<PAGE> 1
PROSPECTUS
5,000,000 SHARES
(GERALD STEVENS, INC. LOGO)
COMMON STOCK
---------------------
All of the shares of common stock are being sold by Gerald Stevens. The
common stock is quoted on the Nasdaq National Market under the symbol "GIFT." On
June 29, 1999, the last sale price of the common stock as reported on the Nasdaq
National Market was $13 1/16 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 10 OF THIS PROSPECTUS.
---------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price........................ $12.00 $60,000,000
Underwriting discount........................ $.72 $3,600,000
Proceeds, before expenses, to Gerald
Stevens.................................... $11.28 $56,400,000
</TABLE>
The underwriters may also purchase up to an additional 750,000 shares
from Gerald Stevens at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New
York on or about July 6, 1999.
---------------------
MERRILL LYNCH & CO.
ALLEN & COMPANY
INCORPORATED
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
---------------------
The date of this prospectus is June 29, 1999.
<PAGE> 2
Cover 2
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[LOGO]
[GRAPHICS]
The Freshest Flowers on Earth(SM)
long-lasting
highest quality
[PHOTOS] [MAP]
unique Current National Platform Includes:
customized *Largest Specialty Floral Retailer
gift giving With Over 125 Retail Locations,
selection In 18 Markets
indulgent *4 Call Centers, w/300 Seats
appealing In 3 Time Zones (a)
professionally staffed *Leading Corporate Affinity
variety Floral Marketer
highly desired products *Largest Floral Yellow Page
wide selection Advertiser
fresh *Largest Floral Catalog
convey emotions Marketer(a)
convenience *Largest Direct-From-Farm
Floral Retailer(a)
Current Locations
National Call Centers/Direct
Marketing(a)
Importer
(a) Assumes Calyx & Corolla is
acquired
Covers 3 and 4
- ----------------
[PHOTOS]
Farm Source / Catalog / Retail / Direct Delivery
Phone / Hub / Walk-In
On-Line / Grocery / Same-Day Delivery
The Joy of Giving and Receiving
<PAGE> 3
[PHOTOS] [LOGO]
Celebrate life with flowers
The joy of giving
Mother's Day Valentine's Day
love Birthdays
Anniversaries Easter
Christmas Nature
indulge Celebrate
happiness honor
relax respect
spiritual peace
joy caring
beauty simple
delight friendship
bright
Seize the Day
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 5
Risk Factors................................................ 10
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Market Price Information.................................... 20
Capitalization.............................................. 21
Supplemental Selected Historical Financial Data............. 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 23
Business.................................................... 36
Management.................................................. 48
Related Party Transactions.................................. 50
Security Ownership of Beneficial Owners and Management...... 51
Description of Our Capital Stock............................ 53
Shares Eligible for Future Sale............................. 54
Material United States Federal Tax Consequences for
Non-United States Holders................................. 55
Underwriting................................................ 59
Legal Matters............................................... 62
Experts..................................................... 62
Where You Can Find More Information......................... 63
Incorporation of Information by Reference................... 63
Index to Pro Forma Supplemental Consolidated Financial
Statements................................................ PF-1
Index to Financial Statements............................... F-1
</TABLE>
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FORWARD-LOOKING STATEMENTS
This document includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about our company, including, among other things:
- Our anticipated growth strategies and ability to integrate acquired
businesses;
- The limited combined operating history of the companies we acquire;
- Our need to improve our information systems;
- Our dependence on additional capital for growth;
- Economic and other conditions beyond our control such as seasonality,
customer discretionary spending and availability of product; and
- Our ability to maintain business relationships within the industry.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in the prospectus might not occur.
---------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate only
as of the date on the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed since that date.
Information on our web sites is not incorporated into this document.
3
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[This Page Intentionally Left Blank]
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements. References in this prospectus to
"Gerald Stevens," "we," "our" and "us" refer to Gerald Stevens, Inc., a Delaware
corporation, and its subsidiaries. Until April 30, 1999, our name was Florafax
International, Inc. Our fiscal year ends on August 31. References to a fiscal
year shall refer to the 12 month period ended August 31 of that year.
GERALD STEVENS
We are an integrated retailer and marketer of flowers, plants, and
complementary gifts and decorative accessories. We currently operate the largest
company-owned network of floral specialty retail stores in the United States,
with 141 locations, which we intend to expand to over 1,000 locations during the
next five years. We are building a national brand and transforming the retail
floral industry by integrating our operations throughout the floral supply
chain, from product sourcing to delivery, and by managing every interaction with
the customer, from order generation to order fulfillment. We ultimately intend
to provide all of our retail customers with a unique and enhanced shopping
experience under the Gerald Stevens brand.
Our national sales and marketing division permits us, through multiple
distribution channels, including the Internet, dial-up numbers and direct mail,
to serve customers who do not visit or phone our retail stores. This division
includes National Flora, the largest yellow page advertiser of floral products,
The Flower Club, a leading corporate affinity marketer, and four primary
websites. We currently promote these websites on leading online portals,
including Yahoo!, Lycos and CNN.com. In total, our national sales and marketing
division generates over one million orders annually. To ensure superior customer
service and efficient order processing, we operate three national call centers.
To facilitate the distribution of these orders in markets where we do not have
our own stores, we operate the Florafax wire service, one of only five national
flowers-by-wire services, with approximately 5,000 member florists covering all
50 states.
To provide the freshest and highest quality products to our retail
customers, we operate our own sourcing operation. Our leading floral importer
and wholesaler, AGA Flowers, has long-term supply agreements and other
relationships to purchase cut flowers with many of the finest growers in the
United States, Central America and South America. These supply arrangements
eliminate several steps in the floral distribution chain, ensuring a reliable
source of high quality products at favorable prices. By reducing the time needed
to transport flowers from farms to our retail stores, we extend the vase life of
our flowers and thus improve customer satisfaction.
We believe our execution of this integrated operating model will make the
Gerald Stevens brand synonymous with superior service, quality and value and
build the most recognized and respected floral and gift brand in the United
States. Once established, we believe the Gerald Stevens brand will drive
increased consumption of all of our products, particularly flowers.
RECENT DEVELOPMENTS
On April 30, 1999, we completed a business combination with Gerald Stevens
Retail, Inc., which was formerly known as Gerald Stevens, Inc., and changed our
business name from Florafax International, Inc. to Gerald Stevens, Inc. Gerald
Stevens Retail provided us with our retail stores, most of our Internet and
order-generation operations, and most of our directors and senior management
team.
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In May 1999, we entered into an Agreement and Plan of Merger with Calyx &
Corolla, Inc., the largest direct marketer of flowers with over $20.0 million in
sales in its latest fiscal year. In connection with the merger, we will nominate
Ruth Owades, the current Chairman and CEO of Calyx & Corolla, to our Board of
Directors.
The Calyx & Corolla acquisition will strengthen our position as the largest
specialty floral and gift retailer in the country and enhance our reputation
with the well-known and highly trusted Calyx & Corolla brand. The acquisition
also will serve as a platform for our direct marketing efforts and expand our
customer database by over 1.5 million floral customers. Given the strength of
the Calyx & Corolla brand and the success of its catalog operation, our
intention is to greatly expand the marketing of its website,
calyxandcorolla.com., which has experienced significant revenue gains over last
year. Calyx & Corolla redesigned this site in late April.
As of June 29, 1999, we were in negotiations to acquire 21 additional
floral businesses with an aggregate of 50 stores.
THE FLORAL INDUSTRY SIZE AND OPPORTUNITIES
Size. The domestic retail floral industry is a large and growing industry
with attractive business economics. According to industry sources:
- Retail floral industry revenue was approximately $15 billion in 1998;
- When added to the complementary gifts and accessories market, the
combined market exceeds $60 billion;
- Sales by florists grew by 5.5% in 1997; and
- Gross margins for retailers average approximately 65%.
Opportunity to Create a National Network. We believe that the domestic
retail floral industry presents opportunities for innovation, differentiation
and the creation of a national brand due to the following industry
characteristics:
- Highly fragmented, with the top ten floral chains accounting for less
than 5% of total retail sales;
- Absence of a national retail brand;
- Unique customer purchasing characteristics, with 70% of product orders
placed over the telephone, approximately 95% of which are made to local
florists, enabling the development of large customer databases;
- Inefficient and decentralized supply chain, with transactions between
growers, importers, wholesalers and retailers creating substantial
incremental costs to the customer but providing little additional value
to the end user;
- Lack of integrated order generation and fulfillment companies;
- Under-marketed, with marketing expenditures typically less than 3% of
sales; and
- Large, underutilized customer lists at retail stores.
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Opportunity to Grow the Market. We believe the retail floral industry also
presents opportunities to expand floral consumption as a result of the following
factors:
- The United States is not among the top ten countries in the world in per
capita consumption of flowers; per capita spending in the United States
is significantly less than that of most western European countries;
- Favorable customer demographics and lifestyle trends should generate
additional industry growth;
- Customers value an extended vase life for flowers, which can be achieved
by streamlining the supply chain;
- Retail florists have largely ignored the opportunity to increase
self-consumption by focusing on the gift-giving customer; and
- The Internet allows for visual merchandising and targeted marketing of
flowers.
BUSINESS STRATEGY
Our goal is to become the premier specialty floral and gift retailer and
marketer in the United States. We intend to accomplish this by selling a broad
selection of products, providing superior customer service and building strong
customer loyalty. Because of our management team's extensive experience in
developing nationally branded specialty retailers, we believe we have the skills
and experience necessary to establish Gerald Stevens as the preeminent brand in
the floral industry. Key elements of our strategies include:
- Building a national network of retail stores by rapidly expanding our
retail store base, enhancing the efficiency of our local order
fulfillment and distribution network and creating an innovative in-store
experience;
- Building our traditional order generation businesses and developing and
promoting our e-commerce operations;
- Building our customer direct business;
- Creating supply chain efficiencies; and
- Developing our information systems.
We believe that by executing these strategies and integrating our
operations, the Gerald Stevens brand will be well-positioned to take advantage
of the significant opportunities in the retail floral industry and become the
premier floral and gift retailer and marketer in the United States.
---------------------
Gerald Stevens was incorporated in 1970. Our principal executive offices
are located at 301 East Las Olas Boulevard, Suite 300, Ft. Lauderdale, Florida
33301. Our telephone number is (954)713-5000.
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THE OFFERING
Common stock offered by
Gerald Stevens.............. 5,000,000 shares
Shares outstanding after the
offering.................... 41,760,342 shares
Use of proceeds............... At a public offering price of $12.00 per share,
we estimate that the net proceeds from this
offering (without exercise of the
over-allotment option), after deducting the
underwriting discount and estimated expenses of
the offering, will be approximately $55.4
million. We intend to use these net proceeds
for:
- Repayment of outstanding indebtedness;
- Internet development and marketing
costs;
- Acquisitions;
- Information systems development costs;
- Store development and remodeling costs;
and
- Working capital.
See "Use of Proceeds."
Risk factors.................. See "Risk Factors" and the other information
included in this prospectus for a discussion of
factors you should carefully consider before
deciding to invest in shares of our common
stock.
Nasdaq National Market
symbol...................... GIFT
The number of shares that will be outstanding after the offering is based
on the number outstanding on June 25, 1999. It excludes (1) 2,314,404 shares
issuable upon the exercise of outstanding options, (2) 885,500 shares reserved
for issuance in connection with options that may be granted under our stock
option plans (725,500 on a pro forma and pro forma as adjusted basis), (3)
239,948 shares issuable upon the exercise of outstanding warrants and (4)
750,000 shares of common stock issuable upon exercise of the underwriters'
over-allotment option.
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SUMMARY SUPPLEMENTAL HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary supplemental historical financial data for Gerald Stevens
presented below for each of the three years ended August 31, 1996, 1997, and
1998 have been derived from the audited supplemental consolidated financial
statements of Gerald Stevens. The summary supplemental historical financial data
for the six month periods ended February 28, 1998 and 1999 for Gerald Stevens
have been derived from the unaudited supplemental consolidated financial
statements of Gerald Stevens. The supplemental unaudited pro forma financial
data presented below assumes the post-October 1, 1998 acquisitions, accounted
for under the purchase method of accounting, and the October 1, 1998 private
placement had been consummated as of the beginning of the period for income
statement data and as if the post-February 28, 1999 acquisitions had been
consummated as of February 28, 1999 for balance sheet data. The summary
supplemental unaudited pro forma, as adjusted financial data presented below
further assumes the offering of common stock contemplated in this prospectus had
been consummated as of the beginning of the period for income statement data and
as of February 28, 1999 for balance sheet data. The data should be read in
conjunction with the supplemental consolidated financial statements, related
notes, management's discussion and analysis of financial condition and results
of operations, and supplemental pro forma financial information which are
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
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1998
1998 (PRO
(PRO FORMA, AS
1996(1)(2) 1997(2)(3) 1998(2)(4) FORMA) ADJUSTED)
---------- ---------- ---------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue............ $10,299 $11,609 $13,391 $124,176 $124,176
Gross profit............. 10,299 11,609 13,391 85,599 85,599
Operating income
(loss)................. 1,562 1,918 (3,076) 1,676 1,676
Net income (loss)........ $ 2,262 $ 3,433 $(2,268) $ 714 $ 1,289
Earnings (loss) per
share:
Basic.................. $ 0.38 $ 0.43 $ (0.26) $ 0.02 $ 0.03
Diluted................ $ 0.35 $ 0.39 $ (0.26) $ 0.02 $ 0.03
Weighted-average common
and common equivalent
shares outstanding:
Basic.................. 5,988 8,076 8,581 36,255 41,255
Diluted................ 6,375 8,715 8,581 37,291 42,291
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
--------------------------------------------
1999
(PRO
1999 FORMA,
(PRO AS
1998 1999(5) FORMA)(6) ADJUSTED)(6)
------ -------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue............ $8,194 $39,995 $68,964 $68,964
Gross profit............. 8,194 27,251 47,437 47,437
Operating income
(loss)................. 1,061 (4,416) (1,784) (1,784)
Net income (loss)........ $ 718 $(6,457) $(1,765) $(1,390)
Earnings (loss) per
share:
Basic.................. $ 0.09 $ (0.21) $ (0.05) $ (0.03)
Diluted................ $ 0.08 $ (0.21) $ (0.05) $ (0.03)
Weighted-average common
and common equivalent
shares outstanding:
Basic.................. 7,677 31,198 36,255 41,255
Diluted................ 8,714 31,198 36,255 41,255
</TABLE>
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BALANCE SHEET DATA:
Working capital (deficiency)......................................................................
Intangible assets.................................................................................
Total assets......................................................................................
Long-term debt....................................................................................
Total liabilities.................................................................................
Stockholders' equity..............................................................................
<CAPTION>
FEBRUARY 28, 1999
--------------------------------
(PRO
FORMA,
(PRO AS
ACTUAL FORMA) ADJUSTED)
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency) $ 1,093 $(5,836) $39,010
Intangible assets........... 45,012 84,259 84,259
Total assets................ 71,544 115,771 160,617
Long-term debt.............. 1,138 10,554 --
Total liabilities........... 19,557 38,464 27,910
Stockholders' equity........ 51,987 77,307 132,707
</TABLE>
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(1) Net income in 1996 includes an extraordinary gain of $128 from the
forgiveness of certain debt.
(2) Net income in 1996, 1997 and 1998 includes income tax benefits of $863, $637
and $682, respectively, primarily from the recognition of benefits related
to net operating loss carry forwards. See Note 10 of the Notes to
Supplemental Consolidated Financial Statements of Gerald Stevens.
(3) Net income in 1997 includes other income of $1,041 related to cash received
from a court award. See Note 7 of the Notes to Supplemental Consolidated
Financial Statements of Gerald Stevens.
(4) Operating income in 1998 includes a contract modification charge of $3,495.
(5) Operating income for the six month period ended 1999 includes merger
expenses of $4,051 and a non-cash compensation expense of $1,373 related to
non-plan stock options.
(6) Operating income for the pro forma, and pro forma, as adjusted, six month
period ended 1999 excludes the merger expenses of $4,051.
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RISK FACTORS
There are various risks to an investment in our common stock, including
those described below. You should carefully consider these risk factors,
together with all of the other information included in this prospectus, before
you decide to invest in shares of our common stock.
If any of the following risks, or other risks not presently known to us or
that we currently believe not to be significant, develop into actual events,
then our business, financial condition, results of operations or prospects could
be materially adversely affected. If that happens, the market price of our
common stock could decline, and you may lose all or part of your investment.
OUR POTENTIAL INABILITY TO IMPLEMENT OUR GROWTH STRATEGY
Our business strategy will focus on growing our revenue and operations
internally by opening new retail locations and expanding sales through other
order-generating operations, including our websites on the Internet, as well as
by making acquisitions of floral and gift 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 growth.
We may expand our operations not only in the lines of business we currently
conduct, 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 may not 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 and our
growth strategy may not result in improving our profitability. If we fail to
implement our growth strategy successfully, the market price of our common stock
may decline. In addition, we may not be able to retain all of the customers of
the retail stores that we acquire.
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DEMANDS ON OUR RESOURCES DUE TO GROWTH
Our anticipated growth could place significant demands on our management
and our operational, financial and marketing resources. These demands are due to
our plans to:
- acquire and integrate numerous floral and gift 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.
Our management and resources, now and in the future, may not be adequate to
meet the demands resulting from our expected growth.
CONTINUED NET LOSSES COULD HINDER OUR GROWTH STRATEGY
We have experienced losses during our most recent fiscal year and interim
period. Our net losses were $2.3 million for fiscal 1998 and $6.5 million for
the six months ended February 28, 1999, which include a contract modification
charge of $3.5 million in fiscal 1998 and merger expense of $4.1 million and a
non-cash compensation expense of $1.4 million related to non-plan stock options
during the six month period. Gerald Stevens Retail was established in May 1998,
and commenced operations in October 1998 upon completion of its acquisition of
ten floral businesses. For the period from its inception to September 30, 1998,
Gerald Stevens Retail was a development stage company with no revenue and
generated a net loss of $2.1 million. If we incur net losses in future periods,
we may not be able to implement our growth strategy in accordance with our
present plans and our stock price may decline.
OUR PRO FORMA RESULTS MAY NOT BE INDICATIVE OF FUTURE RESULTS
The pro forma supplemental consolidated financial statements included in
this prospectus cover periods when Gerald Stevens and the acquired businesses
were not under common control or management. These pro forma financial
statements may not be indicative of our future financial condition, operating
results, growth trends or prospects.
You must evaluate our prospects in light of the risks, expenses and
difficulties frequently encountered by companies in the early stages of a new
growth strategy. Our strategy of building a nationally branded floral and gift
retailer and marketer may not lead to growth, profitability or increased market
prices for our common stock.
WE NEED TO IMPROVE OUR INFORMATION SYSTEMS
We need to make improvements to and integrate our information systems.
Although we intend to spend approximately $15.0 million on hardware and software
over the next three years to improve our systems, this budget may not be
sufficient. We also need to hire more accounting and information systems
personnel. We may experience delays, disruptions and unanticipated expenses in
implementing, integrating and operating our information systems. Failure to
fully integrate and enhance our information systems or hire additional personnel
could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
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WE MAY HAVE DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES WITH OUR COMPANY
Until we improve our information systems, we will use and be dependent upon
the information and operating systems of our acquired entities. We may not be
able to efficiently combine our operations with those of the businesses we have
acquired without encountering difficulties. These difficulties could result from
having different and potentially incompatible operating practices, computers or
other information systems. By consolidating personnel with different business
backgrounds and corporate cultures into one company, we may experience
additional difficulties. As a result, we may not achieve anticipated cost
savings and operating efficiencies and may have difficulties in managing,
operating and integrating our businesses.
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.
Environmental liabilities could arise regardless of whether we own or lease our
properties. While we will try to minimize our potential exposure by conducting
thorough investigations during the acquisition process, we will not be able to
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, this indemnification may not be adequate to fully
offset any undisclosed liabilities associated with the business or property
acquired.
GOODWILL RESULTING FROM ACQUISITIONS MAY ADVERSELY AFFECT OUR RESULTS
Our pro forma supplemental (as adjusted for the offering) goodwill related
to acquired businesses at February 28, 1999 was approximately $84.3 million,
which represents approximately 52.5% of our pro forma as adjusted total assets
of approximately $160.6 million, and approximately 63.5% of our pro forma as
adjusted total stockholders' equity of approximately $132.7 million. The $84.3
million of goodwill will result in an annual amortization expense of
approximately $2.6 million, based upon the amortization of goodwill related to
the acquisition of retail floral businesses over useful lives of 40 years, as
well as the amortization of goodwill related to the acquisition of National
Flora, an order generation business, and Calyx & Corolla, a floral catalog and
Internet business, over useful lives of 20 years.
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 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
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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, we have financed capital expenditures and
acquisitions primarily through private equity and our revolving bank credit
facility. We have a $40.0 million revolving credit facility under which we have
outstanding borrowings of approximately $30.4 million as of June 25, 1999. We
are in discussions with a number of financial institutions regarding their
participation in an effort to increase the revolving credit facility to between
$50.0 and $75.0 million. We may not be successful in obtaining an increased
credit facility. In addition, to execute our growth strategy and meet our
capital needs, we plan to issue additional equity securities as part of the
purchase price of future acquisitions, which may have a dilutive effect on the
interests of our stockholders. However, additional capital may not 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 credit facility 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.
With regard to acquisitions, our credit facility requires that, in the
event that our consolidated leverage ratio is greater than 1.5 to 1.0 (or,
assuming the offering is completed, 2.0 to 1.0), and the cash portion of the
cost of a business acquisition exceeds $3.0 million, certain acquisition
specific covenants are applicable. These covenants include, among other things,
the requirement that at least 35.0% of the cost of an acquisition be paid for in
the form of common stock, that the proceeds of loans used to pay the cost of an
acquisition cannot exceed three times the acquired company's earnings before
interest, taxes, depreciation and amortization, and that the lender be provided
certain financial information and give consent to the acquisition.
Our credit facility also requires us 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
2.75 to 1.00 (3.00 to 1.00 on or prior to August 31, 1999) or exceed
consolidated stockholders' equity. In addition, the ratio of EBIT plus lease
payments to the sum of interest expense, current maturities of debt, cash income
taxes and lease payments must not be less than 1.10 to 1.00 prior to December
31, 2000 and 1.25 to 1.00 thereafter. Assuming the offering is completed,
capital expenditures in any fiscal year cannot exceed $22.0 million for the
fiscal year ending 1999, $42.0 million for the fiscal year ending 2000, $50.0
million for the fiscal year ending 2001 and $52.0 million for the fiscal year
ending 2002.
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 that 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, Easter and Mother's Day. In contrast to the first and second
calendar quarters, the third and fourth calendar quarters have
13
<PAGE> 15
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.
CUSTOMERS MAY REDUCE DISCRETIONARY PURCHASES OF FLOWERS AND GIFTS
We believe that the floral and gift industry is influenced by general
economic conditions and particularly by the level of personal discretionary
spending by customers. As a result, the floral and gift 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
material decline in personal discretionary spending could have a negative effect
on our business, financial condition, results of operations or prospects.
COMPETITION MAY ADVERSELY IMPACT OUR PERFORMANCE
The floral and gift industry is highly competitive. Competition exists in
each segment of the industry. We expect competition from:
- flower growers, importers, wholesalers and bouquet companies, including
Dole Food Company Inc. and USA Floral Products Inc.;
- floral wire services, including FTD, Teleflora and AFS;
- retailers including traditional floral and gift shops, supermarkets, mass
merchandisers and garden centers; and
- traditional and online order generators of floral and gift products,
including 1-800-FLOWERS.
In many of our markets, our competitors have larger and greater financial
resources than we do. The Gerald Stevens brand is new, and may not be marketed
effectively by us. We may not be able to compete successfully against our
existing competitors 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 home market price or constructed value of the flowers, then the Commerce
Department may impose an anti-dumping duty upon the importer. The precise amount
of duty is calculated after a review of sales over a twelve month period and a
comparison of the prices of the United States sales with the prices of home
market sales or constructed value. The Commerce Department is currently
conducting industry-wide 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 of later periods at any
time. Gerald Stevens currently estimates and remits the estimated assessment to
the Department of Commerce based on the most current information
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<PAGE> 16
available. The final assessment is subject to determination by the Department of
Commerce and may result in additional charges which may be material.
