing or are being tested, and, if necessary,
will be adapted or replaced to provide uninterrupted millennium functionality to
record, store, process and present calendar dates falling on or after January 1,
2000 and date-dependent data in substantially the same manner and with the same
functionality as such software records, stores, processes and presents such
calendar dates and date-dependent data as of the date hereof, except for the
failure to have such capability which would not, individually or in the
aggregate, be reasonably likely to have a Red Cannon Material Adverse Effect.
ARTICLE V
COVENANTS OF THE COMPANY
Section 5.1. Conduct of Business of the Company. Except as may be agreed
to in writing by Red Cannon, from the date hereof to the Effective Time, the
Company shall, and shall cause its subsidiaries to, (i) use its and their best
efforts to conduct its and their operations according to its and their ordinary
and usual course of business, consistent with past practice, it being understood
that the Company is evaluating all aspects of the operations of the businesses
of the Company and its subsidiaries and it is agreed that the Company shall have
the right, in its sole discretion, to make changes to such operations, (ii) use
its and their best efforts to preserve intact its and their business
organization, (iii) keep or cause to be kept in full force and effect all of its
and their material rights, contracts and agreements, (iv) maintain all of its
and their property in good operating condition and repair, (v) use its and their
best efforts to maintain satisfactory relationships with licensors, licensees,
suppliers, contractors, distributors, customers and others having business
relationships with any of them, consistent with the Company's past practices,
and (vi) maintain continuously insurance coverage substantially equivalent to
the insurance coverage in existence on the date of this Agreement. Subject to
the exercise of the applicable fiduciary duties of the Board of Directors of the
Company as set forth in Section 5.2, the Company and its subsidiaries shall not
take any action that would, or that could reasonably be expected to, result in
any of the conditions to the obligations of the Company or Red Cannon to
consummate the Merger set forth in Article VIII not being satisfied. Without
limiting the generality of the foregoing and except as provided above, the
Company shall not, and shall not permit any of its subsidiaries to:
(a) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
additional employee or other options, warrants, commitments, subscriptions,
rights to purchase or otherwise) any stock of any class or any options or
rights to purchase, or any securities convertible into, shares of stock of
any class; provided that the Company shall be entitled to (i) grant options
to purchase Company Common Stock to new
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employees, and make annual grants of options to purchase Company Common
Stock under the Company Stock Option Plan to its directors, officers, and
employees, for an aggregate of no more than 700,000 shares of Company
Common Stock, and (ii) issue up to 5,000,000 shares of Company Common Stock
in the aggregate for the acquisition of businesses in the floral and gift
industry in accordance with Schedule 5.1;
(b) split, combine or reclassify any shares of its or any of its
subsidiaries' capital stock; declare, set aside or pay any dividend or
other distribution (whether in cash, stock or property or any combination
thereof) to its stockholders whether or not in respect of its capital
stock; or redeem, purchase or otherwise acquire any shares of, or rights to
acquire shares of, its or any of its subsidiaries' capital stock;
(c) amend its charter or by-laws;
(d) voluntarily sell, transfer, surrender, abandon or dispose of any
of its material assets or property rights (tangible or intangible), other
than in the ordinary course of business consistent with past practices;
(e) acquire (including, without limitation, for cash or shares of
stock, by merger, consolidation, or acquisitions of stock or assets) any
interest in any corporation, partnership or other business organization, or
make any investment in any such entity either by purchase of securities,
contributions of capital or transfer of property, except that the Company
may pursue and complete acquisitions as set forth on Schedule 5.1;
(f) grant or make any mortgage or pledge or subject itself or any of
its material properties or assets to any lien, charge or encumbrance of any
kind, except (i) pursuant to the Company's credit facilities with
NationsBank (or its successors), and (ii) liens for taxes not currently
due;
(g) create, incur or assume any indebtedness for borrowed money
(contingent or otherwise), in an amount exceeding two hundred fifty
thousand dollars ($250,000), except borrowings under the Company's credit
facilities with NationsBank (or its successors), as may be amended to
increase such facilities from $20 million to $40 million, to the extent
such borrowings, not to exceed $40 million in the aggregate including
existing borrowings, are for general working capital purposes in the
ordinary course of business or for the acquisition of businesses in the
floral and gift industry in accordance with Schedule 5.1;
(h) grant any increase in the compensation payable or to become
payable to directors, officers or employees (including, without limitation,
any such increase pursuant to any Company Benefit Plan or otherwise), other
than merit increases to employees of the Company or its subsidiaries who
are not directors or officers of the Company, in the ordinary course of
business and consistent with past practices;
(i) alter the manner of keeping the Company's books, accounts or
records, or change in any manner the accounting practices therein
reflected, except that books, accounts, records and accounting practices of
subsidiaries and acquired businesses may be changed to conform to the
Company's standards and practices;
(j) except as otherwise provided herein (including as set forth on
Schedule 5.1), enter into any material commitment, transaction or
agreement, other than in the ordinary course of business consistent with
past practices and other than commitments, transactions or agreements that
are terminable by the Company without cost or penalty on no more than 60
days prior notice;
(k) apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any affiliate of the Company or any
affiliate of its subsidiaries;
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(l) modify any provision of any Company Benefit Plan (except that new
Company Benefit Plans are being adopted as set forth on Schedule 3.10), any
stock option plans of the Company or the terms of any stock options granted
thereunder;
(m) modify any of the Designated Contracts of the Company;
(n) enter into any agreement or transaction with any Person
controlling, controlled by or under common control with the Company; or
(o) agree, whether in writing or otherwise, to do any of the
foregoing.
Section 5.2. Approval by the Company's Stockholders. The Company shall,
as soon as practicable following the date hereof, establish a record date for,
duly call, give notice of, convene and hold a meeting of its stockholders, to be
held as promptly as practicable after the date of this Agreement, for the
purpose of voting upon the Merger and this Agreement (the "Company Special
Meeting"). Subject to the exercise of its applicable fiduciary duties under
Delaware Law to the stockholders of the Company, the Board of Directors of the
Company (i) shall recommend that the Company's stockholders approve and adopt
this Agreement and the Merger, and include such recommendation in the Proxy
Statement, provided that the Board of Directors shall not be obligated to make
such recommendation if the Company shall have received an offer for a Competing
Transaction that the Board of Directors determines in good faith is more
favorable to the stockholders of the Company from a financial point of view than
the transactions contemplated by this Agreement, and (ii) shall use its
reasonable best efforts to solicit from stockholders of the Company votes in
favor of such proposal. Nothing in this Agreement or otherwise shall relieve the
Company of its obligation to hold a meeting and submit approval of this
Agreement and the Merger to its stockholders at such meeting in accordance with
Section 251 of Delaware Law.
Section 5.3. Access to Information. From the date of this Agreement to
the Effective Time, the Company shall, and shall cause its subsidiaries and its
and their representatives, officers, directors, employees, auditors and agents
to, afford the representatives, officers, employees and agents of Red Cannon
reasonable access at all reasonable times to its representatives, officers,
employees, agents, properties, offices, and other facilities and to all books
and records, and shall furnish Red Cannon with all financial, operating and
other data and information Red Cannon, through its representatives, officers,
employees or agents, may reasonably request. Red Cannon shall hold, and will
cause its directors, officers, employees, agents, advisors (including attorneys,
auditors, and representatives) to hold in confidence, all documents and
information concerning the Company and its subsidiaries furnished to Red Cannon
in connection with the transactions contemplated in this Agreement, to the
extent required by, and in accordance with, the provisions of that certain
confidentiality letter agreement previously entered into by and between Red
Cannon and the Company (the "Confidentiality Agreement").
Section 5.4. Affiliate Letters.
(a) Schedule 5.4 sets forth a list of names and addresses of those
Persons who may be deemed "affiliates" of the Company within the meaning of
Rule 145 under the Securities Act ("Rule 145"), including all officers and
directors of the Company (each an "Affiliate"). The Company shall provide
Red Cannon such information and documents as Red Cannon shall reasonably
request for purposes of reviewing the accuracy and completeness of such
list. There shall be added to such list the names and addresses of any
other Person who becomes an Affiliate of the Company at any time after the
date hereof up to and including the time of the Company Special Meeting or
who Red Cannon reasonably identifies (by written notice to the Company) as
being a Person who may be deemed to be an Affiliate of the Company. The
Company shall deliver or cause to be delivered to Red Cannon, concurrent
herewith, from each of the Affiliates identified on Schedule 5.4 (as the
same may be supplemented as aforesaid), a letter in the form of Exhibit A
hereto which shall contain (i) a representation that on the date hereof,
such Affiliate has no plan or intention to sell,
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exchange or otherwise dispose of the Red Cannon Common Stock received by it
pursuant to the Merger, (ii) a covenant that such Affiliate shall not sell
or otherwise dispose of any shares of Red Cannon Common Stock issued to it
in the Merger until such time as final results of operations of Red Cannon
covering at least thirty (30) days of combined operations of Red Cannon and
the Company have been published and (iii) a covenant that such Affiliate
will not sell or otherwise dispose of any shares of Red Cannon Common Stock
issued to it in the Merger, except pursuant to an effective registration
statement under the Securities Act or in accordance with the provisions of
paragraph (d) of Rule 145 or another exemption from registration under the
Securities Act.
(b) Red Cannon shall be entitled to place appropriate legends on the
certificates evidencing the Red Cannon Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stock transfer instructions to the transfer agent for the Red
Cannon Common Stock, to the effect that the shares of the Red Cannon Common
Stock received or to be received by such Affiliates pursuant to the terms
of this Agreement may only be sold, transferred or otherwise conveyed, and
the holder thereof may only reduce his interest in or risks relating to
such shares of Red Cannon Common Stock, pursuant to an effective
registration statement under the Securities Act or in accordance with the
provisions of paragraph (d) of Rule 145 or another exemption from
registration under the Securities Act and, in any event, only after
financial results covering at least 30 days of combined operations of Red
Cannon and the Company after the Effective Time shall have been published.
The foregoing restrictions on the transferability of the Red Cannon Common
Stock shall apply to all purported sales, transfers and other conveyances
of the shares of Red Cannon Common Stock received or to be received by such
Affiliates pursuant to this Agreement and to all purported reductions in
the interest in or risks relating to such shares of the Red Cannon Common
Stock whether or not such Affiliate has exchanged the certificates
previously evidencing such Affiliate's shares of the Company Common Stock
for certificates evidencing the shares of Red Cannon Common Stock into
which such shares of the Company Common Stock were converted. The Proxy
Statement and the Registration Statement shall disclose the foregoing in a
reasonably prominent manner.
Section 5.5. Letter of Company's Accountants. The Company shall cause to
be delivered to Red Cannon a letter of Arthur Andersen LLP, the Company's
independent public accountants, dated a date within two business days before (a)
the date on which the Proxy Statement is filed with the SEC, (b) the date on
which the Proxy Statement is mailed to the stockholders of Red Cannon, (c) the
date of the Red Cannon Meeting (as defined in Section 6.3), and (d) the
Effective Time, and addressed to Red Cannon in form and substance reasonably
satisfactory to Red Cannon and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement. In connection with Red
Cannon's efforts to obtain such letter, if requested by Arthur Andersen LLP, Red
Cannon shall provide a representation letter to Arthur Andersen LLP complying
with SAS 72 (as amended), if then required.
Section 5.6. Company Voting Agreement. On the date hereof, the Persons
listed on Appendix A to Exhibit B attached hereto (collectively, the "Company
Principal Stockholders") shall execute and deliver to Red Cannon a voting
agreement and proxy in the form of Exhibit B hereto (the "Company Voting
Agreement"). To the extent that the Company issues any additional shares of
Company Common Stock, the Company agrees to obtain a voting agreement and proxy
in the form of Exhibit B hereto from additional holders of Company Common Stock
so that Red Cannon holds voting proxies with respect to at least 50% of the
issued and outstanding shares of Company Common Stock at all times until the
Effective Time or the termination of this Agreement, if earlier.
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ARTICLE VI
COVENANTS OF RED CANNON AND MERGERSUB
Section 6.1. Conduct of Business of Red Cannon. Except as may be agreed
to in writing by the Company, from the date hereof to the Effective Time, Red
Cannon shall, and shall cause its subsidiaries to, (i) use its and their best
efforts to conduct its and their operations according to its and their ordinary
and usual course of business, consistent with past practice, (ii) use its and
their best efforts to preserve intact its and their business organization, (iii)
keep or cause to be kept in full force and effect all of its and their material
rights, contracts and agreements, (iv) maintain all of its and their property in
good operating condition and repair, (v) use its and their best efforts to
maintain satisfactory relationships with licensors, licensees, suppliers,
contractors, distributors, customers and others having business relationships
with any of them, consistent with Red Cannon's past practices, and (vi) maintain
continuously insurance coverage substantially equivalent to the insurance
coverage in existence on the date of this Agreement. Subject to the exercise of
the applicable fiduciary duties of the Board of Directors of Red Cannon as set
forth in Section 6.2, Red Cannon and its subsidiaries shall not take any action
that would, or that could reasonably be expected to, result in any of the
conditions to the obligations of the Company or Red Cannon to consummate the
Merger set forth in Article VIII not being satisfied. Without limiting the
generality of the foregoing and except as provided above, Red Cannon shall not,
and shall not permit any of its subsidiaries to:
(a) authorize for issuance, issue, sell, deliver or agree or commit to
issue, sell or deliver (whether through the issuance or granting of
additional employee or other options, warrants, commitments, subscriptions,
rights to purchase or otherwise) any stock of any class or any options or
rights to acquire, or any securities convertible into, shares of stock of
any class; provided that Red Cannon shall be entitled to issue shares of
Red Cannon Common Stock upon exercise of Red Cannon Stock Options or
warrants against payment therefor in accordance with their terms;
(b) split, combine or reclassify any shares of its or any of its
subsidiaries' capital stock; declare, set aside or pay any dividend or
other distribution (whether in cash, stock or property or any combination
thereof) to its stockholders whether or not in respect of its capital
stock; or redeem, purchase or otherwise acquire any shares of, or rights to
acquire shares of, its or any of its subsidiaries' capital stock;
(c) amend its charter or by-laws;
(d) voluntarily sell, transfer, surrender, abandon or dispose of any
of its material assets or property rights (tangible or intangible), other
than in the ordinary course of business consistent with past practices;
(e) acquire (including, without limitation, for cash or shares of
stock, by merger, consolidation, or acquisitions of stock or assets) any
interest in any corporation, partnership or other business organization or
division thereof, or make any investment in any entity either by purchase
of securities, contributions of capital or transfer of property, or make
any loans or advances to any Person;
(f) grant or make any mortgage or pledge or subject itself or any of
its material properties or assets to any lien, charge or encumbrance of any
kind, except liens for taxes not currently due;
(g) create, incur or assume any indebtedness for borrowed money
(contingent or otherwise), in an amount exceeding one hundred thousand
dollars ($100,000) individually or two hundred fifty thousand dollars
($250,000) in the aggregate;
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(h) make or commit to make any capital expenditures in excess of
$100,000 individually or $250,000 in the aggregate, other than as set forth
on the capital expenditure budget provided by Red Cannon to the Company, a
copy of which is attached as Schedule 6.1;
(i) grant any increase in the compensation payable or to become
payable to directors, officers or employees (including, without limitation,
any such increase pursuant to any Benefit Plan or otherwise), other than
merit increases to employees of Red Cannon or its subsidiaries who are not
directors or officers of the Red Cannon, in the ordinary course of business
and consistent with past practices;
(j) alter the manner of keeping its books, accounts or records, or
change in any manner the accounting practices therein reflected;
(k) enter into any material commitment, transaction or agreement,
other than in the ordinary course of business consistent with past
practices and other than commitments, transactions or agreements that are
terminable by Red Cannon without cost or penalty on no more than 60 days
prior notice;
(l) apply any of its assets to the direct or indirect payment,
discharge, satisfaction or reduction of any amount payable directly or
indirectly to or for the benefit of any affiliate of Red Cannon or any
affiliate of its subsidiaries;
(m) modify any provision of any Red Cannon Benefit Plan, any stock
option plans of Red Cannon or the terms of any stock options granted
thereunder, including taking any action with respect to stock options
otherwise permitted under Section 9 of the Management Incentive Stock Plan
or Section 6 of the 1996 Nonemployee Directors' Stock Option Plan;
(n) modify any of the Designated Contracts of Red Cannon;
(o) enter into any agreement or transaction with any Person
controlling, controlled by or under common control with Red Cannon; or
(p) agree, whether in writing or otherwise, to do any of the
foregoing.
Section 6.2. Compliance with Nasdaq and SEC Requirements. From the date
hereof to the Effective Time, Red Cannon shall comply in all material respects
with all applicable requirements of Nasdaq and the SEC with respect to the
filing of information and reports.
Section 6.3. Approval By Red Cannon's Stockholders. Red Cannon shall, as
soon as practicable following the date hereof, establish a record date for, duly
call, give notice of, convene and hold a meeting of its stockholders, to be held
as promptly as practicable after the date of this Agreement, for the purpose of
voting upon (1) the stock issuance pursuant to the Merger and the other
transactions contemplated by this Agreement, (2) the Certificate of Amendment to
Red Cannon's Certificate of Incorporation contemplated by this Agreement, (3)
the election of new directors to the Board of Directors of Red Cannon pursuant
to this Agreement, and (4) the ratification of the appointment of Arthur
Andersen LLP as independent auditors for Red Cannon (the "Red Cannon Meeting").
Subject to the exercise of its applicable fiduciary duties under Delaware Law to
the stockholders of Red Cannon, the Board of Directors of Red Cannon (i) shall
recommend that Red Cannon's stockholders approve each of such proposals, and
include such recommendations in the Proxy Statement, provided that the Board of
Directors shall not be obligated to make such recommendations if Red Cannon
shall have received an offer for a Competing Transaction that the Board of
Directors determines in good faith is more favorable to the stockholders of Red
Cannon from a financial point of view than the transactions contemplated by this
Agreement, and (ii) shall use its reasonable best efforts to solicit from
stockholders of Red Cannon votes in favor of approving such proposals. Nothing
in this Agreement or otherwise shall relieve Red Cannon of its obligation to
hold a meeting and submit approval of the stock issuance pursuant to the
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Merger and the other transactions contemplated by this Agreement to its
stockholders at such meeting in accordance with Section 251 of Delaware Law.
Section 6.4. Access to Information. From the date of this Agreement to
the Effective Time, Red Cannon shall, and shall cause its subsidiaries and its
and their representatives, officers, directors, employees, auditors and agents
to, afford the representatives, officers, employees and agents of the Company
reasonable access at all reasonable times to its representatives, officers,
employees, agents, properties, offices, and other facilities and to all books
and records, and shall furnish the Company with all financial, operating and
other data and information the Company, through its representatives, officers,
employees or agents, may reasonably request. The Company shall hold, and will
cause its directors, officers, employees, agents, advisors (including attorneys,
auditors, and representatives) to hold in confidence, all documents and
information concerning Red Cannon and its subsidiaries furnished to the Company
in connection with the transactions contemplated in this Agreement, to the
extent required by, and in accordance with, the provisions of the
Confidentiality Agreement.
Section 6.5. Affiliate Letters.
(a) Schedule 6.5 sets forth a list of names and addresses of those
Persons who may be deemed "affiliates" of Red Cannon within the meaning of
Rule 145 under the Securities Act ("Rule 145"), including the Red Cannon
Principal Stockholders (as defined in Section 6.7) and all officers and
directors of Red Cannon (each an "Affiliate"). Red Cannon shall provide the
Company such information and documents as the Company shall reasonably
request for purposes of reviewing the accuracy and completeness of such
list. There shall be added to such list the names and addresses of any
other Person who becomes an Affiliate of Red Cannon at any time after the
date hereof up to and including the time of Red Cannon Meeting or who the
Company reasonably identifies (by written notice to Red Cannon) as being a
Person who may be deemed to be an Affiliate of Red Cannon. Red Cannon shall
deliver or cause to be delivered to the Company, concurrent herewith, from
each of the Affiliates identified on Schedule 6.5 (as the same may be
supplemented as aforesaid), a letter in the form of Exhibit C hereto, which
shall contain (i) a representation that on the date hereof, such Affiliate
had no plan or intention to sell, exchange or otherwise dispose of any Red
Cannon Common Stock owned by it as of the date hereof, (ii) a covenant that
such Affiliate shall not sell or otherwise dispose of any shares of Red
Cannon Common Stock until such time as final results of operations of Red
Cannon covering at least thirty (30) days of combined operations of Red
Cannon and the Company have been published and (iii) a covenant that such
Affiliate will not sell or otherwise dispose of any shares of Red Cannon
Common Stock issued to it in the Merger, except pursuant to an effective
registration statement under the Securities Act or an applicable exemption
from registration under the Securities Act.
(b) Red Cannon shall be entitled to place appropriate legends on the
certificates evidencing the Red Cannon Common Stock owned by such
Affiliates pursuant to the terms of this Agreement, and to issue
appropriate stock transfer instructions to the transfer agent for the Red
Cannon Common Stock, to the effect that the shares of the Red Cannon Common
Stock owned by such Affiliates may only be sold, transferred or otherwise
conveyed, and the holder thereof may only reduce his interest in or risks
relating to such shares of Red Cannon Common Stock, pursuant to an
effective registration statement under the Securities Act or in accordance
with an exemption from registration under the Securities Act and, in any
event, only after financial results covering at least 30 days of combined
operations of Red Cannon and the Company after the Effective Time shall
have been published. The foregoing restrictions on the transferability of
the Red Cannon Common Stock shall apply to all purported sales, transfers
and other conveyances of the shares of Red Cannon Common Stock owned by
such Affiliates and to all purported reductions in the interest in or risks
relating to such shares of the Red Cannon Common Stock. The Proxy Statement
and the Registration Statement shall disclose the foregoing in a reasonably
prominent manner.
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Section 6.6. Employment Agreements; Covenant Not to Compete. On the date
hereof, Andrew W. Williams shall execute and deliver to the Company a covenant
not to compete and non-disclosure agreement in the form of Exhibit C hereto (the
"Covenant Letter"). Each of the Company, on the one hand, and James W. West,
James Pagano, Kelly McMakin, Peggy O'Neil, David Rogers and Beverly Bishop,
separately on the other hand, shall have executed and delivered to each other an
employment agreement substantially in the form of Exhibit D hereto (the
"Employment Agreements").
Section 6.7. Red Cannon Voting Agreement. On the date hereof, the Persons
listed on Appendix A to Exhibit E hereto (collectively, the "Red Cannon
Principal Stockholders") shall execute and deliver to the Company a voting
agreement and voting proxy in the form of Exhibit E hereto (the "Red Cannon
Voting Agreement," and together with the Company Voting Agreement, the "Voting
Agreements"). The Persons executing the Red Cannon Voting Agreement beneficially
own, in the aggregate, over 50% of the issued and outstanding shares of Red
Cannon Common Stock.
Section 6.8. Letter of Red Cannon's Accountants. Red Cannon shall cause
to be delivered to the Company a letter of Ernst & Young LLP, Red Cannon's
independent public accountants, dated a date within two business days before (a)
the date on which the Proxy Statement is filed with the SEC, (b) the date on
which the Proxy Statement is mailed to the stockholders of Red Cannon and the
Company, (c) the date of the Red Cannon Meeting, and (d) the Effective Time, and
addressed to the Company in form and substance reasonably satisfactory to the
Company and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement. In connection with the Company's efforts
to obtain such letter, if requested by Ernst & Young LLP, Red Cannon shall
provide a representation letter to Ernst & Young LLP complying with SAS 72 (as
amended), if then required.
ARTICLE VII
COVENANTS OF THE COMPANY, RED CANNON AND MERGERSUB
Section 7.1. Legal Conditions to Merger. Each of the Company, Red Cannon
and Mergersub, shall use its best efforts to comply promptly with all legal
requirements which may be imposed on it with respect to the Merger, this
Agreement and the transactions contemplated hereby. Such actions shall include,
without limitation, filing or causing to be filed under the HSR Act a premerger
notification and report form, with respect to the transactions contemplated
hereby, furnishing all additional information required under the HSR Act and in
connection with approvals of or filings with any Governmental Authority. Each of
the Company, Red Cannon and Mergersub promptly shall cooperate with and furnish
information to each other in connection with any such requirements imposed upon
any of them or any of their subsidiaries in connection with such transactions.
Each of the Company, Red Cannon and Mergersub shall, and shall cause each of its
subsidiaries to, use its best efforts to obtain (and shall cooperate with each
other in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Governmental Authority or other public or private third party,
required to be obtained or made by the Company, Red Cannon or any of their
subsidiaries in connection with the Merger and the other transactions
contemplated by this Agreement. In connection with the filings under the HSR
Act, each party shall request early termination of the HSR waiting period.
Section 7.2. Preparation of Proxy Statement and Registration Statement.