POLITICAL AND ECONOMIC EVENTS IN FOREIGN COUNTRIES MAY LIMIT SUPPLY OF FLOWERS
Flowers are imported principally from countries in South America and
Central 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. As a result, future political and economic
events in these flower growing countries may 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.
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.
WE MAY HAVE DIFFICULTIES TRANSPORTING FLOWERS
The perishable nature of flowers requires the floral industry to have a
transportation network that can move products quickly from the farm to the
retailer. Flowers grown in South America and Central America are typically
transported via charter flights to the United States, principally to Miami.
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 disruptions in service at Miami International Airport,
fuel shortages, work stoppages in the air charter or trucking industries or
other problems encountered in transporting flowers.
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 customer 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, particularly FTD's Mercury network. 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 may
not be able to use our normal computer-based methods for communicating orders.
In this event, 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 us 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.
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<PAGE> 17
RELATIONSHIPS WITH FLORAL WIRE SERVICE BUSINESSES MAY DETERIORATE
The retail floral industry has traditionally relied upon floral wire
services, including FTD, Teleflora, AFS and our Florafax division, to act as
intermediaries to effectively manage, among other things, the financial
settlement among 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 generating activities. One or more of
these wire services may seek to prohibit our order generation business or our
retail operations from settling orders through their wire services, or using
their technology to transmit orders. These actions may have a short-term
material adverse impact on our business, financial condition, results of
operations or prospects.
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. FTD has
notified National Flora that FTD will refuse to continue to provide financial
rebates to National Flora in the future. We may not be able to fully replace
these rebates by using other wire services. Any change in the industry's rebate
or incentive structure may have a short-term material impact on our business,
financial condition, results of operations or prospects.
RELATIONSHIPS WITH MEMBER FLORISTS OF OUR WIRE SERVICE BUSINESS MAY DETERIORATE
Some of the member florists of our Florafax wire service business may not
want to continue as members if they perceive that we are in competition with
them through our retail stores. This risk may be heightened when we acquire or
open 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.
UNCERTAINTY OF INTERNET USE AND ITS IMPACT ON OUR BUSINESS
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. However, the use of the Internet and
e-commerce by customers to purchase flowers and gifts may not increase as
rapidly as we expect, and other purchasing mediums may replace the Internet.
Additionally, unlike building traditional retail stores, where there is a
limited amount of prime retail real estate and significant capital requirements,
there are few barriers to entry on the Internet. Our competitors may be better
funded or have other proprietary technologies or approaches to e-commerce that
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.
In addition, if the use of the Internet for direct-from-grower sales does
rapidly increase and such sales replace locally delivered floral arrangements,
then the revenue we plan to generate by owning and operating numerous retail
stores may be adversely affected. Also, as e-commerce becomes more prevalent and
the use of Internet phone directories increases, the value we receive from
advertisements in traditional phone books may decrease.
WE MAY FACE INCREASED GOVERNMENT REGULATION OF THE INTERNET
There are an increasing number of federal, state, local and foreign laws
and regulations pertaining to the Internet. In addition, a number of federal,
state, local and foreign legislative and regulatory proposals are under
consideration. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content, user privacy and quality of services. Changes in tax
laws relating to electronic commerce could adversely affect our business. The
applicability to the Internet of existing laws covering issues such as
intellectual property, libel, personal privacy and other areas is uncertain and
developing. New
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<PAGE> 18
legislation or regulations could decrease growth in the use of the Internet,
impose additional burdens on e-commerce or alter how we do business. This could
decrease demand for our online product offerings, increase our cost of doing
business, increase the costs of products sold on the Internet or otherwise have
an adverse effect on our business, financial condition, results of operations
and prospects. See "Business -- Regulation."
YEAR 2000 ISSUE MAY ADVERSELY AFFECT OUR COMPUTER SYSTEMS AND OPERATIONS
Businesses we acquire 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 or 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 our retail stores;
- communicate with vendors;
- conduct accounting and banking functions; and
- manage the business effectively due to lack of information.
We may be materially adversely impacted by any of these problems.
OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE LIMITED INDUSTRY EXPERIENCE
Other than Kenneth Royer and Andrew Williams, none of our directors and
executive officers have significant experience in the floral and gift industry.
Our directors and executive officers may not ultimately be successful in the
floral and gift industry. In addition, we believe that our success will depend
to a significant extent upon the efforts and abilities of the management of
companies that we acquire.
WE DEPEND HEAVILY ON OUR SENIOR MANAGEMENT
We believe that our success will depend to a significant extent upon the
efforts and abilities of our President and Chief Executive Officer, Gerald
Geddis, our other executive officers and the senior management of the companies
which we acquire. While we have entered into employment agreements with our
executive officers and the senior management of some companies we have acquired,
we cannot assure you that any of these individuals will remain with us
throughout the term of the agreements or thereafter. Our employment agreements
with Mr. Geddis, Albert Detz and Adam Phillips terminate on December 31, 2000,
and our employment agreement with Steven Nevill terminates on February 2, 2001.
We do not have "key person" life insurance policies covering any of our
employees. We will likely also depend on the senior management of any
significant business which we acquire in the future. If we lose the services of
one or more of these key employees before we are able to attract qualified
replacement personnel, our business could be adversely affected.
OUR SIGNIFICANT STOCKHOLDERS WILL BE IN A POSITION TO INFLUENCE CORPORATE ACTION
As a result of its stock ownership and board representation, New River
Capital Partners will be in a position to influence our corporate actions such
as mergers or takeover attempts in a manner that could conflict with the
interests of our other stockholders. New River Capital Partners will own
7,977,104 shares of common stock after the offering. Based on its ownership, New
River Capital
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<PAGE> 19
Partners will own approximately 19.1% of the common stock, assuming the
underwriters do not exercise their over-allotment option. In addition, two of
the six members of our board of directors are representatives of New River
Capital Partners. In addition, our executive officers will own 4,258,380 shares
of common stock, or approximately 10.2% of our common stock, following
completion of this offering. Although there are no agreements or understandings
between New River Capital Partners and our executive officers as to voting, if
such parties voted in concert they would exert significant influence over us.
OUR STOCK PRICE MAY BE VOLATILE
The market price for our common stock has been volatile and may be affected
by a number of factors, including the announcement of acquisitions or other
developments by us or our competitors, quarterly variations in our or other
industry participants' results of operations, changes in earnings estimates or
recommendations by securities analysts, developments in the floral and gift
industry, sales of a substantial number of shares of our common stock in the
public market, general market conditions, general economic conditions and other
factors. Some of these factors may be beyond our control or may be unrelated to
our results of operations or financial condition. Such factors may lead to
further volatility in the market price of our common stock.
POSSIBLE DEPRESSING EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of a large number of shares of our common stock in the market 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 issued approximately 28.1 million shares to Gerald Stevens Retail
stockholders in the merger. These shares generally are eligible to be sold in
the public market. In addition, we may sell additional shares of common stock as
part of the purchase price for future acquisitions. 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.
Our officers and directors, New River Capital Partners and some of our
other stockholders have agreed not to sell or otherwise dispose of any shares of
common stock for a period of at least 90 days after the date of this prospectus
without the prior written approval of Merrill Lynch, Pierce, Fenner & Smith
Incorporated on behalf of the underwriters. See "Shares Eligible for Future
Sale."
POSSIBLE DILUTION IN VALUE OF COMMON STOCK AND VOTING POWER
If we issue additional shares of common stock, including shares that may be
issued pursuant to option grants, earn-out arrangements and future acquisitions,
purchasers of common stock may experience dilution in the net tangible book
values per share of the common stock. In addition, because our stockholders do
not have any preemptive right to purchase additional shares in the future, their
voting power will be diluted by any issuance of shares.
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<PAGE> 20
USE OF PROCEEDS
The net proceeds we receive from the sale of the 5,000,000 shares of common
stock in this offering are estimated to be approximately $55.4 million at the
public offering price of $12.00 per share and after deducting the estimated
underwriting discount and offering expenses that we will pay. If the
underwriters exercise their over-allotment option in full, the net proceeds we
receive will be approximately $63.9 million.
We expect to use the net proceeds (1) to repay approximately $30.4 million
of existing indebtedness under our revolving credit facility, any part of which
is available to be reborrowed, (2) for Internet development and marketing costs,
(3) for acquisitions of businesses that are complementary to ours, (4) for
development of information systems, (5) for store development and remodeling
costs, and (6) for working capital. The approximate $30.4 million of
indebtedness to be repaid consists of approximately $3.0 million at the base
rate of our revolving credit facility, currently 7.75%, and approximately $27.4
million in LIBOR notes, at an average rate of 5.97%. Our notes mature at various
dates from June 30, 1999 to July 2, 1999, and our current revolving credit
facility expires in June 2002. This indebtedness has been incurred since March
1999 and has been used principally to finance our acquisition growth.
Pending these uses, we intend to invest the net proceeds from this offering
in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid dividends on our common stock and we do not anticipate
paying cash dividends in the foreseeable future. We intend to retain future
earnings to fund the development and growth of our business. Any 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. Our credit facility
also restricts our ability to pay dividends.
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<PAGE> 21
MARKET PRICE INFORMATION
Our common stock began trading on the Nasdaq National Market under the
symbol "GIFT" on May 3, 1999. Prior to that date, our common stock traded on the
Nasdaq SmallCap Market under the symbol "FIIF" beginning on May 30, 1997. Prior
to that date, our common stock traded in the "Over the Counter" or "Pink Sheet"
market. The number of registered stockholders of our common stock on June 1,
1999 was approximately 1,350 based on information furnished by our transfer
agent.
The table below sets forth by quarter, for the fiscal years ended August
31, 1997 and 1998 and for the indicated quarterly periods in the current year,
the high and low intra-day sale 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>
SALE PRICES
-------------
HIGH LOW
---- ---
<S> <C> <C>
1997:
First quarter............................................... $ 2 7/8 $ 1 3/4
Second quarter.............................................. 3 7/16 2 3/8
Third quarter............................................... 3 7/16 2 13/32
Fourth quarter.............................................. 4 1/8 3 1/8
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
1999:
First quarter............................................... $ 7 1/4 $ 4
Second quarter.............................................. 21 7/8 6 7/16
Third quarter............................................... 18 3/4 10 3/8
Fourth quarter (through June 29)............................ 16 12 1/8
</TABLE>
On June 29, 1999, the closing sale price of our common stock on the Nasdaq
National Market was $13 1/16 per share. We urge you to obtain current market
quotations for shares of our common stock.
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<PAGE> 22
CAPITALIZATION
The following table sets forth our unaudited capitalization as of February
28, 1999 (1) on a historical basis, (2) pro forma for the post-February 28, 1999
significant probable and completed acquisitions that are reflected in the Pro
Forma Supplemental Consolidated Financial Statements included in this
prospectus, and (3) pro forma as adjusted for the offering, including the
application of the net proceeds therefrom as set forth in "Use of Proceeds."
This table should be read in conjunction with the Pro Forma Supplemental
Consolidated Financial Statements and our Supplemental Consolidated Financial
Statements included elsewhere in the prospectus.
<TABLE>
<CAPTION>
FEBRUARY 28, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 4,768 $ 2,000 $ 46,846
======== ======== ========
Debt:
Current portion of long-term debt......................... $ 45 $ 227 $ 227
Credit facility(1)........................................ -- 10,554 --
Long-term debt............................................ 1,138 -- --
-------- -------- --------
Total debt............................................. 1,183 10,781 227
-------- -------- --------
Stockholders' equity:
Preferred stock, $10 par value, 600,000 shares authorized;
no shares issued and outstanding....................... -- -- --
Common stock, $.01 par value, 250,000,000 shares
authorized; 34,581,500 shares issued and outstanding,
37,215,163 shares issued and outstanding pro forma, and
42,215,163 shares issued and outstanding pro forma as
adjusted(2)............................................ 346 372 422
Additional paid-in capital................................ 65,482 90,776 146,126
Retained earnings......................................... (12,225) (12,225) (12,225)
Treasury stock at cost.................................... (1,616) (1,616) (1,616)
-------- -------- --------
Total stockholders' equity............................. 51,987 77,307 132,707
-------- -------- --------
Total capitalization.............................. $ 53,170 $ 88,088 $132,934
======== ======== ========
</TABLE>
- -------------------------
(1) As of June 25, 1999, total principal amounts outstanding under our revolving
credit facility were approximately $30.4 million.
(2) Share amounts do not include (1) 2,301,699 shares issuable upon the exercise
of outstanding options with exercise prices ranging from $.72 to $6.30 per
share and a weighted average exercise price of $3.90 per share (on a pro
forma and pro forma as adjusted basis, 2,461,669 shares issuable upon the
exercise of outstanding options with exercise prices ranging from $.36 to
$9.44 per share and a weighted average exercise price of $3.81 per share),
(2) 885,500 shares reserved for issuance in connection with options that may
be granted under our stock option plans (725,500 on a pro forma and pro
forma as adjusted basis), (3) 239,948 shares issuable upon the exercise of
outstanding warrants and (4) 750,000 shares of common stock issuable upon
exercise of the underwriters' over-allotment option.
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SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL DATA
The supplemental selected historical financial data for Gerald Stevens
presented below for each of the five years ended and as of August 31, 1994,
1995, 1996, 1997, and 1998 have been derived from the audited supplemental
consolidated financial statements of Gerald Stevens. The supplemental selected
historical financial data for the six month periods ended February 28, 1998 and
1999 for Gerald Stevens have been derived from the unaudited supplemental
consolidated financial statements of Gerald Stevens. The data should be read in
conjunction with the supplemental consolidated financial statements, related
notes and management's discussion and analysis of financial condition and
results of operations which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------------------------------- ----------------
1994 1995 1996(1)(2) 1997(2)(3) 1998(2)(4) 1998 1999(5)
------- ------- ---------- ---------- ---------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................................... $ 7,567 $ 8,449 $10,299 $11,609 $13,391 $8,194 $39,995
Gross profit..................................... 7,567 8,449 10,299 11,609 13,391 8,194 27,251
Expenses:
Operating...................................... -- -- -- -- -- -- 13,356
Selling, general and administrative............ 7,547 7,497 8,737 9,691 12,972 7,133 14,260
Contract modification expense.................. -- -- -- -- 3,495 -- --
Merger related expense......................... -- -- -- -- -- -- 4,051
------- ------- ------- ------- ------- ------ -------
Operating income (loss).......................... 20 952 1,562 1,918 (3,076) 1,061 (4,416)
Net income (loss)(1)(2)(3)....................... $ (311) $ 707 $ 2,262 $ 3,433 $(2,268) $ 718 $(6,457)
Earnings (loss) per share:
Basic.......................................... $ (0.06) $ 0.12 $ 0.38 $ 0.43 $ (0.26) $ 0.09 $ (0.21)
Diluted........................................ $ (0.06) $ 0.12 $ 0.35 $ 0.39 $ (0.26) $ 0.08 $ (0.21)
Weighted-average common and common equivalent
shares outstanding:
Basic.......................................... 5,532 5,701 5,988 8,076 8,581 7,677 31,198
Diluted........................................ 5,532 5,872 6,375 8,715 8,581 8,714 31,198
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
----------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)............................ $(2,412) $(1,398) $ 488 $ 1,116 $ 7,548 $ 919 $ 1,093
Intangible assets....................................... 2,473 2,366 2,256 2,090 3,791 2,159 45,012
Total assets............................................ 5,946 6,468 8,822 10,594 21,335 13,034 71,544
Long-term debt.......................................... 3,142 3,034 334 80 2,018 80 1,138
Total liabilities....................................... 8,461 8,224 5,585 5,341 8,585 7,229 19,557
Stockholders' equity (deficit).......................... (2,515) (1,756) 3,237 5,253 12,750 5,805 51,987
</TABLE>
- -------------------------
(1) Net income in 1996 includes an extraordinary gain of $128 from the
forgiveness of certain debt.
(2) Net income in 1996, 1997 and 1998 includes income tax benefits of $863, $637
and $682, respectively, primarily from the recognition of benefits related
to net operating loss carry forwards. See Note 10 of the Notes to
Supplemental Consolidated Financial Statements of Gerald Stevens.
(3) Net income in 1997 includes other income of $1,041 related to cash received
from a court award. See Note 7 of the Notes to Supplemental Consolidated
Financial Statements of Gerald Stevens.
(4) Operating income in 1998 includes a contract modification charge of $3,495.
(5) Operating income for the six month period ended 1999 includes a merger
related expense of $4,051 and a non-cash compensation expense of $1,373
related to non-plan stock options.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
On April 30, 1999, Gerald Stevens, Inc. ("Gerald Stevens"), formerly known
as Florafax International, Inc. and Gerald Stevens Retail, Inc. ("Gerald Stevens
Retail"), which was formerly known as Gerald Stevens, Inc., completed a merger
accounted for as a pooling of interests. This Management's Discussion and
Analysis of Financial Condition and Results of Operations gives retroactive
effect to the merger, and reference is made to the supplemental financial
statements of Gerald Stevens which are being filed as part of this prospectus.
In the merger, Gerald Stevens issued 1.35 shares of its common stock for each
share of Gerald Stevens Retail common stock outstanding at the effective time of
the merger. In total, Gerald Stevens issued 28.1 million shares of its common
stock to the stockholders of Gerald Stevens Retail, resulting in the
stockholders of Gerald Stevens Retail holding approximately 77.5% of the shares
of Gerald Stevens' common stock then outstanding.
Gerald Stevens is an integrated retailer and marketer of flowers, plants,
and complementary gifts and decorative accessories. Gerald Stevens currently
operates the largest company-owned network of floral specialty retail stores in
the United States, with 141 locations. Gerald Stevens is building a national
brand and transforming the retail floral industry by integrating its operations
throughout the floral supply chain, from product sourcing to delivery, and by
managing every interaction with the customer, from order generation to order
fulfillment. Gerald Stevens ultimately intends to provide all of its retail
customers with a unique and enhanced shopping experience under the Gerald
Stevens brand.
Upon consummation of its merger with Gerald Stevens Retail, management
redefined the manner in which it evaluates and reports the operating results of
its newly combined business for internal purposes. In this regard, management
has chosen to break down its component businesses into two segments: (1) the
Retail Segment and (2) the Order Generation Segment. The Retail Segment will
consist of all of our retail and import businesses and operations while the
Order Generation Segment will consist of all non-retail order generation and
fulfillment businesses and operations.
BUSINESS COMBINATIONS
From October 1, 1998 through February 28, 1999, Gerald Stevens acquired 17
retail florist businesses, an Internet-based order generation business, and a
floral import business for total consideration of $50.1 million, consisting of
$27.1 million in cash and 6,185,179 shares of its common stock. From March 1,
1999 to June 25, 1999, Gerald Stevens acquired 13 retail florist businesses, a
small order generation business and National Flora, a floral order generation
business, for total consideration of $41.8 million, consisting of $28.4 million
in cash and 2,172,129 shares of its common stock.
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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. All of the acquisitions were
accounted for under the purchase method of accounting, with results of
operations included in Gerald Stevens' results from date of acquisition.
<TABLE>
<CAPTION>
PURCHASE PRICE
--------------- SHARE
COMPANY TOTAL CASH STOCK SHARES PRICE
- ------- ----- ------ ------ ---------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
THROUGH FEBRUARY 28, 1999:
Royer's............................................... $11.2 $ 6.3 $ 4.8 1,371,168 $ 3.52
Boesen................................................ 5.2 2.5 2.7 757,423 3.52
Maple Lee............................................. 4.7 2.5 2.2 613,612 3.52
Dr. Delphinium........................................ 3.1 0.9 2.2 631,658 3.52
Cactus................................................ 3.0 1.8 1.2 341,053 3.52
AGA................................................... 2.9 1.5 1.5 417,079 3.52
Eastern............................................... 2.9 2.9 -- -- N/A
Martina's............................................. 1.9 1.2 0.8 221,685 3.52
Norton's.............................................. 1.6 0.5 1.0 289,298 3.52
Fallon's.............................................. 1.9 1.1 0.8 227,368 3.52
Jennie's.............................................. 3.6 2.0 1.6 354,375 4.44
Other acquisitions.................................... 8.1 3.8 4.3 960,460 4.44
----- ----- ----- ----------
Total....................................... 50.1 27.1 23.0 6,185,179
----- ----- ----- ----------
MARCH 1, TO JUNE 25, 1999:
Phoebe's.............................................. 2.8 2.2 0.6 98,765 6.30
National Flora........................................ 19.7 10.0 9.8 1,552,500 6.30
Exotic Gardens and Kuhn............................... 6.2 5.6 0.6 49,236 12.59
Other Acquisitions.................................... 13.1 10.7 2.4 471,628 5.10
----- ----- ----- ----------
Total....................................... 41.8 28.4 13.4 2,172,129
----- ----- ----- ----------
Total....................................... $91.9 $55.5 $36.4 8,357,308
===== ===== ===== ==========
</TABLE>
In May 1999, Gerald Stevens entered into an agreement to acquire Calyx &
Corolla, Inc., a floral catalog and Internet business, for total consideration
of approximately $14.3 million, consisting of approximately 934,000 shares of
common stock and approximately 160,000 options to acquire shares of common stock
with exercise prices ranging from $.36 per share to $9.44 per share. The
acquisition is expected to be consummated in June 1999.
The Gerald Stevens pro forma supplemental (as adjusted for the offering),
goodwill related to acquired businesses at February 28, 1999 was approximately
$84.3 million, which represents approximately 52.5% of our pro forma as adjusted
total assets of approximately $160.6 million and approximately 63.5% of our pro
forma as adjusted total stockholders equity of approximately $132.7 million. The
$84.3 million of goodwill will result in an annual amortization expense of
approximately $2.6 million, based upon the amortization of goodwill related to
the acquisition of retail floral businesses over useful lives of 40 years, as
well as the amortization of goodwill related to the acquisition of National
Flora, an order generation business, and Calyx & Corolla, a floral catalog and
Internet business, over useful lives of 20 years. 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
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<PAGE> 26
management later determines either that the remaining balance of goodwill is
impaired or that a shorter amortization period is applicable.
RESULTS OF OPERATIONS
Six Months Ended February 28, 1999 Compared to Six Months Ended February 28,
1998
The table below presents the results of operations through operating income
(loss) of Gerald Stevens' Retail and Order Generation segments and Corporate
Overhead for the six month periods ended February 28, 1999 and 1998. The Retail
Segment results include the post-acquisition operating results of the 17 retail
florist businesses and one import business acquired by Gerald Stevens during the
six month period ended February 28, 1999. The Order Generation Segment results
include the operating results of our historical wire service, credit and charge
card processing, and The Flower Club business units, in addition to the
activities of Gerald Stevens' newly formed Internet-based order generation
business unit. Prior to the acquisition of its initial retail florist and import
businesses on October 1, 1998, Gerald Stevens operated in only the Order
Generation Segment.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FEBRUARY 28, 1999 SIX MONTHS ENDED FEBRUARY 28, 1998
------------------------------------------ -----------------------------------------
ORDER CORPORATE ORDER CORPORATE
RETAIL GENERATION OVERHEAD TOTAL RETAIL GENERATION OVERHEAD TOTAL
------- ---------- --------- ------- ------- ---------- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, net................. $28,373 $ -- $ -- $28,373 $ -- $ -- $ -- $ --
Service and other revenue.......... 2,736 8,886 -- 11,622 -- 8,194 -- 8,194
------- ------ ------- ------- ------- ------ ------- ------
31,109 8,886 -- 39,995 -- 8,194 -- 8,194
------- ------ ------- ------- ------- ------ ------- ------
Operating costs and expenses:
Cost of product sales.............. 12,744 -- -- 12,744 -- -- -- --
Operating.......................... 13,356 -- -- 13,356 -- -- -- --
Selling, general and
administrative................... 2,619 7,352 4,289 14,260 -- 6,830 303 7,133
Merger expenses.................... -- -- 4,051 4,051 -- -- -- --
------- ------ ------- ------- ------- ------ ------- ------
28,719 7,352 8,340 44,411 -- 6,830 303 7,133
------- ------ ------- ------- ------- ------ ------- ------
Operating income (loss)...... $ 2,390 $1,534 $(8,340) $(4,416) $ -- $1,364 $ (303) $1,061
======= ====== ======= ======= ======= ====== ======= ======
</TABLE>
Retail Segment. Product sales in the retail segment for the six months
ended February 28, 1999 include sales of floral and gift products at retail
businesses of $23.4 million and sales of floral product by Gerald Stevens'
import business of $5.0 million. Service and other revenue in the retail segment
consists principally of delivery and other service fees charged to customers and
commissions on orders transmitted to and fulfilled by other retail florists.