(a) Red Cannon and the Company promptly shall prepare and file with
the SEC the Proxy Statement, and Red Cannon promptly shall prepare and file
with the SEC the Registration Statement. Each party shall provide the other
party and such other party's counsel and auditors with reasonable
opportunity to review and comment upon the Registration Statement,
including all amendments thereto and all supplements to the Proxy Statement
contained therein and constituting a part thereof, prior to the filing
thereof with the SEC and/or the distribution thereof to the
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stockholders of either party, and shall make all reasonable changes thereto
requested by such other party, counsel or auditors. The parties agree that
the Registration Statement shall comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations
thereunder, and the Proxy Statement shall comply as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder. Each of Red Cannon and the Company shall use its
best efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing consistent
with a desired Effective Time of on or prior to February 28, 1999;
provided, that the failure of the Effective Time to have occurred on or
prior to February 28, 1999 shall not be considered a breach of this
Agreement or grounds for termination of this Agreement. Red Cannon shall
advise the Company (promptly after it receives notice thereof) of the time
when the Registration Statement has become effective, of any supplement or
amendment that has been filed, of the issuance of any stop order, of the
suspension of the qualification of the shares of Red Cannon Common Stock
for offering or sale in any jurisdiction, or of any request by the SEC for
amendment of the Registration Statement or for additional information.
Promptly after the Registration Statement has been declared effective, Red
Cannon and the Company shall use all reasonable efforts to mail the Proxy
Statement to their respective stockholders.
(b) Red Cannon shall use its reasonable best efforts to obtain, prior
to the effective date of the Registration Statement, all necessary state
securities law or "Blue Sky" permits or approvals in connection with the
issuance of Red Cannon Common Stock in the Merger, except that Red Cannon
shall not be required to execute or file any general consent to service of
process in any jurisdiction in which it is not qualified to transact
business or to register as a dealer in any jurisdiction in which it is not
qualified to transact business or to register as a dealer in any
jurisdiction.
(c) If at any time prior to the Effective Time any event relating to
Red Cannon or any of its subsidiaries should be discovered which should be
set forth in an amendment of, or a supplement to, the Registration
Statement, Red Cannon promptly shall so inform the Company and shall
furnish all necessary information to the Company relating to such event. If
at any time prior to the Effective Time any event relating to the Company
or any of its subsidiaries should be discovered which should be set forth
in an amendment of, or a supplement to, the Proxy Statement, the Company
promptly shall so inform Red Cannon and shall furnish all necessary
information to Red Cannon relating to such event.
Section 7.3. Best Efforts. Upon the terms and subject to the conditions
of this Agreement (including, without limitation, the provisions of Sections
5.2, 6.3 and 7.10 relating to the exercise of the applicable fiduciary duties of
the Board of Directors of the Company or Red Cannon, as applicable), each of the
parties to this Agreement shall use its best efforts to take or cause to be
taken all actions and to do or cause to be done all things necessary, proper or
advisable under applicable laws and regulations to consummate the transactions
contemplated by this Agreement, and shall use its best efforts to obtain all
necessary waivers, consents and approvals, including the actions described in
Sections 7.1 and 7.2 above.
Section 7.4. Notification of Certain Matters. The Company shall give
prompt notice to Red Cannon and Red Cannon shall give prompt notice to the
Company, of (a) the occurrence, or non-occurrence, of any event the occurrence,
or non-occurrence, of which would, in the reasonable judgment of their
respective management, be likely to cause either (i) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date of this Agreement to the Effective Time or
(ii) any condition set forth herein to be unsatisfied in any material respect at
any time from the date of this Agreement to the Effective Time, and (b) any
material failure of the Company, Red Cannon or Mergersub, as the case may be, or
any officer, director, employee or
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agent thereof, to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it hereunder, provided that the delivery of any
notice pursuant to this Section 7.4 shall not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
Section 7.5. Brokers. Each of the Company and Red Cannon represents that
no agent, broker, investment banker, financial advisor or other firm or Person
is or shall be entitled to any brokers' or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement (except as set forth in Sections 3.22 and 4.22), and each of the
Company and Red Cannon shall indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations with respect to any other
fees, commissions or expenses asserted by any Person on the basis of any act or
statement alleged to have been made by such party.
Section 7.6. Public Announcements. Neither the Company nor Red Cannon
shall issue any press release or public announcement, including announcements by
any party for general reception by or dissemination to employees, agents or
customers, with respect to this Agreement, the Merger and the other transactions
contemplated by this Agreement without the prior written consent of the other
party (which consent shall not be withheld unreasonably), provided that the
Company or Red Cannon may make any disclosure or announcement which, in the
opinion of its counsel, it is obligated to make pursuant to applicable law or
regulations of Nasdaq, in which case the party desiring to make the disclosure
shall reasonably consult with the other party prior to making such disclosure or
announcement.
Section 7.7. Tax and Accounting Treatment. Until the Effective Time, the
Company and Red Cannon each shall, and from and after the Effective Time Red
Cannon shall, use its best efforts to qualify the Merger, and shall use best
efforts not to take any action to cause the Merger not to qualify, as a
reorganization within the meaning of Section 368(a) of the Code. From and after
the Effective Time, (a) Red Cannon shall cause the Surviving Corporation to
continue the Company's historic business or use a significant portion of the
Company's historic business assets in a business within the meaning of the
Treasury regulation Section 1.368-1(d), and (b) Red Cannon and Mergersub shall,
and Red Cannon shall cause the Surviving Corporation to, treat the Merger as a
"reorganization" within the meaning of Section 368(a) of the Code and shall file
such information with their income tax returns as may be required by Treasury
regulation Section 1.368-3 or other applicable law. Until the Effective Time,
each of the Company and Red Cannon, and from and after the Effective Time Red
Cannon and their respective subsidiaries and other Affiliates over which they
exercise control, shall not knowingly take any action, or knowingly fail to take
any action, that is reasonably likely to jeopardize the treatment of the Merger
as a pooling of interests for accounting purposes.
Section 7.8. Indemnification of Officers and Directors.
(a) Red Cannon shall indemnify, defend and hold harmless each Person
who is now, or who becomes prior to the Effective Time, an officer or
director of Red Cannon or the Company (the "Indemnified Parties") against
(i) all losses, claims, damages, costs, expenses, liabilities or judgments
or amounts that are paid in settlement with the approval of the
indemnifying party (which approval shall not be withheld unreasonably) of
or in connection with any claim, action, suit, proceeding or investigation
based in whole or in part on or arising in whole or in part out of the fact
that such Person is or was a director or officer of Red Cannon or the
Company, whether pertaining to any matter existing or occurring at or prior
to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities"), and (ii) all
Indemnified Liabilities based in whole or in part on, or arising in whole
or in part out of, or pertaining to this Agreement or the transactions
contemplated by this Agreement, in each case to the full extent provided
under the Certificate of Incorporation and By-laws of the Company as in
effect as of the date hereof or permitted under Delaware Law, as
applicable, to indemnify directors and officers. As of the date hereof,
neither Red Cannon nor the Company has knowledge, after due inquiry of its
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respective directors and executive officers, of any pending or threatened
claims, actions or other matters which reasonably could give rise to
Indemnified Liabilities.
(b) The Certificate of Incorporation and the By-laws of Red Cannon and
the Surviving Corporation shall contain the provisions with respect to
indemnification substantially the same as set forth in the Company's
Certificate of Incorporation and By-laws on the date of this Agreement, and
such provisions shall not be amended, repealed or otherwise modified for a
period of six (6) years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who on or prior to
the Effective Time were directors or officers of Red Cannon or the Company,
unless such modification is required by law.
(c) The provisions of this Section 7.8 are intended for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her
heirs and executors after the Effective Time.
Section 7.9. Further Assurances. In the event that at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement, the proper officers and/or directors of the Company,
Red Cannon, Mergersub and the Surviving Corporation shall take such necessary
action.
Section 7.10. No Solicitations. From the date hereof until the earlier of
(a) the Effective Time, or (b) the date that this Agreement shall terminate in
accordance with its terms (the "Non-Solicitation Period"), neither of the
Company nor Red Cannon shall, and each such party shall cause its subsidiaries
not to, permit any of its representatives to, and shall use its best efforts to
cause such persons not to, directly or indirectly, initiate, solicit or
encourage, or take any action to facilitate the making of any offer or proposal
that constitutes or is reasonably likely to lead to any Competing Transaction.
Any violation of the restrictions set forth in the preceding sentence by an
officer or director of either the Company or Red Cannon or any investment
banker, attorney or other representative of such party, whether such person is
purporting to act on behalf of such party or otherwise, shall be deemed to be a
breach of this Section 7.10. Each party hereto shall immediately cease and cause
to be terminated all existing discussions and negotiations, if any, with any
other persons conducted heretofore with respect to any Competing Transaction.
During the Non- Solicitation Period, Red Cannon shall notify the Company, and
the Company shall notify Red Cannon, orally and confirmed in writing, of any
inquiries, offers or proposals relating to a Competing Transaction (including,
without limitation, the terms and conditions of any such proposal and the
identity of the person making it) within 24 hours of the receipt thereof and
shall give the other five days' advance notice of any agreement to be entered
into with or any information to be supplied to any person making such inquiry,
offer or proposal. Notwithstanding anything in this Section 7.10 to the
contrary, in the event of an unsolicited Competing Transaction, unless the
respective approvals of Red Cannon's Stockholders and the Company's Stockholders
have both been obtained, Red Cannon or the Company, as the case may be, may
participate in discussions or negotiations with, furnish information to, and
afford access to its properties, books and records and that of its subsidiaries,
to any person in connection with a possible Competing Transaction by such person
(provided such person is bona fide and financially capable) with respect to
either the Company or Red Cannon if the Board of Directors of the Company or Red
Cannon, as the case may be, after weighing the advice of its counsel and
financial advisor, determines in good faith that taking such action is
reasonably likely to lead to a definitive written offer or proposal with respect
to a Competing Transaction by or with such other person that would be more
favorable than the Merger to such party's stockholders from a financial point of
view. As used in this Section 7.10, "Competing Transaction" shall mean any
tender or exchange offer, proposal for a merger, consolidation or other business
combination involving any party or any of its material subsidiaries, or any
proposal or offer to acquire in any manner controlling equity interest in, or
substantially all of the assets of, any party or any of its material
subsidiaries, other than (i) pursuant to transactions contemplated by this
Agreement, (ii) any transaction by or involving the Company which is permitted
pursuant to Section 5.1 (and Schedule 5.1).
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ARTICLE VIII
CONDITIONS TO CLOSING
Section 8.1. Conditions to Obligations of the Company, Red Cannon and
Mergersub. The obligations of the Company, Red Cannon and Mergersub to
consummate the Merger and the other transactions contemplated by this Agreement
are subject to the fulfillment, on or before the Effective Time, of each of the
following conditions:
(a) Stockholder Approvals. The Merger and the other transactions
contemplated by this Agreement shall have been approved and adopted by the
affirmative vote of the holders of a majority of the outstanding shares of
Company Common Stock entitled to vote at the Company Special Meeting. The
stock issuance pursuant to the Merger, the Certificate of Amendment, the
election of directors and the other transactions contemplated by this
Agreement shall have been approved and adopted by the affirmative vote of
the holders of a majority of the outstanding shares of Red Cannon Common
Stock entitled to vote at the Red Cannon Meeting.
(b) Approvals of Governmental Authorities and Other Persons. All
authorizations, consents, orders or approvals of, or declarations or
filings with, or expiration or termination of any notice and waiting period
imposed by, any Governmental Authority or any other Person upon the
consummation of the transactions contemplated by this Agreement, the
failure of which to obtain could reasonably be expected to have a Company
Material Adverse Effect or a Red Cannon Material Adverse Effect, shall have
been filed or obtained or shall have occurred. All of such authorizations,
consents, orders or approvals shall have been obtained without the
imposition of any conditions which would require the divestiture of any of
the Company's or Red Cannon's assets or would otherwise materially
adversely affect Red Cannon's ability to operate the businesses of the
Company and its subsidiaries following the Effective Time.
(c) Registration Statement. The Registration Statement shall have
been declared effective, and no stop order terminating the effectiveness of
the Registration Statement shall have been issued or threatened.
(d) No Order or Injunction. The consummation of the Merger shall not
be precluded, enjoined, prohibited or materially restricted by any order or
injunction of a court of competent jurisdiction (each party agreeing to use
its best efforts to have any such order reversed or injunction lifted), and
no litigation, arbitration, or other proceeding initiated by any
Governmental Authority shall be pending which seeks to enjoin prohibit or
materially restrict the consummation of the Merger.
(e) Pooling Letters. The Company shall have received a letter from
its auditors, addressed to the Company, dated the date the Proxy Statement
is first mailed to the stockholders of the Company and confirmed in writing
as of the Effective Time, and Red Cannon shall have received a letter from
its auditors, addressed to Red Cannon, dated the date the Proxy Statement
is first mailed to the stockholders of Red Cannon and confirmed in writing
as of the Effective Time, stating that the Merger shall qualify as a
pooling of interests business combination under applicable accounting and
SEC rules, and the SEC shall not have objected to such treatment.
(f) Accountants Letters. The Company and Red Cannon shall have
received the letters described in Sections 5.5 and 6.8 above.
(g) Nasdaq. The shares of Red Cannon Common Stock included in the
Merger Consideration shall have been duly approved for quotation on Nasdaq,
subject to official notice of issuance.
(h) Average Trading Price of Red Cannon Common Stock. The average
daily closing sales price of a share of Red Cannon Common Stock as quoted
on Nasdaq for the 20 consecutive trading
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days immediately preceding the third trading day (including such third
trading day) prior to the Effective Time, shall be greater than or equal to
$4.00.
(i) Dissenting Shares. Less than 10% of the issued and outstanding
shares of Company Common Stock shall have duly demanded and perfected
dissenters' rights of appraisal in accordance with Section 2.5 of this
Agreement and Section 262 of Delaware Law.
(j) Blue Sky Laws. Red Cannon shall have received all state
securities or "Blue Sky" permits and other authorizations, if any,
necessary to issue the shares of Red Cannon Common Stock pursuant to the
Merger.
Section 8.2. Conditions to Obligations of the Company. Except as
otherwise provided below, the obligations of the Company to consummate the
Merger and the other transactions contemplated by this Agreement shall be
subject to the fulfillment on or prior to the Effective Time of the following
additional conditions, any one or more of which may be waived by the Company:
(a) Performance of Obligations of Red Cannon and Mergersub. Red
Cannon and Mergersub shall have performed and complied in all material
respects with all agreements required by this Agreement to be performed or
complied with by them on or prior to the Effective Time, and the Company
shall have received a certificate signed on behalf of each of Red Cannon
and Mergersub by an executive officer of each such company to such effect.
(b) Representations and Warranties; Change in Condition. The
representations and warranties of Red Cannon and Mergersub set forth in
this Agreement shall be true and correct in all material respects on and as
of the date hereof and on and as of the Effective Time, with the same force
and effect as through such representations and warranties had been made on
and as of the Effective Time, and the Company shall have received a
certificate signed on behalf of each of Red Cannon and Mergersub by an
executive officer of each such company to such effect. Since the date
hereof, no event or condition shall have occurred (or shall be discovered)
that could reasonably be expected to have a material adverse effect on the
business, assets, results of operations or financial condition of Red
Cannon and its subsidiaries, taken as a whole (a "Red Cannon Material
Adverse Effect").
(c) Corporate Action. The Company shall have received from Red Cannon
(i) copies of the certificates of incorporation and by-laws of Red Cannon
and Mergersub, (ii) copies of resolutions of Red Cannon's and Mergersub's
Boards of Directors approving and adopting this Agreement and the
transactions contemplated hereby, certified on behalf of each of Red Cannon
and Mergersub by the corporate secretary of each such company, and (iii) a
certificate of good standing from the Secretary of State of the State of
Delaware for each of Red Cannon and Mergersub (dated as of a date not more
than 10 days prior to the Closing).
(d) Opinion of Counsel. The Company shall have received an opinion of
counsel to Red Cannon and Mergersub, dated the Effective Time,
substantially in the form of Exhibit G.
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Section 8.3. Conditions to Obligations of Red Cannon and Mergersub. The
obligations of Red Cannon and Mergersub to consummate the Merger and the other
transactions contemplated by this Agreement shall be subject to the fulfillment
on or prior to the Effective Time of the following additional conditions, any
one or more of which may be waived by Red Cannon and Mergersub:
(a) Performance of Obligations of the Company. The Company shall have
performed and complied in all material respects with all agreements
required by this Agreement to be performed or complied with by the Company
at or prior to the Effective Time, and Red Cannon and Mergersub shall have
received a certificate of the Company, signed by the chief executive
officer and the chief financial officer of the Company, to such effect.
(b) Representations and Warranties; Change in Condition. The
representations and warranties of the Company set forth in this Agreement
shall be true and correct in all material respects on and as of the date
hereof and at and as of the Effective Time, with the same force and effect
as though such representations and warranties had been made on and as of
the Effective Time, and Red Cannon and Mergersub shall have received a
certificate of the Company, signed by the chief executive officer and the
chief financial officer of the Company, to such effect. Since the date
hereof, no event or condition shall have occurred (or shall be discovered)
that could reasonably be expected to have a material adverse effect on the
business, assets, results of operations, or financial condition of the
Company and its subsidiaries, taken as a whole (a "Company Material Adverse
Effect").
(c) Corporate Action. Red Cannon and Mergersub shall have received
from the Company (i) copies of the certificates of incorporation and bylaws
of the Company and each of its subsidiaries, (ii) copies of resolutions of
the Company's Board of Directors approving and adopting this Agreement and
the transactions contemplated hereby, certified on behalf of the Company by
its corporate secretary, and (iii) a certificate of good standing from the
Secretary of State of the State of Delaware for the Company (dated as of a
date not more than 10 days prior to the Closing).
(d) Businesses Acquired by the Company. As of the Effective Time, the
Company shall have Annualized Adjusted EBITDA of at least $11 million (it
being acknowledged and agreed by Red Cannon that the Company had at least
$8.3 million of Annualized Adjusted EBITDA as of December 8, 1998). For
purposes of this Agreement, the following terms shall have the meanings set
forth below:
"Addbacks" shall mean, with respect to each floral business
acquired by the Company, all expenses incurred by such floral business
during the applicable accounting period(s) preceding such acquisition,
which expenses would not have been incurred by the Company if the
Company owned such business during such period, including, without
limitation, dividends, distributions, excess owner's compensation,
extraordinary fringe benefits and perquisites provided to owners and
other employees, and other non-recurring revenue and expenses, in all
cases as evidenced by the Company's records.
"Annualized Adjusted EBITDA" shall mean, as of any date, the
Company's consolidated net income for the 12-month period immediately
preceding such date before (x) interest, taxes, depreciation and
amortization expenses paid or accrued during such period, and (y) plus
(or minus) all Addbacks related to such period; provided that (I) all
businesses acquired by the Company during such 12-month period shall be
treated as having been acquired by the Company as of the first day of
such 12-month period, and (II) other pro forma adjustments shall be made
to such net income consistent with the pro forma adjustments described
in the Company's Private Placement Memorandum dated September 1998.
(e) Opinion of Counsel. Red Cannon and Mergersub shall have received
an opinion of counsel to the Company, dated the Effective Time,
substantially in the form of Exhibit H.
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ARTICLE IX
TERMINATION
Section 9.1. Termination. This Agreement may be terminated and the Merger
contemplated by this Agreement may be abandoned at any time after the occurrence
of any of the following events, but prior to the Effective Time (notwithstanding
any approval of this Agreement by the stockholders of the Company);
(a) by mutual written consent of Red Cannon and the Company;
(b) by either Red Cannon or the Company, if any Governmental Authority
shall have issued an order, decree or ruling or taken any other action
permanently enjoining, restraining or otherwise prohibiting the Merger, and
such order, decree, ruling or other action shall have become final and
nonappealing;
(c) by either Red Cannon or the Company, if the Merger has not been
consummated by March 31, 1999 (such date, or such later date mutually
agreed to in writing by the parties, hereto referred to as the "End Date")
(other than due to the failure of the party seeking to terminate this
Agreement to perform its obligations under this Agreement required to be
performed at or prior to the Effective Time); provided, however, that if
the reason the Merger has not been consummated by March 31, 1999 is due to
any of the conditions in Sections 8.1(a), 8.1(b), 8.1(c), or 8.1(d) not
having been satisfied as of March 31, 1999, then the End Date shall be
automatically extended, without further action of the parties, to May 31,
1999; further provided, that if the reason the Merger has not been
consummated by March 31, 1999 is due to the condition in Section 8.1(e) not
having been satisfied as of March 31, 1999, then the parties agree to
negotiate in good faith to agree on such terms and conditions as may permit
the Merger and the other transactions contemplated by this Agreement to be
closed and treated for accounting purposes as a purchase transaction as
opposed to a pooling of interests, and the End Date shall be automatically
extended, without further action of the parties, to May 31, 1999;
(d) by Red Cannon, if any of the representations and warranties of the
Company in this Agreement are not true and correct in all material respects
and could not reasonably be expected to become true and correct prior to
the End Date, or if the Company breaches in any material respects any
covenant of the Company contained in this Agreement and such breach could
not reasonably be expected to be cured prior to the End Date; or
(e) by the Company, if any of the representations and warranties of
Red Cannon in this Agreement are not true and correct in all material
respects and could not reasonably be expected to become true and correct
prior to the End Date, or if Red Cannon breaches in any material respect
any covenant of Red Cannon contained in this Agreement and such breach
could not reasonably be expected to be cured prior to the End Date.
Section 9.2. Effect of Termination. In the event this Agreement is
terminated pursuant to Section 9.1, this Agreement shall terminate and become
void and of no force and effect, the Merger shall be abandoned without further
action by any of the parties to this Agreement, and no party to this Agreement
shall have any liability or further obligation under this Agreement, except for
the agreements contained in Sections 3.22 and 4.22 (Brokers), 7.10 (No
Solicitation), 10.3 (Fees and Expenses) and 10.8 (Governing Law); provided that
any termination of this Agreement pursuant to Sections 9.1(d) or 9.1(e) of this
Agreement shall not relieve any party from any liability for the breach of any
material representation, warranty or covenant contained in this Agreement or be
deemed to constitute a waiver of any remedy available for such breach, and
further provided, that if Red Cannon terminates this Agreement pursuant to
Section 9.1(d), then Red Cannon shall be entitled to recover its reasonable
attorney's fees and costs incurred in any action brought by Red Cannon against
the Company to recover
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its damages caused by such breach, or if the Company terminates this Agreement
pursuant to Section 9.1(e), then the Company shall be entitled to recover its
reasonable attorney's fees and costs incurred in any action brought by the
Company against Red Cannon to recover its damages caused by such breach. Upon
termination of this Agreement, each party shall return all documents and other
materials of any other party which constitute confidential or proprietary
information or trade secrets, whether so obtained before or after the execution
of this Agreement, to the party furnishing the same, and will otherwise continue
to abide by the terms of the Confidentiality Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
Section 10.1. Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by written agreement of
the Company, on the one hand, and Red Cannon and Mergersub, on the other hand,
at any time prior to the Effective Time with respect to any of the terms
contained herein; provided, however, that, after the adoption of this Agreement
by the Company's stockholders, no such amendment or modification shall reduce
the amount or change the form the consideration to be delivered to the
stockholders of the Company as contemplated by Article II of this Agreement.
Section 10.2. Waiver of Compliance; Consents. Any failure of the Company,
or of Red Cannon or Mergersub, to comply with any obligation, covenant,
agreement or condition herein may be waived in writing by Red Cannon or
Mergersub, or by the Company, respectively, but such waiver or failure to insist
upon strict compliance with such obligation, covenant, agreement or condition
shall not operate as a waiver of, or estoppel with respect to, any subsequent or
other failure. Whenever this Agreement requires or permits consent by or on
behalf of any party hereto, such consent shall be given in writing in a manner
consistent with the requirements for a waiver of compliance as set forth in this
Section 10.2.
Section 10.3. Fees and Expenses. Except as otherwise provided in this
Agreement or by law, all fees and expenses incurred in connection with the
Merger, this Agreement and the transactions contemplated by this Agreement shall
be paid by the party incurring such fees or expenses, except that Red Cannon and
the Company shall share equally (i) the expenses payable in connection with
printing and mailing the Registration Statement and the Proxy Statement and all
SEC filing fees relating to the transactions contemplated herein, and (ii) all
HSR Act filing fees payable with respect to the Merger and other transactions
contemplated by this Agreement.
Section 10.4. No Third-Party Beneficiaries. Except as provided in Section
7.8, this Agreement is for the sole benefit of the parties hereto and nothing
herein expressed or implied shall give or be construed or is intended to give to
any Person, other than the parties hereto, any legal or equitable rights
hereunder.
Section 10.5. Reliance on and Survival of Representations and
Warranties. Notwithstanding any knowledge of facts determined or determinable
by any party by investigation, each party shall have the right to fully rely on
the representations and warranties of the other parties contained in this
Agreement or in any other documents or certificates delivered in connection
herewith. Each representation and warranty contained in this Agreement is
independent of each other representation and warranty. None of the
representation, warranties, or covenants in this Agreement or in any Schedule,
certificate, or other document delivered pursuant to this Agreement shall
survive beyond the Effective Time, except for the agreements in Article I (The
Merger), Article II (Conversion of Securities; Exchange of Certificates),
Section 7.7 (Tax Treatment), Section 7.8 (Indemnification of Officers and
Directors), Section 7.9 (Further Assurances), and Section 10.8 (Governing Law),
and for those set forth in the Affiliate letters required under Sections 5.4 and
6.5, the Covenant Letter, the Employment Agreements and the Voting Agreements.
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Section 10.6. Notices. All notice and other communications required or
permitted hereunder shall be in writing and shall be deemed duly given if
delivered by hand, faxed (provided a confirmation is sent by guaranteed
overnight delivery), guaranteed overnight delivery or mailed, first class
certified mail with postage prepaid, to the parties at the following addresses,
or such other addresses as such party shall furnish to the other in writing:
(a) If to Red Cannon or Mergersub to:
Florafax International, Inc.
8075 20th Street
Vero Beach, FL 32966
Attn: James West
Fax: (561) 234-4044
with a copy to:
Andrews & Kurth L.L.P.
1701 Pennsylvania Ave. N.W., Suite 200
Washington, D.C. 20008
Attn: James A. Blalock III, Esq.
Fax: (202) 662-2739
(b) If to the Company to:
GERALD STEVENS, INC.
One Financial Plaza, Suite 1100
110 East Broward Blvd.
Fort Lauderdale, FL 33394
Attn: Adam D. Phillips
Fax: (954) 713-1175
with a copy to:
Akerman, Senterfitt & Eidson, P.A.
One Southeast Third Avenue
28th Floor
Miami, Florida 33131
Attn: Jonathan L. Awner, Esq.
Fax: (305) 374-5095
Section 10.7. Assignment. This Agreement and all of its provisions shall
be binding upon and inure to the benefit of the parties to this Agreement, but
neither this Agreement nor any of the rights, interests or obligations hereunder
may be assigned by operation of law or otherwise.
Section 10.8. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Delaware
applicable to contracts executed and to be wholly performed within such State.
Section 10.9. Headings. The table of contents and the article and section
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. When
reference is made in this Agreement to a Section, Exhibit or Schedule, such
reference shall be to a Section of, or an Exhibit or Schedule to, this Agreement
unless otherwise indicated.
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Section 10.10. Entire Agreement. This Agreement (which term as used
throughout includes the Exhibits and Schedules hereto) and the other documents
and certificates contemplated herein embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein, and supersedes all prior agreements and understandings (oral or written)
between or among the parties with respect to such subject matter, except for the
Confidentiality Agreement. There are no restrictions, promises, representations,
warranties, covenants or undertakings, other than those expressly set forth or
referred to herein.
Section 10.11. Severability. Wherever possible, each provision or portion
of any provisions of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of this
Agreement is held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or portion of any provision
in such jurisdiction, and this Agreement will be reformed, construed and
enforced in such jurisdiction as if such invalid, illegal or unenforceable
provision or portion of any provision had never been contained herein.
Section 10.12. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have made and entered into this
Agreement on the date set forth above.
FLORAFAX INTERNATIONAL, INC., a
Delaware corporation
By: /s/ ANDREW W. WILLIAMS
------------------------------------
Name: ANDREW W. WILLIAMS
Title: CHIEF EXECUTIVE OFFICER
RED CANNON ACQUISITION CORP., a
Delaware corporation
By: /s/ ANDREW W. WILLIAMS
------------------------------------
Name: ANDREW W. WILLIAMS
Title: CHIEF EXECUTIVE OFFICER
GERALD STEVENS, INC., a Delaware
corporation
By: /s/ GERALD R. GEDDIS
------------------------------------
Name: GERALD R. GEDDIS
Title: CHIEF EXECUTIVE OFFICER
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ANNEX A-1
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 is made as of April 9, 1999 to that certain Agreement
and Plan of Merger dated as of December 9, 1998 by and among Florafax
International, Inc., Red Cannon Acquisition Corp., and Gerald Stevens, Inc. All
defined terms used herein shall have the same meanings given such terms in the
Agreement.
1. Waiver of Certain Conditions by the Company. The Company agrees to
waive the condition to closing set forth in Section 8.2(b) of the Agreement to
the extent that the following representations and warranties of Red Cannon and
Mergersub as set forth in the Agreement shall not be true and correct in all
material respects as of the Effective Time, and the Company agrees to accept a
certificate pursuant to Section 8.2(b) at the Effective Time which qualifies the
following representations and warranties to the extent provided below:
(a) With respect to the representation and warranty in Section 4.3 of the
Agreement, Red Cannon and Mergersub will not be filing a premerger
notification and report form under the HSR Act as the parties have
determined that the transactions contemplated by the Agreement are not
required to be approved under the HSR Act;
(b) With respect to the representation and warranty in Section 4.4 of the
Agreement, (i) the financial statements of Red Cannon included in the
Red Cannon SEC Documents have been amended to change the manner of
accounting for Red Cannon's acquisition of Marketing Projects, Inc.,
(ii) Red Cannon's Forms 10-KSB/A and 10-QSB/A as filed with the SEC on
April 8, 1999 reflect such changes, and (iii) the representations and
warranties set forth in Section 4.4 of the Agreement are true and
correct in all material respects as to such amended filings; and
(c) With respect to the representation and warranty in Section 4.22 of the
Agreement, Red Cannon has amended its retainer agreement with ABN AMRO
as of March 12, 1999, and a true and correct copy of the amended
retainer agreement with ABN AMRO has been delivered to the Company.
The Company agrees that the none of the matters specified above constitutes a
violation of or non-compliance with Sections 6.1, 7.1, 7.3 or 7.4 of the
Agreement, and the Company agrees to accept a certificate pursuant to Section
8.2(a) of the Agreement at or prior to the Effective Time which reflects the
foregoing matters to the extent such matters may constitute a violation of or
non-compliance with any covenant of Red Cannon and Mergersub in the Agreement.
2. Satisfaction of Certain Conditions by the Company. Red Cannon and
Mergersub agree that the condition to closing set forth in Section 8.3(a) has
not been violated by reason of the Company's acquisitions since the date of the
Agreement, all of which Red Cannon and Mergersub agree (i) either have been made
in accordance with Section 5.1(e) and Schedule 5.1 of the Agreement or have been
made with Red Cannon and Mergersub having waived compliance with Section 5.1(e)
and Schedule 5.1 of the Agreement, and (ii) do not violate Sections 7.1, 7.3 or
7.4 of the Agreement. All of the Company's acquisitions since the date of the
Agreement are listed on Schedule 2 hereto.
3. Waiver of Certain Conditions by Red Cannon and Mergersub. Red Cannon
and Mergersub agree to waive the condition to closing set forth in Section
8.3(b) of the Agreement to the extent that the following representations and
warranties of the Company as set forth in the Agreement shall not be true and
correct in all material respects as of the Effective Time, and Red Cannon and
Mergersub agree to
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accept a certificate pursuant to Section 8.3(b) at the Effective Time which
qualifies the following representations and warranties to the extent provided
below:
(a) With respect to the representations and warranties in Sections 3.2 and
3.20 of the Agreement, the Company has acquired several additional
subsidiaries, as reflected in the amended Proxy Statement, and the
Company will list those subsidiaries on a revised Schedule 3.2, and
list the fictitious and other names of such subsidiaries on a revised
Schedule 3.20, to be attached to the certificate;
(b) With respect to the representation and warranty in Section 3.3 of the
Agreement, the Company will update its stockholder and option holder
lists on revised Schedules 3.3(a) and 3.3(b) to be attached to the
certificate;
(c) With respect to the representation and warranty in Section 3.4 of the
Agreement, the Company will not be filing a premerger notification and
report form under the HSR Act as the transactions contemplated by the
Agreement are not required to be approved under the HSR Act;
(d) With respect to the representations and warranties in Sections 3.6(vi)
and 3.17 of the Agreement, the Company has hired Steven J. Nevill as
Senior Vice President and Chief Information Officer, and will update
its list of executive officers on revised Schedule 3.17 to be attached
to the certificate;
(e) With respect to the representation and warranty in Section 3.13(a) of
the Agreement, the Company has entered into an advertising and
marketing agreement with Yahoo!, and will add that agreement as a
Designated Contract on revised Schedule 3.13 to be attached to the
certificate;
(f) With respect to the representation and warranty in Section 3.15 of the
Agreement, the Company will update its lists of real property owned
and leased on revised Schedules 3.15(a) and 3.15(b) to be attached to
the certificate; and
(g) With respect to the representation and warranty in Section 3.18 of the
Agreement, the Company will update its lists of insurance on revised
Schedule 3.18 to be attached to the Agreement.
Red Cannon and Mergersub further agree that the none of the matters specified
above constitutes a violation of or non-compliance with Sections 5.1, 7.1, 7.3
or 7.4 of the Agreement, and Red Cannon and Mergersub agree to accept a
certificate pursuant to Section 8.3(a) of the Agreement at or prior to the
Effective Time which reflects the foregoing matters to the extent such matters
may constitute a violation of or non-compliance with any covenant of the Company
in the Agreement.
4. Amendment of Certain Representations, Agreements and Covenants. Red
Cannon, Mergersub and the Company agree that Sections 3.5, 4.5, 5.2, 6.3 and 7.2
of the Agreement are deemed to be amended and revised so that the Proxy
Statement will not be a joint proxy statement and will only be a proxy statement
for the annual meeting of stockholders of Red Cannon, and agree that the Company
will be holding a special meeting of its stockholders to approve the Merger
Agreement but the Company's Board of Directors will not be soliciting proxies
for such special meeting. In addition, Red Cannon, Mergersub and the Company
agree that Section 6.3 of the Agreement is amended so that the proposal
described in the Agreement which relates to the ratification of the appointment
of Arthur Andersen, LLP as independent auditors for Red Cannon will not be
included in the Proxy Statement, provided that the Board of Directors of Red
Cannon shall appoint Arthur Andersen, LLP as its independent auditors subject to
completion of the Merger and the Proxy Statement will reflect that. The parties
further agree that the reference to February 28, 1999 in Section 7.2(a) of the
Agreement is amended to refer to April 15, 1999. Finally, the phrase "A[a]t the
Effective Time," in the first and fourth sentences of
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Section 1.9 is replaced with "A[a]s of the close of business on the day of the
Effective Time," in both sentences.
5. Miscellaneous. This Amendment No. 1 to the Agreement is entered into
by the parties pursuant to Section 10.1 of the Agreement. Nothing contained
herein shall be construed as or shall operate as a waiver of, or estoppel with
respect to, any other condition contained in Article VIII of the Agreement.
IN WITNESS WHEREOF, the parties hereto have made and entered into this
Amendment No. 1 to the Agreement on the date first set forth above.
FLORAFAX INTERNATIONAL, INC.,
a Delaware corporation
By: /s/ ANDREW W. WILLIAMS
-------------------------------------
Andrew W. Williams, Chief Executive
Officer
RED CANNON ACQUISITION CORP.,
a Delaware corporation
By: /s/ ANDREW W. WILLIAMS
-------------------------------------
Andrew W. Williams, President
GERALD STEVENS, INC.,
a Delaware corporation
By: /s/ ADAM D. PHILLIPS
-------------------------------------
Adam D. Phillips, Senior Vice
President
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ANNEX B
ABN AMRO
ABN AMRO Incorporated
208 South LaSalle Street
Chicago, Illinois
60604-1003
(312) 855-7600
December 9, 1998
Board of Directors
Florafax International, Inc.
5075 20th Street
Vero Beach, FL 32966
Members of the Board:
We understand that Florafax International, Inc. ("Florafax" or the
"Company"), Gerald Stevens, Inc. ("Gerald Stevens") and Red Cannon Acquisition
Corp., a wholly-owned subsidiary of Florafax ("Mergersub"), propose to enter
into an Agreement and Plan of Merger to be dated December 9, 1998 (the
"Agreement") pursuant to which Gerald Stevens will be merged with and into
Mergersub in a transaction (the "Merger") in which each issued and outstanding
share of common stock of Gerald Stevens ("Gerald Stevens Common Stock") will be
converted into the right to receive shares of common stock of Florafax, $0.01
par value per share ("Florafax Common Stock"), in the applicable ratio (the
"Exchange Ratio") as follows: (i) if the average daily closing sales price of a
share of Florafax Common Stock on the NASDAQ Small Cap System ("Nasdaq"), as
reported in The Wall Street Journal, for the 45 consecutive trading days
immediately preceding the third day (including such third trading day) prior to
the Florafax Stockholder Meeting, as defined in the Agreement ("Average Trading
Price") is less than $5.00, the Exchange Ratio shall be equal to 1.25, (ii) if
the Average Trading Price is greater than or equal to $5.00 but less than $6.50,
the Exchange Ratio shall be 1.30, and (iii) if the Average Trading Price is
greater than or equal to $6.50, the Exchange Ratio shall be 1.35. If the Average
Trading Price is less than $4.00, either party shall have the right to terminate
the Agreement.
You have asked us whether, in our opinion, the Exchange Ratio determining
the number of shares to be issued to the holders of Gerald Stevens Common Stock
in the Merger is fair to Florafax stockholders from a financial point of view.
In connection with this opinion we have:
(i) reviewed the Agreement and certain related documents;
(ii) held discussions with certain senior officers and directors of
Florafax and certain senior officers of Gerald Stevens concerning the
businesses, operations and prospects of Florafax and Gerald Stevens;
(iii) examined certain publicly available information and other data for
Florafax which were provided to or otherwise discussed with us by
the management of Florafax;
(iv) examined certain financial information, including limited historical
information, and other data for Gerald Stevens which were provided to
or otherwise discussed with us by the management of Gerald Stevens;
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<PAGE> 309
Florafax International,
Inc.
Page 2
(v) reviewed the financial terms of the Merger as set forth in the
Agreement in relation to: (a) current and historical market prices
and trading volumes of Florafax Common Stock; (b) the respective
companies' financial and other operating data; and (c) the
capitalization and financial condition of Florafax and Gerald
Stevens;
(vi) considered, to the extent publicly available, the financial terms of
certain other similar transactions recently effected which we
considered relevant in evaluating the Merger and analyzed certain
financial, stock market and other publicly available information
relating to the businesses of other companies whose operations we
considered relevant in evaluating those of Florafax and Gerald
Stevens;
(vii) reviewed Gerald Stevens plans for and certain documents relating to
planned acquisitions of certain other parties (collectively, the
"Early Acquisitions");
(viii) reviewed and discussed with senior management of the Company and
Gerald Stevens the projected operating results, the strategic
rationale for the Merger and certain sensitivity analyses relating
to the operations of Gerald Stevens, Florafax, and the combined
entity; and
(ix) interviewed the management of Florafax regarding the reasonableness
of such projections and analyses.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information reviewed by us and we have
not made or obtained or assumed any responsibility for independent verification
of such information. In particular, we have assumed that the Early Acquisitions
are consummated as contemplated and we have relied upon the estimates of
management of the Company and their concurrence with Gerald Stevens as to
operating performance and balance sheet projections resulting from the Merger
and Early Acquisitions. In addition, we have not assumed any responsibility for
making an independent evaluation or appraisal of the assets and liabilities of
Florafax and Gerald Stevens or any of their respective subsidiaries. With
respect to the financial projections of Florafax and Gerald Stevens, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of Florafax and
Gerald Stevens, respectively, as to the future financial performance of
Florafax. We have assumed that the Merger will be consummated in accordance with
the terms of the Agreement including among other things, that the Merger will be
accounted for as a pooling of interests under generally accepted accounting
principles and as a tax-free reorganization for federal income tax purposes.
Other than as specifically stated herein, we express no opinion regarding the
terms of the Agreement or any other agreements contemplated by this transaction.
We are not expressing any opinion as to what the value of Florafax Common Stock
actually will be at closing pursuant to the Merger or the price at which
Florafax Common Stock will trade subsequent to the Merger.
In connection with our engagement, we assisted the Company in reviewing and
responding to certain other indications of interest; however, we have not been
authorized by the Company or the Board of Director to solicit, nor have we
solicited, third party indications of interest for all or any part of the
Company.
ABN AMRO, Incorporated ("AAI"), as part of its investment banking business,
is continually engaged in the valuation of businesses in connection with mergers
and acquisitions, as well as initial and secondary offering of securities and
valuations for other purposes. We have acted as financial advisor to the Board
of Directors of Florafax in connection with this transaction and will receive a
fee for our services, including rendering this opinion. A significant portion of
the fees to be received by AAI is contingent upon the consummation of the
Merger. In the ordinary course of our business, AAI and its affiliates may
actively trade securities of Florafax for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position in
such securities.
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<PAGE> 310
Florafax International,
Inc.
Page 3
It is understood that this letter is for the benefit and use of the Board
of Directors of Florafax in its consideration of the Merger and may not be used
for any other purpose or reproduced, disseminated, quoted or referred to at any
time, in any manner or for any purpose without our prior written consent, except
that this letter may be used, in its entirety, as part of any proxy
statement/prospectus relating to the Merger. This letter does not address
Florafax's underlying business decision to enter into the Merger or other
business strategies being considered by the Company's Board of Directors or
constitute a recommendation to any stockholder as to how such stockholder should
vote with respect to the proposed Merger. Finally, our opinion is necessarily
based on economic, monetary, market and other conditions as in effect on, and
the information made available to us, as of the date hereof, and we assume no
responsibility to update or revise our opinion based on circumstances or events
occurring after the date hereof.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio pursuant to the Agreement is fair from a
financial point of view to the stockholders of Florafax.
Sincerely,
/s/ ABN AMRO INCORPORATED
ABN AMRO Incorporated
B-3
<PAGE> 311
ANNEX C
FORM OF
CERTIFICATE OF AMENDMENT
OF
FLORAFAX INTERNATIONAL, INC.
We, the Chief Executive Officer and the Secretary of Florafax
International, Inc. (the "Corporation"), do hereby certify under the seal of
said Corporation as follows:
1: The name of the Corporation is Florafax International, Inc. and the
original name under which the Corporation was formed is Spotts Florafax
Corporation.
2: The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State, State of Delaware, on October 29, 1970.
3: This Certificate of Amendment was duly adopted in accordance
Section 242 of the Delaware General Corporation Law.
4: Article I and Article IV of the Certificate of Incorporation are
amended to read in its entirety as follows:
ARTICLE I
The name of the Corporation is GERALD STEVENS, INC.
ARTICLE IV
The total number of shares which this Corporation is authorized to issue is
Two Hundred Fifty Million (250,000,000) shares of Common Stock, par value $0.01
per share, and Six hundred Thousand (600,000) shares of Preferred Stock, par
value $10.00 per share.
The Preferred Stock shall be issued in one or more series. The Board of
Directors is hereby expressly authorized to issue the shares of Preferred Stock
in such series and to fix from time to time before issuance the number of shares
to be included in any series and the designation, relative rights, preferences
and limitations of all shares of such series. The authority of the Board of
Directors with respect to each series shall include, without limitation thereto,
the determination of any or all of the following and the shares of each series
may vary from the shares of any other series in the following respects:
(a) The number of shares constituting such series and the designation
thereof to distinguish the shares of such series form the share of all
other series;
(b) The annual dividend rate on the shares of that series and whether
such dividends shall be cumulative and, if cumulative, the date from which
dividends shall accumulate;
(c) The redemption price or prices for the particular series, if
redeemable, and the terms and conditions of such redemption;
(d) The preference, if any, of shares of such series in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation;
(e) The voting rights, if any, in addition to the voting rights
prescribed by law and the terms of exercise of such voting rights;
(f) The right, if any, of shares of such series to be converted into
shares of any other series or class and the terms and conditions of such
conversion; and
(g) Any other relative rights, preferences and limitations of that
series.
C-1
<PAGE> 312
IN WITNESS WHEREOF, we have signed this Certificate of Amendment and caused
the corporate seal of the Corporation to be hereunto affixed this day of
, 1999.
--------------------------------------
Gerald R. Geddis
Chief Executive Officer
(SEAL)
ATTEST:
- -----------------------------------
Adam D. Phillips, Secretary
C-2
<PAGE> 313
ANNEX D-1
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
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)
<TABLE>
<S> <C>
DELAWARE 41-0719035
(State or other jurisdiction (I.R.S. Employer Identification
No.)
of incorporation or organization)
</TABLE>
<TABLE>
<S> <C>
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices) (Zip Code)
</TABLE>
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 ]
D-1-1
<PAGE> 314
FLORAFAX INTERNATIONAL, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Reference
PART I
Item 1 Description of Business..................................... 3
Item 2 Description of Property..................................... 5
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........... 6
Item 7 Financial Statements:
Report of Independent Certified Public Accountants.......... 13
Consolidated Balance Sheets................................. 14
Consolidated Statements of Income........................... 16
Consolidated Statements of Changes in Stockholders Equity... 17
Consolidated Statements of Cash Flows....................... 18
Notes to Consolidated Financial Statements.................. 19
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 29
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act......................................................... 29
Item 10 Executive Compensation...................................... 30
Item 11 Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 12 Certain Relationships and Related Transactions.............. 34
PART IV
Item 13 Exhibits and Reports on Form 8-K............................ 36
</TABLE>
D-1-2
<PAGE> 315
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.
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.
D-1-3
<PAGE> 316
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.
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.
D-1-4
<PAGE> 317
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.
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.
D-1-5
<PAGE> 318
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.
<TABLE>
<CAPTION>
BID PRICES
-----------
HIGH LOW
---- ---
<S> <C> <C>
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
</TABLE>
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.
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,
D-1-6
<PAGE> 319
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.
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.
D-1-7
<PAGE> 320
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% 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 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
D-1-8
<PAGE> 321
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.
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.
D-1-9
<PAGE> 322
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 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
D-1-10
<PAGE> 323
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 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>
D-1-11
<PAGE> 324
ITEM 7. 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.
/s/ ERNST & YOUNG LLP
Tampa, Florida
October 8, 1998
D-1-12
<PAGE> 325
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.
D-1-13
<PAGE> 326
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.
D-1-14
<PAGE> 327
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
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
</TABLE>
See accompanying notes.
D-1-15
<PAGE> 328
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 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.
D-1-16
<PAGE> 329
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)
======= =======
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.
D-1-17
<PAGE> 330
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.
(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.
D-1-18
<PAGE> 331
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(H) PROPERTY AND EQUIPMENT DEPRECIATION
The provisions for depreciation and amortization are computed using the
straight-line method for financial reporting purposes with the following
estimated useful lives:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED USEFUL LIVES
----------- ----------------------
<S> <C>
Fixtures and equipment.................................. 2 to 10 years
Computer systems........................................ 3 to 10 years
Communication systems................................... 2 to 5 years
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. 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.
(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.
D-1-19
<PAGE> 332
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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 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.
D-1-20
<PAGE> 333
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>
<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>
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
D-1-21
<PAGE> 334
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES -- (CONTINUED)
(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.
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 exceeds the exercise price. As of August 31,
1998, 76,000 of these shares had vested and were exercisable
D-1-22
<PAGE> 335
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
(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.
D-1-23
<PAGE> 336
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
------ ------
<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>
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 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
D-1-24
<PAGE> 337
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES -- (CONTINUED)
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.
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.
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,
D-1-25
<PAGE> 338
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BUSINESS SEGMENTS -- (CONTINUED)
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>
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
D-1-26
<PAGE> 339
FLORAFAX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BUSINESS COMBINATIONS -- (CONTINUED)
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>
D-1-27
<PAGE> 340
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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.
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.
D-1-28
<PAGE> 341
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.
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 $100,000 or more for the fiscal year ended August 31,
1998 ("Named Officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND ANNUAL OTHER ANNUAL
PRINCIPAL COMPENSATION COMPENSATION
POSITION FISCAL YEAR SALARY ($) BONUS ($) ($) (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 $50,000 or 10% of the total amount of annual salary and
bonus for such Named Officer.
D-1-29
<PAGE> 342
STOCK OPTIONS
The Management Incentive Plan ("Plan") was adopted by the Board of
Directors of the Company on October 26, 1995, and was approved by the
stockholders on January 30, 1996.
Under the Incentive Plan, employees are periodically granted market-based
awards, including nonqualified stock options, incentive stock options, stock
appreciation rights ("SARs"), restricted stock and performance share awards.
Such awards are granted to those individuals whose judgment, initiative, and
efforts are responsible for the success of the Company. Each individual award is
established by an award agreement with the participant which sets forth the
terms and conditions applicable to such award. The exercise price of an option
and any SARs, which are determined at the time of the grant, may not be less
than the fair market value of the shares subject thereto on the date of grant.
No options or SARS were granted to any Named Officer during fiscal year
1998.
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table lists all options and SARs exercised during fiscal 1998
by each Named Officer. The Company has not granted SARs to any of the Named
Officers.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FY-END (#) AT FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE 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.
D-1-30
<PAGE> 343
(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.
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>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF PERCENT OF BENEFICIAL
BENEFICIAL OWNER COMMON STOCK OWNERSHIP
------------------- -------------------- ------------
<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>
- ---------------
(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
D-1-31
<PAGE> 344
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>
<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
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
D-1-32
<PAGE> 345
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.