Cost of product sales in the retail segment for the six months ended
February 28, 1999 include cost of products sold at retail businesses of $8.9
million and cost of products sold at Gerald Stevens' import business of $3.8
million. Gross margins on product sales and gross margins on total revenue at
retail businesses averaged 61.8% and 65.8%, respectively, during the period.
Gross margins on product sales at Gerald Stevens' import business averaged 23.7%
during the period.
Operating expenses in the retail segment for the six months ended February
28, 1999 include expenses at retail businesses of $12.7 million and expenses at
Gerald Stevens' import business of $0.6 million. Operating expenses are
comprised of salaries and benefit expenses of $9.9 million, occupancy expenses
of $2.0 million, vehicle expenses of $0.7 million, depreciation and amortization
expenses of $0.8 million, and other expenses of $20,000.
Selling, general and administrative expenses in the retail segment for the
six months ended February 28, 1999 include expenses at retail businesses of $2.4
million and expenses at Gerald Stevens' import business of $193,000, and consist
primarily of advertising expense, commissions paid on orders transmitted from
third parties, and legal and accounting expenses.
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<PAGE> 27
Order Generation Segment. Total revenue in the order generation segment
for the six months ended February 28, 1999 increased by $0.7 million, or 8.4%,
to $8.9 million, compared to the same period in 1998. Service and other revenue
in the order generation segment consists of floral order processing, member dues
and fees, directory and advertising fees and charge card processing. Floral
order revenue increased by $317,000, or 6.3%, to $5.3 million due primarily to
an increase in The Flower Club revenue, as well as an increase in store-to-store
revenue. Member dues and fees increased by $106,000, or 7.8%, to $1.5 million
due primarily to an increase in member florists and an increase in dues.
Publication and advertising fees increased by $230,000, or 27.9%, to $1.1
million due to the publication of a new selection guide. New selection guides
are published approximately every three years. Credit card processing and other
revenue increased by $39,000, or 4.0%, to $1.0 million, with gross dollars
processed increasing and margins remaining relatively constant with the prior
year period. 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. Gerald Stevens continues to adjust the
pricing of its products to remain competitive in the market. Gerald Stevens'
response to the increased competition could lead to lower margins in the future.
Total selling, general and administrative expenses in the order generation
segment for the six months ended February 28, 1999 increased by $0.5 million, or
7.6%, to $7.4 million, compared to the same period in 1998. The expense increase
is due in part to start-up costs of $219,000 incurred in connection with Gerald
Stevens' newly formed Internet-based order generation business unit and an
increase in depreciation and amortization expenses of $149,000 related to new
computer and telephone equipment and an increase in intangible assets purchased
in the Marketing Projects, Inc. ("MPI") transaction, as more fully described
later in the section entitled "MPI Agreement."
Corporate Overhead. Total Corporate Overhead selling, general and
administrative expenses for the six months ended February 28, 1999 increased to
$4.3 million from $303,000 in the same period in 1998 due primarily to corporate
overhead expenses of $2.6 million incurred by the Gerald Stevens Retail
organization and non-cash compensation expense of $1.4 million recorded in
connection with the vesting of certain non-plan stock options. The non-plan
stock options are fully vested and will cause no further compensation expense to
be recorded in future periods. Gerald Stevens plans to expand its business over
the next several years, largely through the acquisition of retail florist
businesses. Gerald Stevens expects Corporate Overhead expenses to increase
significantly over this time period, due principally to integration costs
planned to be incurred in connection with the development and implementation of
centralized operational and financial systems and the establishment of the
Gerald Stevens brand name. See "Liquidity and Capital Resources."
Merger Expenses. During the six months ended February 28, 1999, Gerald
Stevens incurred a total of $4.1 million in investment banking, accounting, and
legal costs in connection with its merger with Gerald Stevens Retail. In
accordance with the accounting rules governing business combinations accounted
for as a pooling of interests, all merger-related costs were recognized as an
expense during the period in which they were incurred.
Operating Income (Loss). Gerald Stevens' operating loss during the six
months ended February 28, 1999 was $(4.4 million) compared to operating income
of $1.1 million during the six months ended February 28, 1998. The primary
causes of the 1999 operating loss were the merger expenses of $4.1 million and
the non-cash compensation expense recorded in connection with the vesting of
non-plan stock options of $1.4 million.
Income Taxes. The provision for income taxes for the six months ended
February 28, 1999 was $2.1 million compared to $424,000 during the same period
in 1998. The increase in income tax expense was due principally to an increase
in the deferred tax asset valuation allowance of $1.4 million for net operating
losses and basis differences in assets which, because of the uncertainty
26
<PAGE> 28
associated with our near-term future combined operating results, now requires
the valuation allowance.
Gerald Stevens' future effective tax rate will depend on various factors
including the mix between state taxable income or losses, amounts of
nondeductible goodwill, and the timing of adjustments to the valuation allowance
on our net deferred tax assets.
Net Income. As a result of the above factors, net loss for the six months
ended February 28, 1999 was $(6.5 million) compared to net income of $0.7
million for the same period in 1998.
Year Ended August 31, 1998 Compared to Year Ended August 31, 1997
Revenue. Total revenue for fiscal 1998 increased by $1.8 million, or
15.4%, to $13.4 million compared to $11.6 million during fiscal 1997.
Net revenue from member dues and fees during fiscal 1998 increased by
$386,000, or 16.1%, to $2.8 million compared to 1997. During fiscal 1998, Gerald
Stevens continued to experience an increase in its dues-paying floral members.
Dues-paying floral members at August 31, 1998 totaled approximately 5,200
compared to 4,850 at August 31, 1997. Management believes that the increased
number of orders Gerald Stevens provided to its members assisted Gerald Stevens
in retaining its existing member florists and adding new member florists.
Floral order processing revenue continued to grow during fiscal 1998,
increasing by $1.0 million, or 16.7%, to $7.2 million compared to fiscal 1997.
The increase is due primarily to orders generated by The Flower Club. In
addition to the growth of The Flower Club revenue, Gerald Stevens also
experienced an increase in its florist shop-to-shop orders, Talking Bouquet
revenue and gift basket revenue during fiscal 1998 compared to fiscal 1997.
Directory fees and advertising revenue during fiscal 1998 increased by
$71,000, or 5.1%, to $1.5 million compared to fiscal 1997 due to moderate
increases in both advertising and directory fees.
Net revenue from charge card processing increased by $204,000, or 12.6%, to
$1.8 million during fiscal 1998 compared to fiscal 1997. The fiscal 1998
increase is attributable to an increase in dollar volumes processed. During
fiscal 1998, gross dollars processed were $392.0 million compared to $318.0
million in fiscal 1997.
Other revenue for fiscal 1998 increased by $94,000 to $126,000 compared to
fiscal 1997.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for fiscal 1998 increased by $3.3 million, or 33.9%, to
$13.0 million compared to the same period in fiscal 1997.
General and administrative expenses in fiscal 1998 increased by $2.3
million, or 39.9%, to $8.2 million compared to fiscal 1997. The increase was due
primarily to start-up expenses of approximately $1.6 million incurred in
connection with Gerald Stevens' expansion into the retail distribution segment
of the floral industry, consisting principally of audit, consulting, legal and
compensation costs. These start-up expenses include a write-off of $0.5 million
related to Gerald Stevens' acquisition of the assets of International Floral
Network, Inc., a business whose acquired assets consisted solely of rights to
acquire 33 retail florist businesses under non-binding letters of intent with
the owners of those businesses, and approximately $0.5 million of costs
reimbursed to SB Management Corp., a corporation controlled and managed by two
directors of Gerald Stevens. To a lesser extent, salary and telephone cost
increases related to The Flower Club's higher volume were also responsible for
the overall general and administrative expense increase.
27
<PAGE> 29
Selling, advertising and promotion expense in fiscal 1998 increased by $0.8
million, or 22.5%, to $4.4 million compared to fiscal 1997. The increase was
comprised of two main components. First, Gerald Stevens established its own
marketing department to interface with current partners of The Flower Club, as
well as prospect for new partners. Second, Gerald Stevens introduced several new
marketing campaigns during fiscal 1998, which caused a significant increase in
the cost of marketing materials. Conversely, Gerald Stevens experienced a
decline in commissions paid to MPI, an independent marketing firm which had been
Gerald Stevens' primary source of marketing until the third quarter of fiscal
1998, at which time Gerald Stevens modified its contract with this firm, thereby
eliminating the commissions.
Depreciation and amortization expenses increased during fiscal 1998 by
$142,000, or 54.4%, to $403,000 compared to 1997. During fiscal 1997 and 1998,
Gerald Stevens expanded its 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 fiscal 1998 with MPI caused
Gerald Stevens 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 fiscal 1998.
Contract Modification Charge. During fiscal 1998, Gerald Stevens paid $3.5
million to MPI to modify a servicing agreement with MPI. Prior to modifying this
servicing agreement, MPI acted as an agent that interfaced with The Flower
Club's corporate customers. By modifying the servicing agreement, Gerald Stevens
began interfacing with the corporate customers directly, thereby strengthening
these relationships. See "-- MPI Agreement."
Operating Income (Loss). Gerald Stevens' operating loss during the year
ended August 31, 1998 was $(3.1 million) compared to operating income of $1.9
million during the year ended August 31, 1997. The primary causes of the fiscal
1998 operating loss were the contract modification charge of $3.5 million and
start-up expenses of $1.6 million incurred in connection with our expansion into
the retail distribution segment of the floral industry.
Other Income (Expense). Other income (expense) for the year ended August
31, 1997 totalled $0.8 million and consisted of a gain, net of related legal
fees, of $1.0 million recognized in connection with the resolution of a 1990
lawsuit, offset by charges of $222,000 related to consulting agreement and
contingency reserve write-offs.
Income Taxes. During fiscal 1998, Gerald Stevens recognized a net deferred
income tax benefit of $0.7 million due to the utilization of net operating loss
carryforwards. During fiscal 1997, Gerald Stevens recognized a net income tax
benefit of $0.5 million. The benefit consisted of a deferred income tax benefit
of $0.6 million from the utilization of net operating loss carryforwards and a
current income tax expense of $118,000.
Net Income. Net income declined from $3.4 million in fiscal 1997 to a net
loss of $(2.3 million) in fiscal 1998, due primarily to two reasons. First,
start-up expenses related to Gerald Stevens' expansion into the retail
distribution segment of the floral industry of $1.6 million were incurred during
fiscal 1998. Second, Gerald Stevens recorded $3.5 million as a contract
modification expense related to the MPI transaction during fiscal 1998.
Additionally, in fiscal 1997 Gerald Stevens recorded other income of $0.8
million resulting primarily from litigation proceeds.
Year Ended August 31, 1997 Compared to Year Ended August 31, 1996
Revenue. Total revenue for fiscal 1997 increased by $1.3 million, or
12.7%, to $11.6 million compared to fiscal 1996.
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<PAGE> 30
Net revenue from member dues and fees during fiscal 1997 increased by
$379,000, or 18.8%, to $2.4 million compared to 1996. During fiscal 1997, Gerald
Stevens continued to experience an increase in its dues-paying floral members.
Dues-paying members at August 31, 1997 totaled approximately 4,850 compared to
4,300 at August 31, 1996. Management believes that the increased number of
orders that Gerald Stevens was providing to its members has assisted Gerald
Stevens in retaining its existing member florists and adding new member
florists.
Floral order processing revenue during fiscal 1997 increased by $0.6
million, or 10.4%, to $6.2 million compared to fiscal 1996. The increase is due
primarily to orders generated by The Flower Club.
Directory and advertising fees increased by $127,000, or 9.9%, to $1.4
million in fiscal 1997 compared to fiscal 1996 as a result of growth in
membership during fiscal 1997.
Net revenue from charge card processing increased by $240,000, or 17.4%, to
$1.6 million during fiscal 1997 compared to fiscal 1996. The increase during
fiscal 1997 is attributable to an increase in dollar volumes processed. During
fiscal 1997 gross dollars processed were $318.0 million compared to $261.0
million in 1996. During fiscal 1997 Gerald Stevens did not experience a
significant increase in cost from the credit card companies. However, as in the
past few years, Gerald Stevens lowered the discount rate charged to certain
customers to remain competitive.
Other revenue for fiscal 1997 decreased $14,000 to $32,000 compared to
fiscal 1996.
Selling, General and Administrative Expenses. Total selling, general and
administrative expenses for fiscal 1997 increased by $1.0 million, or 10.9%, to
$9.7 million compared to fiscal 1996.
General and administrative expenses increased by $0.5 million, or 9.5%, to
$5.8 million in fiscal 1997 compared to 1996. The main component of this
increase was in salaries and wages, which increased due to an increase in phone
operators needed to handle The Flower Club's increased 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.
Selling and advertising expenses increased by $0.6 million, or 19.3%, to
$3.6 million in fiscal 1997 compared to fiscal 1996. The primary cause for this
increase are the marketing expenses associated with generating and maintaining
The Flower Club order volume. The Flower Club expenses included in selling
expenses are commissions paid to MPI, an outside marketing firm, printing costs
for marketing pieces provided to The Flower Club members, and certain
promotional floral arrangements. In addition to The Flower Club related expense
increases, in fiscal 1997 Gerald Stevens also incurred increased costs in sales
salaries and commissions.
Depreciation and amortization expenses decreased by $132,000, or 33.6%, to
$261,000 in fiscal 1997 compared to fiscal 1996 primarily due to the write-off
of an intangible asset related to the start-up of The Flower Club which was
previously being amortized.
Other Income (Expense). Other income (expense) for the year ended August
31, 1997 totalled $0.8 million and consisted of a gain, net of related legal
fees, of $1.0 million recognized in connection with the resolution of a 1990
lawsuit, offset by charges of $222,000 related to consulting agreement and
contingency reserve write-offs.
Income Taxes. During fiscal 1997, Gerald Stevens recognized a net income
tax benefit of $0.5 million. The benefit consisted of a deferred income tax
benefit of $0.6 million from the utilization of net operating loss carryforwards
and a current income tax expense of $118,000. Gerald Stevens recognized a net
income tax benefit in fiscal 1996 of $0.8 million consisting of a deferred
income tax benefit of $0.9 million related to the reduction of a valuation
allowance established in prior years and a current provision for federal
alternative minimum taxes of $46,000.
29
<PAGE> 31
Net Income. As a result of the above factors net income for fiscal 1997
was $3.4 million compared to $2.3 million for fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
Prior to October 1, 1998, operating cash flow has been generated primarily
from processing floral orders and charge card transactions for Gerald Stevens'
member florists, as well as collecting dues, fees and directory advertising from
the members. Charge card processing generally allows Gerald Stevens to collect
funds from the charge card issuer prior to settlement with the member florist.
Historically, operating cash flow benefited significantly from orders generated
by The Flower Club. Because all orders of The Flower Club are paid for by credit
cards, Gerald Stevens receives a significant portion of the money from these
orders within days after processing the transaction.
During the years ended August 31, 1998, 1997, and 1996, Gerald Stevens
generated the majority of the cash necessary to operate and expand its business
from operations, due principally to the growth in The Flower Club orders during
these years. For the three years ended August 31, 1998, cash flow from operating
activities totalled $3.8 million, inclusive of the unfavorable impact of $3.5
million paid to MPI in fiscal 1998 under the terms of a contract modification
agreement and the favorable impact of $1.0 million received in connection with
the settlement of a lawsuit in fiscal 1997. Capital expenditures during the
three years ended August 31, 1998 totalled $2.4 million and related principally
to the purchase of the land and building which were previously leased as the
Company's corporate headquarters and other facility and equipment expansion
costs.
During fiscal 1997 and 1996, Gerald Stevens retired substantially all of
its existing long-term debt, with outstanding borrowings reduced by a total of
$0.8 million for these years.
During fiscal 1998 and 1997, Gerald Stevens repurchased 519,975 shares of
treasury stock at a total cost of $1.6 million. Additionally, during the three
years ended August 31, 1998, Gerald Stevens issued a total of 584,000 shares of
common stock and received total proceeds of $95,000 in connection with the
exercise of stock options and warrants.
In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 12,863,290 shares of common stock were issued to
various founding shareholders for total consideration of $9.3 million. In August
1998, Gerald Stevens also paid $1.5 million in cash and issued 641,997 shares of
its common stock in connection with the acquisition of International Floral
Network, Inc., a business whose acquired assets consisted solely of rights to
acquire 33 retail florist businesses under non-binding letters of intent with
the owners of those businesses. Additionally, a total of 224,000 shares of
common stock were issued for total consideration of $275,000 in connection with
the exercise of stock options and warrants during the six months ended February
28, 1999.
During the six months ended February 28, 1999, Gerald Stevens used a total
of $0.5 million of cash in operating activities, as it expanded its business
operations into the retail distribution segment of the floral industry compared
to cash provided by operating activities of $1.7 million for the six months
ended February 28, 1998. The cash portion of the purchase prices for all
acquisitions completed by Gerald Stevens during the six month period ended
February 28, 1999, net of cash acquired, aggregated $25.6 million, as more fully
described in the preceding section entitled "Business Combinations". Capital
expenditures during the six month period totalled $1.4 million and primarily
included the costs of building one new retail hub store and equipment purchases
at existing retail stores.
During the six months ended February 28, 1999, Gerald Stevens issued
6,217,537 shares of its common stock in private placement transactions for
consideration of $21.1 million, net of underwriting fees and expenses.
30
<PAGE> 32
In September 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank in which the bank agreed to loan Gerald Stevens Retail up
to $20.0 million for a term of 18 months. In February 1999, the credit agreement
was amended to increase the line of credit to $40.0 million. Borrowings under
the credit agreement bear interest at either the Eurodollar market rate plus a
percentage ranging from 100 to 225 basis points depending on the consolidated
leverage ratio for the preceding quarter, or at Gerald Stevens Retail's option,
a base rate equal to the higher of the federal funds rate plus 0.5% or the prime
rate. At February 28, 1999, Gerald Stevens Retail had no indebtedness from
borrowings under this credit facility.
In June 1999, Gerald Stevens Retail and its primary lender amended and
restated their existing $40.0 million revolving credit agreement. Gerald
Stevens, the parent of Gerald Stevens Retail, agreed to guarantee payment of all
obligations under the amended and restated agreement and has terminated its
existing $5.0 million bank credit agreement.
The amended and restated credit agreement provides for borrowings over a
term of 36 months which will bear interest at either the Eurodollar market rate
plus a percentage ranging from 125 to 250 basis points, depending on the
consolidated leverage ratio for the previous quarter, or at Gerald Stevens
option, at a base rate equal to the sum of the higher of the federal funds rate
plus 0.5% or the prime rate plus a percentage ranging from 0 to 100 basis points
depending on the consolidated leverage ratio for the previous quarter. The line
of credit will be used to finance business acquisitions and capital expenditures
and to provide working capital for general corporate purposes. Gerald Stevens'
effective Eurodollar borrowing rate and its base rate as of June 25, 1999 are
6.14% and 7.75%, respectively. Outstanding borrowings under the current credit
facility at June 25, 1999 were $30.4 million.
Borrowings under the amended and restated 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 credit agreement
contains covenants requiring bank approval of certain business acquisitions, and
the maintenance of agreed upon financial ratios, as more specifically described
in the following paragraphs.
In the event that Gerald Stevens' consolidated leverage ratio is greater
than 1.5 to 1.0 (or, assuming the offering is completed, 2.0 to 1.0), and the
cash portion of the cost of a business acquisition exceeds $3.0 million, certain
acquisition specific covenants are applicable. These covenants include, among
other things, the requirement that at least 35.0% of the cost of an acquisition
be paid for in the form of common stock, that the proceeds of loans used to pay
the cost of an acquisition cannot exceed three times the acquired company's
earnings before interest, taxes, depreciation and amortization, and that the
lender be provided certain financial information and give consent to the
acquisition.
The amended and restated 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 2.75 to 1.00 (3.00 to 1.00 on or prior to August
31, 1999) or exceed consolidated stockholders' equity. In addition, the ratio of
EBIT plus lease payments to the sum of interest expense, current maturities of
debt, cash income taxes and lease payments must not be less than 1.10 to 1.00
prior to December 31, 2000 and 1.25 to 1.00 thereafter. Assuming the offering is
completed, capital expenditures in any fiscal year cannot exceed
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<PAGE> 33
$22.0 million for the fiscal year ending 1999, $42.0 million for the fiscal year
ending 2000, $50.0 million for the fiscal year ending 2001 and $52.0 million for
the fiscal year ending 2002.
Gerald Stevens is currently in discussions with a number of financial
institutions regarding their participation in a proposed syndication of its bank
credit facility. Gerald Stevens anticipates that, assuming there are not
material adverse changes or material disruption of conditions in the financial,
banking or capital markets, the borrowing limits under its credit facility can
be increased from $40.0 million to approximately $50.0 to $75.0 million.
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 incur significant
expenditures to remodel and retrofit some of its acquired stores to be
consistent with the Gerald Stevens 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 in the future. Over the
next two to three years, we expect to spend approximately $10.0 million for
remodeling and retrofitting acquired stores, $50.0 million for construction of
new stores and $15.0 million on information systems.
Gerald Stevens also expects to incur significant expenditures over the next
several years, in connection with the development and marketing of its newly
formed Internet based order generation business unit and the establishment of
the Gerald Stevens brand name. In this regard, Gerald Stevens plans to incur
approximately $20.0 million of advertising costs during the remainder of fiscal
1999 and fiscal 2000. The Internet based floral order generation industry is
highly competitive and there can be no assurance that Gerald Stevens' new
Internet-based business unit will be successful in achieving sufficient market
share to enable it to operate on a profitable basis.
Gerald Stevens intends to finance the costs of its business acquisitions
and capital expenditures with a combination of debt and equity capital,
including the net proceeds from the sale of the shares of common stock in the
offering as well as cash generated from internal operations. Specifically, it
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 its common stock as circumstances and market conditions dictate.
Gerald Stevens believes that its existing credit facilities, in addition to
the net proceeds from the offering, will provide adequate capital to meet its
ongoing cash requirements over the next 12 months. Gerald Stevens also believes
that it will be successful in raising additional debt and equity capital in the
future. 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.
MPI AGREEMENT
Prior to May 1, 1998, under the terms of an existing joint marketing
service agreement, Gerald Stevens was required to pay MPI commissions equaling
8.0% of floral orders generated from marketing partners solicited by MPI. During
the years ended August 31, 1998, 1997 and 1996 Gerald Stevens recorded
commissions expense of $1.1 million, $1.5 million and $1.2 million relative to
the agreement.
Effective May 1, 1998, Gerald Stevens 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 Gerald Stevens. Also on May 1, 1998,
Gerald Stevens entered into a non-compete and non-disclosure agreement with MPI
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and the principal employees of MPI. Total consideration of $3.7 million was paid
to MPI at the time of closing and Gerald Stevens is further obligated to pay up
to $125,000 in cash in each of the following eight fiscal quarters, contingent
upon the attainment of quarterly revenue targets.
Of total consideration paid, $150,000 has been allocated to the purchase of
MPI's proprietary marketing systems and $100,000 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, are included
in intangible assets in Gerald Stevens' consolidated balance sheet.
As a result of the contract modification, Gerald Stevens 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 unaffected by the contract
modifications, Gerald Stevens 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, $3.5 million of the total
consideration paid has been recognized as a contract modification expense during
year ended August 31, 1998.
Gerald Stevens will expense all quarterly contingent payments to the extent
and at the time they become earned. During the year ended August 31, 1998 and
the six month period ended February 28, 1999, contingent payments of $125,000
and $250,000, respectively, were earned, paid, and included within selling,
advertising, and promotion expenses.