(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
D-1-33
<PAGE> 346
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 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.
D-1-34
<PAGE> 347
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(a) 1. Financial Statements
Included in Part II of this report:
Report of Independent Certified Public Accountants.......... 13
Consolidated Balance Sheets at August 31, 1998 and 1997..... 14
Consolidated Statements of Income for the years ended August
31, 1998 and 1997...................................... 16
Consolidated Statements of Changes in Stockholders' Equity
for the years ended August 31, 1998 and 1997........... 17
Consolidated Statements of Cash Flows for the years ended
August 31, 1998 and 1997............................... 18
Notes to Consolidated Financial Statements.................. 19
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)
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.
D-1-35
<PAGE> 348
(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.
(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.
D-1-36
<PAGE> 349
(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.
(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.
D-1-37
<PAGE> 350
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.
<TABLE>
<S> <C> <C>
/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
</TABLE>
D-1-38
<PAGE> 351
ANNEX D-2
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)
<TABLE>
<S> <C>
DELAWARE 41-0719035
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices) (Zip Code)
</TABLE>
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 ]
---
D-2-1
<PAGE> 352
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.
D-2-2
<PAGE> 353
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
D-2-3
<PAGE> 354
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.
D-2-4
<PAGE> 355
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
D-2-5
<PAGE> 356
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.
D-2-6
<PAGE> 357
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
D-2-7
<PAGE> 358
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
D-2-8
<PAGE> 359
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
D-2-9
<PAGE> 360
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:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------
1998 1997 1996 1995 1994
----------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(RESTATED
SEE NOTE 4)
<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)...................... $ (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>
D-2-10
<PAGE> 361
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
D-2-11
<PAGE> 362
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.
D-2-12
<PAGE> 363
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.
D-2-13
<PAGE> 364
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.
D-2-14
<PAGE> 365
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.
D-2-15
<PAGE> 366
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.
D-2-16
<PAGE> 367
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.
D-2-17
<PAGE> 368
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.
D-2-18
<PAGE> 369
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.
D-2-19
<PAGE> 370
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>
D-2-20
<PAGE> 371
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
D-2-21
<PAGE> 372
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.
D-2-22
<PAGE> 373
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.
D-2-23
<PAGE> 374
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
D-2-24
<PAGE> 375
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>
D-2-25
<PAGE> 376
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.
D-2-26
<PAGE> 377
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 its 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>
D-2-27
<PAGE> 378
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>
D-2-28
<PAGE> 379
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>
D-2-29
<PAGE> 380
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
D-2-30
<PAGE> 381
ANNEX D-3
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-5531
FLORAFAX INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 41-0719035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices)
561-563-0263
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,085,106 as of December 29,
1998.
Transitional Small Business Disclosure Format (Check
one): Yes [ ]; No [X]
D-3-1
<PAGE> 382
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets
November 30, 1998 and August 31, 1998....................... 1
Consolidated Statements of Income and Accumulated Deficit
Three Months Ended November 30, 1998 and November 30,
1997........................................................ 2
Consolidated Statements of Cash Flows
Three Months Ended November 30, 1998 and November 30,
1997........................................................ 3
Notes to Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis or Plan of Operation... 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 9
Item 2. Changes in Securities and use of Proceeds................... 9
Item 3. Defaults Upon Senior Securities............................. 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
Item 5. Other Information........................................... 9
Item 6. Exhibits and Reports on Form 8-K............................ 9
Signatures.................................................. 12
</TABLE>
D-3-2
<PAGE> 383
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30 AUGUST 31
1998 1998
----------- ---------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,164 $ 3,438
Restricted cash........................................... 109 106
Accounts receivable:
Trade, less allowances of $462 at November 30, 1998 and
$482 at August 31, 1998............................... 1,697 1,421
Charge card issuers.................................... 212 211
Other.................................................. 154 110
------- -------
2,063 1,742
Deferred tax asset, net of allowance........................ 1,057 1,265
Prepaid and other assets.................................... 398 151
------- -------
Total current assets.............................. 6,791 6,702
Property and equipment, at cost:
Fixtures and equipment.................................... 1,662 1,594
Computer systems.......................................... 992 977
Communication systems..................................... 1,171 1,121
Land, building and leasehold improvements................. 1,292 1,282
------- -------
5,117 4,974
Accumulated depreciation and amortization......... 3,078 2,992
------- -------
2,039 1,982
Excess of cost over net assets of acquired business......... 5,780 5,704
Deferred tax asset, net of allowance........................ 163 163
Other....................................................... 147 176
------- -------
6,090 6,043
------- -------
Total assets...................................... $14,920 $14,727
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 80 $ 80
Accounts payable.......................................... 4,535 3,986
Accrued expenses.......................................... 1,177 1,077
Member benefits........................................... 121 116
------- -------
Total current liabilities......................... 5,913 5,259
Long term debt, less current maturities..................... 1,000 2,018
Deferred tax liability...................................... 450 450
Deferred revenue............................................ 85 --
Membership security deposits................................ 47 52
------- -------
Total liabilities................................. 7,495 7,779
Stockholders' equity
Preferred stock ($10 par value, 600,000 shares authorized
at November 30, 1998 and August 31, 1998, none
issued)................................................ -- --
Common stock -- ($.01 par value, 70,000,000 shares
authorized, 8,523,577 and 8,449,198 shares issued at
November 30, 1998 and August 31, 1998, respectively.... 86 85
Additional paid-in capital.................................. 10,296 10,211
Treasury stock at cost...................................... (1,616) (1,616)
Accumulated deficit......................................... (1,341) (1,732)
------- -------
Total stockholders' equity........................ 7,425 6,948
------- -------
Total liabilities and stockholders' equity.................. $14,920 $14,727
======= =======
</TABLE>
See accompanying notes.
D-3-3
<PAGE> 384
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NOVEMBER 30
------------------
1998 1997
------- -------
<S> <C> <C>
NET REVENUES:
Member dues and fees...................................... $ 700 $ 629
Floral and other order processing......................... 1,882 1,814
Publication and advertising fees.......................... 679 360
Charge card processing.................................... 463 424
Other revenue............................................. 31 33
------- -------
3,755 3,260
EXPENSES:
General and administrative................................ 1,431 1,336
Selling and advertising................................... 1,261 1,271
Publications.............................................. 179 91
Depreciation and amortization............................. 161 69
------- -------
3,032 2,767
------- -------
OPERATING INCOME............................................ 723 493
OTHER INCOME (EXPENSE)
Interest expense.......................................... (26) (2)
Other..................................................... (85) 2
Interest income........................................... 17 36
------- -------
(94) 36
------- -------
INCOME BEFORE TAXES......................................... 629 529
Income tax expense........................................ 238 191
------- -------
NET INCOME.................................................. $ 391 $ 338
======= =======
Accumulated deficit at beginning of period.................. (1,732) (3,500)
------- -------
ACCUMULATED DEFICIT AT END OF PERIOD........................ $(1,341) $(3,162)
------- -------
Basic earnings per common share:............................ $ .05 $ .04
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 7,944 7,751
Fully diluted earnings per common share:.................... $ .04 $ .04
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 8,801 8,718
</TABLE>
See accompanying notes
D-3-4
<PAGE> 385
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30,
---------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 391 $ 338
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.......................... 160 54
Provision for doubtful accounts........................ 37 38
Deferred income taxes.................................. 208 153
Increase (decrease) in cash flows due to changes in:
Accounts receivable.................................. (358) (223)
Prepaid and other assets............................. (247) (215)
Other assets......................................... 1 15
Accounts payable..................................... 549 367
Deferred revenue..................................... 85
Accrued liabilities.................................. 105 290
Membership security deposits......................... (5) --
------ ------
Net cash provided by operating activities......... 926 817
INVESTING ACTIVITIES
Capital expenditures........................................ (143) (421)
Increase in goodwill........................................ (122) --
Purchase of common stock.................................... -- (100)
(Increase) decrease in restricted cash...................... (3) (17)
------ ------
Net cash (used in) investing activities........... $ (268) $ (538)
FINANCING ACTIVITIES
Purchases of treasury stock................................. -- (178)
Proceeds from issuing stock................................. 86 2
Payments of debt............................................ (1,018) --
------ ------
Net cash (used in) financing activities........... (932) (176)
------ ------
Net increase (decrease) in cash and cash
equivalents...................................... (274) 103
Cash and cash equivalents at beginning of period............ 3,438 4,170
------ ------
Cash and cash equivalents at end of period.................. $3,164 $4,273
====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. 18 --
Cash paid during the period for income tax................ 30 38
</TABLE>
See accompanying notes.
D-3-5
<PAGE> 386
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES
The accompanying interim financial statements should be read in conjunction
with the Florafax International, Inc. (the Company's) Form 10-KSB for the year
ended August 31, 1998.
In the opinion of Management the unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position as of November 30, 1998 and the consolidated results of operations and
cash flows for the three months ended November 30, 1998. For the quarter ended
November 30, 1997 certain income statement items have been reclassified to
conform to current period presentation.
Historically, the Company's flowers-by-wire operation is seasonal in that
its member florists send a much larger volume of orders during Thanksgiving, the
Christmas season, Valentine's Day, Easter and Mother's Day. Therefore, the
results of operations of an interim period may not necessarily be indicative of
the results expected for a full year. In an effort to increase orders to member
florists, the Company continues to engage in non traditional campaigns through
it's wholly owned subsidiary, The Flower Club. The Flower Club was formed 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 non-seasonal periods in
an effort to provide member florists with orders during slow periods of the
year.
NOTE (2) YEAR 2000 ISSUE
The Company believes that it has adequately addressed its year 2000 issues.
The Company has implemented the majority of the necessary internal system
changes and expects to be year 2000 compliant by February 28, 1999. Costs
associated with those changes were not material. For externally purchased
software the Company has performed various test transactions and concluded that
these applications are ready for use in the year 2000. In addition, major
vendors that the Company relies upon to operate the credit card segment of the
Company's business have notified the Company that they are year 2000 compliant.
Although the Company believes its efforts to be year 2000 compliant will be
successful, there can be no guarantee that these efforts will be adequate to
address all of the potential year 2000 issues. If these efforts are unsuccessful
it could have a material adverse effect on the Company's systems and results of
operations which could lead to an inability to process orders, bill florists,
process credit card transactions, and collect payments from florists. In
addition, if certain third party service providers, such as those supplying
electricity, water or telephone service, experience difficulties resulting in
disruption of service to the Company, a shutdown of the Company's facilities
could occur for the duration of the disruption.
NOTE (3) INCREASE IN GOODWILL
As a result of the Companies acquisition of Marketing Projects Inc. ("MPI")
during 1998 the Company is required to make additional contingent payments to
the seller of MPI, based upon the operating performance of the business
acquired. If made, these payments will be recorded as an increase to goodwill at
that time. For the quarter ended November 30, 1998, the Company recorded
$122,000 of goodwill related to these contingent payments.
NOTE (4) RECENT PRONOUNCEMENTS
For a discussion of recent accounting pronouncements please refer to the
Company's 10-KSB for the year ended August 31, 1998.
NOTE (5) SUBSEQUENT EVENTS
On December 9, 1998 the Company entered into a definitive merger with
privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of
flowers, floral-related merchandise and gifts. Under terms of the agreement,
Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the
Company for
D-3-6
<PAGE> 387
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each common share of Gerald Stevens share owned. The exchange rate will be
determined based on the average closing sales price of Florafax common stock for
the 45 consecutive trading days prior to the third trading day before the merger
is completed. Depending on the conversion ratio, Gerald Stevens' shareholders
will own approximately 75% of the Company's common stock after the merger. The
parties expect the transaction to be treated as a pooling-of-interests for
accounting purposes and anticipate that the merger will be completed by the end
of March 1999. Merger related expenses during the quarter ended November 30,
1998 amounted to $85,000. Upon consummation of the merger the Company will incur
additional significant merger related expenses, including accounting, legal and
investment banking fees. These expenses are expected to result in the Company
reporting a net loss for that quarter.
Certain options granted by the Company in 1997 created a variable stock
compensation plan. As a result the, Company is required to recognize non cash
compensation expense when the price of the Companies common stock reaches
certain prices for a specified number of trading days. The current rise in the
price of the companies common stock will cause the Company to record non-cash
compensation expense, in addition to ordinary salaries and wages, of
approximately $725,000 for the quarter ended February 28, 1999. In addition, if
the Companies stock sustains a price of $12.50 or greater for 20 consecutive
trading days during the quarter ended February 28, 1999, the Company will
recognize an additional $650,000 in non-cash compensation expense.
D-3-7
<PAGE> 388
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate adequate operational cash flows. Cash
provided by operating activities was $926,000 for the three months ended
November 30, 1998 compared to $817,000 for the three months ended November 30,
1997.
Operating cash flows historically have 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. Charge card
processing, however, generally allows the Company to collect funds from the
charge card issuer prior to settlement with the merchant. Since in both types of
transactions the Company is both collecting and settling funds, the timing of
these cash flows has a significant impact on the Company's liquidity.
As discussed in Note 1 to the consolidated financial statements the Company
continues to engage in non traditional campaigns through its wholly owned
subsidiary, The Flower Club. This generally has a positive impact on the
Company's cash flow as the majority of orders generated through The Flower Club
are paid for by credit cards. This allows the Company to receive a significant
portion of the proceeds from these orders within days after processing the
transaction.
On December 10, 1998 the Company announced that it will merge with
privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of
flowers, floral-related merchandise and gifts. Under terms of the agreement,
Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the
Company for each common share of Gerald Stevens share owned. The exchange rate
will be determined based on the average closing sales price of Florafax common
stock for the 45 consecutive trading days prior to the third trading day before
the merger is completed. Depending on the conversion ratio, Gerald Stevens'
shareholders will own approximately 75% of the Company's common stock after the
merger. The parties expect the transaction to be treated as a
pooling-of-interests for accounting purposes and anticipate that the merger will
be completed by the end of March 1999. Merger related expenses during the
quarter ended November 30, 1998 amounted to $85,000. Upon consummation of the
merger the Company will incur additional significant merger related expenses,
including accounting, legal and investment banking fees. These expenses are
expected to result in the Company reporting a net loss for the quarter.
Certain options granted by the Company in 1997 created a variable stock
compensation plan. As a result the, Company is required to recognize non cash
compensation expense when the price of the Companies common stock reaches
certain prices for a specified number of trading days. The current rise in the
price of the companies common stock will cause the Company to record non-cash
compensation expense, in addition to ordinary salaries and wages, of
approximately $725,000 for the quarter ended February 28, 1999. In addition, if
the Companies stock sustains a price of $12.50 or greater for 20 trading days
during the quarter ended February 28, 1999, the Company will recognize an
additional $650,000 in non-cash compensation expense.
RESULTS OF OPERATIONS
General Comments
Revenues are up in every major category for the quarter ended November 30,
1998 when compared to the same period in the previous year. Aggregate net
revenues were up 15% for the quarter ended November 30, 1998 when compared to
the same quarter in the prior year. Operating income increased by 47% for the
quarter when compared to the same period in the prior year.
Net Revenues
Revenue from member dues and fees has increased for the quarter ended
November 30, 1998 when compared to the same period in the prior year. This
increase is primarily attributable to an increase in member florists and a minor
increase in dues.
D-3-8
<PAGE> 389
Floral order revenue increased moderately for the quarter ended November
30, 1998 when compared to the same period last year. This is attributable
primarily to an increase in Flower Club revenues as well as an increase in shop
to shop revenues.
Net revenues from credit card operations increased for the quarter ended
November 30, 1998 when compared to the same period in the prior year. This is
primarily attributable to an increase in gross dollars processed by the
Company's merchants and a non recurring credit to income in the amount of
$25,000 during the quarter ended November 30, 1998.
Advertising and publication fees increased significantly for the quarter
ended November 30, 1998 when compared to the same period in the prior year. This
is due to the publication of new selection guides in the quarter ended November
30, 1998. Selection guides are recipe books and sales materials used by member
florists when producing the various flower arrangements that the Company
advertises throughout the country. New selection guides are published
approximately every three years.
Expenses
General and administrative expenses increased by 7% for the quarter ended
November 30, 1998 when compared to the same period in the prior year. There was
no primary expense item that caused the increase. Certain expenses related to
payroll, postage, insurance, legal fees and supplies all increased for the
quarter while other expenses such as travel, lodging and consulting fees
declined for the quarter. In addition, the quarter ended November 30, 1997
included a credit from the Company's long distance telephone provider in the
approximate amount of $45,000, with no similar credit in the quarter ended
November 30, 1998.
Selling and advertising expenses remained relatively constant for the
quarter ended November 30, 1998 when compared to the same period in the prior
year. However, there were several components that changed within the selling and
advertising expense category, as follows. For the quarter ended November 30,
1998 the Company eliminated commission expenses paid to an outside marketing
firm, as this marketing function is now performed internally by a newly formed
marketing department. These decreased commissions were offset somewhat by
expenses related to the new marketing department. The Company also experienced
an increase in amounts paid to Flower Club corporate partners as a result of
increased order volume and due to several new contracts that call for additional
commissions to these partners. The Company also experienced an increase in
salaries and commissions to sales persons, but experienced a decline in
advertising and tradeshow expenses.
Depreciation and amortization increased during the quarter ended November
30, 1998 when compared to the quarter ended November 30, 1997. During 1998 the
Company expanded its facilities as well as purchased new computer and telephone
equipment, thereby causing an increase in depreciation. In addition, the
acquisition of Marketing Projects, Inc. during 1998 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 for the
quarter ended November 30, 1998, and is expected to increase amortization
expense in future periods.
Other Income (Expense)
Other expense for the quarter ended November 30, 1998 consisted of legal
and accounting fees related to the merger between the Company and Gerald
Stevens, Inc.
Year 2000 Issue
The Company believes that it has adequately addressed its year 2000 issues.
The Company has implemented the majority of the necessary internal system
changes and expects to be year 2000 compliant by February 28, 1999. Costs
associated with those changes were not material. For externally purchased
software the Company has performed various test transactions and concluded that
these applications are ready for use in the year 2000. In addition, major
vendors that the Company relies upon to operate the credit card segment of the
Company's business have notified the Company that they are year 2000 compliant.
Although the
D-3-9
<PAGE> 390
Company believes its efforts to be year 2000 compliant will be successful, there
can be no guarantee that these efforts will be adequate to address all of the
potential year 2000 issues. If these efforts are unsuccessful it could have a
material adverse effect on the Company's systems and results of operations which
could lead to an inability to process orders, bill florists, process credit card
transactions, and collect payments from florists. In addition, if certain third
party service providers, such as those supplying electricity, water or telephone
service, experience difficulties resulting in disruption of service to the
Company, a shutdown of the Company's facilities could occur for the duration of
the disruption.
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 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 and gift industry as a whole.
D-3-10
<PAGE> 391
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a summary of legal proceedings, reference is made to Item 3, Legal
Proceedings, included in the Company's annual report on Form 10-KSB for the year
ended August 31, 1998.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. THE SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
Exhibit Reference
(27) Financial Data Schedule (for SEC use only).
The following items have been included as exhibits in filings by the
Company in a previous filing and, accordingly, are incorporated here by
reference.
Exhibit Reference
(3) Articles of incorporation and Bylaws of the Registrant, as amended.
(10) Material Contracts
<TABLE>
<CAPTION>
EXHIBIT
REFERENCE
- ---------
<C> <S>
(a) Convertible subordinated notes due to Clark Estates maturing
June 30, 1996.
(b) Subordinated debentures maturing in 1998.
(c) Agreement dated December 3 1993, Addendum, Second Addendum,
Third Addendum, Fourth Addendum and Fifth Addendum thereto
by and between the Registrant and Citizens Fidelity Bank and
Trust Company (now PNC Bank, Kentucky, Inc.).
(d) Purchase Agreement for certain assets formerly owned by
Savannah Floral Services, Inc. dated March 10, 1994.
(e) Note Payable to Andrew Williams dated March 10, 1994.
(f) Promissory Note to Citrus Bank dated November 9, 1993.
(g) Promissory Note to Citrus Bank dated November 17, 1993.
(h) Promissory Note to Citrus Bank dated January 25, 1994.
(i) Loan to James H. West, Director, President and Chief
Financial Officer, dated August 28, 1994.
(j) Consulting agreement with David Harper of Ventura County
California dated December 10, 1993.
(k) Promissory Note to Citrus Bank dated August 31, 1995.
</TABLE>
D-3-11
<PAGE> 392
<TABLE>
<CAPTION>
EXHIBIT
REFERENCE
- ---------
<C> <S>
(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.
(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.
(jj) Agreement and Plan of Merger dated December 9, 1998 by and
among Registrant, Red Cannon Acquisition Corp. and Gerald
Stevens, Inc.
</TABLE>
D-3-12
<PAGE> 393
<TABLE>
<CAPTION>
EXHIBIT
REFERENCE
- ---------
<C> <S>
(kk) Voting Agreement between affiliates of Registrant and Gerald
Stevens, Inc.
(ll) Voting Agreement between affiliates of Gerald Stevens, Inc.
and Registrant
</TABLE>
REPORTS ON FORM 8-K
On December 11, 1998 the company filed a form 8-K announcing that effective
December 9, 1998 the Company had entered into a merger agreement with Gerald
Stevens, Inc. Under the terms of the agreement the Company is expected to issue
additional shares of its common stock that will result in Gerald Stevens, Inc.
owning approximately 75% of the Company. The Company anticipates filing the
required financial statements pursuant to this merger no later than February 22,
1999.
D-3-13
<PAGE> 394
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FLORAFAX INTERNATIONAL, INC.
--------------------------------------
(Registrant)
<TABLE>
<S> <C>
Date: January 13, 1999 /s/ JAMES H. WEST
-----------------------------------------------------
James H. West
President and Chief Financial Officer
</TABLE>
D-3-14
<PAGE> 395
ANNEX D-4
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to
Commission File Number 0-5531
FLORAFAX INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 41-0719035
(State or other jurisdiction (I.R.S. Employer Identification
No.)
of incorporation or organization)
</TABLE>
<TABLE>
<S> <C>
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number (561) 563-0263
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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_
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,085,106 as of December 29, 1998.
Transitional Small Business Disclosure Format (Check one): Yes [__] No
[ X ]
D-4-1
<PAGE> 396
FLORAFAX INTERNATIONAL, INC.
EXPLANATORY NOTE TO FORM 10-QSB/A
This quarterly report on Form 10-QSB/A amends and supersedes, to the extent
set forth herein, the Registrant's Quarterly Report on Form 10-QSB for the
quarter ended November 30, 1998 previously filed on January 13, 1999. 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-QSB affected by this Amendment No. 1 on Form 10-QSB/A
are as follows:
Part I -- Item 1. Financial Statements
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 I -- Item 2. Management's Discussion and Analysis or Plan of
Operation
Page numbers for the amended Items set forth in this Form 10-QSB/A
correspond to the page numbering of the same Items in the original Form 10-QSB.
D-4-2
<PAGE> 397
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30 AUGUST 31
1998 1998
----------- ---------
(UNAUDITED) (RESTATED
(RESTATED SEE NOTE 6)
SEE NOTE 6)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,164 $ 3,438
Restricted cash........................................... 109 106
Accounts receivable:
Trade, less allowances of $462 at November 30, 1998 and $482
at August 31, 1998........................................ 1,697 1,421
Charge card issuers.................................... 212 211
Other.................................................. 168 110
------- -------
2077 1,742
Deferred tax asset, net of allowance........................ 103 301
Prepaid and other assets.................................... 398 165
------- -------
Total current assets................................... 5,851 5,752
Property and equipment, at cost:
Fixtures and equipment.................................... 1,662 1,594
Computer systems.......................................... 992 977
Communication systems..................................... 1,171 1,121
Land, building and leasehold improvements................. 1,292 1,282
------- -------
5,117 4,974
Accumulated depreciation and amortization................. 3,078 2,992
------- -------
2,039 1,982
Excess of cost over net assets of acquired business......... 1,995 1995
Deferred tax asset, net of allowance........................ 1,881 1,881
Marketing techniques........................................ 62 100
Other....................................................... 147 176
------- -------
4,085 4,152
------- -------
Total assets........................................... $11,975 $11,886
======= =======
</TABLE>
See accompanying notes.
D-4-3
<PAGE> 398
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30 AUGUST 31
1998 1998
----------- ---------
(UNAUDITED) (RESTATED
(RESTATED SEE NOTE 6)
SEE NOTE 6)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................ $ 80 $ 80
Accounts payable............................................ 4,535 3,986
Accrued expenses............................................ 1,177 1,077
Member benefits............................................. 121 116
------- -------
Total current liabilities.............................. 5,913 5,259
Long term debt, less current maturities..................... 1,000 2,018
Deferred revenue............................................ 85 --
Membership security deposits................................ 47 52
------- -------
Total liabilities...................................... 7,045 7,329
Stockholders' equity
Preferred stock ($10 par value, 600,000 shares Authorized at
November 30, 1998 and August 31, 1998, none issued)....... -- --
Common stock ($.01 par value, 70,000,000 shares authorized,
8,523,577 and 8,449,198 shares issued at November 30, 1998
and August 31, 1998, respectively......................... 86 85
Additional paid-in capital.................................. 10,296 10,211
Treasury stock at cost...................................... (1,616) (1,616)
Accumulated deficit......................................... (3,836) (4,123)
------- -------
Total stockholders' equity............................. 4,930 4,557
------- -------
Total liabilities and stockholders' equity............. $11,975 $11,886
======= =======
</TABLE>
See accompanying notes.
D-4-4
<PAGE> 399
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30
-------------------------
1998 1997
----------- --------
(RESTATED
SEE NOTE 6)
<S> <C> <C>
Net revenues:
Member dues and fees...................................... $ 700 $ 629
Floral and other order Processing......................... 1,882 1,814
Publication and advertising fees.......................... 679 360
Charge card processing.................................... 463 424
Other revenue............................................. 31 33
------- -------
3,755 3,260
Expenses:
General and administrative................................ 1,431 1,336
Selling and advertising................................... 1,383 1,271
Publications.............................................. 179 91
Depreciation and amortization............................. 153 69
------- -------
3,146 2,767
------- -------
Operating Income............................................ 609 493
Other income (expense):
Interest expense.......................................... (26) (2)
Other..................................................... (85) 2
Interest income........................................... 17 36
------- -------
(94) 36
------- -------
Income before taxes......................................... 515 529
Income tax expense.......................................... 228 191
------- -------
Net Income.................................................. $ 287 $ 338
======= =======
Net income.................................................. $ 287 $ 338
Accumulated deficit at beginning of period................ (4,123) (3,500)
------- -------
Accumulated deficit at end of period........................ $(3,836) $(3,162)
------- -------
Basic earnings per common share............................. $ .04 $ .04
======= =======
Weighted average shares outstanding......................... 7,944 7,751
======= =======
Fully diluted earnings per common share..................... $ .03 $ .04
======= =======
Weighted average shares outstanding......................... 8,801 8,718
======= =======
</TABLE>
See accompanying notes.
D-4-5
<PAGE> 400
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NOVEMBER 30
-----------------------
1998 1997
----------- ------
<S> <C> <C>
(RESTATED
SEE NOTE 6)
<CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 287 $ 338
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 153 54
Provision for doubtful accounts........................ 37 38
Deferred income taxes.................................. 198 153
Increase (decrease) in cash flows due to changes in:
Accounts receivable.................................. (372) (223)
Prepaid and other assets............................. (233) (215)
Other assets......................................... 15
Accounts payable..................................... 549 367
Deferred revenue..................................... 85
Accrued liabilities.................................. 105 290
Membership security deposits......................... (5) --
------- ------
Net cash provided by operating activities................. 804 817
------- ------
Investing activities
Capital expenditures...................................... (143) (421)
Purchase of common stock.................................. (100)
(Increase) decrease in restricted cash.................... (3) (17)
------- ------
Net cash (used in) investing activities................... $ (146) $ (538)
======= ======
</TABLE>
<TABLE>
FINANCING ACTIVITIES
<S> <C> <C>
Purchases of treasury stock............................... $ $ (178)
Proceeds from issuing stock............................... 86 2
Payments of debt.......................................... (1,018) --
------- ------
Net cash (used in) financing activities................... $ (932) (176)
------- ------
Net increase (decrease) in cash and cash equivalents...... $ (274) 103
Cash and cash equivalents at beginning of period.......... 3,438 4,170
------- ------
Cash and cash equivalents at end of period................ $ 3,164 $4,273
======= ======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest............... $ 18 $ --
Cash paid during the period for income tax............. 30 38
</TABLE>
See accompanying notes.
D-4-6
<PAGE> 401
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES
The accompanying interim financial statements should be read in conjunction
with the Florafax International, Inc. (the Company's) Form 10-KSB/A, filed on
April 9, 1999 (See Note 6), for the year ended August 31, 1998.
In the opinion of Management the unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position as of November 30, 1998 and the consolidated results of operations and
cash flows for the three months ended November 30, 1998. For the quarter ended
November 30, 1997 certain income statement items have been reclassified to
conform to current period presentation.
Historically, the Company's flowers-by-wire operation is seasonal in that
its member florists send a much larger volume of orders during Thanksgiving, the
Christmas season, Valentine's Day, Easter and Mother's Day. Therefore, the
results of operations of an interim period may not necessarily be indicative of
the results expected for a full year. In an effort to increase orders to member
florists, the Company continues to engage in non traditional campaigns through
it's wholly owned subsidiary, The Flower Club. The Flower Club was formed 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 non-seasonal periods in
an effort to provide member florists with orders during slow periods of the
year.
NOTE (2) YEAR 2000 ISSUE
The Company operates three primary information technology computer systems,
which are a main frame, a network based order entry system, and a telephone
system. A year 2000 discussion of each of these systems is as follows.
The Company operates a main frame computer system that processes floral
orders, credit card transactions, and performs the Company's monthly billings to
its member florists. The year 2000 software upgrade has been installed, tested,
and is currently in use. The manufacturer of the software has provided the
Company with the year 2000 upgrade at no charge. In addition, all internally
developed software applications have been modified to be year 2000 compliant. At
this time, these modifications are being tested and are expected to be
operational by March 31, 1999. The cost to update these applications was less
than $50,000.
The Company operates a network based order entry system. The manufacturers
operating system software is year 2000 compliant. However, not all internally
developed software applications have been modified to be year 2000 compliant.
The Company is in the process of modifying its internally developed software
applications and expects to complete the modifications no later than June 30,
1999. These internal programs are being modified by current employees and, as a
result, the cost of these modifications is not expected to be material.
The Company operates a telephone system which is integrated with the order
entry system discussed in the preceding paragraph. The Company recently learned
that a primary component of this system will need to be upgraded or replaced to
be year 2000 compliant. The company is in the process of evaluating whether to
upgrade or replace this component. Regardless of which option is selected by the
Company, this component is expected to be operational no later than, July 31,
1999, at a cost not to exceed $200,000.
Currently the company does not operate any significant non-information
technology systems.
Management believes the most reasonably likely worst case year 2000
scenario would occur if the order entry system failed, which would prevent
automated processing of floral orders. At this time, there is no indication that
this will happen. However, should this occur, the Company would be forced to
process incoming floral orders manually, until such time that the failure could
be corrected. This could cause labor costs to double or triple during the time
period while the system failure was being corrected.
D-4-7
<PAGE> 402
The Company relies on two main vendors to operate the credit card portion
of its business. Both of these vendors have represented that they are year 2000
compliant. One vendor has provided the Company written certification of their
year 2000 readiness. The other vendor has provided the Company with limited
written certification regarding a particular type of credit card terminal used
by merchants who process transactions with the Company.
Other significant vendors include certain third party service providers,
such as those supplying electricity, water or telephone service. If these
vendors experience year 2000 difficulties this could result in disruption of
service to the Company, and a shutdown of the Company's facilities could occur
for the duration of the disruption. None of these vendors have certified that
their systems are year 2000 compliant.
NOTE (3) CONTRACT MODIFICATION
As a result of the Companies contract modification with Marketing Projects
Inc. ("MPI") during 1998 the Company is required to make additional contingent
payments to MPI, contingent upon the attainment of quarterly revenue targets. If
made, these payments will be recorded as commission expense in the period in
which they were earned. For the quarter ended November 30, 1998, the Company
recorded $122,000 of commission expense related to these contingent payments.
NOTE (4) RECENT PRONOUNCEMENTS
For a discussion of recent accounting pronouncements please refer to the
Company's 10-KSB for the year ended August 31, 1998.
NOTE (5) SUBSEQUENT EVENTS
On December 9, 1998 the Company entered into a definitive merger with
privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of
flowers, floral-related merchandise and gifts. Under terms of the agreement,
Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the
Company for each common share of Gerald Stevens share owned. The exchange rate
will be determined based on the average closing sales price of Florafax common
stock for the 45 consecutive trading days prior to the third trading day before
the merger is completed. Depending on the conversion ratio, Gerald Stevens'
shareholders will own approximately 75% of the Company's common stock after the
merger. The parties expect the transaction to be treated as a
pooling-of-interests for accounting purposes and anticipate that the merger will
be completed by the end of March 1999. Merger related expenses during the
quarter ended November 30, 1998 amounted to $85,000. Upon consummation of the
merger the Company will incur additional significant merger related expenses,
including accounting, legal and investment banking fees. These expenses are
expected to result in the Company reporting a net loss for that quarter.
Certain options granted by the Company in 1997 created a variable stock
compensation plan. As a result, the Company is required to recognize non-cash
compensation expense when the price of the Company's common stock reaches
certain prices for a specified number of trading days. The current rise in the
price of the Company's common stock will cause the Company to record non-cash
compensation expense, in addition to ordinary salaries and wages, of
approximately $1,373,000 for the quarter ended February 28, 1999.
NOTE (6) RESTATEMENT
Effective May 1, 1998 the Company entered into a contract modification
agreement with Marketing Projects Inc. 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 its financial statements to account for the transaction as a contract
modification.
D-4-8
<PAGE> 403
The following tables reflect the more significant effects of the
restatements on certain components of operations:
<TABLE>
<S> <C>
EFFECTS ON OPERATIONS
Operating income, as previously reported.................... $ 723
Adjustment related to:
Adjustment to amortization expense........................ 8
Contingent commission expense............................. (122)
------
Restated operating income................................... 609
======
Net income, as previously reported.......................... $ 391
Adjustment related to:
Adjustment to amortization expense........................ 8
Contingent commission expense............................. (122)
Income tax effects of adjustments......................... 10
------
Restated net income......................................... 287
======
Basic income, per share, as previously reported............. $ 0.05
Adjustment related to:
Adjustment to amortization expense........................ --
Contingent commission expense............................. (0.01)
Income tax effects of adjustments......................... --
------
Restated basic income (loss) per share...................... 0.04
======
Diluted income, per share, as previously reported........... $ 0.04
Adjustment related to:
Adjustment to amortization expense........................ --
Contingent commission expense............................. (0.01)
Income tax effects of adjustments......................... --
------
Restated diluted income (loss) per share.................... 0.03
======
</TABLE>
D-4-9
<PAGE> 404
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate adequate operational cash flows. Cash
provided by operating activities was $804,000 for the three months ended
November 30, 1998 compared to $817,000 for the three months ended November 30,
1997.
Operating cash flows historically have 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. Charge card
processing, however, generally allows the Company to collect funds from the
charge card issuer prior to settlement with the merchant. Since in both types of
transactions the Company is both collecting and settling funds, the timing of
these cash flows has a significant impact on the Company's liquidity.
As discussed in Note 1 to the consolidated financial statements the Company
continues to engage in non traditional campaigns through it's wholly owned
subsidiary, The Flower Club. This generally has a positive impact on the
Company's cash flow as the majority of orders generated through The Flower Club
are paid for by credit cards. This allows the Company to receive a significant
portion of the proceeds from these orders within days after processing the
transaction.
On December 10, 1998 the Company announced that it will merge with
privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of
flowers, floral-related merchandise and gifts. Under terms of the agreement,
Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the
Company for each common share of Gerald Stevens share owned. The exchange rate
will be determined based on the average closing sales price of Florafax common
stock for the 45 consecutive trading days prior to the third trading day before
the merger is completed. Depending on the conversion ratio, Gerald Stevens'
shareholders will own approximately 75% of the Company's common stock after the
merger. The parties expect the transaction to be treated as a
pooling-of-interests for accounting purposes and anticipate that the merger will
be completed by the end of March 1999. Merger related expenses during the
quarter ended November 30, 1998 amounted to $85,000. Upon consummation of the
merger the Company will incur additional significant merger related expenses,
including accounting, legal and investment banking fees. These expenses are
expected to result in the Company reporting a net loss for that quarter.
Certain options granted by the Company in 1997 created a variable stock
compensation plan. As a result, the Company is required to recognize non cash
compensation expense when the price of the Company's common stock reaches
certain prices for a specified number of trading days. The current rise in the
price of the Company's common stock will cause the Company to record non-cash
compensation expense, in addition to ordinary salaries and wages, of
approximately $1,373,000 for the quarter ended February 28, 1999.
RESULTS OF OPERATIONS
GENERAL COMMENTS
Revenues are up in every major category for the quarter ended November 30,
1998 when compared to the same period in the previous year. Aggregate net
revenues were up 15% for the quarter ended November 30, 1998 when compared to
the same quarter in the prior year. Operating income increased by 24% for the
quarter when compared to the same period in the prior year.
NET REVENUES
Revenue from member dues and fees has increased for the quarter ended
November 30, 1998 when compared to the same period in the prior year. This
increase is primarily attributable to an increase in member florists and a minor
increase in dues.
Floral order revenue increased moderately for the quarter ended November
30, 1998 when compared to the same period last year. This is attributable
primarily to an increase in Flower Club revenues as well as an increase in shop
to shop revenues.
D-4-10
<PAGE> 405
Net revenues from credit card operations increased for the quarter ended
November 30, 1998 when compared to the same period in the prior year. This is
primarily attributable to an increase in gross dollars processed by the
Company's merchants and a non recurring credit to income in the amount of
$25,000 during the quarter ended November 30, 1998.
Advertising and publication fees increased significantly for the quarter
ended November 30, 1998 when compared to the same period in the prior year. This
is due to the publication of new selection guides in the quarter ended November
30, 1998. Selection guides are recipe books and sales materials used by member
florists when producing the various flower arrangements that the Company
advertises throughout the country. New selection guides are published
approximately every three years.
EXPENSES
General and administrative expenses increased by 7% for the quarter ended
November 30, 1998 when compared to the same period in the prior year. There was
no primary expense item that caused the increase. Certain expenses related to
payroll, postage, insurance, legal fees and supplies all increased for the
quarter while other expenses such as travel, lodging and consulting fees
declined for the quarter. In addition, the quarter ended November 30, 1997
included a credit from the Company's long distance telephone provider in the
approximate amount of $45,000, with no similar credit in the quarter ended
November 30, 1998.
Selling and advertising expenses increased by nine percent for the quarter
ended November 30, 1998 when compared to the same period in the prior year.
There were several components that changed within the selling and advertising
expense category, as follows. For the quarter ended November 30, 1998 the
Company eliminated commission expenses paid to MPI, as this marketing function
is now performed internally by a newly formed marketing department. These
decreased commissions were offset somewhat by expenses related to the new
marketing department, as well as contingent commissions related to the MPI
contract modification (see Note 6). The Company also experienced an increase in
amounts paid to Flower Club corporate partners as a result of increased order
volume and due to several new contracts that call for additional commissions to
these partners. The Company also experienced an increase in salaries and
commissions to sales persons, but experienced a decline in advertising and
tradeshow expenses.
Depreciation and amortization increased during the quarter ended November
30, 1998 when compared to the quarter ended November 30, 1997. During 1998 the
Company expanded its facilities as well as purchased new computer and telephone
equipment, thereby causing an increase in depreciation. In addition, the
contract modification agreement with Marketing Projects, Inc. during 1998 caused
the Company to record certain intangible assets. The amortization of these
intangible assets increased amortization expense for the quarter ended November
30, 1998.
OTHER INCOME (EXPENSE)
Other expense for the quarter ended November 30, 1998 consisted of legal
and accounting fees related to the merger between the Company and Gerald
Stevens, Inc.
YEAR 2000 ISSUE
The Company operates three primary information technology computer systems,
which are a main frame, a network based order entry system, and a telephone
system. A year 2000 discussion of each of these systems is as follows.
The Company operates a main frame computer system that processes floral
orders, credit card transactions, and performs the Company's monthly billings to
its member florists. The year 2000 software upgrade has been installed, tested,
and is currently in use. The manufacturer of the software has provided the
Company with the year 2000 upgrade at no charge. In addition, all internally
developed software applications have been modified to be year 2000 compliant. At
this time, these modifications are being tested and are expected to be
operational by March 31, 1999. The cost to update these applications was less
than $50,000.
D-4-11
<PAGE> 406
The Company operates a network based order entry system. The manufacturers
operating system software is year 2000 compliant. However, not all internally
developed software applications have been modified to be year 2000 compliant.
The Company is in the process of modifying its internally developed software
applications and expects to complete the modifications no later than June 30,
1999. These internal programs are being modified by current employees and, as a
result, the cost of these modifications is not expected to be material.
The Company operates a telephone system which is integrated with the order
entry system discussed in the preceding paragraph. The Company recently learned
that a primary component of this system will need to be upgraded or replaced to
be year 2000 compliant. The company is in the process of evaluating whether to
upgrade or replace this component. Regardless of which option is selected by the
Company, this component is expected to be operational no later than, July 31,
1999, at a cost not to exceed $200,000.
Currently the company does not operate any significant non-information
technology systems.
Management believes the most reasonably likely worst case year 2000
scenario would occur if the order entry system failed, which would prevent
automated processing of floral orders. At this time, there is no indication that
this will happen. However, should this occur, the Company would be forced to
process incoming floral orders manually, until such time that the failure could
be corrected. This could cause labor costs to double or triple during the time
period while the system failure was being corrected.
The Company relies on two main vendors to operate the credit card portion
of its business. Both of these vendors have represented that they are year 2000
compliant. One vendor has provided the Company written certification of their
year 2000 readiness. The other vendor has provided the Company limited written
certification regarding a particular type of credit card terminal used by
merchants who process transactions with the Company.
Other significant vendors include certain third party service providers,
such as those supplying electricity, water or telephone service. If these
vendors experience year 2000 difficulties this could result in disruption of
service to the Company, and a shutdown of the Company's facilities could occur
for the duration of the disruption. None of these vendors have certified that
their systems 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 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 and gift industry as a whole.
D-4-12
<PAGE> 407
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FLORAFAX INTERNATIONAL, INC.
--------------------------------------
(Registrant)
<TABLE>
<S> <C>
Date: April 8, 1999 /s/ JAMES H. WEST
-----------------------------------------------------
James H. West
President and Chief
Financial Officer
</TABLE>
D-4-13
<PAGE> 408
ANNEX D-5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
------------------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) August 11, 1998 (May 29, 1998)
------------------------
FLORAFAX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-5531 41-0719035
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of Incorporation) Identification No.)
</TABLE>
<TABLE>
<S> <C>
8075 20TH STREET, VERO BEACH, FLORIDA 32966
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code 561/563-0263
------------------------
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
D-5-1
<PAGE> 409
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
The Current Report on Form 8-K, dated June 8, 1998, (the "Original Current
Report") of Florafax International, Inc., a Delaware corporation (the "Company")
is hereby amended to report the information required by Item 7 that was not
available for the filing of the Original Current Report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
(1) Marketing Projects, Inc. (MPI) balance sheet as of December 31,
1997, and income statement and statement of cash flows and changes
in stockholders' equity for the year ended December 31, 1997 and
Independent Auditors Report.
(2) MPI balance sheet as of March 31, 1998, and income statement and
cash flows statement and changes in stockholders equity for the
three month periods ended March 31, 1998 and 1997 (unaudited)
(b) Unaudited Pro Forma Financial Information
(1) Florafax International, Inc. (Florafax) Pro Forma combined
statement of operations for the year ended August 31, 1997.
(2) Florafax International, Inc. combined statement of operations for
the nine months ended May 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FLORAFAX INTERNATIONAL, INC.
(Registrant)
/s/ JAMES H. WEST
--------------------------------------
James H. West
Chief Financial Officer
Date August 11, 1998
D-5-2
<PAGE> 410
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholder and Board of Directors
Marketing Projects, Inc.
We have audited the accompanying balance sheet of Marketing Projects, Inc.
as of December 31, 1997 and the related statements of operations, stockholder's
equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marketing Projects, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
June 26, 1998
D-5-3
<PAGE> 411
MARKETING PROJECTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $203,057 $ 25,215
Accounts receivable....................................... 1,859 3,532
Prepaid expenses and other current assets................. -- 130,430
-------- --------
Total current assets........................................ 204,916 159,177
Property and equipment, at cost
Fixtures and equipment.................................... 8,107 8,107
Computer equipment........................................ 15,701 15,701
Vehicle................................................... 35,596 35,596
-------- --------
59,404 59,404
Accumulated depreciation.................................... (27,124) (28,156)
-------- --------
32,280 31,248
Other assets................................................ 933 758
-------- --------
Total assets................................................ $238,129 $191,183
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and accrued liabilities.................... $ 6,440 $ 6,733
Stockholder's equity:
Common stock, $1 par value -- authorized 100,000 shares;
issued and outstanding 2,500 shares.................... 2,500 2,500
Retained earnings......................................... 229,189 181,950
-------- --------
Total stockholder's equity.................................. 231,689 184,450
-------- --------
Total liabilities and stockholder's equity.................. $238,129 $191,183
======== ========
</TABLE>
See accompanying notes.
D-5-4
<PAGE> 412
MARKETING PROJECTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 --------------------
1997 1997 1998
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Commission revenues..................................... $1,501,412 $341,049 $336,664
Expenses:
General and administrative............................ 109,435 29,600 37,581
Selling, advertising and promotion.................... 1,113,779 227,430 345,223
Depreciation and amortization......................... 15,461 3,141 1,207
---------- -------- --------
Operating income (loss)................................. 262,737 80,878 (47,347)
Gains on sale of marketable securities and other
income................................................ 125,280 -- 108
Income (loss) before provision for income taxes......... 388,017 80,878 (47,239)
Provision for income taxes............................ 5,640 1,370 --
---------- -------- --------
Net income (loss)....................................... $ 382,377 $ 79,508 $(47,239)
========== ======== ========
</TABLE>
See accompanying notes.
D-5-5
<PAGE> 413
MARKETING PROJECTS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
NUMBER OF RETAINED
SHARES ISSUED PAR VALUE EARNINGS TOTAL
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1997........................ 2,500 $2,500 $ 214,812 $ 217,312
Net income...................................... -- -- 382,377 382,377
Distributions................................... -- -- (368,000) (368,000)
----- ------ --------- ---------
Balance at December 31, 1997...................... 2,500 $2,500 $ 229,189 $ 231,689
Net loss for three-months ended March 31, 1998
(unaudited).................................. -- -- (47,239) (47,239)
----- ------ --------- ---------
Balance at March 31, 1998 (unaudited)............. 2,500 $2,500 $ 181,950 $ 184,450
===== ====== ========= =========
</TABLE>
See accompanying notes.
D-5-6
<PAGE> 414
MARKETING PROJECTS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31
DECEMBER 31 -------------------
1997 1997 1998
----------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................................... $382,377 $79,468 $(47,239)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 15,461 3,141 1,207
Gain on sale of marketable securities................ (124,995) -- --
Changes in operating assets and liabilities:
Accounts receivable............................... 18,053 13,077 (1,673)
Prepaid expenses and other current assets......... -- -- (130,430)
Accounts payable and other accrued liabilities.... (8,899) (5,272) 293
-------- ------- --------
Net cash provided by (used in) operating activities.... 281,997 97,249 (177,842)
INVESTING ACTIVITIES
Capital expenditures................................... (17,388) (1,256) --
Proceeds from sale of marketable securities............ 247,495 -- --
-------- ------- --------
Net cash provided by (used in) investing activities.... 230,107 (1,256) --
FINANCING ACTIVITIES
Distributions.......................................... (368,000) (75,000) --
-------- ------- --------
Net increase (decrease) in cash........................ 144,104 20,993 (177,842)
Cash at beginning of the period........................ 58,953 58,953 203,057
-------- ------- --------
Cash at end of the period.............................. $203,057 $79,946 $ 25,215
======== ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for income taxes........... $ 3,800 $ 950 $ 5,640
======== ======= ========
</TABLE>
See accompanying notes.
D-5-7
<PAGE> 415
MARKETING PROJECTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Marketing Projects, Inc. (the Company), a California Corporation, is
engaged in the business of marketing, through large United States corporations,
floral arrangements and floral related gift products to principally individual
consumers throughout the United States. Such floral arrangements and gift
products are provided directly to consumers by Florafax International Inc.
(Florafax) pursuant to a servicing agreement that provides for a commission to
the Company.
The Company's business is highly cyclical, with large portions of
commission revenue realized near major United States holidays.
The Company maintains their underlying books and records on the federal
income tax basis. These financial statements include adjustments necessary for a
presentation in accordance with generally accepted accounting principles.
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial information as of March 31, 1998 and
for the three months ended March 31, 1998 and 1997 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the applicable sections of Regulation S-B. Accordingly, all
information and footnotes that are otherwise required under generally accepted
accounting principles and Regulation S-B are not required as it relates to the
interim financial information. However, in the opinion of management of the
Company, all adjustments (consisting of normal recurring accruals) necessary to
present fairly the unaudited interim financial information have been included.
Results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the full fiscal year.
REVENUE RECOGNITION
Commission revenues relate principally to commissions under the servicing
agreement with Florafax. Commission revenue is recognized as a percentage of the
sales revenue to the benefit of Florafax, for its sale of floral arrangements
and related gift products, at the time of delivery of the product to the
consumer.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Estimated useful lives are three years for fixtures and equipment, computers and
the vehicle.