YEAR 2000 ISSUE
Gerald Stevens has developed a Year 2000 compliance plan and completed a
preliminary assessment of Year 2000 issues, risks, and exposures. Gerald Stevens
and every business acquired by Gerald Stevens to date has Year 2000 issues in
various stages of investigation and resolution. The unresolved issues typically
relate to a network-based order entry system, telephone systems and switches,
voicemail systems, store server hardware and operating systems, and the business
software installed on these store systems.
Gerald Stevens 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. Gerald Stevens 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.
Gerald Stevens operates a telephone system which is integrated with the
order entry system discussed in the preceding paragraph. Gerald Stevens recently
learned that a primary component of this system will need to be upgraded or
replaced to be Year 2000 compliant. Gerald Stevens is in the process of
evaluating whether to upgrade or replace this component. Regardless of which
option is selected by Gerald Stevens, this component is expected to be
operational no later than July 31, 1999.
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.
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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 of
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 calendar year 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, Gerald
Stevens 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 Gerald Stevens' 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, Gerald
Stevens 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.
In the event that the network based order entry system failed, automated
processing of floral orders would be prevented. Should this occur, Gerald
Stevens would be forced to process incoming orders manually until such time that
the failure could be corrected. While this would significantly increase
operating costs, loss of sales resulting from the failure would be minimized.
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
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 $1.5 million. Based on its
preliminary assessment of Gerald Stevens' Year 2000 issues and considering its
primary and contingency plans, Gerald Stevens' management does not
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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 and 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 Mother's 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
Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for
years ending after December 15, 1997. As a result, Gerald Stevens was required
to change the method 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.
Comprehensive Income -- In June 1997, the FASB issued SFAS 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 Gerald Stevens'
fiscal year ended August 31, 1999.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS 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 Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ended August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption to include retail operations.
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. Gerald Stevens believes that this statement will not have a
material effect on its accounting for computer software development or
acquisition.
SOP 98-5, Reporting on the Costs of Start-Up Activities, requires the
immediate expensing of 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 February 28, 1999 or August 31, 1998.
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BUSINESS
GERALD STEVENS
We are an integrated retailer and marketer of flowers, plants, and
complementary gifts and decorative accessories. We currently operate the largest
company-owned network of floral specialty retail stores in the United States,
with 141 locations. We are building a national brand and transforming the retail
floral industry by integrating our operations throughout the floral supply
chain, from product sourcing to delivery, and by managing every interaction with
the customer, from order generation to order fulfillment. We ultimately intend
to provide all of our retail customers with a unique and enhanced shopping
experience under the Gerald Stevens brand.
Our national sales and marketing division permits us, through multiple
distribution channels, including the Internet, dial-up numbers and direct mail,
to serve customers who do not visit or phone our retail stores. This division
includes National Flora, the largest yellow page advertiser of floral products,
The Flower Club, a leading corporate affinity marketer, and four primary
websites. We currently promote these websites on leading online portals,
including Yahoo!, Lycos and CNN.com. In total, our national sales and marketing
division generates over one million orders annually. To ensure superior customer
service and efficient order processing, we operate three national call centers.
To facilitate the distribution of these orders in markets where we do not have
our own stores, we operate the Florafax wire service, one of only five national
flowers-by-wire services, with approximately 5,000 member florists covering all
50 states.
To provide the freshest and highest quality products to our retail
customers, we operate our own sourcing operation. Our leading floral importer
and wholesaler, AGA Flowers, has long-term supply agreements and other
relationships to purchase cut flowers with many of the finest growers in the
United States, Central America and South America. These supply arrangements
eliminate several steps in the floral distribution chain, ensuring a reliable
source of high quality products at favorable prices. By reducing the time needed
to transport flowers from farms to our retail stores, we extend the vase life of
our flowers and thus improve customer satisfaction.
We believe our execution of this integrated operating model will make the
Gerald Stevens brand synonymous with superior service, quality and value and
build the most recognized and respected floral and gift brand in the United
States. Once established, we believe the Gerald Stevens brand will drive
increased consumption of all of our products, particularly flowers.
INDUSTRY OVERVIEW
- THE FLORAL INDUSTRY SEGMENT REVIEW.
Supply Chain. The majority of cut flowers sold at retail in the United
States are grown outside of the United States, principally in Colombia,
Mexico, Ecuador and the Netherlands. Flowers grown outside of the United
States are shipped from the farms to importers in the United States. The
majority of European products arrive in New York while most Central and
South American products arrive in Miami. After clearing customs and
inspections the flowers are divided by importers into smaller lot sizes and
repacked for shipment to wholesalers or bouquet companies. Wholesalers then
market the flowers to retail florists, supermarkets, other mass market
outlets, and bouquet companies. Flowers arriving at bouquet companies are
usually packaged using mass-production techniques into smaller arrangements
designed for the consumer market and are typically sold in bulk by the
bouquet companies to supermarkets and mass-market retailers. In aggregate,
the supply chain often takes approximately 10 to 12 days from the time a
flower is first cut until it reaches the retailer. Moreover, the extensive
handling of the
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product and the temperature fluctuations to which it is subjected adversely
affects the life of the flower.
Order Generation. Order generators market and advertise in various
media to generate floral orders via dial-up numbers, the Internet or direct
mail. As order generators typically lack fulfillment capabilities, they
forward these orders through a wire service to a retail florist for
delivery. Order generators typically receive a fee equal to 20% of the
order for their services. Certain order generators also impose a service
charge on the customer for handling the order. Large order generators
typically receive rebates from wire services for sending orders to them.
Wire Services. Wire services are networks of retail florists that
facilitate the transmission and financial settlement of floral orders
between network members. Wire services publish a membership directory that
enables florists to select which florist will deliver an arrangement for
deliveries outside their own delivery area. Alternatively, florists can
allow the wire service to choose which florist will deliver an arrangement
outside their own delivery area. Certain wire services also supply florists
various hardgoods, including vases and other materials, that florists may
use in the ordinary course of business.
For orders exchanged between florists via the wire service, the wire
service typically collects a fee equal to 7% of the value of the order;
however, for larger florists and order generators, this fee is often offset
by a rebate. Wire services also typically charge a monthly membership fee
to member florists. Since wire services have no ownership in their member
florists, they typically have little control over the consistency of
product and service of the delivering florist.
Retail. Retailers sell flowers, plants and, in certain cases,
complementary gifts and decorative accessories to customers. Retailers
include floral shops, supermarkets, garden centers, discount warehouses and
lawn and garden centers. Floral shops also receive orders for out of town
delivery which they forward, typically through wire services, to other
floral shops for fulfillment and local delivery.
Direct from Farm. The direct from farm segment consists of certain
order generators, primarily catalog and websites, which utilize third-party
overnight shipping vendors like FedEx to distribute products directly from
importers or growers to consumers. This segment, while growing, accounts
for less than 1% of overall floral purchases. The majority of direct from
farm flowers are pre-made bouquets or "bunches" of flowers that require
assembly by the recipient.
- THE FLORAL INDUSTRY SIZE AND OPPORTUNITY.
Size. The domestic retail floral industry is a large and growing
industry with attractive business economics. According to industry sources:
- Retail floral industry revenue was approximately $15 billion in
1998;
- When added to the complementary gifts and accessories market, the
combined industry exceeds $60 billion;
- Sales by florists grew by 5.5% in 1997; and
- Gross margins for retailers average approximately 65%.
Opportunity to Create a National Network. We believe that the domestic
retail floral industry presents opportunities for innovation, differentiation
and the creation of a national brand due to the following industry
characteristics:
- Highly fragmented, with the top ten floral chains accounting for less
than 5% of total retail sales;
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- Absence of a national retail brand;
- Unique customer purchasing characteristics, with 70% of product orders
placed over the telephone, approximately 95% of which are made to local
florists, enabling the development of large customer databases;
- Inefficient and decentralized supply chain, with transactions between
growers, importers, wholesalers and retailers creating substantial
incremental costs but providing little additional value to the end user;
- Lack of integrated order generation and fulfillment companies;
- Under-marketed, with marketing expenditures typically less than 3% of
sales; and
- Large, underutilized customer lists at retail stores.
Opportunity to Grow the Market. We believe the retail floral industry also
presents opportunities to expand floral consumption as a result of the following
factors:
- The United States is not among the top ten countries in the world in per
capita consumption of flowers; per capita spending in the United States
is significantly less than that of most western European countries,
according to the Floral Council of Holland;
- Favorable customer demographics and lifestyle trends should generate
additional industry growth;
- Customers value an extended vase life for flowers, which can be achieved
by streamlining the supply chain;
- Retail florists have largely ignored the opportunity to increase
self-consumption by focusing on the gift-giving customer; and
- The Internet allows for visual merchandising and targeted marketing of
flowers.
BUSINESS STRATEGY
Our goal is to become the premier specialty floral and gift retailer and
marketer in the United States. We intend to accomplish this by selling a broad
selection of products, providing superior customer service and building strong
customer loyalty. Because of our management team's extensive experience in
developing nationally branded specialty retailers, we believe we have the skills
and experience necessary to establish Gerald Stevens as the preeminent brand in
the floral industry. Key elements of our strategies include:
- - BUILD A NATIONAL NETWORK OF RETAIL STORES.
Rapidly Expand Our Retail Store Base. We plan to expand our retail
operations in order to increase our market share in existing markets and to
open and/or acquire stores in new markets where the opportunity exists to
become the leading floral retailer. Through June 29, 1999, we have acquired
many of the top floral retailers in the United States, with an aggregate of
141 locations in 18 markets. We believe these initial acquisitions have
provided us with a significant competitive advantage in developing a
national brand. Over the next five years, our strategy is to develop a
retail network in the country's largest markets and operate over 1,000
stores.
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Enhance the Efficiency of Our Local Order Fulfillment and Distribution
Network. Our retailing network is based on a "hub and satellite" system,
which we believe is the most efficient operating structure for the retail
floral industry based upon the success of the leading retail chains,
several of which we have acquired. We currently operate hub facilities in
nine of our 18 markets. We will have at least one hub in each of the major
markets in which we will operate, either through acquisition or
construction. A hub facility serves as a distribution center and warehouse
for surrounding satellite stores within a market. A hub facility will
eliminate cost redundancies and delivery inefficiencies resulting from the
typically decentralized floral supply chain. Satellite stores are
stand-alone or store-in-store retail outlets in supermarkets and grocery
stores. Typically, our retail stores will be located in high traffic, high
visibility areas to service walk-in business and promote brand awareness.
These locations will be connected to supporting hub facilities through
internal information systems, allowing us to provide customers with
efficient service and increased product variety.
Create an Innovative In-Store Experience. We have developed a concept
store that is designed to maximize revenue within the hub and satellite
network by catering to the walk-in customer. This store will create a
unique and enhanced shopping experience through an expanded product mix,
innovative merchandising and store design, a knowledgeable staff of
professional florists and exceptional customer service. Over the next two
years, our plan is to introduce elements of this concept store to a number
of our acquired stores in order to develop the Gerald Stevens brand and
bring consistency to our national retail network. The remodeling of our
acquired stores will likely coincide with the renaming of these stores as
Gerald Stevens stores.
- - BUILD OUR ORDER GENERATION BUSINESSES.
Build Our Traditional Order Generation Businesses. Most order generators
lack fulfillment capabilities and transmit their orders through wire
services, such as FTD, to an independent local florist for production and
delivery. We have acquired several order generation businesses to permit us
to serve customers who do not visit or phone our retail stores. In
addition, we are compiling a national customer database that will allow us
to target our advertising and promotions. Through the use of more
sophisticated database marketing techniques, our strategy is to use our
order generation capabilities to increase non-holiday and advance sales to
customers in all channels. Our call centers and sales organization provide
us with a platform to continue to add national corporate accounts. Where
possible, we expect to distribute orders generated by these businesses
through our retail store network, assuring our customers of high quality
products and superior customer service. We believe our retail stores will
provide us with a significant competitive advantage over order generators
who lack fulfillment capabilities, particularly at holidays and other peak
times.
Develop and Promote E-Commerce Operations. Similar to traditional order
generation businesses, we believe that online flower order generation must
be coupled with an owned or affiliated local delivery network. This
approach provides the greatest ability to manage all aspects of an order,
from order taking to delivery confirmation, and ensures product quality and
customer service consistency. Our e-commerce strategy is to position Gerald
Stevens as a premier online floral and related gift marketer through a
multi-branded strategy targeted at specific audiences. To promote our
websites, we have marketing contracts with major online portals, including
Yahoo!, Lycos and CNN.com. We plan to make significant investments in the
promotion of our websites. We also intend to continually upgrade our
website offerings in order to provide existing and new customers with the
broadest product offerings and convenient ordering processes.
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- - BUILD OUR CONSUMER DIRECT BUSINESS.
We plan to establish a leading consumer direct business. This business will
arrange for the overnight delivery of products directly from third party growers
and our own import operation. A consumer direct business will enable us to offer
our customers "farm fresh" flowers and unique floral products, fruit and gourmet
food gift baskets and other gift items that we may not stock at our retail
stores. This business will also permit us to promote recurring gifts such as
flower-of-the-month and plant-of-the-month offerings where same-day delivery is
not required. We plan to market these products to our customers primarily
through the use of catalogs and the Internet.
- - CREATE SUPPLY CHAIN EFFICIENCIES.
We believe the current floral supply chain is inefficient in that it adds
little incremental value and creates substantial incremental costs to retailers.
We believe that a retailer with direct farm relationships can reduce
inefficiencies in delivery time and cost by minimizing the use of flower
wholesalers. As a result, we expect to cut the time it takes to deliver flowers
from growers to our stores by up to seven days, while at the same time reducing
the cost of the product to us. We believe that improved quality and vase life of
flowers will lead to improved customer satisfaction and loyalty.
- - DEVELOP OUR INFORMATION SYSTEMS.
Our plan is to develop information systems that will give us a competitive
advantage. To this end, we are integrating our information systems to support
real-time order and inventory processing throughout all of our business units.
This capability will allow us to enhance the customer's overall experience
across our retail network and throughout our order generation businesses. By
combining enhanced information systems with sophisticated merchandising,
database and supply chain management techniques, we believe these information
systems will improve our profitability.
RECENT DEVELOPMENTS
On April 30, 1999, we completed a business combination with Gerald Stevens
Retail, Inc., which was formerly known as Gerald Stevens, Inc., and changed our
business name from Florafax International, Inc. to Gerald Stevens, Inc. Gerald
Stevens Retail provided us with our retail stores, most of our Internet and
order-generation operations, and most of our directors and senior management
team.
In May 1999, we entered into an Agreement and Plan of Merger with Calyx &
Corolla, Inc., the largest direct marketer of flowers with over $20.0 million in
sales in its latest fiscal year, for total consideration of approximately $14.3
million, consisting of approximately 934,000 shares of common stock and
approximately 160,000 options to acquire shares of common stock with exercise
prices ranging from $.36 to $9.44 per share. In addition, we will nominate Ruth
Owades, the current Chairman and CEO of Calyx & Corolla, to our Board of
Directors.
The Calyx & Corolla acquisition will strengthen our position as the largest
floral and gift retailer in the country and enhance our reputation with the
well-known and highly trusted Calyx & Corolla brand. Additionally, the
acquisition will serve as a platform for our direct marketing efforts and expand
our customer database by over 1.5 million floral customers.
In 1988, Ms. Owades and Calyx & Corolla pioneered the limited
inventory/direct-from-source model that is being so vigorously pursued by
Internet retailers today. Over the past 11 years, Calyx & Corolla has developed
partnerships with more than 30 high quality flower and plant growers who package
and ship flowers and vases to customers via overnight delivery upon receipt of
an order. This "just-in-time" product procurement process allows Calyx & Corolla
to eliminate its inventory risk
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while at the same time giving its customers fresh, just-cut flowers. It also
permits Calyx & Corolla to allow customers to customize their floral orders.
We plan to capture same-day delivery sales that Calyx & Corolla currently
foregoes through our network of retail stores. Additionally, we plan to leverage
Calyx & Corolla's expertise and infrastructure to provide unique and hard to
find direct-from-grower offerings to customers of our retail stores, our
Internet sites and our call centers and to make in-store gift catalogs available
to our customers.
Given the strength of the Calyx & Corolla brand, it is our intention to
greatly expand the marketing of the company's web site, calyxandcorolla.com.,
which has experienced significant revenue gains over last year. Calyx & Corolla
redesigned this site in late April.
OPERATIONS
- - RETAIL NETWORK.
Our retail stores are among the leading retail floral operations in their
markets, with a total of 141 locations in 18 markets across the United States.
<TABLE>
<CAPTION>
HUB STORE- TOTAL
FACILITIES STAND-ALONES IN-STORES LOCATIONS
---------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Allentown, PA............................ 1 1
Atlanta, GA.............................. 3 3
Augusta, GA.............................. 2 2
Central Pennsylvania..................... 1 14 20 35
Columbus, OH............................. 1 3 4
Dallas, TX............................... 2 2
Des Moines, IA........................... 1 5 11 17
Detroit, MI.............................. 2 22 6 30
Grand Rapids, MI......................... 1 2 3
Jacksonville, FL......................... 1 5 6
Milwaukee, WI............................ 3 3
Orlando, FL.............................. 1 1
Phoenix, AZ.............................. 1 6 7
Raleigh, NC.............................. 5 5
Salt Lake City, UT....................... 1 12 13
Savannah, GA............................. 1 1
South Florida............................ 3 3
Tampa, FL................................ 1 4 5
-- -- -- ---
Total............................... 10 94 37 141
== == == ===
</TABLE>
We intend to continue to expand our retail network through the acquisition
of additional floral businesses in our current markets and in new markets where
the opportunity exists to become the leading specialty floral and gift retailer
and marketer of flowers in the United States. As of June 29, 1999, we were in
negotiations to acquire 21 additional floral businesses, with an aggregate of 50
stores. The transactions contemplated by the negotiations are subject to
contingencies and conditions, including the completion of due diligence reviews
and the negotiation and execution of definitive purchase agreements. We cannot
assure you that any of these acquisitions will be completed.
In most cases, our initial market entry will be through the acquisition of
key existing retailers followed by the acquisition of smaller retailers. Our
acquisition of key existing retailers will focus on the most respected and
established retailers in a market. We intend to retain the management of
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well-run retailers to leverage their market knowledge, name recognition and
local reputation, and promote greater levels of customer retention and loyalty.
Smaller stores we acquire may be in non-strategic locations, and therefore
ultimately may be moved to a better location or integrated into our hub
facility. We believe that by acquiring existing stores, we acquire loyal
customers in the most cost-efficient manner. Given the results of our recent
acquisitions, we expect to retain a substantial amount of the acquired stores'
customers even when the former locations are relocated to one of our other
facilities.
Hub Facilities. Hub facilities in a typical market are up to 40,000 square
foot facilities that provide centralized call-in order taking, floral
arranging and delivery. A typical major market will have one or two hub
facilities. Hub facilities eliminate cost redundancies inherent in the
typical decentralized floral market, such as duplicative labor functions,
inventory spoilage and delivery inefficiencies, and allow us to control
product quality and consistency. Hub facilities also produce standard
floral arrangements for our retail stores. Our hub facilities may also
serve as retail locations depending on their locations.
Satellite Stores. Our retail stores are either stand-alone or
store-in-store outlets that are located in high traffic, high visibility
areas to service walk-in business. We believe that introducing attractive,
well-merchandised retail stores in high traffic areas will help promote
growth in the walk-in segment of the floral and gift industry and promote
awareness of the Gerald Stevens brand. Because we can vary our store size
and format while maintaining a consistent Gerald Stevens look and feel, our
retail stores will be located in a variety of settings, including downtown
and suburban retail centers, office buildings, supermarkets and university
campuses. These retail locations will be connected to supporting hub
facilities through internal systems, allowing us to provide the customer
with efficient service and increased product variety. Each store will vary
its product mix depending upon the size of the store, its location and
customer preferences. We intend our satellite stores to differentiate
themselves from our competitors by offering an enhanced customer experience
within the floral shop through improved marketing, merchandising and
service.
Our store-in-store locations provide the supermarkets and grocery stores in
which they are located a one-stop solution for offering their customers
quality floral products and services. These locations benefit from the high
traffic and brand appeal of the store in which they are located. Each of
these store-in-store locations will be operated by a Gerald Stevens
employee to ensure consistency of product and service, as well as to
promote our brand.
Customer Experience. Our Gerald Stevens concept retail store will create a
unique and enhanced shopping experience for our customers. Our stores will
feature specially designed fixtures, be divided into easy-to-shop
categories and feature professionals demonstrating the art of flower
arranging. The store design is intended to give customers a warm, inviting
place to browse and learn about our products.
In our stores, customers will find fresh cut flowers and bouquets displayed
creatively and in abundance, with informational tags and signage to guide
the customer through the store. The traffic pattern of the Gerald Stevens
store will draw customers through the store in a logical progression,
exposing the customer to the breadth of available floral products and gift
items. In addition to flowers and plants, our stores will carry a number of
products which we believe are complementary. These products, categorized as
complementary gifts and decorative accessories, will include greeting
cards, stationery and other paper products, gourmet confections, gift
baskets, decorative accessories, collectibles and seasonal/holiday
decorations. We believe that expanding the product mix of our stores to
include these products is a natural extension of our floral product
offerings since these products, like flowers, are commonly used by
customers to
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<PAGE> 44
communicate personal expressions to others and for self-consumption to
create a warm and friendly home environment. We believe that offering gifts
and decorative accessories will not only enable us to meet the needs of our
existing customers who currently purchase these products at competing
specialty retailers, but will also allow us to attract new customers to our
stores who do not purchase flowers or plants.
In addition to providing our customers with a unique and enhanced in-store
experience and a broader array of merchandise, we are committed to
providing superior customer service. We intend to provide same-day delivery
on a national scale from all distribution points, and expanded hours
through our call centers, which offer customers the opportunity to place
orders 24 hours a day, 7 days a week.
- - ORDER GENERATION.
As a complement to our retail network, we operate several order generation
businesses, including National Flora and The Flower Club. These businesses focus
on generating floral orders through channels that include mailing inserts,
yellow page advertisements and corporate affinity programs.
Through National Flora, we are the largest yellow page advertiser of floral
products. We generate orders through a variety of additional advertising
efforts, including Internet websites, affinity partnerships, corporate programs
and direct mail marketing. We forward these orders primarily to National Flora's
preferred network of stores and to our stores.
Through The Flower Club, we have relationships with major corporate
partners. We engage in joint marketing campaigns with these corporate partners
throughout the year in an effort to provide member florists with orders during
slower periods of the year. Orders generated by The Flower Club are transmitted
by our Florafax wire service business to member florists. Our corporate partners
include many nationally recognized companies, including airlines, credit card
issuers, retailers and other businesses. We market directly to the customers of
these companies by inserting marketing materials into their customers' periodic
statements.
SELECTED CORPORATE PARTNERS
<TABLE>
<S> <C> <C>
America West Airlines Exxon Safeway
American Express First Union Shell Oil
AT&T Goodyear Texaco
Citibank Hallmark TWA
Coca-Cola Limited Stores United Parcel Service
Continental Airlines Lowes Victoria's Secret
Costco Mellon Bank Wachovia Bank
Discover Card Northwest Airlines Zales
</TABLE>
Our order generation businesses are currently supported by three call
centers with a total of approximately 300 call stations in three time zones. Our
call centers are located in Vero Beach, Florida, Tulsa, Oklahoma and Medford,
Oregon. These call centers service our order generation businesses 24 hours a
day, 7 days a week, and provide after-hours phone answering for our retail
stores enabling our local customers to place an order through a Gerald Stevens
representative at any time. Upon completion of our acquisition of Calyx &
Corolla, we will add a fourth call center with 50 call stations.
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<PAGE> 45
- - E-COMMERCE.
We intend to become the premier floral and gift marketer on the Internet.
We believe the Internet will enhance our ability to develop targeted
relationships with customers and introduce new products more quickly and with
less financial risk than otherwise possible.