INCOME TAXES
The Company has elected to be treated as an S corporation under the
Internal Revenue Code. In lieu of corporate income taxes, the stockholders of an
S Corporation are taxed on their proportionate share of the taxable income of
the Company. The Company is still liable for income taxes in the state of
California. However, for the three-month period ended March 31, 1998, this
liability is deemed
D-5-8
<PAGE> 416
MARKETING PROJECTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
immaterial. Therefore, no provision or liability for federal or state income
taxes has been included in these financial statements for the three-month period
ended March 31, 1998.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense amounted to
$23,230 in 1997.
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.
2. LEASES
Non-cancelable obligations under an operating lease for office space are as
follows for each year ending December 31:
<TABLE>
<CAPTION>
MINIMUM
LEASE
PAYMENTS
--------
<S> <C>
1998........................................................ $23,137
1999........................................................ 23,137
2000........................................................ 3,856
Thereafter.................................................. --
-------
Total....................................................... $50,130
=======
</TABLE>
Total rent expense under the operating lease for 1997 amounted to $19,211.
3. RETIREMENT PLAN
The Company sponsors a profit sharing plan covering all employees.
Contributions under the plan are discretionary and, accordingly, the Company may
contribute up to 13% of the employees annual salary. During 1997, the Company
contributed and expensed $100,627 under the plan. All costs have been expensed
as incurred by the Company.
4. YEAR 2000 ISSUE (UNAUDITED)
The Company modified its information technology to be ready for the year
2000 and converted critical data processing systems. The Company completed the
project in 1997 and has only incurred the costs to upgrade and replace systems
in the normal course of business. All costs have been expensed as incurred by
the Company.
5. SUBSEQUENT EVENT
On May 29, 1998, Florafax acquired substantially all the assets and assumed
substantially all of the liabilities of the Company, pursuant to an Asset
Purchase and Sale Agreement, dated May 29, 1998, by and between the Company and
Florafax. The sale consideration exceeded the net book values of the Company's
assets and liabilities on the date of the sale.
D-5-9
<PAGE> 417
FLORAFAX INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SUMMARY
The accompanying unaudited pro forma consolidated statements of operations
of Florafax International, Inc. (Florafax) for the fiscal year ended August 31,
1997 and the nine-months ended May 31, 1998 includes the historical and pro
forma effects of the acquisition of Marketing Projects, Inc. (MPI), which was
consummated on May 29, 1998, effective on May 1, 1998. In connection with the
acquisition, the Company incurred $2.5 million in bank debt. The accompanying
unaudited pro forma consolidated statements of operations includes the effects
on such financials statements of that debt.
The pro forma effects are based on the historical statement of operations
of the acquired business giving effect to the transaction under the purchase
method of accounting. As such, the total cost of the acquisition has or will be
allocated to the net tangible and intangible assets acquired and liabilities
assumed based upon their respective fair values at the effective date of the
acquisition. Accordingly, the allocations reflected in the pro forma statement
of operations are preliminary and subject to revision.
The unaudited pro forma consolidated statement of operations are not
intended to purport to be indicative of the actual results of operations that
would have been achieved had the acquisition in fact been consummated at the
beginning of the periods presented. Such pro forma financial information should
be read in conjunction with the Consolidated Financial Statements and Notes of
Florafax.
D-5-10
<PAGE> 418
FLORAFAX INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED AUGUST 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(B) (C)
FLORAFAX MPI
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
AUGUST 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS TOTALS
--------------- ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Net Revenues:................... $11,609 $1,501 $ (1,501)(d) $11,609
Expenses:
General and administrative.... 5,668 109 -- 5,777
Selling and advertising....... 3,379 1,114 (1,501)(d) 2,992
Depreciation and
amortization............... 261 15 90(e) 416
50(f)
Directory publishing.......... 383 -- -- 383
------- ------ ---------- -------
Operating income................ 1,918 263 (140) 2,041
Other income.................... 996 125 (133)(g) 988
------- ------ ---------- -------
Income before provision for
income taxes.................. 2,914 388 (273) 3,029
Benefit (provision) for income
taxes......................... 519 (6) (37)(h) 476
------- ------ ---------- -------
Net income...................... $ 3,433 $ 382 $ (310) $ 3,505
======= ====== ========== =======
Net income per share:
Primary....................... $ 0.40 $ 0.41
======= =======
Fully diluted................. $ 0.39 $ 0.40
======= =======
</TABLE>
See accompanying notes.
D-5-11
<PAGE> 419
FLORAFAX INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1997
a) The unaudited proforma consolidated statement of operations for the fiscal
year ended August 31, 1997 does not give effect to any potential cost
savings and synergies that could result from the MPI acquisition.
b) This column represents the historical consolidated statement of operations
of Florafax for the fiscal year ended August 31, 1997.
c) This column represents the historical statement of operations of MPI for the
year ended December 31, 1997.
d) This adjustment represents the elimination of commission revenue
paid/accrued to MPI, by Florafax.
e) This adjustment represents the amortization expense on the goodwill that
would have been recorded in connection with the MPI acquisition. For
purposes of the pro forma presentation, it is assumed that the excess of
the purchase price over the net tangible assets acquired will be allocated
to goodwill and amortized over 40 years.
f) This adjustment represents the amortization expense of the non-compete
agreement related to the purchase of MPI. The non-compete agreement is to
be amortized over its term of two years.
g) This adjustment represents management's best estimate of the effect on
interest expense of the incurred debt and the reduction of interest income
associated with the cash used to fund the purchase of MPI.
h) This adjustment represents the additional income tax expense the Company
would have provided if MPI was acquired at the beginning of the fiscal
year.
D-5-12
<PAGE> 420
FLORAFAX INTERNATIONAL, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE-MONTHS ENDED MAY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(B) (C)
FLORAFAX MPI
NINE-MONTHS ENDED EIGHT-MONTHS ENDED PRO FORMA PRO FORMA
MAY 31, 1998 APRIL 30, 1998 ADJUSTMENTS TOTALS
----------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Net Revenues:................... $10,712 $993 $ (993) $10,712
Expenses:
General and administrative.... 5,064 99 -- 5,163
Selling and advertising....... 3,297 908 (993)(d) 3,212
Depreciation and
amortization............... 247 10 60(e) 350
33(f)
Directory publishing.......... 301 -- -- 301
------- ---- -------- -------
Operating income (loss)......... 1,803 (24) (93) 1,686
Other income.................... 136 125 (122)(g) 139
------- ---- -------- -------
Income before provision for
income taxes.................. 1,939 101 (215) 1,825
Provision for income taxes...... (721) (2) 45(h) (678)
------- ---- -------- -------
Net income...................... $ 1,218 $ 99 $ (170) $ 1,147
======= ==== ======== =======
Net income per share:
Primary....................... $ 0.14 $ 0.13
======= =======
Fully diluted................. $ 0.14 $ 0.13
======= =======
</TABLE>
See accompanying notes.
D-5-13
<PAGE> 421
FLORAFAX INTERNATIONAL, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE-MONTHS ENDED MAY 31, 1998
a) The unaudited pro forma consolidated statement of operations for the
nine-months ended May 31, 1998 does not give effect to any potential cost
savings and synergies that could result from the MPI acquisition.
b) This column represents the historical consolidated statement of operations
of Florafax for the nine-months ended May 31, 1998.
c) This column represents the historical statement of operations of MPI for the
eight-months ended April 30, 1998.
d) This adjustment represents the elimination of commission revenue
paid/accrued to MPI, by Florafax.
e) This adjustment represents the amortization expense on the goodwill that
would have been recorded in connection with the MPI acquisition. For
purposes of the pro forma presentation, it is assumed that the excess of
the purchase price over the net tangible assets acquired will be allocated
to goodwill and amortized over 40 years.
f) This adjustment represents the amortization expense of the non-compete
agreement related to the purchase of MPI. The non-compete agreement is to
be amortized over its term of two years.
g) This adjustment represents management's best estimate of the effect on
interest expense of the incurred debt and the reduction of interest income
associated with the cash used to fund the purchase of MPI.
h) This adjustment represents the reduction in the income tax expense the
Company would have provided if MPI was acquired at the beginning of the
fiscal period.
D-5-14
<PAGE> 422
ANNEX D-6
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 9, 1998
FLORAFAX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-5531 41-0719035
(State or other jurisdiction (Commission File (I.R.S. Employer
of Incorporation) Number) Identification No.)
</TABLE>
<TABLE>
<S> <C>
8075 20TH STREET, VERO BEACH, FLORIDA 32966
Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code 561/563-0263
---------------------------------------------------------------------------
(Former name or former address, if changed since last report)
D-6-1
<PAGE> 423
ITEM 5. OTHER EVENTS
Attached as Exhibit 99.1 to this Current Report is an Agreement and Plan of
Merger by and among the Registrant, Red Cannon Acquisition Corp. ("Red Cannon"),
a wholly owned subsidiary of the Registrant, and Gerald Stevens, Inc. (the
"Agreement") whereby Gerald Stevens, Inc. will be merged with and into Red
Cannon with Gerald Stevens, Inc. surviving as a wholly owned subsidiary of the
Registrant (the "Merger").
Attached as Exhibit 99.2 to this Current Report is a form of Voting
Agreement and Proxy that, pursuant to the Agreement, was entered into by and
between certain principal shareholders of the Registrant (who hold in the
aggregate in excess of fifty percent of the outstanding shares of the
Registrant's common stock on a fully diluted basis) and Gerald Stevens, Inc.,
whereby such shareholders have agreed to vote in favor of the Merger and related
matters when such matters are presented to the shareholders of the Registrant
for approval.
Attached as Exhibit 99.3 to this Current Report is a form of Voting
Agreement and Proxy that, pursuant to the Agreement, was entered into by and
between certain principal shareholders of Gerald Stevens, Inc. (who hold in the
aggregate in excess of fifty percent of the outstanding shares of Gerald
Stevens, Inc.'s common stock on a fully diluted basis) and the Registrant,
whereby such shareholders have agreed to vote in favor of the Merger and related
matters when such matters are presented to the shareholders of Gerald Stevens,
Inc. for approval.
Attached as Exhibit 99.4 to this Current Report is a press release issued
by the Registrant on December 9, 1998 announcing the Merger.
ITEM 7. FINANCIAL STATEMENTS; PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Not applicable.
(b) Not applicable.
(c) Exhibits:
<TABLE>
<S> <C>
99.1 The Agreement and Plan of Merger, dated December 9, 1998, by
and among the Registrant, Red Cannon Acquisition Corp. and
Gerald Stevens, Inc.
99.2 A form of the Voting Agreement, dated December 9, 1998, by
and between certain principal shareholders of the Registrant
and Gerald Stevens, Inc.
99.3 A form of the Voting Agreement, dated December 9, 1998, by
and between certain principal shareholders of Gerald
Stevens, Inc. and the Registrant
99.4 The press release of the Registrant, dated December 10,
1998, announcing the Merger
</TABLE>
D-6-2
<PAGE> 424
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FLORAFAX INTERNATIONAL, INC.
--------------------------------------
(Registrant)
<TABLE>
<S> <C>
Date: December 11, 1998 /s/ JAMES H. WEST
-----------------------------------------------------
James H. West Chief
Financial Officer
</TABLE>
D-6-3
<PAGE> 425
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) Section 145 of the General Corporation Law of Delaware permits
indemnification against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with actions, suits or proceedings in which an officer,
director, employee or agent is a party by reason of the fact that he is or
was such a director, officer, employee or agent, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
However, in connection with actions by or in the right of the corporation,
such indemnification is not permitted if such person has been adjudged
liable to the corporation unless the court determines that, under all of
the circumstances, such person is nonetheless fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
Section 145 also permits a corporation to purchase and maintain
insurance on behalf of its directors and officers against any liability
which may be asserted against, or incurred by, such persons in their
capacities as directors or officers of the corporation whether or not
Florafax would have the power to indemnify such persons against such
liabilities under the provisions of such sections. Florafax has purchased
such insurance.
Section 145 further provides that the statutory provision is not
exclusive of any other right to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or independent directors, or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office.
(b) Article 8 of Florafax International, Inc.'s Restated Certificate
of Incorporation, as amended, permits, and Article 7 of its Bylaws provides
for, indemnification of directors, officers, employees and agents to the
fullest extent permitted by law.
(c) Florafax maintains directors' and officers' liability insurance
coverage for its directors and officers and those of its subsidiaries and
for certain other executive employees. This coverage insures such persons
against certain losses that may be incurred by them in their respective
capacities as directors, officers or employees, with respect to which they
may or may not be indemnified under the provisions of Florafax's Restated
Certificate of Incorporation, as amended, or Bylaws.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
See Index to Exhibits included herewith which is incorporated by
reference herein.
II-1
<PAGE> 426
(b) Financial Statement Schedules:
Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities
II-2
<PAGE> 427
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof;
(7) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first-class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request; and
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE> 428
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Florafax
International, Inc. has duly caused this Registration Statement on Form S-4 to
be signed on its behalf by the undersigned, thereunto duly authorized, in Vero
Beach, Florida on April 12, 1999.
FLORAFAX INTERNATIONAL, INC.
/s/ ANDREW W. WILLIAMS
By:
------------------------------------------
Andrew W. Williams
Chief Executive Officer and Chairman
POWERS OF ATTORNEY
Each person whose signature appears below appoints Andrew W. Williams or
James H. West, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution for him and in his name, place and
stead, in any and all capacities, to execute and file any amendment to this
Registration Statement (including post-effective amendments) necessary or
advisable to enable the registrant to comply with the Securities Act of 1933, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission in respect thereof, in connection with the registration of
the securities which are the subject hereof, which amendment may make such
changes herein as either of the said named attorneys-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-4 has been signed by the following persons in
the capacities indicated below on April 12, 1999.
<TABLE>
<C> <S>
/s/ ANDREW W. WILLIAMS Chief Executive Officer, Chairman of the Board
- -----------------------------------------------------
Andrew W. Williams
/s/ JAMES H. WEST President, Chief Financial Officer and
- ----------------------------------------------------- Director
James H. West
/s/ KELLY S. MCMAKIN Controller and Treasurer
- -----------------------------------------------------
Kelly S. McMakin
/s/ SOLOMON ODEN HOWELL, JR. Director
- -----------------------------------------------------
Solomon Oden Howell, Jr.
/s/ WILLIAM E. MERCER Director
- -----------------------------------------------------
William E. Mercer
/s/ KENNETH G. PUTTICK Director
- -----------------------------------------------------
Kenneth G. Puttick
</TABLE>
II-4
<PAGE> 429
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of December 9, 1998,
by and between Florafax International, Inc., Red Cannon
Acquisition Corp. and Gerald Stevens, Inc.(1)
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated April
9, 1999, by and between Florafax International, Inc., Red
Cannon Acquisition Corp. and Gerald Stevens, Inc. (2)
4.1 Form of Certificate of Amendment of Florafax International,
Inc.(3)
5.1 Opinion of Andrews & Kurth L.L.P. as to the legality of the
shares of common stock to be registered under this
Registration Statement(4)
8.1 Opinion of Akerman, Senterfitt & Eidson, P.A. regarding
certain United States federal income tax consequences of the
merger(4)
10.1 Voting Agreement(4)
10.2 Non-Compete Agreement by and between Andrew W. Williams and
Florafax International, Inc.(4)
10.3 Form of Employment Agreement to be executed by Florafax
International, Inc. and James H. West,(4)
10.4 Form of Employment Agreement to be executed by Florafax
International, Inc. and Kelly S. McMakin and James J.
Pagano(4)
23.1 Consent of Arthur Anderson LLP(4)
23.2 Consent of PricewaterhouseCoopers LLP(4)
23.3 Consent of Ernst & Young LLP(4)
23.4 Consent of Adair, Fuller, Witcher & Malcom, P.A.(4)
23.5 Consent of Andrews & Kurth L.L.P. (included in the opinion
filed as Exhibit 5.1 to this Registration Statement)
23.6 Consent of Akerman, Senterfitt & Eidson, P.A. (included in
the opinion filed in Exhibit 8.1 of this Registration
Statement)
23.7 Consent of ABN-AMRO Incorporated(4)
23.8 Consents of persons to be named as Directors of Florafax(4)
24.1 Powers of Attorney (included on signature page of this
Registration Statement)
27.1 Financial Data Schedules (4)
99.1 Form of Proxy of Florafax International, Inc.(4)
</TABLE>
- -------------------------
(1) Attached as Annex A to the Proxy Statement/Prospectus contained in this
Registration Statement.
(2) Attached as Annex A-1 to the Proxy Statement/Prospectus contained in this
Registration Statement.
(3) Attached as Annex C to the Proxy Statement/Prospectus contained in this
Registration Statement.
(4) Filed herewith.
<PAGE> 1
EXHIBIT 5.1
ANDREWS & KURTH L.L.P.
ATTORNEYS
1701 PENNSYLVANIA AVENUE, SUITE 300
WASHINGTON, D.C. 20006 5805
HOUSTON TELEPHONE: 202.662.2700
WASHINGTON, D.C. FACSIMILE: 202.662.2739
DALLAS
LOS ANGELES
NEW YORK
THE WOODLANDS
LONDON
April 12, 1999
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Gentlemen:
We have acted as counsel for Florafax International, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), pursuant to its Registration
Statement on Form S-4 (the "Registration Statement") filed today with the
Securities and Exchange Commission, of up to 28,052,878 shares of the Company's
common stock, par value $0.01 per share (the "Shares"), to be issued in
connection with its acquisition of Gerald Stevens, Inc.
In this connection, we have examined the corporate records of the Company,
including its articles of incorporation, bylaws and minutes of meetings of its
directors and stockholders. We have also examined the Registration Statement
together with the exhibits thereto, and such other documents as we have deemed
necessary for the purposes of the opinions contained herein. With respect to
certain factual matters we have relied on statements of officers of the Company.
Based on the foregoing, we are of the opinion that the Shares are duly
authorized and, when issued as described in the Registration Statement, will be
validly issued fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and the use of our name in the Prospectus forming a part
of the Registration Statement under the caption "Legal Matters." In giving this
consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act and rules and regulations
thereunder.
Sincerely,
/s/ ANDREWS & KURTH L.L.P.
ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 8.1
AKERMAN, SENTERFITT & EIDSON, P.A.
ATTORNEYS AT LAW
SUNTRUST INTERNATIONAL CENTER
28th FLOOR
ONE SOUTHEAST THIRD AVENUE
MIAMI, FLORIDA 33131-1704
(305) 374-5600
FACSIMILE (305) 374-5095
April 9, 1999
Gerald Stevens, Inc.
Suite 1101
100 S.E. Third Avenue
Miami, Florida 33394
Re: Federal income tax consequences of merger with Red Cannon Acquisition Corp.
Gentlemen:
This letter sets forth our opinion to you concerning certain Federal
income tax consequences arising from the consummation of the merger (the
"Merger") of Red Cannon Acquisition Corp., a Delaware corporation ("Merger
Sub"), with and into Gerald Stevens, Inc., a Delaware corporation ("Stevens"),
pursuant to that certain Agreement and Plan of Merger dated as of December 9,
1998, as amended by that Amendment No. 1 dated as of April 9, 1999, among
Florafax International, Inc., a Delaware corporation ("Florafax"), Merger Sub
and Stevens. The foregoing Agreement and Plan of Merger, as amended, together
with the exhibits and schedules attached thereto, are collectively referred to
herein as the "Merger Agreement." The Merger is to occur at the Effective Time.
Unless otherwise defined herein, capitalized terms used herein shall have the
meanings given to them in the Merger Agreement. All shareholders of Stevens
receiving Florafax shares of common stock in exchange for Stevens shares of
common stock as a result of the Merger may rely upon this opinion.
In rendering this opinion, we have examined and relied upon the following
documents:
1. The Tax Opinion Certificate provided to us by the management of
Stevens of even date herewith, the form of which is attached hereto as Schedule
A;
2. The Tax Opinion Certificate provided to us by the management of
Florafax of even date herewith, the form of which is attached hereto as Schedule
B;
<PAGE> 2
Gerald Stevens, Inc.
April 9, 1999
Page 2
3. The Merger Agreement.
The foregoing documents are collectively referred to herein as the "Documents."1
For purposes of this letter, we have assumed that the factual
representations set forth in the Documents provide an accurate and complete
description of the facts and circumstances concerning the businesses conducted
by Stevens and Florafax and the proposed transaction. We have made no
independent determination regarding such facts and circumstances and, therefore,
have relied upon the Documents for purposes of this letter. Any changes to the
Documents or inaccuracy in the facts, representations or warranties set forth
therein, or breach of the covenants set forth therein, may affect the
conclusions stated herein. In addition, in rendering the opinions below, we have
assumed that the Merger will be consummated in accordance with the terms of the
Merger Agreement and the laws of the State of Delaware, and that all necessary
regulatory approvals which are conditions to the consummation of the Merger have
been received. If these assumptions are not correct, the opinions below might
change.
FEDERAL INCOME TAX CONSEQUENCES
Based solely upon the facts as presented to us and subject to the
conditions, qualifications, and limitations set forth herein, we are of the
opinion that:
1. The Merger will qualify as a Type A reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
2. Florafax, Merger Sub and Stevens are each a party to the
reorganization within the meaning of Section 368(b) of the Code;
3. Florafax, Merger Sub and Stevens will not recognize gain or loss as a
result of the Merger;
4. Except for cash payments, if any, in lieu of fractional share
interests, no gain or loss will be recognized by the shareholders of Stevens
upon their receipt of shares of Florafax common stock in exchange for shares of
stock in Stevens;
5. The basis of the shares of Florafax common stock received by the
shareholders of Stevens will be the same as the basis of the shares of Stevens
common stock surrendered in exchange therefor; and
6. For Stevens shareholders holding Stevens common stock as a capital
asset, the
<PAGE> 3
Gerald Stevens, Inc.
April 9, 1999
Page 3
holding period of the shares of Florafax common stock received by the
shareholders of Stevens will include the period during which the shares of
Stevens common stock surrendered therefor were held by the shareholders.
SCOPE OF OPINION
The scope of this opinion is expressly limited to the Federal income tax
consequences specifically addressed in the section entitled "Federal Income Tax
Consequences" above. Our opinion has not been requested and none is expressed
with respect to any other tax consequences to the shareholders of Stevens. We
have made no determination nor expressed any opinion as to the basis of each
particular share of Florafax common stock received by the shareholders. We also
note that the Merger might also qualify as a reorganization under Code section
368(a)(1)(B), but we express no opinion as to the applicability of that section
of the Code.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement filed on Form S-4 by Florafax International, Inc. with
the Securities and Exchange Commission on April 9, 1999 as amended through the
date hereof. We also consent to the references to Akerman, Senterfitt & Eidson,
P.A. under the captions "PROPOSAL NO. 1 - STOCK ISSUANCE AND CHANGE OF CONTROL -
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER."
Our opinion is based upon our analysis of the Code, the Regulations
thereunder, current case law, and published rulings. The foregoing are subject
to change, and such change may be retroactively effective. If so, our views, as
set forth above, may be affected and may not be relied upon. In addition, we
have undertaken no obligation to update this opinion for changes in facts or law
occurring subsequent to the date hereof. This letter is an opinion of our firm
as to the interpretation of existing law and, as such, is not binding on the
Internal Revenue Service or the courts.
Very truly yours,
/s/ AKERMAN, SENTERFITT & EIDSON, P.A.
AKERMAN, SENTERFITT & EIDSON, P.A.
<PAGE> 4
SCHEDULE "A"
TAX OPINION CERTIFICATE
GERALD STEVENS, INC.
April 9, 1999
This TAX OPINION CERTIFICATE, made by the management of Gerald Stevens, Inc.
(the "Company") to Akerman, Senterfitt & Eidson, provides certain
representations that Akerman, Senterfitt & Eidson will be relying upon in the
issuance of an opinion as to certain federal income tax consequences arising
from the consummation of the merger of Red Cannon Acquisition Corp. ("Newco"), a
newly-created and wholly owned subsidiary of Florafax International, Inc. (the
"Acquiring Company"), with and into the Company (the "Merger"). Capitalized
terms used herein without definition have the respective meanings specified in
the Agreement and Plan of Merger, dated as of December 9, 1998, between
Acquiring Company, Newco, and the Company as amended by Amendment No. 1 to such
Agreement and Plan of Merger among the parties dated as of April 9, 1999 (the
"Merger Agreement"). For purposes of this Certificate, the term "Subsidiaries"
means any corporation, partnership, limited liability company, joint venture or
other entity in which the Company owns, directly or indirectly, any capital
stock or other ownership interest.
The undersigned hereby certifies that he/she is an officer of the Company duly
authorized to make the representations below on behalf of the Company. The
undersigned hereby represents that the following matters are true on the date
hereof and the following matters may be assumed to be true on the date the
Merger is to be consummated:
The undersigned representations are made in connection with the Merger:
1. The Merger will be consummated in compliance with the terms of the
Merger Agreement and, except for waivers and modifications disclosed
to Akerman, Senterfitt & Eidson, none of the material terms and
conditions therein have been waived or modified, and the Company has
no plan or intention to waive or modify any of such terms and
conditions.
2. The ratio for the exchange of shares of common stock of the Company
for common stock of Acquiring Company was negotiated through
arm's-length bargaining.
3. Following the Merger, the Company will hold at least 90% of the fair
market value of its net assets, and at least 70% of the fair market
value of its gross assets, held by the Company immediately prior to
the Merger. For purposes of this representation, amounts paid by the
Company to shareholders who receive cash or other property, amounts
used
<PAGE> 5
by the Company to pay Merger-related expenses, and all transfers of
assets by the Company in connection with redemptions and
distributions (except for regular, normal dividends made by the
Company) related to the transaction will be included as assets of
the Company immediately prior to the Merger.
4. The liabilities of the Company were incurred by the Company in the
ordinary course of its business.
5. Subsidiaries of the Company do not own any shares of stock of the
Company.
6. Except as provided in of the Merger Agreement, Acquiring Company,
the Company and the shareholders of the Company will pay their
respective expenses incurred in connection with the Merger.
7. There is no intercorporate indebtedness existing between the Company
and its affiliates on the one hand and Acquiring Company and its
affiliates on the other hand that was issued, acquired, or will be
settled at a discount.
8. The Company has made all payments when due and has otherwise never
defaulted with respect to its obligations under the debt or notes,
if any, issued by the Company to its shareholders and any
predecessor note or notes thereto.
9. The Company has no plan or intention to issue additional shares of
Company stock following the Merger.
10. The Company has no plan or intention to liquidate; to merge after
the Merger with or into another corporation; to sell or otherwise
dispose of any of its assets, except for dispositions made in the
ordinary course of business; or to reacquire directly, or indirectly
through any of its Subsidiaries, any of the stock of the Acquiring
Company issued in the Merger.
11. The compensation to be paid to any shareholder-employee will be for
services actually rendered or to be rendered and will be
commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
The undersigned acknowledges that these representations are provided to Akerman,
Senterfitt & Eidson in connection with the preparation of an opinion with
respect to the tax consequences of the Merger and that such opinion may not be
relied upon if any of the foregoing representations should prove to be
inaccurate or incomplete in any material respect.
<PAGE> 6
The undersigned has executed the foregoing certificate as of this 9th day of
April, 1999.
GERALD STEVENS, INC.
Signed: /s/ ADAM PHILLIPS
---------------------------------
Title: Senior Vice President
---------------------------------
<PAGE> 7
SCHEDULE "B"
TAX OPINION CERTIFICATE
FLORAFAX INTERNATIONAL, INC.
April 9, 1999
This TAX OPINION CERTIFICATE, made by the management of Florafax International,
Inc. ("Acquiring Company") to Akerman, Senterfitt & Eidson, provides certain
representations that Akerman, Senterfitt & Eidson, P.A. will be relying upon in
the issuance of an opinion as to certain federal income tax consequences arising
from the consummation of the merger of Red Cannon Acquisition Corp. ("Newco"), a
newly created and wholly owned subsidiary of Acquiring Company, with and into
Gerald Stevens, Inc. (the "Company") (the "Merger"). Capitalized terms used
herein without definition have the respective meanings specified in the
Agreement and Plan of Merger, dated as of December 9, 1998, between Acquiring
Company, Newco, and the Company as amended by Amendment No. 1 to such Agreement
and Plan of Merger among the parties dated as of April 9, 1999 (the "Merger
Agreement"). For purposes of this Certificate, the term "Subsidiaries" means any
corporation, partnership, limited liability company, joint venture or other
entity in which the Acquiring Company owns, directly or indirectly, any capital
stock or other ownership interest.
The undersigned hereby certifies that he/she is an officer of Acquiring Company
duly authorized to make the representations below on behalf of Acquiring
Company. The undersigned hereby represents that the following matters are true
on the date hereof and the following matters may be assumed to be true on the
date the Merger is to be consummated:
The following representations are made in connection with the Merger:
1. The Merger will be consummated in compliance with the terms of the
Merger Agreement and, except for waivers and modifications disclosed
to Akerman, Senterfitt & Eidson, none of the material terms and
conditions therein have been waived or modified, and Acquiring
Company has no plan or intention to waive or modify any of such
terms and conditions.
2. The ratio for the exchange of shares of common stock of the Company
for common stock of Acquiring Company was negotiated through
arm's-length bargaining.
3. Acquiring Company has no plan or intention to reacquire directly, or
indirectly through any of its Subsidiaries, any of its stock to be
issued in the Merger, except in the event of the application of
certain forfeiture provisions in the Merger Agreement.
<PAGE> 8
4. Prior to the Merger, Acquiring Company will own directly all of the
issued and outstanding shares of capital stock of Newco.
5. Newco is a single-purpose corporation formed by Acquiring Company
for the sole purpose of consummating the Merger, and, in the Merger,
Newco will not transfer any assets to the Company and the Company
will not assume any liabilities of Newco.
6. Neither the Acquiring Company nor any of its Subsidiaries owns any
shares of stock of the Company.
7. The Acquiring Company has no plan or intention to cause the Company
to issue additional shares of Company stock following the Merger.
8. Acquiring Company has a plan or intention to continue following the
Merger, substantially unchanged, the business of the Company.
9. Acquiring Company has no plan or intention to liquidate the Company;
to merge the Company after the Merger with or into another
corporation; to sell or otherwise dispose of the stock of the
Company; or to cause the Company to sell or otherwise dispose of any
of its assets, except for dispositions made in the ordinary course
of business.
10. Except as provided in the Merger Agreement, Acquiring Company, the
Company, and the shareholders of the Company will pay their
respective expenses incurred in connection with the Merger.
11. There is no intercorporate indebtedness existing between the Company
and its affiliates on the one hand and Acquiring Company and its
affiliates on the other hand that was issued, acquired, or will be
settled at a discount.
12. The compensation to be paid to any shareholder-employee will be for
services actually rendered or to be rendered and will be
commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
The undersigned acknowledges that these representations are provided to Akerman,
Senterfiff & Eidson in connection with the preparation of an opinion to the
Company and its shareholders with respect to the tax consequences of the Merger
and that such opinion may not be relied upon by the Company and its shareholders
if any of the foregoing representations should prove to be inaccurate or
incomplete in any material respect.
<PAGE> 9
The undersigned has executed the foregoing certificate as of this 9th day of
April, 1999.
FLORAFAX INTERNATIONAL, INC.
Signed: /s/ JAMES H. WEST
------------------------------
Title: President
------------------------------
<PAGE> 1
EXHIBIT 10.1
VOTING AGREEMENT AND PROXY
This VOTING AGREEMENT, dated as of December 8, 1998 (this "Agreement"), by
and between the parties listed on Appendix A hereto (collectively, the
"Stockholders") and GERALD STEVENS, INC., a Delaware corporation ("GSI").
WHEREAS, GSI, Florafax International, Inc., a Delaware corporation ("Red
Cannon"), and Red Cannon Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Red Cannon, propose to enter into an Agreement and
Plan of Merger (as amended from time to time, the "Merger Agreement"), pursuant
to which Merger Sub is to be merged with and into GSI (the "Merger"), with GSI
continuing as the surviving corporation and a wholly-owned subsidiary of Red
Cannon;
WHEREAS, as of the date hereof, the Stockholders own 4,965,946 shares of
Red Cannon common stock, par value $.01 per share ("Red Cannon Common Stock"),
which represent in the aggregate approximately 62% of the total issued and
outstanding Red Cannon Common Stock (53% on a fully-diluted basis); and
WHEREAS, as a condition to the willingness of GSI to enter into the Merger
Agreement, GSI has required that the Stockholders agree, and in order to induce
GSI to enter into the Merger Agreement, the Stockholders have agreed, to enter
into this Agreement with respect to all the shares of Red Cannon Common Stock
now owned and which may hereafter be acquired by the Stockholders (the "Shares")
and any other securities, if any, which the Stockholders are entitled to vote at
any meeting of stockholders of Red Cannon (the "Other Securities").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
PROXY OF THE STOCKHOLDERS
SECTION 1.01. Voting Agreement. Each Stockholder hereby agrees that during
the time this Agreement is in effect, at any meeting of the stockholders of Red
Cannon, however called, and in any action by consent of the stockholders of Red
Cannon, each of the Stockholders shall vote the Shares and the Other Securities:
(a) in favor of the issuance of Red Cannon Common Stock pursuant to the Merger
and the other transactions contemplated by the Merger Agreement; (b) for an
amendment to the Certificate of Incorporation of Red Cannon to increase in the
number of authorized shares of Common Stock and to change the name of Red Cannon
to "Gerald Stevens, Inc." as contemplated in the Merger Agreement; (c) for the
election of new directors to the Board of Directors of Red Cannon as
contemplated by the Merger Agreement; and (d) against any other corporate action
or agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of Red Cannon under the Merger
Agreement or that could result in any of the conditions to Red Cannon's
obligations under the Merger Agreement not being fulfilled, including, without
limitation, any proposal with respect to approving a Competing Transaction (as
defined in the Merger Agreement). Each Stockholder acknowledges receipt and
review of a copy of the Merger Agreement.
SECTION 1.02. Irrevocable Proxy. Each Stockholder hereby irrevocably
appoints GSI, until termination of the Merger Agreement, as his or its attorney
and proxy pursuant to the provisions of Section 212(c) of the General
Corporation Law of the State of Delaware, with full power of substitution, to
vote and otherwise act (by written consent or otherwise) with respect to the
Shares and the Other Securities, which such Stockholder is entitled to vote at
any meeting of stockholders of Red Cannon (whether annual or special and whether
or not an adjourned or postponed meeting) or consent in lieu of any such meeting
or otherwise, on the matters and in the manner specified in Section 1.01 hereof.
THIS PROXY AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST.
The Stockholders hereby revoke all other
<PAGE> 2
proxies and powers of attorney with respect to the Shares and the Other
Securities which they may have heretofore appointed or granted, and no
subsequent proxy or power of attorney shall be given or written consent executed
(and if given or executed, shall not be effective) by the Stockholders with
respect to the matters specified in Section 1.01 hereof. All authority herein
conferred or agreed to be conferred shall survive the death or incapacity of any
Stockholder which is a natural person and any obligation of any Stockholder
under this Agreement shall be binding upon the heirs, personal representatives
and successors of such Stockholder.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
Each Stockholder hereby represents and warrants, severally but not jointly,
to GSI as follows:
SECTION 2.01. Authority Relative to This Agreement. Each Stockholder has
all necessary power and authority to execute and deliver this Agreement, to
perform his or its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by such
Stockholder and constitutes a legal, valid and binding obligation of such
Stockholder, enforceable against such Stockholder in accordance with its terms.
SECTION 2.02. No Conflict. (a) The execution and delivery of this Agreement
by such Stockholder do not, and the performance of this Agreement by such
Stockholder shall not, (i) conflict with or violate any federal, state or local
law, statute, ordinance, rule, regulation, order, judgment or decree applicable
to such Stockholder or by which the Shares or the Other Securities owned by such
Stockholder are bound or affected or (ii) result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the Shares or the Other Securities owned by such
Stockholder pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Stockholder is a party or by which such Stockholder or the Shares
or Other Securities owned by such Stockholder are bound or affected.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Authority (as such term is defined in the
Merger Agreement) except for applicable requirements, if any, of the Securities
Exchange Act of 1934, as amended, or the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
SECTION 2.03. Title to the Shares. As of the date hereof, each Stockholder
is the record and beneficial owner of the number of shares of Red Cannon Common
Stock set forth opposite such Stockholder's name on Appendix A hereto, which
shares of Red Cannon Common Stock represent on the date hereof the percentage of
the total outstanding shares of Red Cannon Common Stock set forth on such
Appendix. Such Shares are all the securities of the Company owned, either of
record or beneficially, by such Stockholder. Except as set forth on Appendix A,
such Shares are owned free and clear of all security interests, liens, claims,
pledges, options, rights of first refusal, agreements, limitations on such
Stockholder's voting rights, charges and other encumbrances of any nature
whatsoever. Except as provided in this Agreement, no Stockholder has appointed
or granted any proxy, which appointment or grant is still effective, with
respect to the Shares or Other Securities owned by such Stockholder.
ARTICLE III
COVENANTS OF THE STOCKHOLDERS
SECTION 3.01. No Disposition or Encumbrance of Shares. Each Stockholder
hereby covenants and agrees that, except as contemplated by this Agreement, such
Stockholder shall not offer or agree to sell, transfer, tender, assign,
hypothecate or otherwise dispose of, grant a proxy or power of attorney with
respect to, or create or permit to exist any security interest, lien, claim,
pledge, option, right of first refusal, agreement,
2
<PAGE> 3
limitation on any Stockholder's voting rights, charge or other encumbrance of
any nature whatsoever with respect to the Shares or, directly or indirectly,
initiate, solicit or encourage, any person to take actions which could
reasonably be expected to lead to the occurrence of any of the foregoing.
SECTION 3.02. No Solicitation of Competing Transactions. Each Stockholder
hereby agrees, jointly and severally, to be bound and to comply with the
obligations of Red Cannon set forth in Section 6.2 of the Merger Agreement as if
such obligations were set forth in their entirety in this Section 3.02 as
obligations of such Stockholder.
ARTICLE IV
MISCELLANEOUS
SECTION 4.01. Termination. This Agreement shall terminate upon the
termination of the Merger Agreement in accordance with its terms.
SECTION 4.02. Further Assurances. Each Stockholder and GSI will execute and
deliver all such further documents and instruments and take all such further
action as may be necessary in order to consummate the transactions contemplated
hereby.
SECTION 4.03. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 4.04. Entire Agreement. This Agreement constitutes the entire
agreement between GSI and the Stockholders with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both written and
oral, between GSI and the Stockholders with respect to the subject matter
hereof.
SECTION 4.05. Amendment. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 4.06. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of this Agreement is not affected in any manner materially adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
terms of this Agreement remain as originally contemplated to the fullest extent
possible.
SECTION 4.07. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
SECTION 4.08. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3
<PAGE> 4
IN WITNESS WHEREOF, each Stockholder has duly executed this Agreement as of
the date first above written.
HILLTOP PARTNERS L.P.
By: LAIFER CAPITAL MANAGEMENT, INC.
as General Partner
By: /s/ LANCE LAIFER
----------------------------------
Lance Laifer, President
HILLTOP OFFSHORE, LTD.
By: LAIFER CAPITAL MANAGEMENT, INC.
as General Partner
By: /s/ LANCE LAIFER
----------------------------------
Lance Laifer, President
CHESED CONGREGATIONS OF AMERICA
By: /s/ JACOB SAIFER
----------------------------------
Jacob Saifer, President
UNITED CONGREGATION MESORAH
By: /s/ ALISA SAFIER
----------------------------------
Alisa Safier, Secretary
THE WOLFSON GRANDCHILDREN TRUST
By: /s/ BINIAMINA AMOYELLE
----------------------------------
Biniamina Amoyelle, Trustee
THE WOLFSON FAMILY TRUST
By: /s/ BINIAMINA AMOYELLE
----------------------------------
Biniamina Amoyelle, Trustee
4
<PAGE> 5
F/B/O ZEV WOLFSON, IRA
By: /s/ ZEV WOLFSON
----------------------------------
Zev Wolfson
/s/ ANDREW W. WILLIAMS
----------------------------------
Andrew W. Williams, individually,
as custodian on behalf of
Theodore J. Williams, and
jointly with his spouse, Robin
W. Williams
/s/ ROBIN W. WILLIAMS
----------------------------------
Robin W. Williams, individually,
jointly with her spouse, Andrew
W. Williams, as trustee of the
Robin W. Williams Family Trust,
and as custodian for the benefit
of Andrew W. Williams, Jr., Mark
F. Williams and Theodore
Williams
EQUITY RESOURCE GROUP OF INDIAN
RIVER COUNTY, INC.
By: /s/ ANDREW W. WILLIAMS
----------------------------------
Andrew W. Williams, President
5
<PAGE> 6
CONFIDENTIAL INVESTMENT SERVICES,
INC.
By: /s/ ANDREW W. WILLIAMS
----------------------------------
Andrew W. Williams, President
/s/ KENNETH G. PUTTICK
----------------------------------
Kenneth G. Puttick, individually
and on behalf of PUTTICK
ENTERPRISES
/s/ S. ODEN HOWELL, JR.
----------------------------------
S. Oden Howell, Jr.
/s/ T. CRAIG BENSON
----------------------------------
T. Craig Benson
/s/ JAMES H. WEST
----------------------------------
James H. West
/s/ WILLIAM E. MERCER
----------------------------------
William E. Mercer
/s/ KELLY S. MCMAKIN
----------------------------------
Kelly S. McMakin
AGREED AND ACCEPTED
GERALD STEVENS, INC.,
A DELAWARE CORPORATION
By: /s/ GERALD R. GEDDIS
--------------------------------
Gerald R. Geddis,
President and Chief Executive
Officer
6
<PAGE> 7
APPENDIX A
<TABLE>
<CAPTION>
APPROXIMATE
PERCENTAGE
NUMBER OF OF OUTSTANDING
SHARES OF RED CANNON NUMBER OF
COMMON STOCK COMMON STOCK SHARES PLEDGED
------------ -------------- --------------
<S> <C> <C> <C>
Hilltop Partners L.P.(1)............................ 1,156,829 14.6% 0
Hilltop Offshore, Ltd.(1)........................... 267,300 3.4 0
Chesed Congregations of America(2).................. 42,800 * 0
United Congregation Mesorah(2)...................... 288,900 3.6 0
The Wolfson Grandchildren Trust(2).................. 28,500 * 0
The Wolfson Family Trust(2)......................... 99,000 1.2 0
F/B/O Zev Wolfson, IRA(2)........................... 188,800 2.4 0
Andrew W. Williams and Robin W. Williams(3)......... 587,182 2.8 0
Equity Resource Group of Indian River County,
Inc............................................... 58,704 0
Confidential Investment Services, Inc............... 77,000 * 0
Puttick Enterprises................................. 637,000 8.0 0
Kenneth G. Puttick.................................. 458,000 5.8 0
S. Oden Howell, Jr. ................................ 243,300 3.1 0
T. Craig Benson..................................... 215,000 2.7 0
James H. West....................................... 275,321 3.5 0
William E. Mercer................................... 136,000 1.7 0
Kelly S. McMakin.................................... 56,500 * 0
--------- ----
TOTAL..................................... 4,816,136 60.2%
</TABLE>
- ---------------
* Less than 1%
(1) Shares beneficially owned by Laifer Capital Management, Inc., as general
partner
(2) Shares beneficially owned by Laifer Capital Management, Inc., as account
custodian and attorney-in-fact
(3) Shares owned individually, jointly, as trustee and/or as custodian for
children
A-1
<PAGE> 1
EXHIBIT 10.2
December 9, 1998
Florafax International, Inc.
8075 20th Street
Vero Beach, FL 32966
Gentlemen:
Reference is made to the Agreement and Plan of Merger, dated as of December
9, 1998 (the "Merger Agreement"), among FLORAFAX INTERNATIONAL, INC., a Delaware
corporation ("Red Cannon"), RED CANNON ACQUISITION, INC., a Delaware corporation
and wholly-owned subsidiary of Red Cannon ("Merger Sub"), GERALD STEVENS, INC.,
a Delaware corporation (the "Company"), pursuant to which Merger Sub is to be
merged with and into the Company (the "Merger"), with the Company continuing as
the surviving corporation and a wholly-owned subsidiary of Red Cannon.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to such terms in the Merger Agreement.
The undersigned agrees that during the undersigned's tenure as a director
of Red Cannon, the Company or any of their subsidiaries (the "Red Cannon
Companies") following the consummation of the Merger and for a period of three
(3) years after termination for any reason of the undersigned's tenure as a
director of any of the Red Cannon Companies, the undersigned shall not, directly
or indirectly:
(1) alone or as a partner, joint venturer, officer, director,
employee, consultant, agent, independent contractor, or security holder, of
any Person, engage in any business activity in any State in which the Red
Cannon Companies are doing business, which is directly or indirectly in
competition with the business engaged in by the Red Cannon Companies in
such States (a "Competing Business"); provided, however, that the
beneficial ownership of less than five percent (5%) of any class of
securities of any entity having a class of equity securities actively
traded on a national securities exchange or the Nasdaq National or SmallCap
markets shall not be deemed, in and of itself, to violate the prohibitions
of this Section;
(2) (i) induce any customer of the Red Cannon Companies to patronize
any business which is a Competing Business; (ii) solicit or accept for or
on behalf of any such Competing Business any customer of the Red Cannon
Companies; or (iii) request or advise any customer of the Red Cannon
Companies to withdraw, curtail or cancel any such customer's business with
the Red Cannon Companies;
(3) employ any person who was employed by the Red Cannon Companies
within six months prior to the date that the undersigned's tenure as a
director of Red Cannon is terminated, or in any manner seek to induce any
employee of the Red Cannon Companies to leave his or her employment;
(4) in any way utilize, disclose, copy, reproduce or retain in his
possession any of the proprietary rights, records or trade secrets of the
Red Cannon Companies, including, but not limited to, any customer lists,
marketing plans, corporate development plans, and non-public financial and
other data; provided that the foregoing shall not restrict the retention by
the undersigned of non-public data received by the undersigned in his
capacity as a director of any of the Red Cannon Companies.
The undersigned agrees and acknowledges that the restrictions contained in
this letter are reasonable in scope and duration, and are necessary to protect
Red Cannon. If any provision of this letter is adjudged by a court of competent
jurisdiction to be invalid or unenforceable, the same will in no way affect the
validity or enforceability of the remainder of this Agreement. If any such
provision, or any part thereof, is held to be unenforceable because of the
duration of such provision, the area covered thereby or otherwise, then the
parties agree that the court making such determination shall have the power to
reduce the duration, area or scope of such provision, and/or to delete specific
words or phrases, and in its reduced or modified form, such provision shall then
be enforceable and shall be enforced. The undersigned further agrees and
acknowledges that any breach of this letter will cause irreparable injury to Red
Cannon and upon any breach or threatened breach of any provision of this letter,
Red Cannon shall be entitled to injunctive relief, specific performance or
<PAGE> 2
other equitable relief, without the necessity of posting bond; provided,
however, that this shall in no way limit any other remedies which Red Cannon may
have as a result of such breach, including the right to seek monetary damages.
This Letter shall terminate if the Merger Agreement is terminated.
/s/ ANDREW W. WILLIAMS
------------------------------------
ANDREW W. WILLIAMS
ACCEPTED AND AGREED TO AS OF THE
DATE FIRST ABOVE WRITTEN:
FLORAFAX INTERNATIONAL, INC.
By: /s/ JAMES H. WEST
--------------------------------
Name: JAMES H. WEST
- ------------------------------------
Title: President
- ------------------------------------
2
<PAGE> 1
EXHIBIT 10.3
FORM OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of , 1998, between
Gerald Stevens, Inc., a Delaware corporation (the "Company"), and
("Executive").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending on the
Termination Date, as defined in paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as Senior Vice
President of the Company and President of the Company's Division
(the " Division") and shall be responsible for managing the day to
day business and affairs of the retail flower shops in the
Division.
(b) Executive shall report to the Company's President and Executive
shall devote his reasonable best efforts and his full business time and
attention (except for permitted vacation periods, periods of illness or
other incapacity) to the business and affairs of the Company.
(c) For purposes of this Agreement, all references to "Company" shall
include any corporation of which the securities having a majority of the
voting power in electing directors are, at the time of determination, owned
by the Company, directly or through one of more subsidiaries.
3. Base Salary and Benefits.
(a) During the remainder of 1998 and 1999, Executive's base salary
shall be $ per annum (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices (but at least monthly) and shall be subject to required
withholding. In January of 2000, the Company's President shall review the
Base Salary for increase. In addition, during the Employment Period,
Executive shall be entitled to participate in all of the Company's employee
benefit programs for which senior executive employees of the Company are
generally eligible, including annual grants of stock options (beginning in
1999) under the Company's Nonqualified Stock Option Plan and other stock
option plans that the Company may adopt from time to time (all such plans,
as they may be adopted and amended from time to time being hereinafter
referred to collectively as the "Stock Option Plan"), at a level
commensurate with Executive's position in the Company.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Company's policies in effect from time to
time for senior executives with respect to travel, entertainment and other
business expenses, subject to the Company's requirements for its executives
with respect to reporting and documentation of such expenses.
(c) Beginning with the Company's 1999 calendar year, in addition to
the Base Salary, Executive shall be eligible to receive a bonus (the
"Bonus") at the end of each calendar year during the Employment Period of
up to 20% of Executive's Base Salary (the "Target Bonus") based upon
Executive's performance and the Company's and/or Division's
financial results versus targets established by the President or the
Compensation Committee of the Board for such year. The Bonus, if any, will
be payable no later than March 1 of the year immediately following the year
in which the Bonus was earned. The Bonus will be prorated for any partial
year during the Employment Period.
1
<PAGE> 2
4. Term and Termination.
(a) This Agreement shall terminate on the second anniversary of the
date hereof (the "Expiration Date") unless terminated earlier (i) by
Executive's resignation with or without Good Reason or Executive's death or
Disability or (ii) by the Company with or without Cause. The date on which
Executive's employment with the Company is terminated is referred to herein
as the "Termination Date."