Currently, we operate a number of websites. We acquired many of these
websites in connection with our purchases of local florists, while a few we
developed internally. Going forward, we anticipate concentrating on a select
number of websites that we will continuously enhance and promote, including
GeraldStevens.com, FlowerClub.com, FlowerMarket.com, and FlowerLink.com. We
expect to spend the majority of our efforts on GeraldStevens.com.
We intend for each of these websites to appeal to a different customer
segment and offer users targeted content and products. The content will be
designed to educate and inform customers, as well as to encourage additional
consumption. Product selection will be targeted by customer segment and will
encompass all distribution channels that we currently offer.
We are committed to marketing and promoting these operations in our stores,
through traditional advertising mediums, and via relationships with strategic or
high traffic websites. We have entered into agreements with a number of
companies, including Yahoo!, Lycos, CNN.com and Hallmark.com. FlowerClub.com is
the exclusive flower and gift basket retailer within the recently launched
CNN.com shopping area and is prominently featured on the CNN.com home page. We
also intend to aggressively pursue online direct-marketing strategies including
the development of an affiliate network and the implementation of outbound
e-mail marketing.
In addition, through FlowerLink, we provide an opportunity for florists to
participate in the growth of the Internet by developing and hosting customized
websites for them. In exchange for providing free order processing and customer
service, we collect a transaction fee for each order placed through one of these
websites. Approximately 900 florists are members of FlowerLink.
- - FLOWERS-BY-WIRE.
We operate Florafax, a flowers-by-wire business which enables member
florists, who are independent retailers, to send and deliver floral orders
throughout the United States. We act as an intermediary between florists
primarily by telephone or fax.
Our order allocation system has the ability to distribute orders ratably to
our member florists. Based on our experience in the flowers-by-wire business and
observation of other wire services, we believe that most other wire services
typically do not select florists to receive orders 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 florists deliver to that location. The system
then determines which florist should receive that order based on distribution
criteria and then sends the order via facsimile or telephone. We believe that
our order allocation system is presently the only system in the industry that
distributes orders in an equitable manner to member florists.
We list our member florists and their advertisements 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.
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<PAGE> 46
- - CHARGE AND CREDIT CARD SERVICES.
We offer an electronic credit card and charge card processing system. This
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. This system allows florists and non-floral
merchants to receive frequent, automatic deposits directly to their bank
accounts. We sell and lease system terminals and optional printers at
competitive rates.
SUPPLIERS
We currently operate AGA Flowers, a leading Miami-based importer of cut
flowers. We primarily import cut flowers from abroad, principally from Colombia
and Ecuador. We purchase cut flowers, plants and greens grown in the United
States, principally from California. Although we do not generally enter into
long-term contracts with our suppliers, through AGA Flowers we actively manage
relationships with more than 40 growers in South America and Central America
which allow us to obtain high quality flowers in large quantities and at times
needed. In addition, we enter into standing order arrangements with other
importers and wholesalers that provide us fixed quantity purchases on a fixed
price basis throughout the year, with higher quantities at those prices during
peak demand periods to ensure an adequate supply of flowers during periods of
peak demand. We believe that we have good relationships with our suppliers and
that the larger number of current and potential suppliers should continue to
make perishable floral products available to us as needed.
INFORMATION SYSTEMS
We currently intend to invest $15.0 million over the next three years in
our information systems, which we believe will enhance our competitive advantage
over other flower retailers and marketers. Our systems will include leading
retail applications designed to support large-chain specialty retailers. Our
systems will also allow us to use historical customer data to further enhance
the execution, service, and identification of new markets and marketing
opportunities.
COMPETITION
We face competition in each segment of the retail floral industry. Our
retail stores compete with traditional floral shops, supermarkets, garden
centers, vendors and other retailers based upon price, credit terms, breadth of
product offering, product quality, customer service and location. We also
compete with gift and other specialty retailers with our non-floral products.
Both our traditional and our Internet order generation businesses face
significant competition from others providing similar services. In particular,
dial-up numbers and websites in the retail floral industry have become
significantly more competitive in recent years. Our floral wire service business
is one of five national wire services in the country, and the top three wire
services have substantial market share. To the extent we are unable to compete
successfully against our existing and future competitors, our business,
operating results and financial condition may be materially adversely affected.
While we believe that we compete effectively within each segment in the retail
floral industry, additional competitors with greater resources than us may enter
the industry and compete effectively against us.
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SERVICE MARKS, TRADEMARKS AND TRADE NAMES
We have registered or are in the process of registering a variety of
service marks, trademarks and trade names for use in our business, including:
- Gerald Stevens(SM)
- National Flora(TM)
- The Flower Club(TM)
We regard our intellectual property as being an important factor in the
marketing of our company and our brand. We are not aware of any facts which
would negatively impact our continuing use of any of our service marks,
trademarks or trade names.
EMPLOYEES
As of March 31, 1999, we employed approximately 1,100 full-time and 900
part-time employees. We also employ approximately 600 additional employees
during peak seasons. Of our non-seasonal employees, approximately 50 are
corporate personnel. None of our employees are represented by unions. We
consider our employee relations to be good.
PROPERTIES
Our corporate headquarters are located in leased premises at 301 East Las
Olas Blvd., Suite 300, Ft. Lauderdale, FL 33301. As of June 28, 1999, we owned 1
hub location, leased our other hubs and all of our retail stand-alone stores,
and leased or licensed space inside 31 supermarkets and six department stores.
None of these individual locations are material to us. We consider each of these
stores to be in good operating condition and suitable for their current use.
The following table lists our principal non-retail properties, all of which
are leased:
<TABLE>
<CAPTION>
LOCATION USE
- -------- ---
<S> <C>
2055 Cardinal Avenue
Medford, Oregon 97504.............. Call Center for National Flora
875 20th Street
Vero Beach, Florida 32961.......... Call Center and Headquarters for Florafax
6925 East 14th Street
Tulsa, Oklahoma 74112.............. Call Center for Florafax
8416 N.W. 17th Street
Miami, Florida 33126............... Import Facility
</TABLE>
We expect to make significant capital expenditures to provide consistent
features and signage for our retail stores. We expect to make significant
capital expenditures to develop hub locations. We believe that all of our
facilities are sufficient for our current needs.
REGULATION
We are subject to laws and regulations that are applicable to various
Internet activities. There are many legislative and regulatory proposals under
consideration by federal, state, local and foreign governments and agencies,
including matters relating to online content, Internet privacy, Internet
taxation, access charges, liability for information retrieved from or
transmitted over the Internet, domain names, database protection, unsolicited
commercial e-mail messages and jurisdiction. New
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<PAGE> 48
regulations may increase our costs of compliance and doing business, decrease
the growth in Internet use, decrease the demand for our services or otherwise
have a material adverse effect on our business.
We are also subject to federal, state and local environmental, health and
safety laws and regulations. Under environmental laws, we may be responsible for
investigating and remediating environmental conditions relating to conditions at
the numerous real properties at which we operate. These obligations could arise
whether we own or lease the property. We are not aware of any pending federal
environmental legislation that we expect to have a material adverse impact on
our Company.
In addition, our import operations are generally subject to United States
federal regulations governing international trade and the import of products
into the United States. Imports into the United States are subject to various
tariffs and customs duties imposed by the federal government. Such tariffs and
duties are subject to change. In addition, when a particular foreign country
limits the amount of a particular product which may be exported from the United
States to such country, the United States government from time to time may
retaliate by imposing a new or additional tariff on other products which such
country exports into the United States. Such retaliatory tariffs could be
material. In addition, the United States from time to time imposes anti-dumping
duties on imports into the United States. Dumping is the practice whereby
importers sell products in the United States at prices below the flowers' home
market value. The anti-dumping duties generally are paid by the importer.
LEGAL PROCEEDINGS
We are party to pending legal proceedings arising in the ordinary course of
business. While we cannot predict the results of these proceedings with
certainty, we do not believe that any of these matters are material to our
financial condition or results of operations.
We have become aware that NASD Regulation and the staff of the Commission
are conducting investigations into the trading of our common stock prior to the
public announcement of our business combination with Gerald Stevens Retail on
December 10, 1998. We have responded to information requests by both regulators.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gerald R. Geddis..................... 49 Chief Executive Officer, President and
Director
Albert J. Detz....................... 51 Senior Vice President and Chief Financial
Officer
Steven J. Nevill..................... 34 Senior Vice President and Chief Information
Officer
Adam D. Phillips..................... 36 Senior Vice President, Chief Administrative
Officer, General Counsel and Secretary
Steven R. Berrard.................... 44 Director
Thomas C. Byrne...................... 37 Director
Kenneth G. Puttick................... 51 Director
Kenneth Royer........................ 68 Director
Andrew W. Williams................... 46 Director
</TABLE>
GERALD R. GEDDIS, a member of our board of directors since April 30, 1999,
serves as our Chief Executive Officer and President. He co-founded Gerald
Stevens Retail with Messrs. Berrard and Byrne in May 1998 and served as its
Chief Executive Officer and President until its merger with us on April 30,
1999. From 1988 to 1996, Mr. Geddis served in various executive positions at
Blockbuster Entertainment Group, a division of Viacom Inc., which, prior to its
acquisition by Viacom in September 1994, operated as Blockbuster Entertainment
Corporation. He served Blockbuster 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. During his tenure at
Blockbuster, Mr. Geddis was involved in all facets of the company's operations,
including worldwide store operations, merchandising, marketing and training. For
the 17 years prior to 1989, Mr. Geddis served in various positions with Tandy
Corporation.
ALBERT J. DETZ has served as our Senior Vice President and Chief Financial
Officer since April 30, 1999. Prior to joining Gerald Stevens Retail in July
1998 as its Senior Vice President and Chief Financial Officer, 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.
STEVEN J. NEVILL has served as our Senior Vice President and Chief
Information Officer since April 30, 1999. From 1996 until joining Gerald Stevens
Retail as Senior Vice President 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 has served as our Senior Vice President, Chief
Administrative Officer, General Counsel and Secretary since April 30, 1999. From
January 1998 until joining Gerald Stevens Retail as Senior Vice President in
July 1998, Mr. Phillips was a shareholder of the law firm of Akerman,
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<PAGE> 50
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.
STEVEN R. BERRARD has served as a member of our board of directors since
April 30, 1999. In 1997, Mr. Berrard co-founded, with Mr. Byrne, New River
Capital Partners, a private equity firm with an investment strategy focused on
branded specialty retail, e-commerce and education, and he controls New River's
managing general partner. Mr. Berrard has served as Co-Chief Executive Officer
of AutoNation, Inc. (formerly known as Republic Industries, Inc.) since October
1996. AutoNation is the world's largest automotive retailer with over 380
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.
From September 1994 through March 1996, Mr. Berrard served as President and
Chief Executive Officer of Blockbuster. 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. In
addition, Mr. Berrard served as President and Chief Executive Officer and a
director of Spelling Entertainment Group Inc., a televised and filmed
entertainment producer and distributor, from March 1993 through March 1996, and
served as a director of Viacom from September 1994 until March 1996. Mr. Berrard
presently serves as a director of AutoNation and of Florida Panthers Holdings,
Inc., which owns and operates luxury resorts, arena and entertainment facilities
and a professional sports franchise.
THOMAS C. BYRNE has served as a member of our board of directors since
April 30, 1999. Currently, Mr. Byrne is a limited partner of New River and
controls an administrative partner of New River. 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, Technology and Online
Operations. Additionally, Mr. Byrne led the development of several new retail
concepts. Mr. Byrne is a certified public accountant and prior to joining
Blockbuster was employed with KPMG Peat Marwick.
KENNETH G. PUTTICK has been a member of our board of directors since
January 1995. Mr. Puttick is President, director and owner of Ken Puttick
Buick-Cadillac, in Vero Beach, Florida. Mr. Puttick has been in the retail
automobile business since 1968. Mr. Puttick has owned and operated several
retail and real estate businesses.
KENNETH ROYER has served as a member of our board of directors since April
30, 1999. Prior to joining Gerald Stevens Retail 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, a privately
owned floral retailer. 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 has served as a member of our board of directors since
December 1988. Mr. Williams served as Chairman of the Board of Directors from
November 1992 until April 1999
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<PAGE> 51
and as Chief Executive Officer from September 1994 until April 1999. Since 1978
Mr. Williams has been a certified public accountant practicing principally in
Vero Beach, Florida.
EMPLOYMENT AGREEMENTS
We have employment agreements with each of our executive officers. Each
agreement provides that the executive officer will receive an annual base salary
of $150,000. In addition, each executive officer will be eligible for an annual
bonus of up to 20% of his base salary, based on the achievement of certain
corporate goals and objectives. If any executive officer is terminated "without
cause" or if he elects to terminate his employment for "good reason," in each
case as defined in his employment agreement, then he will be entitled to
continue to receive his base salary and bonus through the end of the employment
term, and all of his unvested stock options will automatically vest on the date
of termination and will be exercisable in full. In addition, following a change
of control, all unvested stock options held by Messrs. Detz and Phillips will
automatically vest and will be exercisable in full. Each of our executive
officers is also subject to confidentiality obligations as well as to
non-compete and non-solicitation covenants during his employment and for a two
year period following the termination of his employment. The employment
agreements with Messrs. Geddis, Detz and Phillips terminate on December 31,
2000, and the employment agreement with Mr. Nevill terminates on February 2,
2001.
RELATED PARTY TRANSACTIONS
In connection with our acquisition of Royer's Flower Shops, we assumed five
leases which were entered into in July 1994 between Royer's Flower Shops, as
tenant, and Kenneth Royer and his spouse, as landlord. The leases are for retail
flower shops which we own and operate in central Pennsylvania. The aggregate
annual rent payable by us to Mr. and Mrs. Royer for the five floral shop leases
is approximately $260,000. We believe that each of the leases is on terms no
less favorable than could be obtained from third parties for comparable retail
space in the same markets.
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SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 25, 1999 information regarding
the beneficial ownership of our common stock, including shares which the
individuals have the right to acquire within 60 days upon the exercise of
outstanding options and warrants. The table lists (1) each person known to us to
beneficially own more than 5% of our common stock, (2) each of our directors,
(3) each of our executive officers and (4) all of our directors and executive
officers as a group. Unless otherwise indicated, the address of each person or
party is 301 East Las Olas Boulevard, Suite 300, Fort Lauderdale, Florida 33301,
our principal business address.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
---------------------------------------------
BEFORE THE OFFERING AFTER THE OFFERING
--------------------- ---------------------
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------ ----------- ------- ----------- -------
<S> <C> <C> <C> <C>
New River Capital Partnership, L.P.................. 7,977,104 21.7% 7,977,104 19.1%
100 S.E. Third Avenue
Ft. Lauderdale, Florida 33301
Lance Laifer(1)..................................... 2,072,129 5.6% 2,072,129 5.0%
45 West 45th Street
New York, New York 10036
Gerald R. Geddis.................................... 3,402,005 9.3% 3,452,005 8.3%
Albert J. Detz(2)................................... 367,875 1.0% 367,875 *
Adam D. Phillips(2)(3).............................. 486,000 1.3% 506,000 1.2%
Steven J. Nevill.................................... 0 * 0 *
Steven R. Berrard(4)................................ 7,977,104 21.7% 7,977,104 19.1%
Thomas C. Byrne(5).................................. 190,518 * 190,518 *
Kenneth G. Puttick(6)(7)............................ 1,155,000 3.1% 1,155,000 2.8%
Kenneth Royer....................................... 47,031 * 47,031 *
Andrew W. Williams(8)............................... 1,112,303 3.0% 1,112,303 2.6%
All Directors and Executive Officers as a
Group(9).......................................... 14,737,836 39.6% 14,807,836 35.1%
</TABLE>
- -------------------------
* less than one percent
(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. 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.
(2) Includes 33,750 shares of our common stock subject to options granted under
Gerald Stevens Retail's 1998 Stock Option Plan, which options we assumed in
connection with our business combination with Gerald Stevens Retail and
which are exercisable within 60 days of the date of this prospectus.
(3) Mr. Phillips owns his shares of our common stock jointly with his spouse.
(4) The aggregate amount of our common stock deemed beneficially owned by Mr.
Berrard consists of 7,977,104 shares owned by New River Capital Partners.
Mr. Berrard controls and beneficially owns his interests in New River
Capital Partners indirectly through other entities.
(5) The aggregate amount of our common stock beneficially owned by Mr. Byrne
consists of 190,518 shares owned directly by him, but does not include any
shares owned by New River Capital Partners. Mr. Byrne has a non-controlling
interest in New River Capital Partners.
(continued on next page)
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<PAGE> 53
(6) Includes 637,000 shares held by Puttick Enterprises, of which Mr. Puttick is
President, director and owner.
(7) 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 prospectus.
(8) 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.
(9) The shares shown for all directors and executive officers as a group include
427,500 shares of our common stock subject to options which they have the
right to acquire within 60 days of the date of this prospectus.
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DESCRIPTION OF OUR 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 250,000,000 shares of our
common stock, par value $0.01 per share, and 600,000 shares of our preferred
stock, par value $10 per share. On June 25, 1999, we had 36,760,342 shares of
common stock outstanding. No shares of our preferred stock were outstanding on
that date.
COMMON STOCK
Subject to the prior rights of stockholders of our preferred stock, the
stockholders of our common stock:
- are entitled to dividends if they are 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
- 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 on May
10, 1999 are fully paid and non-assessable.
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 at the time of issuance. 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.
STOCKHOLDERS AGREEMENT
On October 1, 1998, New River Capital Partners, Gerald R. Geddis, Adam D.
Phillips, Albert J. Detz, and stockholders of the founding companies of Gerald
Stevens Retail, among others, entered into a stockholders agreement which was
amended on June 5, 1999. Under the stockholders agreement, as amended, we have a
"right to first offer" under which, prior to October 1, 2000, any holder of
shares governed by the stockholders agreement who desires to sell shares having
a market value of more than $500,000 must first offer his shares to us in the
same amount and at the same price or prices. We may purchase some or all of the
offered stock for at least 95% of the price or prices specified in the offer.
This right to first offer does not apply to any transfers in connection with
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a registration of our common stock, employment or stock option agreements or any
reorganization, recapitalization, merger or sale of all of our issued and
outstanding capital stock.
Until October 1, 2000, if requested by the managing underwriter, each
holder of shares governed by the stockholders agreement agrees not to sell,
transfer or otherwise dispose of any shares during the 90 days following the
effective date of a registration statement.
TRANSFER AGENT
The transfer agent and registrar for our common stock is Registrar and
Transfer Company, Cranford, New Jersey.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have 41,760,342 shares of common
stock outstanding (assuming no exercise of any stock options). All of these
shares (including the 5,000,000 shares we offered hereby) are or will be
tradable without restriction or further registration under the Securities Act of
1933, as amended unless the shares are held by our "affiliates," as that term is
defined under Rule 144 promulgated under the Securities Act.
We are unable to predict the effect that sales of common stock made under
Rule 144, pursuant to future registration statements or otherwise, may have on
any then-prevailing market price for shares of our common stock. Nevertheless,
sales of a substantial amount of our common stock in the public market, or the
perception that such sales could occur, could materially adversely affect the
market price of our common stock as well as our ability to raise additional
capital through the sale of our equity securities.
An aggregate of up to 3,199,904 shares of common stock issuable under our
stock option plans and options which we assumed in our business combination with
Gerald Stevens Retail (consisting of options currently outstanding to purchase
2,314,404 shares of common stock and 885,500 shares of common stock remaining
available for grant or award thereunder) may become eligible for sale without
restriction to the extent they are held by persons who are not our affiliates
and by affiliates pursuant to Rule 144. In addition, warrants to purchase an
additional 239,948 shares of common stock are outstanding, and we currently
expect to issue an additional 160,000 options in connection with the Caylx &
Corolla acquisition. See "Security Ownership of Beneficial Owners and
Management."
Our officers and directors, New River Capital Partners and certain other
stockholders have agreed, subject to certain exceptions, not to directly or
indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer
any shares of common stock or securities convertible into or
exchangeable or exercisable for or repayable with common stock,
whether now owned or thereafter acquired by the person executing the
agreement or with respect to which the person executing the agreement
thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing, or
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<PAGE> 56
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock
whether any such swap or transaction is to be settled by delivery of
common stock or other securities, in cash or otherwise, without the
prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 90 days after the date of this prospectus. See
"Underwriting."
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of material U.S. federal income and
estate tax consequences of the ownership and disposition of our common stock
applicable to Non-U.S. Holders. A "Non-U.S. Holder" is a person other than:
- an individual who is a citizen or resident of the U.S.;
- a corporation, partnership or other entity created or organized in the
U.S. or under the laws of the U.S. or of any political subdivision
thereof, other than a partnership treated as foreign under U.S.
Treasury regulations;
- an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of source; and
- a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
An individual may, subject to certain exceptions, be treated as a resident
of the U.S. for U.S. federal income tax purposes, instead of a non-resident, by,
among other things, being present in the U.S. for at least 31 days in the
calendar year and for a total of at least 183 days during a three-year period
ending in the current calendar year -- counting for these purposes all of the
days present in the current year, one-third of the days present in the
immediately preceding year, and one-sixth of the days present in the second
preceding year. Such residents are subject to tax as if they were U.S. citizens.
This discussion does not consider:
- U.S. state and local or non-U.S. tax consequences;
- specific facts and circumstances that may be relevant to a particular
Non-U.S. Holder's tax position, including, if the Non-U.S. Holder is a
partnership, that the U.S. tax consequences of holding and disposing
of our common stock may be affected by certain determinations made at
the partner level;
- the tax consequences for the shareholders, partners or beneficiaries
of a Non-U.S. Holder;
- special tax rules that may apply to certain Non-U.S. Holders,
including without limitation, banks, insurance companies, dealers in
securities and traders in securities; or
- special tax rules that may apply to a Non-U.S. Holder that holds our
common stock as part of a "straddle," "hedge" or "conversion
transaction."
The following discussion is based on provisions of the U.S. Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, and
administrative and judicial interpretations as of the date of this prospectus,
all of which may change retroactively or prospectively. The following summary is
for general information. Each Non-U.S. Holder should consult a tax advisor
regarding
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the U.S. federal tax consequences of holding and disposing of our common stock,
as well as any tax consequences under the laws of any U.S. state, local or other
U.S. or non-U.S. taxing jurisdiction.
DIVIDENDS
We do not anticipate paying any cash dividends on our common stock in the
foreseeable future. Should we pay dividends, dividends paid to a Non-U.S. Holder
of common stock generally will be subject to withholding of U.S. federal income
tax at a 30% rate or such lower rate that an applicable income tax treaty
specifies. Non-U.S. Holders should consult their tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a Non-U.S. Holder's conduct
of a trade or business in the U.S. (or, if an income tax treaty applies,
attributable to a permanent establishment, or, in the case of an individual, a
"fixed base" in the U.S., as provided in such treaty) ("U.S. trade or business
income") are generally subject to U.S. federal income tax on a net income basis
at regular graduated rates, but generally are not subject to the 30% withholding
tax if the Non-U.S. Holder files the appropriate U.S. Internal Revenue Service
form with the payer. Any U.S. trade or business income received by a Non-U.S.
Holder that is a corporation may, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or such lower rate which an
applicable income tax treaty specifies.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above and for purposes of
determining the applicability of an income tax treaty rate. For dividends paid
after 2000:
- a Non-U.S. Holder of common stock that claims the benefit of an income
tax treaty rate generally will be required to satisfy applicable
certification and other requirements;
- in the case of common stock held by a foreign partnership, the
certification requirement generally will be applied to the partners of
the partnership, and the partnership will be required to provide
certain information, including a U.S. taxpayer identification number;
and
- look-through rules will apply to tiered partnerships.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
- the gain is U.S. trade or business income, in which case the branch
profits tax described above may also apply to a corporate Non-U.S.
Holder;
- the Non-U.S. Holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the U.S. Internal
Revenue Code, is present in the United States for more than 182 days
in the taxable year of the disposition and meets certain other
requirements; if these rules cause a Non-U.S. Holder to be subject to
U.S.
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federal income tax on the gain on the disposition, the Non-U.S.
Holder's net gains will be subject to tax at a 30% rate, unless a tax
treaty reduces or eliminates the tax;
- the Non-U.S. Holder is subject to tax under provisions of U.S. tax law
applicable to certain U.S. expatriates; or
- we are or have been a "U.S. real property holding corporation" for
U.S. federal income tax purposes at any time during the shorter of the
five-year period ending on the date of disposition and the Non-U.S.
Holder's holding period for the common stock.
Generally, a corporation is a "U.S. real property holding corporation" if
the fair market value of its "U.S. real property interests" equals or exceeds
50% of the sum of the fair market value of its worldwide real property interests
and its other assets used or held for use in a trade or business. We believe
that we are not now, and do not anticipate that we will become, a "U.S. real
property holding corporation." Even if we are or were to become a U.S. real
property holding corporation at any time during the shorter of the five-year
period ending on the date of the Non-U.S. Holder's disposition of our common
stock or the Non-U.S. Holder's holding period for the common stock, there will
be no tax on the gain from the stock disposition so long as the Non-U.S. Holder
did not own at any time during the applicable period more than 5% of our common
stock and our common stock is regularly traded on an established securities
market at any time during the calendar years of the disposition. A Non-U.S.
Holder's ownership of common stock would include for this purpose common stock
directly owned, indirectly owned through ownership of entities owning our common
stock, and constructively owned from certain family members of other affiliated
parties owning our common stock.
FEDERAL ESTATES TAXES
Common stock owned or treated as owned by an individual who is a Non-U.S.
Holder at the time of death will be included in the individual's gross estate
for U.S. federal estate tax purposes and may be subject to U.S. federal estate
tax, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
Non-U.S. Holder the amount of the dividends paid to that holder and any tax
withheld with respect to those dividends. These information reporting
requirements apply regardless of whether withholding is required. Copies of the
information returns reporting those dividends and withholding may also be made
available, under an applicable income tax treaty or agreement, to the tax
authorities in the country in which the Non-U.S. Holder resides.
Under certain circumstances, U.S. Treasury regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, Non-U.S. Holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to 2001 to an address outside the
U.S. For dividends paid after 2000, however, a Non-U.S. Holder of common stock
that fails to certify its Non-U.S. Holder status in accordance with applicable
U.S. Treasury regulations may be subject to backup withholding at a rate of 31%
on payments of dividends.
The payment of the proceeds of the disposition of common stock by or
through the U.S. office of a broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the holder certifies
its status as a Non-U.S. Holder under penalties of perjury or otherwise
establishes an exemption. The payment of the proceeds of the disposition by a
Non-U.S. Holder of common stock by or through a non-U.S. office of a non-U.S.
broker will not be subject to backup
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withholding or information reporting unless the non-U.S. broker is a "U.S.
related person." In the case of the payment of proceeds from disposition of
common stock by or through a non-U.S. office of a broker that is a U.S. person
or a "U.S. related person," information reporting, but currently not backup
withholding, on the payment applies unless, in general, the holder certifies its
status as a Non-U.S. Holder under penalties of perjury or the broker has
documentary evidence in its files that the holder is a Non-U.S. Holder and the
broker has no actual knowledge to the contrary. For this purpose, a "U.S.
related person" is:
- a "controlled foreign corporation" for U.S. federal income tax
purposes;
- a foreign person 50% or more of whose gross income from all sources
for the three-year period ending with the close of its taxable year
preceding the payment, or for such party of the period that the broker
has been in existence, is derived from activities that are effectively
connected with the conduct of a U.S. trade or business; or
- effective after 2000, a foreign partnership if, at any time during the
taxable year, (A) at least 50% of the capital or profits interest in
the partnership is owned by U.S. persons, or (B) the partnership is
engaged in a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a "U.S. related person" unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. Holders should consult
their own tax advisors regarding the application of the information reporting
and backup withholding rules to them, including changes to these rules that will
become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be refunded or credited against the holder's U.S. federal
income tax liability, if any, if the required information is furnished to the
U.S. Internal Revenue Service.
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UNDERWRITING
GENERAL
We intend to offer our common stock in the United States and Canada through
a number of underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Allen & Company Incorporated, Bear, Stearns & Co. Inc. and Hambrecht & Quist LLC
are acting as representatives of each of the underwriters named below. Subject
to the terms and conditions set forth in a purchase agreement among our company
and the underwriters, we have agreed to sell to the underwriters, and each of
the underwriters severally and not jointly has agreed to purchase from our
company, the number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 800,000
Allen & Company Incorporated................................ 800,000
Bear, Stearns & Co. Inc. ................................... 800,000
Hambrecht & Quist LLC....................................... 800,000
Banc of America Securities LLC.............................. 250,000
A.G. Edwards & Sons, Inc. .................................. 250,000
Prudential Securities Incorporated.......................... 250,000
William Blair & Company, L.L.C. ............................ 150,000
Branch, Cabell & Co. ....................................... 150,000
EVEREN Securities, Inc. .................................... 150,000
First Union Capital Markets Corp. .......................... 150,000
Raymond James & Associates, Inc. ........................... 150,000
SunTrust Equitable Securities Corporation................... 150,000
U.S. Bancorp Piper Jaffray Inc. ............................ 150,000
---------
Total........................................... 5,000,000
=========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in the agreement, to purchase all of the
shares of common stock being sold under the terms of the agreement if any of the
shares of common stock being sold under the terms of the agreement are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in certain circumstances, the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus, and to certain dealers at
such price less a concession not in excess of $.45 per share of
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common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $.10 per share of common stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public offering price.......................... $12.00 $60,000,000 $69,000,000
Underwriting discount.......................... $.72 $3,600,000 $4,140,000
Proceeds, before expenses, to Gerald Stevens... $11.28 $56,400,000 $64,860,000
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $1.0 million and are payable by us.
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of 750,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less the underwriting discount. The
underwriters may exercise this option from time to time solely to cover
over-allotments, if any, made on the sale of our common stock offered hereby. To
the extent that the underwriters exercise this option, each underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares of our common stock proportionate to such underwriter's initial amount
reflected in the foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered hereby to be sold to some
of our directors, officers, employees, business associates and related persons.
The number of shares of our common stock available for sale to the general
public will be reduced to the extent that those persons purchase the reserved
shares. Any reserved shares which are not orally confirmed for purchase within
one day of the pricing of the offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors, and certain stockholders
holding an aggregate of at least approximately 19.9 million shares of common
stock, have agreed, with certain exceptions, without the prior written consent
of Merrill Lynch on behalf of the underwriters for a period of 90 days after the
date of this prospectus, not to directly or indirectly,
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any shares of our common stock or securities convertible into
or exchangeable or exercisable for or repayable with our common stock,
whether now owned or later acquired by the person executing the
agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file a
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registration statement under the Securities Act relating to any shares
of our common stock or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of our common stock
whether any such swap or transaction is to be settled by delivery of
our common stock or other securities, in cash or otherwise,
provided, that we may at any time and from time to time (1) issue shares of our
common stock to third parties as consideration for our acquisition from such
third parties of businesses, provided such third parties agree to the terms of
this provision for 90 days from the date hereof, and (2) issue shares of our
common stock in connection with the exercise of currently outstanding options
and stock options issued pursuant to our stock option plans.
QUOTATION ON THE NASDAQ NATIONAL MARKET
Our common stock is quoted on the Nasdaq National Market under the symbol
"GIFT."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of our common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell more shares of our common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing our common stock in the open market.
The representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither our company nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
our company nor any of the underwriters makes any representation that the
representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
PASSIVE MARKET MAKING
In connection with the offering, underwriters and selling group members may
engage in passive market making transactions in the common stock on the Nasdaq
National Market in accordance with Regulation M under the Exchange Act during a
period before the commencement of offers or sales of common stock hereunder.
OTHER RELATIONSHIPS
Allen & Company Incorporated acted as placement agent in connection with a
private placement in October 1998 of approximately $20.9 million of Gerald
Stevens Retail common stock for which they received customary fees. Allen &
Company Incorporated and certain of its employees also purchased an aggregate of
$1.4 million of Gerald Stevens Retail common stock on the same terms as the
other investors in this private placement.
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LEGAL MATTERS
Legal matters regarding the validity of our common stock offered under this
prospectus will be passed upon on our behalf by Akerman, Senterfitt & Eidson,
P.A., Miami, Florida and for the underwriters by Fried, Frank, Harris, Shriver &
Jacobson (a partnership including professional corporations), New York, New
York. Some attorneys employed by Akerman, Senterfitt & Eidson, P.A. own shares
of our common stock.
EXPERTS
The audited supplemental consolidated financial statements as of August 31,
1998 and for the year then ended of Gerald Stevens, Inc. (formerly Florafax
International, Inc.), the audited financial statements of Florafax
International, Inc. as of August 31, 1998 and for the year then ended, the
audited financial statements of Gerald Stevens Retail, Inc. (formerly 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 document or incorporated into
this document by reference, have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their reports with
respect thereto, and are included in this document in reliance upon the
authority of that firm as experts in giving said reports.
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements for the years ended August 31, 1997 and
1996 included in our Annual Report on Form 10-KSB, as amended by Amendment No. 1
on Form 10-KSB/A and as further amended by Amendment No. 2 on Form 10-KSB/A for
the year ended August 31, 1998, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our consolidated financial statements for the years ended August 31,
1997 and 1996 are incorporated by reference in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent certified public accountants, have audited
our supplemental consolidated financial statements for the years ended August
31, 1997 and 1996 included in our Current Report on Form 8-K filed with the
Securities and Exchange Commission, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our supplemental consolidated financial statements for the years
ended August 31, 1997 and 1996 are incorporated by reference in reliance on
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
The audited 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. incorporated into this document by reference have
been audited by PricewaterhouseCoopers LLP, independent certified public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference in this document in reliance upon the authority of
that firm as experts in giving said reports.
The audited combined financial statements of The Exotic Gardens, Inc. and
Kuhn Flowers, Inc., incorporated by reference into this document, have been
audited by Adair, Fuller, Witcher & Malcolm, P.A., independent certified public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference in this document in reliance upon the authority of
that firm as experts in giving said report.
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The audited financial statements of Calyx & Corolla, Inc. incorporated by
reference in this prospectus from Gerald Stevens' Current Report on Form 8-K,
dated April 30, 1999, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report which is incorporated by reference herein,
and have been so incorporated in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a Registration Statement on Form S-3
under the Securities Act with respect to the common stock offered by this
prospectus. This prospectus does not contain all of the information included in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the Commission. For further information
pertaining to our company and our common stock offered hereby, reference is made
to the registration statement, including the exhibits and the financial
statements, notes and schedules filed as a part of the registration statement.
Statements contained in this prospectus regarding the contents of any contract
or other document referred to in the prospectus or registration statement are
not necessarily complete. In each instance reference is made to the copy of such
contract or other document filed as an exhibit to the registration statement or
such other document, each such statement being qualified in all respects by such
reference.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and file reports, proxy statements and other
information with the Commission. These reports, proxy statements and other
information, as well as the registration statement, exhibits and schedules, may
be inspected, without charge, or copied, at prescribed rates, at the public
reference facility maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. In addition, the Commission maintains an Internet
site that contains reports, proxy and information statements, and other
information, regarding issuers that file electronically with the Commission. The
address of the Commission's site is http://www.sec.gov.
INCORPORATION OF INFORMATION BY REFERENCE
We incorporate by reference the following documents which we have filed
with the Commission under the Exchange Act:
(1) Our Annual Report on Form 10-KSB for the fiscal year ended August
31, 1998, as amended on Amendment No. 1 to Form 10-KSB/A and on Amendment
No. 2 to Form 10-KSB/A.
(2) Our Current Report on Form 8-K, dated December 11, 1998.
(3) Our Quarterly Report on Form 10-QSB for the period ended November
30, 1998, as amended by Form 10-QSB/A.
(4) Our Quarterly Report on Form 10-QSB for the period ended February
28, 1999.
(5) Pages F-20 to F-127 and F-146 to F-151 of our Definitive Proxy
Statement on Schedule 14A, dated April 12, 1999.
(6) Our Current Report on Form 8-K, dated April 30, 1999, filed May 3,
1999.
(7) Our Current Report on Form 8-K, dated April 30, 1999, filed May
17, 1999, as amended on Amendment No. 1 to Form 8-K/A, filed with the
Commission on June 4, 1999.
(8) The description of our common stock contained in our Registration
Statement on Form 10, dated April 27, 1971.
63
<PAGE> 65
You should consider all documents we file pursuant to sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this document
and prior to the termination of this offering of our common stock to be
incorporated by reference in this document. You should consider any statement
contained in this document or in a document incorporated or considered to be
incorporated by reference in this document to be modified or superseded for
purposes of this document to the extent that a statement contained in any
subsequently filed document which also is or is considered to be incorporated by
reference in this document modifies or supersedes that statement. You should not
consider any statement modified or superseded in this manner except as so
modified or superseded, to constitute a part of this document.
We will provide without charge to each person to whom this document is
delivered, upon written or oral request of that person, a copy of any and all of
the information that has been incorporated by reference in this document
(excluding exhibits unless exhibits are specifically incorporated by reference
into the requested documents). Please direct such requests to Jeffrey M.
Mattson, Gerald Stevens, Inc., 301 East Las Olas Boulevard, Suite 300, Ft.
Lauderdale, Florida 33301. Our telephone number is (954) 713-5000.
64
<PAGE> 66
GERALD STEVENS
INDEX TO PRO FORMA SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction to Pro Forma Supplemental Consolidated
Financial Statements...................................... PF-2
Pro Forma Supplemental Consolidated Balance Sheet at
February 28, 1999......................................... PF-3
Pro Forma Supplemental Consolidated Statement of Operations
for the year ended August 31, 1998........................ PF-4
Pro Forma Consolidated Statements of
Operations -- Acquisitions Closed -- for the year ended
September 30, 1998........................................ PF-5
Pro Forma Supplemental Consolidated Statement of Operations
for the six months ended February 28, 1999................ PF-6
Pro Forma Consolidated Statements of
Operations -- Acquisitions Closed -- for the periods
indicated................................................. PF-7
Notes to Unaudited Pro Forma Supplemental Consolidated
Financial Statements...................................... PF-8
</TABLE>
PF-1
<PAGE> 67
GERALD STEVENS
INTRODUCTION TO PRO FORMA SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
The following pro forma supplemental consolidated financial statements
present the pro forma supplemental consolidated balance sheet at February 28,
1999 and the pro forma supplemental consolidated statements of operations for
the fiscal year ended August 31, 1998 and the six months ended February 28,
1999. The pro forma supplemental consolidated financial statements:
(1) 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").
(2) give further effect to the offering contemplated in this prospectus
("Pro Forma, As Adjusted").
The pro forma supplemental consolidated balance sheet at February 28, 1999
presents the pro forma financial position as if (1) the significant completed
and probable post February 28, 1999 acquisitions made by Gerald Stevens and (2)
the offering contemplated in this prospectus, had been consummated on February
28, 1999. The pro forma supplemental consolidated statements of operations for
the year ended August 31, 1998 and the six months ended February 28, 1999
present the pro forma results of operations as if (1) the significant completed
and probable acquisitions made by Gerald Stevens during 1998 and 1999, the
private placement and (2) the offering, had been consummated at the beginning of
the periods presented.
The pro forma supplemental consolidated financial statements are based upon
available information and certain assumptions considered reasonable by
management. The pro forma supplemental consolidated financial statements do not
reflect all of the potential cost savings Gerald Stevens may have achieved had
the acquisitions taken place at the beginning of the periods presented nor do
they reflect the impact of additional corporate overhead costs that would have
been incurred had Gerald Stevens Retail 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 supplemental consolidated financial statements should be read
in conjunction with Gerald Stevens' supplemental consolidated financial
statements, management's discussion, and other financial information included
elsewhere in this Prospectus.
PF-2
<PAGE> 68
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
FEBRUARY 28, 1999
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ACQUISITIONS CLOSED
----------------------------------- PENDING
ACQUISITIONS
GERALD STEVENS NATIONAL EXOTIC/ ---------------- PRO FORMA
SUPPLEMENTAL PHOEBE'S FLORA KUHN CALYX & COROLLA ADJUSTMENTS
-------------- -------- -------------- ------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 4,768 $ 437 $ 900 $ 1,244 $ 3,623 $(17,727)(a)
9,151(c)
(396)(e)
Accounts receivable, net......... 8,895 265 870 484 173 --
Other receivables................ 574 -- -- -- -- --
Inventories...................... 3,714 177 3 263 1,079 --
Prepaid and other current
assets......................... 1,157 17 14 94 1,656 --
Deferred tax asset, net of
allowance...................... 150 -- -- -- 229 --
------- ------- ------- ------- ------- --------
Total current assets....... 19,258 896 1,787 2,085 6,760 (8,972)
Property and equipment, net...... 6,933 190 117 2,217 1,311 (2,010)(b)
Intangible assets, net........... 45,012 -- -- 224 -- 39,429(a)
(406)(b)
Other assets..................... 341 25 31 72 471 --
------- ------- ------- ------- ------- --------
Total assets............ $71,544 $ 1,111 $ 1,935 $ 4,598 $ 8,542 $ 28,041
======= ======= ======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................. $10,196 $ 166 $ 3,934 $ 613 $ 1,773 $ --
Accrued liabilities.............. 7,924 98 81 363 156 --
Deferred revenue................. -- 23 -- -- 1,951 --
Notes payable.................... -- -- -- 2,416 -- (2,416)(b)
Current maturities of long-term
debt........................... 45 69 -- -- 113 --
Other current liabilities........ -- 11 -- -- 134 --
------- ------- ------- ------- ------- --------
Total current liabilities........ 18,165 367 4,015 3,392 4,127 (2,416)
Long-term debt................... 1,138 26 -- -- 239 9,151(c)
Other liabilities................ 254 6 -- -- -- --
------- ------- ------- ------- ------- --------
Total liabilities....... 19,557 399 4,015 3,392 4,366 6,735
------- ------- ------- ------- ------- --------
Stockholders' equity
Common stock..................... 346 83 -- 1 132 (216)(a)
26(a)
Preferred stock.................. -- -- -- -- 11,741 (11,741)(a)
Additional paid-in capital....... 65,482 60 -- 5,219 69 (5,348)(a)
25,294(a)
Media credits.................... -- -- -- -- (2,577) 2,577
Treasury stock................... (1,616) (368) -- -- -- 368(a)
Retained earnings................ (12,225) 937 (2,080) (4,014) (5,189) 10,742(a)
(396)(e)
------- ------- ------- ------- ------- --------
Total stockholders'
equity.................... 51,987 712 (2,080) 1,206 4,176 21,306
------- ------- ------- ------- ------- --------
Total liabilities and
stockholders'
equity................ $71,544 $ 1,111 $ 1,935 $ 4,598 $ 8,542 $ 28,041
======= ======= ======= ======= ======= ========
<CAPTION>
GERALD STEVENS
GERALD STEVENS OFFERING PRO FORMA AS
PRO FORMA ADJUSTMENTS ADJUSTED
-------------- ----------- --------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........ $ 2,000 $ 44,846(d) $ 46,846
Accounts receivable, net......... 10,687 -- 10,687
Other receivables................ 574 -- 574
Inventories...................... 5,236 -- 5,236
Prepaid and other current
assets......................... 2,938 -- 2,938
Deferred tax asset, net of
allowance...................... 379 -- 379
-------- -------- --------
Total current assets....... 21,814 44,846 66,660
Property and equipment, net...... 8,758 -- 8,758
Intangible assets, net........... 84,259 -- 84,259
Other assets..................... 940 -- 940
-------- -------- --------
Total assets............ $115,771 $ 44,846 $160,617
======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities
Accounts payable................. $ 16,682 $ -- $ 16,682
Accrued liabilities.............. 8,622 -- 8,622
Deferred revenue................. 1,974 -- 1,974
Notes payable.................... -- -- --
Current maturities of long-term
debt........................... 227 -- 227
Other current liabilities........ 145 -- 145
-------- -------- --------
Total current liabilities........ 27,650 -- 27,650
Long-term debt................... 10,554 (10,554)(d) --
Other liabilities................ 260 -- 260
-------- -------- --------
Total liabilities....... 38,464 (10,554) 27,910
-------- -------- --------
Stockholders' equity
Common stock..................... 372 50(d) 422
Preferred stock.................. -- -- --
Additional paid-in capital....... 90,776 55,350(d) 146,126
Media credits.................... -- -- --
Treasury stock................... (1,616) -- (1,616)
Retained earnings................ (12,225) -- (12,225)
-------- -------- --------
Total stockholders'
equity.................... 77,307 55,400 132,707
-------- -------- --------
Total liabilities and
stockholders'
equity................ $115,771 $ 44,846 $160,617
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-3
<PAGE> 69
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1998