(b) (i) If Executive's employment with the Company is terminated by
the Company without Cause or by Executive with Good Reason, (x) Executive
shall be entitled to receive his Base Salary and his Target Bonus through
the Expiration Date, payable in accordance with paragraph 3 above, (y) all
stock options granted to Executive under the Stock Option Plan which are
not vested at such time shall automatically, and without further action,
become vested as of the Termination Date and all such options (together
with all of Executive's then vested stock options), shall remain
exercisable until the later to occur of (I) the Expiration Date and (II)
the expiration of such stock options pursuant to the terms of the Stock
Option Plan and (z) Executive's obligations under paragraph 6(a) below
shall terminate and be of no further force or effect.
(ii) If Executive's employment with the Company is terminated for any
reason other than as described in item (i) above, Executive shall be
entitled to receive his Base Salary through the Termination Date.
(c) All of Executive's rights to fringe benefits shall cease upon the
Termination Date.
(d) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Cause" shall mean (i) the conviction of Executive for a felony or
a crime involving moral turpitude or the plea of guilty or no lo
contendre by Executive to a charge of any such crime, (ii) Executive's
theft or embezzlement, of money or property of the Company, (iii)
Executive's perpetration of fraud, or Executive's participation in a
fraud, on the Company or Executive's unauthorized appropriation of any
tangible or intangible material assets or property of the Company, (iv)
Executive's substantial and repeated failure to perform his duties
hereunder in accordance with the reasonable directions of the Board or
the President.
"Disability" shall mean the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of Executive
to carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company
for a period of at least 90 consecutive days or for shorter periods
aggregating at least 120 days (whether or not consecutive) during any
twelve-month period, as determined in the reasonable and good faith
judgment of the Board.
"Good Reason" shall mean (x) the Company's willful and material
breach of this Agreement or (y) the assignment to Executive of duties
that are materially inconsistent with Executive's position.
(e) A termination of this Agreement pursuant to its terms on the
Expiration Date shall not, in and of itself, constitute a termination of
Executive's employment with the Company. At such time, unless the Company
or the Executive terminate Executive's employment with the Company,
Executive shall become an employee at-will of the Company.
5. Confidential Information. Executive acknowledges that the information,
observations and data obtained by him while employed by the Company concerning
the business or affairs of the Company reasonably considered of a confidential
nature ("Confidential Information") are the property of the Company. Therefore,
Executive agrees that he shall not disclose to any unauthorized person or use
for his own purposes any Confidential Information without the prior written
consent of the Board, unless and to the extent that the aforementioned matters
become generally known to and available for use by the public other than as a
result of Executive's acts or omissions, or is otherwise known to Executive from
independent sources prior to or
2
<PAGE> 3
outside of Executive's employment with the Company. Executive shall deliver to
the Company at the termination of the Employment Period, or at any other time
the Company may reasonably request, all memoranda, notes, plans, records,
reports, computer tapes, printouts and software and other documents and data
(and copies thereof) relating to the Confidential Information or the business of
the Company which he may then possess or have under his control. Nothing herein
shall prohibit Executive's disclosure of Confidential Information as directed by
judicial, administrative or other governmental law, rule, regulation or order
provided that Executive shall, to the extent possible, give immediate notice to
the Company of any disclosure of Confidential Information so required so that
the Company may seek a protective order.
6. Non-Compete, Non-Solicitation.
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his
employment with the Company he shall become familiar with the Company's
trade secrets and with other Confidential Information concerning the
Company and that his services shall be of special, unique and extraordinary
value to the Company. Therefore, Executive agrees that, during the
Employment Period and for two years thereafter (the "Noncompete Period"),
he shall not directly or indirectly own any interest in, manage, control,
participate in, consult with, render services for, or in any manner engage
in any business competing with the businesses of the Company, as such
businesses exist or are in process on the date of the termination of
Executive's employment, within any geographical area in which the Company
engages or plans to engage in such businesses. Nothing herein shall
prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded,
so long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any
employee of the Company to leave the employ of the Company, or in any way
interfere with the relationship between the Company and any employee
thereof, (ii) hire any person who was an employee of the Company at any
time during the Employment Period (unless such employee was terminated by
the Company), or (iii) induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee or other business relation of the Company to
cease doing business with the Company, or in any way interfere with the
relationship between any such customer, supplier, licensee or business
relation and the Company.
(c) If, at the time of enforcement of this paragraph 6, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall
be substituted for the stated duration, scope or area and that the court
shall be allowed to revise the restrictions contained herein to cover the
maximum period, scope and area permitted by law. Executive agrees that the
restrictions contained in this paragraph 6 are reasonable.
(d) In the event of the breach or a threatened breach by Executive of
any of the provisions of this paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof (without posting a bond or
other security). In addition, in the event of an alleged breach or
violation by Executive of this paragraph 6, the Noncompete Period shall be
tolled until such breach or violation has been duly cured.
7. Mutual Representations. Executive and the Company each represents and
warrants to the other that (i) the execution, delivery and performance of this
Agreement by such party do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which such party is a party or by which or it is bound, (ii) Such
party is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity that
would be breached or violated by such party execution and delivery or
performance of this Agreement and (iii) upon the execution and delivery of this
Agreement by such party, this Agreement shall be the valid and
3
<PAGE> 4
binding obligation of such party, enforceable in accordance against such party
with its terms. Such party hereby acknowledges and represents that or it has
consulted with independent legal counsel regarding his rights and obligations
under this Agreement and that he fully understands the terms and conditions
contained herein.
8. Survival. Paragraphs 5 and 6 and paragraphs 9 through 16 shall survive
and continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period.
9. Notices. Any notice provided for in this Agreement shall be in writing
and shall be either personally delivered, or mailed by first class mail, return
receipt requested, to the recipient at the address below indicated:
Notices to Executive:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
Notices to the Company:
Gerald Stevens, Inc.
One Financial Plaza, 11th Floor
Ft. Lauderdale, FL 33394
Attention: President
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or three (3) days after so mailed.
10. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement and the Purchase Agreement embodies
with respect to the subject matter hereof the complete agreement and
understanding among the parties and supersedes and preempts with respect to the
subject matter hereof any prior understandings, agreements or representations by
or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
12. No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party,
it being understood that paragraph 6(c) contemplates that a court of competent
jurisdiction shall be entitled to "blue pencil" or conform the express language
of paragraph 6(a) if necessary in order to comply with Florida law.
13. Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
14. Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of and be enforceable by Executive, the Company and their respective
heirs, successors and assigns, except that (x) Executive may not assign his
rights or delegate his obligations hereunder without the prior written consent
of the Company and (y) other than in connection with sale of (i) the stock or
all or substantially all of the assets of [insert chain] or (ii) the Company
(whether by merger, consolidation, sale of all of the Company's stock or sale of
all or substantially all of the Company's assets), the Company may not assign
its rights to Executive's services hereunder to any third party.
4
<PAGE> 5
15. CHOICE OF LAW. ALL ISSUES AND QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF FLORIDA, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS
(WHETHER OF THE STATE OF FLORIDA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF FLORIDA.
16. Amendment and Waiver. The provisions of this Agreement may be amended
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GERALD STEVENS, INC.
By
----------------------------------
Name: Gerald R. Geddis
Title: President
------------------------------------
[Executive]
5
<PAGE> 1
EXHIBIT 10.4
FORM OF
EMPLOYMENT AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of , 1998, between
Gerald Stevens, Inc., a Delaware corporation (the "Company"), and
("Executive").
In consideration of the mutual covenants contained herein and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive hereby
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date hereof and ending on the
Termination Date, as defined in paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as Vice
President of the Company and Vice President of of the Company's
Division and shall be responsible for .
(b) Executive shall report to the President of the Company's
Division (the "Division") and Executive shall devote his
reasonable best efforts and his full business time and attention (except
for permitted vacation periods, periods of illness or other incapacity) to
the business and affairs of the Division.
(c) For purposes of this Agreement, all references to "Company" shall
include any corporation of which the securities having a majority of the
voting power in electing directors are, at the time of determination, owned
by the Company, directly or through one of more subsidiaries.
3. Base Salary and Benefits.
(a) During the remainder of 1998 and 1999, Executive's base salary
shall be $ per annum (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices (but at least monthly) and shall be subject to required
withholding. In January of 2000, the Division's President shall review the
Base Salary for increase. In addition, during the Employment Period,
Executive shall be entitled to participate in all of the Company's employee
benefit programs for which employees of the Division are generally
eligible, including annual grants of stock options (beginning in 1999)
under the Company's Nonqualified Stock Option Plan and other stock option
plans that the Company may adopt from time to time (all such plans, as they
may be adopted and amended from time to time being hereinafter referred to
collectively as the "Stock Option Plan"), at a level commensurate with
Executive's position in the Company.
(b) The Company shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Agreement
which are consistent with the Division's policies in effect from time to
time for senior executives with respect to travel, entertainment and other
business expenses, subject to the Company's requirements for its executives
with respect to reporting and documentation of such expenses.
(c) Beginning with the Company's 1999 calendar year, in addition to
the Base Salary, Executive shall be eligible to receive a bonus (the
"Bonus") at the end of each calendar year during the Employment Period of
up to 20% of Executive's Base Salary (the "Target Bonus") based upon
Executive's performance and the Company's and/or the Division's financial
results versus targets established by the President or the Compensation
Committee of the Board for such year. The Bonus, if any, will be payable no
later than March 1 of the year immediately following the year in which the
Bonus was earned. The Bonus will be prorated for any partial year during
the Employment Period.
1
<PAGE> 2
4. Term and Termination.
(a) This Agreement shall terminate on the second anniversary of the
date hereof (the "Expiration Date") unless terminated earlier (i) by
Executive's resignation with or without Good Reason or Executive's death or
Disability or (ii) by the Company with or without Cause. The date on which
Executive's employment with the Company is terminated is referred to herein
as the "Termination Date."
(b) (i) If Executive's employment with the Company is terminated by
the Company without Cause or by Executive with Good Reason, (x) Executive
shall be entitled to receive his Base Salary and his Target Bonus through
the Expiration Date, payable in accordance with paragraph 3 above, (y) all
stock options granted to Executive under the Stock Option Plan which are
not vested at such time shall automatically, and without further action,
become vested as of the Termination Date and all such options (together
with all of Executive's then vested stock options), shall remain
exercisable until the later to occur of (I) the Expiration Date and (II)
the expiration of such stock options pursuant to the terms of the Stock
Option Plan and (z) Executive's obligations under paragraph 6(a) below
shall terminate and be of no further force or effect.
(ii) If Executive's employment with the Company is terminated for any
reason other than as described in item (i) above, Executive shall be
entitled to receive his Base Salary through the Termination Date.
(c) All of Executive's rights to fringe benefits shall cease upon the
Termination Date.
(d) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
"Cause" shall mean (i) the conviction of Executive for a felony or
a crime involving moral turpitude or the plea of guilty or no lo
contendre by Executive to a charge of any such crime, (ii) Executive's
theft or embezzlement, of money or property of the Company, (iii)
Executive's perpetration of fraud, or Executive's participation in a
fraud, on the Company or Executive's unauthorized appropriation of any
tangible or intangible material assets or property of the Company, (iv)
Executive's substantial and repeated failure to perform his duties
hereunder in accordance with the reasonable directions of the Board or
the President.
"Disability" shall mean the inability, due to illness, accident,
injury, physical or mental incapacity or other disability, of Executive
to carry out effectively his duties and obligations to the Company or to
participate effectively and actively in the management of the Company
for a period of at least 90 consecutive days or for shorter periods
aggregating at least 120 days (whether or not consecutive) during any
twelve-month period, as determined in the reasonable and good faith
judgment of the Board.
"Good Reason" shall mean (x) the Company's willful and material
breach of this Agreement or (y) the assignment to Executive of duties
that are materially inconsistent with Executive's position.
(e) A termination of this Agreement pursuant to its terms on the
Expiration Date shall not, in and of itself, constitute a termination of
Executive's employment with the Company. At such time, unless the Company
or the Executive terminate Executive's employment with the Company,
Executive shall become an employee at-will of the Company.
5. Confidential Information. Executive acknowledges that the information,
observations and data obtained by him while employed by the Company concerning
the business or affairs of the Company reasonably considered of a confidential
nature ("Confidential Information") are the property of the Company. Therefore,
Executive agrees that he shall not disclose to any unauthorized person or use
for his own purposes any Confidential Information without the prior written
consent of the Board, unless and to the extent that the aforementioned matters
become generally known to and available for use by the public other than as a
result of Executive's acts or omissions, or is otherwise known to Executive from
independent sources prior to or
2
<PAGE> 3
outside of Executive's employment with the Company. Executive shall deliver to
the Company at the termination of the Employment Period, or at any other time
the Company may reasonably request, all memoranda, notes, plans, records,
reports, computer tapes, printouts and software and other documents and data
(and copies thereof) relating to the Confidential Information or the business of
the Company which he may then possess or have under his control. Nothing herein
shall prohibit Executive's disclosure of Confidential Information as directed by
judicial, administrative or other governmental law, rule, regulation or order
provided that Executive shall, to the extent possible, give immediate notice to
the Company of any disclosure of Confidential Information so required so that
the Company may seek a protective order.
6. Non-Compete, Non-Solicitation.
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his
employment with the Company he shall become familiar with the Company's
trade secrets and with other Confidential Information concerning the
Company and that his services shall be of special, unique and extraordinary
value to the Company. Therefore, Executive agrees that, during the
Employment Period and for two years thereafter (the "Noncompete Period"),
he shall not directly or indirectly own any interest in, manage, control,
participate in, consult with, render services for, or in any manner engage
in any business competing with the businesses of the Company, as such
businesses exist or are in process on the date of the termination of
Executive's employment, within any geographical area in which the Company
engages or plans to engage in such businesses. Nothing herein shall
prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded,
so long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any
employee of the Company to leave the employ of the Company, or in any way
interfere with the relationship between the Company and any employee
thereof, (ii) hire any person who was an employee of the Company at any
time during the Employment Period (unless such employee was terminated by
the Company), or (iii) induce or attempt to induce any customer, supplier,
licensee, licensor, franchisee or other business relation of the Company to
cease doing business with the Company, or in any way interfere with the
relationship between any such customer, supplier, licensee or business
relation and the Company.
(c) If, at the time of enforcement of this paragraph 6, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall
be substituted for the stated duration, scope or area and that the court
shall be allowed to revise the restrictions contained herein to cover the
maximum period, scope and area permitted by law. Executive agrees that the
restrictions contained in this paragraph 6 are reasonable.
(d) In the event of the breach or a threatened breach by Executive of
any of the provisions of this paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply
to any court of law or equity of competent jurisdiction for specific
performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof (without posting a bond or
other security). In addition, in the event of an alleged breach or
violation by Executive of this paragraph 6, the Noncompete Period shall be
tolled until such breach or violation has been duly cured.
7. Mutual Representations. Executive and the Company each represents and
warrants to the other that (i) the execution, delivery and performance of this
Agreement by such party do not and shall not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which such party is a party or by which or it is bound, (ii) Such
party is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity that
would be breached or violated by such party execution and delivery or
performance of this Agreement and (iii) upon the execution and delivery of this
Agreement by such party, this Agreement shall be the valid and
3
<PAGE> 4
binding obligation of such party, enforceable in accordance against such party
with its terms. Such party hereby acknowledges and represents that or it has
consulted with independent legal counsel regarding his rights and obligations
under this Agreement and that he fully understands the terms and conditions
contained herein.
8. Survival. Paragraphs 5 and 6 and paragraphs 9 through 16 shall survive
and continue in full force in accordance with their terms notwithstanding any
termination of the Employment Period.
9. Notices. Any notice provided for in this Agreement shall be in writing
and shall be either personally delivered, or mailed by first class mail, return
receipt requested, to the recipient at the address below indicated:
Notices to Executive:
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
Notices to the Company:
Gerald Stevens, Inc.
One Financial Plaza, 11th Floor
Ft. Lauderdale, FL 33394
Attention: President
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement shall be deemed to have been given when so delivered
or three (3) days after so mailed.
10. Severability. Whenever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement and the Purchase Agreement embodies
with respect to the subject matter hereof the complete agreement and
understanding among the parties and supersedes and preempts with respect to the
subject matter hereof any prior understandings, agreements or representations by
or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
12. No Strict Construction. The language used in this Agreement shall be
deemed to be the language chosen by the parties hereto to express their mutual
intent, and no rule of strict construction shall be applied against any party,
it being understood that paragraph 6(c) contemplates that a court of competent
jurisdiction shall be entitled to "blue pencil" or conform the express language
of paragraph 6(a) if necessary in order to comply with Florida law.
13. Counterparts. This Agreement may be executed in separate counterparts,
each of which is deemed to be an original and all of which taken together
constitute one and the same agreement.
14. Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of and be enforceable by Executive, the Company and their respective
heirs, successors and assigns, except that (x) Executive may not assign his
rights or delegate his obligations hereunder without the prior written consent
of the Company and (y) other than in connection with sale of (i) the stock or
all or substantially all of the assets of [insert chain] or (ii) the Company
(whether by merger, consolidation, sale of all of the Company's stock or sale of
all or substantially all of the Company's assets), the Company may not assign
its rights to Executive's services hereunder to any third party.
4
<PAGE> 5
15. CHOICE OF LAW. ALL ISSUES AND QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF FLORIDA, WITHOUT
GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW RULES OR PROVISIONS
(WHETHER OF THE STATE OF FLORIDA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE
APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF FLORIDA.
16. Amendment and Waiver. The provisions of this Agreement may be amended
or waived only with the prior written consent of the Company and Executive, and
no course of conduct or failure or delay in enforcing the provisions of this
Agreement shall affect the validity, binding effect or enforceability of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GERALD STEVENS, INC.
By
----------------------------------
Name: Gerald R. Geddis
Title: President
------------------------------------
[Executive]
5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Miami, Florida,
April 7, 1999.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/S/ PRICEWATERHOUSECOOPERS LLP
April 7, 1999
Miami, Florida
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our reports and the reference to our firm
under the caption "Experts" and to the use of our report dated October 8, 1998
(except Notes 14 and 15, as to which the dates are December 9, 1998 and April 6,
1999) in the Registration Statement (Form S-4 No. 333-00000) and related Proxy
Statement/Prospectus of Florafax International, Inc. for the registration of
28,052,878 shares of its common stock filed with the Securities and Exchange
Commission.
/s/ ERNST & YOUNG LLP
------------------------------------------
Ernst & Young LLP
Tampa, Florida
April 9, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ADAIR, FULLER, WITCHER & MALCOM, P.A.
Fort Lauderdale, Florida,
April 7, 1999.
<PAGE> 1
Exhibit 23.7
CONSENT OF ABN AMRO INCORPORATED
We hereby consent to the references to our firm under the captions "SUMMARY -
Stock Issuance and Change of Control - Opinion of our financial advisor, "
"PROPOSAL NO.1 STOCK ISSUANCE AND CHANGE OF CONTROL - Background of the Merger,"
"PROPOSAL NO.1 STOCK ISSUANCE AND CHANGE OF CONTROL - Our Reasons for the
Merger; Recommendations of Our Board of Directors," "PROPOSAL NO.1 STOCK
ISSUANCE AND CHANGE OF CONTROL - Opinion of ABN AMRO" in the Proxy Statement and
Prospectus, each included in the Registration Statement on Form S-4 relating to
the proposed merger of a subsidiary of Florafax International, Inc. with and
into Gerald Stevens, Inc., and to the inclusion of our opinion letter as
Appendix B in the Proxy Statement/Prospectus. In giving this consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, nor to do we
admit that we are experts with respect to any part of such Registration
Statement within the meaning of "experts" as used in the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
ABN AMRO INCORPORATED
April 8, 1999 By: /s/ Philip R. Clarke III
---------------------------
<PAGE> 1
EXHIBIT 23.8
April 7, 1999
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Gentlemen:
I hereby agree to become a director of Florafax International, Inc. (the
"Company") upon completion of the Company's acquisition of Gerald Stevens, Inc.
pursuant to that certain merger agreement dated as of December 9, 1998, as
amended.
/s/ STEVEN R. BERRARD
-------------------------------------------
STEVEN R. BERRARD
<PAGE> 2
EXHIBIT 23.8
April 7, 1999
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Gentlemen:
I hereby agree to become a director of Florafax International, Inc. (the
"Company") upon completion of the Company's acquisition of Gerald Stevens, Inc.
pursuant to that certain merger agreement dated as of December 9, 1998, as
amended.
/s/ THOMAS C. BYRNE
-------------------------------------------
THOMAS C. BYRNE
<PAGE> 3
EXHIBIT 23.8
April 7, 1999
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Gentlemen:
I hereby agree to become a director of Florafax International, Inc. (the
"Company") upon completion of the Company's acquisition of Gerald Stevens, Inc.
pursuant to that certain merger agreement dated as of December 9, 1998, as
amended.
/s/ GERALD R. GEDDIS
-------------------------------------------
GERALD R. GEDDIS
<PAGE> 4
EXHIBIT 23.8
April 7, 1999
Florafax International, Inc.
8075 20th Street
Vero Beach, Florida 32966
Gentlemen:
I hereby agree to become a director of Florafax International, Inc. (the
"Company") upon completion of the Company's acquisition of Gerald Stevens, Inc.
pursuant to that certain merger agreement dated as of December 9, 1998, as
amended.
/s/ KENNETH ROYER
-------------------------------------------
KENNETH ROYER
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> AUG-31-1999 AUG-31-1998
<PERIOD-START> SEP-01-1998 SEP-01-1997
<PERIOD-END> NOV-30-1998 AUG-31-1998
<CASH> 3,273,000 3,544,000
<SECURITIES> 0 0
<RECEIVABLES> 2,539,000 2,224,000
<ALLOWANCES> 462,000 482,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,851,000 5,752,000
<PP&E> 5,117,000 4,974,000
<DEPRECIATION> 3,078,000 2,992,000
<TOTAL-ASSETS> 11,975,000 11,886,000
<CURRENT-LIABILITIES> 5,913,000 5,259,000
<BONDS> 1,080,000 2,098,000
0 0
0 0
<COMMON> 86,000 85,000
<OTHER-SE> 4,844,000 4,472,000
<TOTAL-LIABILITY-AND-EQUITY> 11,975,000 4,557,000
<SALES> 0 0
<TOTAL-REVENUES> 3,755,000 13,391,000
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,146,000 14,822,000
<LOSS-PROVISION> 37,000 127,000
<INTEREST-EXPENSE> 26,000 82,000
<INCOME-PRETAX> 515,000 (1,305,000)
<INCOME-TAX> 228,000 (682,000)
<INCOME-CONTINUING> 287,000 (623,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 287,000 (623,000)
<EPS-PRIMARY> .04 (.08)
<EPS-DILUTED> .03 (.08)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FLORAFAX INTERNATIONAL, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
APRIL 23, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned stockholder of Florafax International, Inc. ("Florafax")
hereby appoints Andrew W. Williams and James H. West, or either of them, as
proxies, each with power to act without the other and with full power of
substitution, for the undersigned to vote the number of shares of common stock
of Florafax that the undersigned would be entitled to vote if personally present
at the Annual Meeting of Stockholders of Florafax to be held on Friday, April
23, 1999, at 2:30 p.m., local time, at Bent Pine Country Club, 6001 Clubhouse
Drive, Vero Beach, Florida 32967, and at any adjournment or postponement
thereof, on the following matters that are more particularly described in the
Proxy Statement/Prospectus dated April 12, 1999:
(1) Proposal to approve the issuance of shares of Florafax common stock in
connection with the merger (the "Merger") of Gerald Stevens, Inc., into a
subsidiary of Florafax and the resulting change of control of Florafax.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) Proposal to amend the Certificate of Incorporation of Florafax upon
consummation of the Merger to change the name of Florafax to "Gerald
Stevens, Inc." and increase the authorized shares of Florafax common stock
from 70,000,000 to 250,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) Election of Steven R. Berrard, Thomas C. Byrne, Gerald R. Geddis, Kenneth R.
Royer and Andrew W. Williams to serve as directors of Florafax upon
consummation of the Merger and until the Annual Meeting of Stockholders of
Florafax in 2000 or until their successors have been qualified.
[ ] FOR all listed nominees (except do not vote for the nominee(s) whose
name(s) appear(s) below):
- --------------------------------------------------------------------------------
[ ] WITHHOLD AUTHORITY to vote for listed nominees.
(4) To consider and take action upon any other matter which may properly come
before the meeting or any adjournment or postponement thereof.
(Continued and to be signed on other side)
(Continued from other side)
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED "FOR" PROPOSALS 1, 2 AND 3. Receipt of the Proxy Statement/Prospectus
dated April 12, 1999, is hereby acknowledged.
----------------------------------
----------------------------------
Signature of Stockholder(s)
Please sign your name exactly as
it appears hereon. Joint owners
must each sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
your full title as it appears
thereon.
Date:
----------------------------------,
1999
Please mark, sign, date and return
using the enclosed envelope.