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PENDING GERALD
ACQUISITION GERALD STEVENS
GERALD STEVENS ACQUISITIONS CALYX & PRO FORMA STEVENS OFFERING PRO FORMA
SUPPLEMENTAL CLOSED COROLLA ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
-------------- ------------ ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales............. $ -- $71,671 $18,093 $ -- $89,764 $ -- $ 89,764
Service & other revenue... 13,391 19,049 1,972 -- 34,412 -- 34,412
------- ------- ------- ------- ------- ------- --------
Total revenue....... 13,391 90,720 20,065 -- 124,176 -- 124,176
------- ------- ------- ------- ------- ------- --------
Operating costs and
expenses:
Cost of product sales..... -- 32,543 6,034 -- 38,577 -- 38,577
Operating expenses........ -- 36,097 -- (1,608)(a) 37,107 -- 37,107
2,618(b)
Selling, general, and
administrative
expenses................ 16,467 15,189 15,160 -- 46,816 -- 46,816
------- ------- ------- ------- ------- ------- --------
Total operating costs and
expenses................ 16,467 83,829 21,194 1,010 122,500 -- 122,500
------- ------- ------- ------- ------- ------- --------
Operating income
(loss)............ (3,076) 6,891 (1,129) (1,010) 1,676 -- 1,676
------- ------- ------- ------- ------- ------- --------
Other
Interest expense.......... (82) (592) (24) (257)(c) (955) 955(f) --
Interest income........... 165 96 285 -- 546 -- 546
Other income (expense),
net..................... 43 713 -- -- 756 -- 756
------- ------- ------- ------- ------- ------- --------
Total other......... 126 217 261 (257) 347 955 1,302
------- ------- ------- ------- ------- ------- --------
Income (loss) before
income taxes...... (2,950) 7,108 (868) (1,267) 2,023 955 2,978
Provision (benefit) for
income taxes............ (682) 2,712 (380) (341)(d) 1,309 380(d) 1,689
------- ------- ------- ------- ------- ------- --------
Net income (loss)......... $(2,268) $ 4,396 $ (488) $ (926) $ 714 $ 575 $ 1,289
======= ======= ======= ======= ======= ======= ========
Earnings (loss) per share:
Basic................... $ (0.26) $ 0.02 $ 0.03
Diluted................. $ (0.26) $ 0.02 $ 0.03
Weighted average shares
outstanding:
Basic................... 8,581 36,255 41,255
Diluted................. 8,581 37,291 42,291
</TABLE>
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-4
<PAGE> 70
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS CLOSED
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ROYERS BOESEN MAPLE DR. DEL CACTUS AGA EASTERN MARTINAS NORTONS JENNIES
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <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 $ 3,697
Service & other
revenue........... 2,475 522 419 194 825 -- 476 179 270 421
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total revenue... 16,041 5,420 6,399 3,487 4,797 10,936 6,832 1,841 2,421 4,118
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales............. 4,026 2,133 2,333 1,129 1,410 8,323 2,560 845 839 1,412
Operating expense... 9,101 2,277 1,936 1,430 2,292 428 3,791 602 1,176 1,743
Selling, general,
and administrative
expenses.......... 2,123 1,027 1,795 575 968 1,676 214 286 281 1,028
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total operating
costs and
expenses.......... 15,250 5,437 6,064 3,134 4,670 10,427 6,565 1,733 2,296 4,183
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Operating income
(loss)......... 791 (17) 335 353 127 509 267 108 125 (65)
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Other
Interest expense.... (14) (23) (10) -- (20) (27) (57) (72) (3) (35)
Interest income..... 42 -- -- -- 1 11 -- -- -- --
Other income
(expense), net.... 89 -- 38 -- -- -- 153 5 31 141
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Total other......... 117 (23) 28 -- (19) (16) 96 (67) 28 106
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Income (loss)
before income
taxes.......... 908 (40) 363 353 108 493 363 41 153 41
Provision (benefit)
for income
taxes............. 368(e) (17) 130(e) 144 43(e) 159 111(e) -- 35 20
------- ------- ------- ------- ------- ------- ------- -------- -------- --------
Net income (loss)... $ 540 $ (23) $ 233 $ 209 $ 65 $ 334 $ 252 $ 41 $ 118 $ 21
======= ======= ======= ======= ======= ======= ======= ======== ======== ========
<CAPTION>
TOTAL
NATIONAL EXOTIC/ ACQUISITIONS
FALLONS PHOEBE'S FLORA KUHN CLOSED
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenue:
Product sales....... $ 2,490 $ 3,750 $ -- $ 8,920 $ 71,671
Service & other
revenue........... 551 427 10,023 2,267 19,049
-------- -------- -------- -------- --------
Total revenue... 3,041 4,177 10,023 11,187 90,720
-------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales............. 1,109 2,422 -- 4,002 32,543
Operating expense... 1,019 1,280 3,622 5,400 36,097
Selling, general,
and administrative
expenses.......... 614 291 2,828 1,483 15,189
-------- -------- -------- -------- --------
Total operating
costs and
expenses.......... 2,742 3,993 6,450 10,885 83,829
-------- -------- -------- -------- --------
Operating income
(loss)......... 299 184 3,573 302 6,891
-------- -------- -------- -------- --------
Other
Interest expense.... (46) (9) (67) (209) (592)
Interest income..... -- 26 13 3 96
Other income
(expense), net.... 1 41 -- 214 713
-------- -------- -------- -------- --------
Total other......... (45) 58 (54) 8 217
-------- -------- -------- -------- --------
Income (loss)
before income
taxes.......... 254 242 3,519 310 7,108
Provision (benefit)
for income
taxes............. 89 98(e) 1,408(e) 124(e) 2,712
-------- -------- -------- -------- --------
Net income (loss)... $ 165 $ 144 $ 2,111 $ 186 $ 4,396
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-5
<PAGE> 71
GERALD STEVENS
PRO FORMA SUPPLEMENTAL CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1999
UNAUDITED
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PENDING GERALD
GERALD ACQUISITION GERALD STEVENS
STEVENS ACQUISITIONS CALYX & PRO FORMA STEVENS OFFERING PRO FORMA
SUPPLEMENTAL CLOSED COROLLA ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales............... $28,373 $11,541 $ 9,283 $ -- $49,197 $ -- $49,197
Service & other revenue..... 11,622 6,912 1,233 -- 19,767 -- 19,767
------- ------- ------- ------- ------- ---- -------
Total revenue......... 39,995 18,453 10,516 -- 68,964 -- 68,964
------- ------- ------- ------- ------- ---- -------
Operating costs and expenses:
Cost of product sales....... 12,744 5,383 3,400 -- 21,527 -- 21,527
Operating expense........... 13,356 6,440 -- (134)(a) 20,629 -- 20,629
967(b)
Selling, general, and
administrative expenses... 14,260 5,299 9,033 -- 28,592 -- 28,592
Merger expense.............. 4,051 -- -- (4,051)(g) -- --
------- ------- ------- ------- ------- ---- -------
Total operating costs and
expenses.................. 44,411 17,122 12,433 (3,218) 70,748 -- 70,748
------- ------- ------- ------- ------- ---- -------
Operating income
(loss).............. (4,416) 1,331 (1,917) 3,218 (1,784) -- (1,784)
------- ------- ------- ------- ------- ---- -------
Other
Interest expense............ (183) (144) (19) (280)(c) (626) 626(f) --
Interest income............. 173 35 99 -- 307 -- 307
Other income (expense),
net....................... 96 748 223 -- 1,067 -- 1,067
------- ------- ------- ------- ------- ---- -------
Total other........... 86 639 303 (280) 748 626 1,374
------- ------- ------- ------- ------- ---- -------
Income (loss) before
income taxes........ (4,330) 1,970 (1,614) 2,938 (1,036) 626 (410)
Provision (benefit) for
income taxes.............. 2,127 867 -- (2,265)(d) 729 251(d) 980
------- ------- ------- ------- ------- ---- -------
Net income (loss)........... $(6,457) $ 1,103 $(1,614) $ 5,203 $(1,765) $375 $(1,390)
======= ======= ======= ======= ======= ==== =======
Earnings (loss) per share:
Basic..................... $ (0.21) $ (0.05) $ (0.03)
Diluted................... $ (0.21) $ (0.05) $ (0.03)
Weighted average shares
outstanding:
Basic..................... 31,198 36,255 41,255
Diluted................... 31,198 36,255 41,255
</TABLE>
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-6
<PAGE> 72
GERALD STEVENS
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
ACQUISITIONS CLOSED
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM SEPTEMBER 1, 1998 TO ACQUISITION DATE FOR THE PER
----------------------------------------------------------------------------------
ROYERS BOESEN MAPLE DR. DEL CACTUS AGA EASTERN MARTINAS
------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales....... $ 948 $ 337 $ 375 $ 241 $ 272 $ 586 $ 453 $ 114
Service & other
revenue........... 144 35 27 15 53 1 31 13
------- ------- ------- ------- ------- ------- ------- --------
Total revenue... 1,092 372 402 256 325 587 484 127
------- ------- ------- ------- ------- ------- ------- --------
Operating costs and
expenses:
Cost of product
sales............. 341 120 142 91 81 456 185 51
Operating expense... 762 182 252 121 218 118 288 35
Selling, general,
and administrative
expenses.......... 507 40 40 51 66 49 41 45
------- ------- ------- ------- ------- ------- ------- --------
Total operating
costs and
expenses.......... 1,610 342 434 263 365 623 514 131
------- ------- ------- ------- ------- ------- ------- --------
Operating income
(loss)......... (518) 30 (32) (7) (40) (36) (30) (4)
------- ------- ------- ------- ------- ------- ------- --------
Other
Interest expense.... (8) (2) -- (1) -- -- (5) --
Interest income..... 7 -- -- -- -- -- 4 --
Other income
(expense), net.... 92 -- (10) -- -- -- 180 --
------- ------- ------- ------- ------- ------- ------- --------
Total other......... 91 (2) (10) (1) -- -- 179 --
------- ------- ------- ------- ------- ------- ------- --------
Income (loss)
before income
taxes.......... (427) 28 (42) (8) (40) (36) 149 (4)
Provision (benefit)
for income
taxes............. (171)(e) 11 4(e) 35 --(e) -- 43(e) --
------- ------- ------- ------- ------- ------- ------- --------
Net income (loss)... $ (256) $ 17 $ (46) $ (43) $ (40) $ (36) $ 106 $ (4)
======= ======= ======= ======= ======= ======= ======= ========
<CAPTION>
FOR THE SIX MONTH PERIODS ENDED
------------------------------------
FEBRUARY 28,
MARCH 31, 1999 1999
FOR THE PERIOD FROM SEPTEMBER 1, 1998 TO ACQUISITION DATE --------- ------------
-------------------------------------------- EXOTIC/ NATIONAL
MARTINAS NORTONS JENNIES FALLONS PHOEBE'S KUHN FLORA
-------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales....... $ 113 $ 1,053 $ 220 $ 1,900 $ 4,929 $ --
Service & other
revenue........... 18 151 41 237 1,203 4,943
-------- -------- -------- -------- -------- --------
Total revenue... 131 1,204 261 2,137 6,132 4,943
-------- -------- -------- -------- -------- --------
Operating costs and
expenses:
Cost of product
sales............. 47 383 114 1,168 2,204 --
Operating expense... 79 639 106 644 2,996 --
Selling, general,
and administrative
expenses.......... 29 205 35 180 583 3,428
-------- -------- -------- -------- -------- --------
Total operating
costs and
expenses.......... 155 1,227 255 1,992 5,783 3,428
-------- -------- -------- -------- -------- --------
Operating income
(loss)......... (24) (23) 6 145 349 1,515
-------- -------- -------- -------- -------- --------
Other
Interest expense.... (2) (23) (3) (4) (86) (10)
Interest income..... -- -- -- 13 6 5
Other income
(expense), net.... 3 33 -- 3 30 417
-------- -------- -------- -------- -------- --------
Total other......... 1 10 (3) 12 (50) 412
-------- -------- -------- -------- -------- --------
Income (loss)
before income
taxes.......... (23) (13) 3 157 299 1,927
Provision (benefit)
for income
taxes............. -- (9) -- 63(e) 120(e) 771(e)
-------- -------- -------- -------- -------- --------
Net income (loss)... $ (23) $ (4) $ 3 $ 94 $ 179 $ 1,156
======== ======== ======== ======== ======== ========
<CAPTION>
TOTAL
ACQUISITIONS
CLOSED
------------
<S> <C>
Revenue:
Product sales....... $ 11,541
Service & other
revenue........... 6,912
--------
Total revenue... 18,453
--------
Operating costs and
expenses:
Cost of product
sales............. 5,383
Operating expense... 6,440
Selling, general,
and administrative
expenses.......... 5,299
--------
Total operating
costs and
expenses.......... 17,122
--------
Operating income
(loss)......... 1,331
--------
Other
Interest expense.... (144)
Interest income..... 35
Other income
(expense), net.... 748
--------
Total other......... 639
--------
Income (loss)
before income
taxes.......... 1,970
Provision (benefit)
for income
taxes............. 867
--------
Net income (loss)... $ 1,103
========
</TABLE>
The accompanying notes are an integral part of these pro forma supplemental
consolidated financial statements
PF-7
<PAGE> 73
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS
1. HISTORICAL FINANCIAL STATEMENTS
The supplemental historical financial data presented in these pro forma
supplemental consolidated financial statements represents the consolidated
financial position of Gerald Stevens and subsidiaries at February 28, 1999 and
their results of operations for the year ended August 31, 1998 and the six
months ended February 28, 1999 restated to give effect to the merger with Gerald
Stevens Retail. The historical balance sheet data presented for the post
February 28, 1999 acquisitions of Gerald Stevens represents the financial
position of each acquired business at March 31, 1999 except that the financial
position of National Flora is presented at February 28, 1999. Acquisitions
closed through February 28, 1999 are included in Gerald Stevens' historical
supplemental consolidated balance sheet at February 28, 1999. The results of
operations for the year ended August 31, 1998 include the results of the
acquisitions of Gerald Stevens for the year ended September 30, 1998, except
that the results of Arizona Wholesale Floral, Inc. ("Cactus") are for the year
ended August 31, 1998, while the results of J.J. Fallon Company, Inc. and Calyx
& Corolla are presented for the year ended June 30, 1998. The results of
operations for the six months ended February 28, 1999 include the results of the
acquisitions of Gerald Stevens from September 1, 1998 to acquisition date with
the exception of Phoebe's, The Exotic Gardens, Inc./Kuhn Flowers, Inc. and Calyx
& Corolla which are presented for the six months ended March 31, 1999 and
National Flora which is presented for the six months ended February 28, 1999.
2. GERALD STEVENS ACQUISITIONS
During the period from October 1, 1998 to February 28, 1999, Gerald Stevens
completed the acquisition of 17 retail florist businesses, one internet based
order generation business, and also acquired AGA Flowers, Inc. ("AGA"), a floral
import business. Based upon insignificance, the pre-acquisition results of
operations of seven of the seventeen retail florist businesses and the internet
based order generation business acquired by Gerald Stevens have not been
included in the pro forma supplemental consolidated financial statements. During
the period from February 28, 1999 to June 25, 1999, Gerald Stevens acquired or
entered into probable agreements to acquire 13 retail florist businesses and a
small order generation business and also acquired National Flora, a floral order
generator. Based upon insignificance, the pre-acquisition results of operations
of 11 of these retail florist businesses and the small order generation business
have not been included in the pro forma supplemental consolidated financial
statements. During May 1999, Gerald Stevens entered into an agreement to acquire
Calyx & Corolla, a floral catalog and internet business. The acquisition is
considered probable by the Company and is expected to be consummated in June
1999. All acquired businesses have been accounted for in the pro forma
consolidated financial statements using the purchase method of accounting. The
pro forma supplemental 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-8
<PAGE> 74
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the acquisitions of Gerald Stevens which
were included in the pro forma consolidated financial statements on a pro forma
basis:
<TABLE>
<CAPTION>
ACQUISITION TANGIBLE INTANGIBLE
DATE CONSIDERATION ASSETS ASSETS LIABILITIES
----------- ------------- -------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
National Flora...................... 3/3/99 19,727 1,935 21,807 4,015
Phoebe's............................ 3/31/99 2,817 715 2,501 399
The Exotic Gardens, Inc. and Kuhn
Flowers, Inc. ("Exotic/Kuhn")..... 4/30/99 6,200 2,588 4,588 976
Calyx & Corolla..................... Pending 14,303 8,542 10,127 4,366
------- ------- ------- -------
Total Gerald Stevens Acquisitions... $85,020 $28,030 $73,194 $16,204
======= ======= ======= =======
</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. Represents preliminary adjustments to record the post February 28, 1999
acquisitions of Gerald Stevens, including: (i) the consideration paid by Gerald
Stevens in connection with such acquisitions, including repayment of assumed
debt and liabilities, (ii) the elimination of the historical stockholders'
equity account balances of these acquired businesses and (iii) the allocation of
excess purchase prices over individual assigned values to goodwill.
b. To adjust for real estate assets not acquired and related debt not assumed in
connection with Gerald Stevens acquisition of Exotic/Kuhn.
PF-9
<PAGE> 75
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
c. Represents borrowings under Gerald Stevens Retail's revolving credit facility
related to its post February 28, 1999 acquisitions.
d. Assumes an offering of 5 million shares at an estimated price of $12 per
share, less underwriting fees and miscellaneous costs. Assumes further that pro
forma debt related to acquisitions is retired.
e. Adjustment for cash not acquired from Phoebe's.
STATEMENTS OF OPERATIONS
a. Adjustment to reduce historical pre-acquisition 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 and Calyx and Corolla 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, Gerald Stevens has focused on acquiring well established companies
that have been in existence for many years.
c. To record interest on borrowings related to acquisitions under Gerald Stevens
Retail's 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 8.0% 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 $11 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, assuming an effective rate
of 40.0%.
f. Represents the elimination of interest expense due to the retirement of debt
with a portion of the proceeds from the contemplated offering.
g. To eliminate non-recurring merger expenses, including investment banking,
legal, and accounting costs.
PF-10
<PAGE> 76
GERALD STEVENS
NOTES TO UNAUDITED PRO FORMA SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PRO FORMA SUPPLEMENTAL DILUTED AND BASIC EARNINGS PER SHARE
Pro forma supplemental diluted and basic earnings per share are calculated
based on the weighted average shares outstanding during the year ended August
31, 1998 and the six months ended February 28, 1999, and gives effect to the
shares issued for acquisitions, in the private placement and in the contemplated
offering 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 calculate pro forma diluted and basic earnings
per share are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, 1998 FEBRUARY 28, 1999
--------------------------- -----------------------
DILUTED BASIC DILUTED BASIC
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Average Shares Outstanding...................... 41,254,705 41,254,705 41,254,705 41,254,705
Common Stock Equivalents........................ 1,036,129 -- -- --
---------- ---------- ---------- ----------
42,290,834 41,254,705 41,254,705 41,254,705
========== ========== ========== ==========
</TABLE>
PF-11
<PAGE> 77
GERALD STEVENS, FORMERLY FLORAFAX INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REGISTRANT
Reports of Independent Certified Public Accountants......... F-2
Supplemental Consolidated Balance Sheets as of February 28,
1999 (unaudited) and August 31, 1998 and 1997............. F-4
Supplemental Consolidated Statements of Operations for the
six month periods ended February 28, 1999 and 1998
(unaudited), and the years ended August 31, 1998, 1997 and
1996...................................................... F-5
Supplemental Consolidated Statements of Stockholders' Equity
for the six months ended February 28, 1999 (unaudited) and
for the years ended August 31, 1998, 1997 and
1996...................................................... F-6
Supplemental Consolidated Statements of Cash Flows for the
six month periods ended February 28, 1999 and 1998
(unaudited), and the years ended August 31, 1998, 1997 and
1996...................................................... F-7
Notes to Supplemental Consolidated Financial Statements..... F-8
</TABLE>
F-1
<PAGE> 78
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gerald Stevens, Inc. (formerly Florafax International, Inc.):
We have audited the balance sheet of Gerald Stevens Retail, Inc. (formerly
Gerald Stevens, Inc.) (a Delaware corporation) as of August 31, 1998, and the
related statements of operations, stockholders' equity and cash flows for the
period from inception (May 7, 1998) to August 31, 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 Retail, Inc.
as of August 31, 1998, and the results of its operations and its cash flows for
the period from inception (May 7, 1998) to August 31, 1998 in conformity with
generally accepted accounting principles.
We have also audited the accompanying supplemental consolidated balance
sheet of Gerald Stevens, Inc. (formerly Florafax International, Inc.) and
subsidiaries as of August 31, 1998, and the related supplemental consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. The supplemental consolidated financial statements give retroactive
effect to the merger with Gerald Stevens Retail, Inc. on April 30, 1999, which
has been accounting for as a pooling of interests as described in Note 1. These
supplemental consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
supplemental consolidated 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Gerald Stevens, Inc. and subsidiaries as of August 31, 1998 and the results of
their operations and their cash flows for the year then ended, after giving
retroactive effect to the merger with Gerald Stevens Retail, Inc. as described
in Note 1, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
May 13, 1999.
F-2
<PAGE> 79
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Gerald Stevens, Inc.
(Formerly Florafax International, Inc.)
We have audited the supplemental consolidated balance sheets of Gerald
Stevens, Inc. (formerly Florafax International, Inc. and formed as a result of
the combination of Gerald Stevens, Inc. and Florafax International, Inc.) as of
August 31, 1997 and the related supplemental consolidated statements of
operations, stockholder's equity, and cash flows for each of the two years in
the period ended August 31, 1997. The supplemental consolidated financial
statements give retroactive effect to the merger of Gerald Stevens, Inc. and
Florafax International, Inc. on April 30, 1999, which has been accounted for
using the pooling of interests method as described in the notes to the
supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of Gerald Stevens, Inc. Our
responsibility is to express an opinion on these supplemental 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 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, the supplemental financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Gerald Stevens, Inc. (formerly known as Florafax International, Inc.) at August
31, 1997, and the consolidated results of its operations and its cash flows for
each of the two years in the period August 31, 1997, after giving retroactive
effect to the merger of Gerald Stevens, Inc., as described in the notes to the
supplemental consolidated financial statements, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Tampa, Florida
October 8, 1998
F-3
<PAGE> 80
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, ------------------------
1999 1998 1997
------------ ------------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,768 $ 7,148 $ 4,267
Accounts receivable, net of allowance for doubtful
accounts of $1,010 (unaudited), $482 and $509 at
February 28, 1999, August 31, 1998, and August 31, 1997,
respectively............................................ 8,895 1,421 1,317
Other receivables......................................... 574 371 437
Inventories............................................... 3,714 -- --
Subscription receivable................................... -- 4,183 --
Deferred tax asset, net of allowance...................... 150 775 264
Prepaid and other current assets.......................... 1,157 165 40
-------- ------- -------
Total current assets................................ 19,258 14,063 6,325
-------- ------- -------
PROPERTY AND EQUIPMENT, net................................. 6,933 2,046 943
-------- ------- -------
OTHER ASSETS:
Intangible assets, net.................................... 45,012 3,791 2,090
Deferred tax asset, net of allowance...................... -- 1,407 1,236
Other..................................................... 341 28 --
-------- ------- -------
Total other assets.................................. 45,353 5,226 3,326
-------- ------- -------
Total assets........................................ $ 71,544 $21,335 $10,594
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 45 $ 80 $ --
Accounts payable.......................................... 10,196 4,336 3,754
Accrued expenses.......................................... 7,924 2,099 1,455
-------- ------- -------
Total current liabilities........................... 18,165 6,515 5,209
LONG-TERM DEBT, LESS CURRENT MATURITIES..................... 1,138 2,018 80
OTHER....................................................... 254 52 52
-------- ------- -------
Total liabilities................................... 19,557 8,585 5,341
-------- ------- -------
COMMITMENTS AND CONTINGENCIES
(Notes 6 and 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 600,000 shares authorized,
none issued............................................. -- -- --
Common stock $0.01 par value, 250,000,000 shares
authorized, 34,581,500 (unaudited), 21,954,483, and
8,253,004 shares issued and outstanding as of February
28, 1999, August 31, 1998, and August 31, 1997,
respectively............................................ 346 220 83
Additional paid-in capital................................ 65,482 19,914 10,108
Accumulated deficit....................................... (12,225) (5,768) (3,500)
Treasury stock, at cost, 519,975 (unaudited), 519,975 and
480,975 shares at February 28, 1999, August 31, 1998,
and August 31, 1997, respectively....................... (1,616) (1,616) (1,438)
-------- ------- -------
Total stockholders' equity.......................... 51,987 12,750 5,253
-------- ------- -------
Total liabilities and stockholders' equity.......... $ 71,544 $21,335 $10,594
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
balance sheets.
F-4
<PAGE> 81
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
----------------- --------------------------------
1999 1998 1998 1997 1996
------- ------- ------------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Product sales, net.......................... $28,373 $ -- $ -- $ -- $ --
Service and other revenue................... 11,622 8,194 13,391 11,609 10,299
------- ------- ------- ------ -------
39,995 8,194 13,391 11,609 10,299
------- ------- ------- ------ -------
OPERATING COSTS AND EXPENSES:
Cost of product sales....................... 12,744 -- -- -- --
Operating................................... 13,356 -- -- -- --
Selling, general and administrative......... 14,260 7,133 12,972 9,691 8,737
Contract modification charge................ -- -- 3,495 -- --
Merger expenses............................. 4,051 -- -- -- --
------- ------- ------- ------ -------
44,411 7,133 16,467 9,691 8,737
------- ------- ------- ------ -------
Operating income (loss)............. (4,416) 1,061 (3,076) 1,918 1,562
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Interest expense............................ (183) (3) (82) (6) (361)
Interest income............................. 173 76 165 183 115
Other....................................... 96 8 43 819 1
------- ------- ------- ------ -------
86 81 126 996 (245)
------- ------- ------- ------ -------
Income (loss) before income taxes... (4,330) 1,142 (2,950) 2,914 1,317
PROVISION (BENEFIT) FOR INCOME TAXES.......... 2,127 424 (682) (519) (817)
------- ------- ------- ------ -------
Income (loss) before extraordinary
item.............................. (6,457) 718 (2,268) 3,433 2,134
EXTRAORDINARY ITEM, net of income taxes....... -- -- -- -- 128
------- ------- ------- ------ -------
Net income (loss)........................ $(6,457) $ 718 $(2,268) $3,433 $ 2,262
======= ======= ======= ====== =======
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before extraordinary item..... $ (0.21) $ 0.09 $ (0.26) $ 0.43 $ 0.36
Extraordinary item.......................... -- -- -- -- 0.02
------- ------- ------- ------ -------
Net income (loss)................... $ (0.21) $ 0.09 $ (0.26) $ 0.43 $ 0.38
======= ======= ======= ====== =======
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item..... $ (0.21) $ 0.08 $ (0.26) $ 0.39 $ 0.33
Extraordinary item.......................... -- -- -- -- 0.02
------- ------- ------- ------ -------
Net income (loss)................... $ (0.21) $ 0.08 $ (0.26) $ 0.39 $ 0.35
======= ======= ======= ====== =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING:
Basic.................................... 31,198 7,677 8,581 8,076 5,988
Diluted.................................. 31,198 8,714 8,581 8,715 6,375
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-5
<PAGE> 82
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL
PAR PAID-IN ACCUMULATED TREASURY
SHARES VALUE CAPITAL DEFICIT STOCK TOTAL
--------- ----- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1995.............................. 5,794 $ 58 $ 7,381 $ (9,195) $ -- $(1,756)
Sale of common stock, net........................... 368 4 41 -- -- 45
Issuance of warrants................................ -- -- 97 -- -- 97
Conversion of debt.................................. 2,071 21 2,568 -- -- 2,589
Net income.......................................... -- -- -- 2,262 -- 2,262
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1996.............................. 8,233 83 10,087 (6,933) -- 3,237
Sale of common stock, net........................... 20 -- 21 -- -- 21
Purchase of treasury stock.......................... -- -- -- -- (1,438) (1,438)
Net income.......................................... -- -- -- 3,433 -- 3,433
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1997.............................. 8,253 83 10,108 (3,500) (1,438) 5,253
Sale of common stock, net........................... 13,059 131 9,236 -- -- 9,367
Common stock issued in acquisitions................. 642 6 494 -- -- 500
Purchase of treasury stock.......................... -- -- -- -- (178) (178)
Compensation expense under stock option plan........ -- -- 76 -- -- 76
Net loss............................................ -- -- -- (2,268) -- (2,268)
------ ---- ------- -------- ------- -------
BALANCE, August 31, 1998.............................. 21,954 220 19,914 (5,768) (1,616) 12,750
Sale of common stock, net........................... 6,442 64 21,277 -- -- 21,341
Common stock issued in acquisitions (unaudited)..... 6,186 62 22,918 -- -- 22,980
Compensation expense under stock option plan
(unaudited)....................................... -- -- 1,373 -- -- 1,373
Net loss (unaudited)................................ -- -- -- (6,457) -- (6,457)
------ ---- ------- -------- ------- -------
BALANCE, February 28, 1999 (unaudited)................ 34,582 $346 $65,482 $(12,225) $(1,616) $51,987
====== ==== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-6
<PAGE> 83
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
----------------- ---------------------------------
1999 1998 1998 1997 1996
------- ------- ------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,457) $ 718 $(2,268) $ 3,433 $ 2,262
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Extraordinary gain from forgiveness of debt............. -- -- -- -- (128)
Deferred income tax expense (benefit)................... 25 364 (682) (637) (863)
Depreciation and amortization........................... 1,078 120 882 261 488
Compensation expense under stock option plan............ 1,373 -- 76 -- --
Provision for doubtful accounts......................... 76 86 127 170 210
Changes in operating assets and liabilities:
Accounts receivable................................... (3,868) (1,279) (115) (323) (647)
Inventories........................................... 219 -- -- -- --
Prepaid and other current assets...................... 213 (254) (649) 14 (23)
Other assets.......................................... 1,908 31 262 84 --
Accounts payable...................................... 1,985 1,921 582 (159) 378
Accrued expenses...................................... 2,920 (40) 644 249 165
Other long-term liabilities........................... 43 7 -- (1) (6)
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities........................................ (485) 1,674 (1,141) 3,091 1,836
------- ------- ------- ------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,359) (1,171) (1,382) (844) (190)
Collection of amounts due from former owners of subsidiary
acquired................................................ 1,300 -- -- -- --
Advance to company subsequently acquired.................. (113) -- -- -- --
Payments for acquisitions, net of cash acquired........... (25,638) -- (1,500) -- --
Investment in common stock................................ -- (100) (100) -- 500
------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities........................................ (25,810) (1,271) (2,982) (844) 310
------- ------- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 2,500 -- 2,500
Proceeds from issuance of common stock, net............... 25,523 12 5,184 21 45
Purchase of treasury stock................................ -- (178) (178) (1,438) --
Payments on long-term debt................................ (1,304) -- (482) (333) (2,959)
Payment of commitment fee on credit facility.............. (304) -- (20) -- --
Proceeds from credit facility............................. 16,900 -- -- -- --
Payment of credit facility................................ (16,900) -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities........................................ 23,915 (166) 7,004 (1,750) (414)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents....................................... (2,380) 237 2,881 497 1,732
CASH AND CASH EQUIVALENTS, beginning of period.............. 7,148 4,267 4,267 3,770 2,038
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 4,768 $ 4,504 $ 7,148 $ 4,267 $ 3,770
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period for interest................ $ 74 $ -- $ 53 $ 1 $ 317
======= ======= ======= ======= =======
Cash paid during the period for income taxes............ $ 320 $ 60 $ 82 $ 52 $ --
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES
Issuance of common stock for acquisitions............... $22,980 $ -- $ 437 $ -- $ --
======= ======= ======= ======= =======
Subscription receivable................................. $ 4,183 $ -- $(4,183) $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
statements.
F-7
<PAGE> 84
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(ALL AMOUNTS AND RELATED DISCLOSURES APPLICABLE TO
THE SIX MONTHS ENDED FEBRUARY 28, 1999 ARE UNAUDITED)
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Gerald Stevens, Inc. ("Gerald Stevens") formerly Florafax International,
Inc., a Delaware corporation, has historically been engaged in the
flowers-by-wire business of generating floral orders and providing floral order
placement services to retail florists throughout the United States and credit
and charge card processing for third parties.
On April 30, 1999, Gerald Stevens completed a merger with Gerald Stevens
Retail, Inc. ("Gerald Stevens Retail") which was formerly known as Gerald
Stevens, Inc. Gerald Stevens Retail was formed on May 7, 1998 and through
September 30, 1998 was in the development stage, had no revenue and all of its
efforts were directed to developing a business strategy, raising capital and
acquiring leading retail flower shops and other floral related businesses. On
October 1, 1998, Gerald Stevens Retail commenced its operations upon the
completion of its acquisition of ten operating flower businesses and, as a
result, emerged from the development stage. Under the terms of the merger
agreement, based on an exchange formula, Gerald Stevens issued 28.1 million
shares of its common stock for all of Gerald Stevens Retail's common stock
outstanding. The merger was accounted for under the pooling of interests method
of accounting. The accompanying Supplemental Consolidated Financial Statements
give retroactive effect to the merger. Gerald Stevens' fiscal year end is August
31.
Details of the results of operations of Gerald Stevens and Gerald Stevens
Retail for the periods before the pooling of interest combination was
consummated are as follows:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Revenue:
Gerald Stevens, as previously reported.................... $13,391
Gerald Stevens Retail..................................... --
-------
$13,391
=======
Net loss:
Gerald Stevens, as previously reported.................... $ (623)
Gerald Stevens Retail..................................... (1,645)
-------
$(2,268)
=======
</TABLE>
Interim Financial Statements
In the opinion of management, the accompanying unaudited interim
supplemental consolidated financial statements of Gerald Stevens contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of Gerald Stevens as of February 28, 1999,
and the results of its operations and its cash flows for the six months ended
February 28, 1999 and 1998. The results of operations and cash flows for the six
months ended February 28, 1999 are
F-8
<PAGE> 85
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
not necessarily indicative of the results of operations or cash flows which may
be reported for fiscal year 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of Gerald
Stevens and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Gerald Stevens considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. As of August
31, 1998 and 1997, cash and cash equivalents included $6,870 and $3,865,
respectively, of interest bearing cash. Also included in cash and cash
equivalents as of August 31, 1998 and 1997, are $106 and $97, respectively, of
restricted cash relating to Gerald Stevens' credit card processing agreement
with its sponsoring bank.
Revenue Recognition
Gerald Stevens' revenue consists of product sales and service and other
revenues. Product sales revenue are recognized at the time of delivery
acceptance of products by the customer. Service and other revenue consists of
floral order processing, member dues and fees, directory and advertising fees
and charge card processing.
Floral Order Processing -- Floral order processing revenues consist of
orders placed through Gerald Stevens' order center, which are recorded at the
time the order is placed which coincides with delivery, and orders sent between
Gerald Stevens' member florists, which are recorded upon receipt of the
reporting document, prepared by the delivering florist, that confirms delivery.
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 Gerald
Stevens 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.
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.
F-9
<PAGE> 86
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventory
Inventory is valued at lower of cost or market, with cost determined on a
first-in, first-out basis.
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. Management expects 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.
Concentration of Credit Risk
A significant portion of Gerald Stevens' accounts receivable is
concentrated in the floral wire service industry. Credit risk is inherent in the
floral wire service industry. Consequently, to reduce this risk Gerald Stevens
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Gerald Stevens records depreciation and amortization using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
DESCRIPTION ESTIMATED USEFUL LIVES
- ----------- ----------------------
<S> <C>
Building and leasehold improvements......................... 3 to 30 years
Furniture, fixtures and equipment........................... 2 to 10 years
Computer hardware and software.............................. 3 to 10 years
Communication systems....................................... 2 to 5 years
Vehicles.................................................... 3 years
</TABLE>
F-10
<PAGE> 87
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets, net consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- ------
<S> <C> <C> <C>
Goodwill............................................. $45,253 $ 1,995 $1,995
Letters of intent.................................... -- 1,520 --
Other................................................ 250 616 311
------- ------- ------
45,503 4,131 2,306
Less: Accumulated amortization....................... (491) (340) (216)
------- ------- ------
$45,012 $ 3,791 $2,090
======= ======= ======
</TABLE>
Goodwill consists of the excess of purchase price over the fair value of
assets and liabilities acquired in acquisitions accounted for under the purchase
method of accounting. Included in goodwill for all periods is $1,995 from an
acquisition prior to October 31, 1970 which is not required to be amortized.
Amortizable goodwill is amortized over periods ranging from 20 to 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. Amortization of goodwill for the six months ended February 28, 1999 is
$395. There was no goodwill amortization in prior periods presented.
Letters of intent represents fair value allocated to letters of intent of
an acquired business (see Note 2). Upon completion of the acquisitions, the
value assigned to the underlying letters of intent was included as a component
of the purchase price for the acquired business.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to
be Disposed of, Gerald Stevens 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, Gerald Stevens makes adjustments to the carrying value of
long-lived assets based upon appraisals, discounted cash flows, or otherwise as
Gerald Stevens considers appropriate. After reviewing the results and
considering other qualitative factors, management is of the opinion that the
carrying amount of goodwill has not been impaired.
Deferred Financing Costs
Included in other assets in the accompanying supplemental consolidated
balance sheets are deferred financing costs of $304 (unaudited), $20 and $0, as
of February 28, 1999, August 31, 1998 and 1997, respectively, related to amounts
incurred in connection with obtaining a credit facility. Gerald Stevens began
recording amortization in September 1998 on a straight-line basis over the term
of the financing agreement (18 months). Accumulated amortization as of February
28, 1999 was $86.
F-11
<PAGE> 88
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Gerald Stevens accounts for income taxes under the provisions of SFAS No.
109, Accounting for Income Taxes. SFAS No. 109 requires the asset and liability
method of accounting for income taxes. Under the asset and liability method,
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 SFAS 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.
Earnings Per Share
Basic and diluted earnings per share in the accompanying supplemental
consolidated statements of operations are based upon the weighted average shares
outstanding during the applicable period. The impact of common stock equivalents
has not been included for loss periods, as they are anti-dilutive, in accordance
with the provisions of SFAS No. 128, Earnings Per Share. The components of
diluted earnings per share are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FEBRUARY 28, YEAR ENDED AUGUST 31,
-------------- ---------------------
1999 1998 1998 1997 1996
------ ----- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Basic Average Shares Outstanding........................ 31,198 7,677 8,581 8,076 5,988
Common Stock Equivalents................................ -- 1,037 -- 639 387
------ ----- ----- ----- -----
Diluted Average Shares Outstanding...................... 31,198 8,714 8,581 8,715 6,375
====== ===== ===== ===== =====
Common stock equivalents not included in the calculation
of diluted earnings per share because their impact is
antidulutive.......................................... 2,542 80 1,563 305 --
====== ===== ===== ===== =====
</TABLE>
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impact of Recently Issued Accounting Standards
Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective for
years ending after December 15, 1997. As a result, Gerald Stevens was required
to change the method 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.
F-12
<PAGE> 89
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Comprehensive Income -- In June 1997, the FASB issued SFAS 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 Gerald Stevens'
fiscal year ended August 31, 1999.
Segments -- In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which supersedes SFAS 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 Gerald Stevens' management. The Statement
is effective for financial statements for fiscal years beginning after December
15, 1997 and, accordingly, applies to Gerald Stevens' fiscal year ended August
31, 1999. Gerald Stevens anticipates expanding its current segment disclosures
upon adoption to include retail operations.
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. Gerald Stevens believes that this statement will not have a
material effect on Gerald Stevens' accounting for computer software development
or acquisition.
SOP 98-5, Reporting on the Costs of Start-Up Activities, requires the
immediate expensing of 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 February 28, 1999 or August 31, 1998.
Stock-Based Compensation
As allowed by SFAS No. 123 Accounting for Stock-Based Compensation, Gerald
Stevens accounts for stock-based compensation to employees 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.
Advertising Costs
Advertising costs associated with the cost of coupons included in corporate
partner advertising campaigns are expensed upon first showing. Advertising
expense amounted to $1,350, $881 and $741 in fiscal 1998, 1997 and 1996,
respectively.
F-13
<PAGE> 90
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
On July 31, 1998, Gerald Stevens acquired all of the assets of
International Floral Network, Inc. ("IFN"), a Florida corporation, for $1,500 in
cash and 641,997 shares of common stock valued at $500 or $0.78 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. Gerald Stevens allocated the
aggregate consideration of approximately $2 million to the nine letters of
intent it intended to pursue. Prior to yearend, Gerald Stevens ceased
discussions with one of these entities at which time the unamortized allocated
portion of the consideration of $480 was charged to amortization expense. Eight
of these retail floral chains were subsequently acquired by Gerald Stevens in
transactions accounted for under the purchase method of accounting in October
1998. Intangible assets as of February 28, 1999 includes $1,520 related to the
IFN transaction.
During the six months ended February 28, 1999, Gerald Stevens 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 Gerald Stevens' results of
operations for the six months ended February 28, 1999.
The following table sets forth businesses acquired during the six months
ended February 28, 1999 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.
<TABLE>
<CAPTION>
PURCHASE PRICE
DATE OF TOTAL ----------------- NUMBER OF SHARE
NAME OF BUSINESS ACQUISITION CONSIDERATION CASH STOCK SHARES PRICE
---------------- ----------- ------------- ------- ------- --------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Eastern Floral & Gift Shop, Inc..................... 10/01/98 $ 2,924 $ 2,924 $ -- -- $ --
The Norton Group, Inc............................... 10/01/98 1,566 548 1,018 289 3.52
Arizona Wholesale Floral Company, (d/b/a Cactus
Flowers).......................................... 10/01/98 3,000 1,800 1,200 341 3.52
Dr. Delphinium Designs, Inc......................... 10/01/98 3,103 880 2,223 632 3.52
Boesen the Florist, Inc............................. 10/01/98 5,150 2,485 2,665 757 3.52
J.J. Fallon Company, Inc............................ 10/01/98 1,917 1,117 800 227 3.52
Martina's Inc....................................... 10/01/98 1,948 1,168 780 222 3.52
Flower Franchising, Inc. (d/b/a Royer's Flower
Shops)............................................ 10/01/98 11,158 6,334 4,824 1,371 3.52
AGA Flowers, Inc.................................... 10/01/98 2,935 1,468 1,467 417 3.52
Jennie's Flower Shop, Inc........................... 12/07/98 3,575 2,000 1,575 354 4.44
Maple Lee Flowers, Inc. and Maple Lee Farm "n"
Garden Center, Ltd................................ 10/01/98 4,698 2,539 2,159 614 3.52
Other acquisitions.................................. Various 8,097 3,828 4,269 961 4.44
------- ------- ------- ------
$50,071 $27,091 $22,980 6,185
======= ======= ======= ======
</TABLE>
The preliminary purchase price allocation for businesses acquired under the
purchase method of accounting is as follows:
<TABLE>
<S> <C>
Assets...................................................... $15,804
Intangible assets........................................... 41,519
Liabilities................................................. (7,252)
-------
$50,071
=======
</TABLE>
As part of two of Gerald Stevens' purchase agreements, Gerald Stevens may
be required to make additional payments to the sellers of up to $580.
F-14
<PAGE> 91
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results of operations, assuming each of the significant
acquisitions described above was consummated as of the beginning of the period
presented are as follows:
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
PERIOD ENDED
FEBRUARY 28, 1999
-----------------
<S> <C>
Revenue..................................................... $45,170
=======
Net loss.................................................... $(2,884)
=======
Net loss per share:
Basic..................................................... $ (0.09)
=======
Diluted................................................... $ (0.09)
=======
</TABLE>
Gerald Stevens is a party to 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.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Gerald Stevens 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 Gerald Stevens' long-term debt are
estimated using discounted cash flow analyses based on Gerald Stevens'
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.
4. LONG-TERM DEBT
At August 31, 1998, long-term debt included 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
Gerald Stevens. Under the terms of the note, Gerald Stevens 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. At August 31, 1998, approximately $2,982 is available
for future borrowings under the bank line of credit.
At August 31, 1998 and 1997, 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.
Gerald Stevens entered into an 18-month senior secured revolving credit
facility (the "Credit Facility") with a bank on September 30, 1998 with
borrowings up to $20,000 and which includes a letter of credit facility of up to
$3,000 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
F-15
<PAGE> 92
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis points (Eurodollar at February 28, 1999 was 5%) or, at Gerald Stevens'
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
4.88% and 7.75%, respectively, at February 28, 1999. The percentage over the
Eurodollar market rate is based on Gerald Stevens' 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 Gerald Stevens,
including a pledge of the stock of each of Gerald Stevens' subsidiaries. As of
February 28, 1999, no amount was outstanding 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 Gerald Stevens' ratio of total funded debt (as defined in the
Credit Facility).
Restrictive covenants contained in Gerald Stevens' Credit Facility may
limit Gerald Stevens' ability to finance future acquisitions, new locations and
other expansion of operations. These covenants require Gerald Stevens to achieve
specific financial ratios and may require Gerald Stevens to obtain bank consent
prior to completing acquisitions.
In connection with the attainment of the Credit Facility, Gerald Stevens
agreed to pay a $250 underwriting fee, $20 of which was paid in September 1998
and the remaining balance was paid in October 1998.
In October 1998, Gerald Stevens borrowed $16,000 on the 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.
In February 1999, Gerald Stevens and its primary lender amended the Credit
Facility to increase it from $20,000 to $40,000. In June 1999, in connection
with a planned syndication and further increase in the size of the Credit
Facility, Gerald Stevens and its primary lender agreed to amend and restate
certain Credit Facility terms and conditions, including among other things,
increasing the term of the Credit Facility to 36 months.
Scheduled maturities of long-term debt at August 31, 1998 for each of the
next five years are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 80
2000........................................................ 336
2001........................................................ 673
2002........................................................ 673
2003........................................................ 336
------
2,098
Current portion............................................. (80)
------
$2,018
======
</TABLE>
F-16
<PAGE> 93
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Land, building and leasehold improvements............... $ 6,337 $ 1,282 $ 524
Furniture, fixtures and equipment....................... 1,858 1,621 1,324
Computer hardware and software.......................... 1,196 1,015 798
Communication systems................................... 1,305 1,121 1,010
Vehicles................................................ 383 -- --
------- ------- -------
11,079 5,039 3,656
Accumulated depreciation and amortization............... (4,146) (2,993) (2,713)
------- ------- -------
$ 6,933 $ 2,046 $ 943
======= ======= =======
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
FEBRUARY 28, -----------------
1999 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Member benefits......................................... $ 118 $ 116 $ 147
Credit card fees........................................ 532 440 359
Professional fees....................................... 3,173 330 --
Salaries and benefits 1,057 144 61
Other................................................... 3,044 1,069 888
------- ------- -------
$ 7,924 $ 2,099 $ 1,455
======= ======= =======
</TABLE>
6. LEASES
Noncancellable lease obligations of Gerald Stevens at August 31, 1998 call
for minimum annual lease payments under various operating leases for buildings
and equipment are as follows:
<TABLE>
<S> <C>
1999........................................................ $135
2000........................................................ 109
2001........................................................ 104
2002........................................................ 85
2003........................................................ 2
----
$435
====
</TABLE>
Total rental expense for fiscal years 1998, 1997 and 1996, which includes
other than non cancelable agreements, was $164, $261 and $245, respectively.
Until January 1998 Gerald Stevens' 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 11).
F-17
<PAGE> 94
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SETTLEMENT OF LITIGATION
During 1990, Gerald Stevens 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 Gerald Stevens. On November 23, 1993, a
jury awarded Gerald Stevens $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 Gerald Stevens. Gerald Stevens recognized a pretax gain, net of related
legal fees, of $1,041 resulting from the award, which is included in other
income in the accompanying supplemental consolidated statement of income for
fiscal 1997.
8. STOCKHOLDERS' EQUITY
On January 28, 1997 the stockholders approved an increase in the number of
shares of authorized common stock from 18,000,000 to 70,000,000. On April 30,
1999, the stockholders approved an increase in the number of shares of
authorized common stock from 70,000,000 to 250,000,000.
In August 1998, Gerald Stevens sold 10,975,814 shares of common stock for
an aggregate purchase price of $7,866 or $0.72 per share.
In August 1998, certain of Gerald Stevens' employees and certain other
investors purchased 1,887,476 shares of stock for an aggregate purchase price of
$1,472 or $0.78 per share.
All of the stockholders who were issued shares of Gerald Stevens' common
stock in August 1998 have entered into stockholders agreements that provide
Gerald Stevens with a right of first refusal for any sales of common stock
governed by such stockholder agreement in excess of $500,000 by such
stockholders until October 1, 2000.
In October 1998, Gerald Stevens issued 6,217,537 shares of common stock at
a price of $3.52 per share in a private placement. Proceeds totaled
approximately $21,066 net of $894 of underwriting fees and expenses. Individuals
who purchased shares in the private placement had agreed to give Gerald Stevens
a right of first refusal, prior to transferring such shares, until Gerald
Stevens became a public company on April 30, 1999.
9. STOCK OPTIONS AND WARRANTS
On October 26, 1995, the Board of Directors approved a Nonemployee
Directors' Stock Option Plan ("Director Plan"). On January 30, 1996, the
stockholders of Gerald Stevens 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 re-election to the Board of Directors. At August 31, 1998, 500,000
shares of Gerald Stevens' common stock were authorized under the Director Plan
and 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 stockholders of Gerald
Stevens 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 Gerald Stevens to various employees of
F-18
<PAGE> 95
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gerald Stevens. 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. These
options vested 25% upon issuance with additional vesting of 25% each year. As of
August 31, 1998, none of these options have 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 Gerald Stevens at an exercise price of $4 per share. These options
vest in 25% increments when the market price of Gerald Stevens' common stock
reaches $5.00, $7.50, $10.00 and $12.50 per share, respectively, for twenty
consecutive trading days. Unexercised vested options expire in 2006. The portion
of unvested options, if any, expire in the year 2002. Compensation expense for
these variable plan options is recorded when the option vests, at the amount
that the targeted market price exceeds the exercise price. As of August 31,
1998, 76,000 of these shares had vested and were exercisable (none at August 31,
1997). Compensation expense of $76 was recorded for the year ended August 31,
1998 (none at August 31, 1997). During the six months ended February 28, 1999,
the remainder of the 305,000 options became vested and Gerald Stevens recorded
compensation expense of $1,373.
In connection with the issuance of a previous financing, Gerald Stevens
issued warrants to purchase 650,000 shares of common stock of Gerald Stevens
with an exercise price of $1.00 per share. During fiscal year 1997, 19,000
warrants were exercised for total proceeds of $19. During fiscal year 1998,
219,000 warrants were exercised in a cashless exercise, as allowed in the
warrant agreement for 176,000 shares of common stock. Additionally, 9,000
warrants were exercised for total proceeds of $9. At August 31, 1998, Gerald
Stevens had 403,000 warrants outstanding, all of which are currently
exercisable. All of these warrants expire on January 1, 2001. During the six
month period ended February 28, 1999, 163,137 warrants were exercised for total
proceeds of $163.
Gerald Stevens also approved a stock option plan (the "New Plan") on May
20, 1998, authorizing the issuance of stock options for up to 5,400,000 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% 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.
Under the New Plan, in August 1998, 202,500 options were granted with an
exercise price of the then fair market value of $0.72. From September 1, 1998 to
February 28, 1999, a total of 1,206,726 options were granted at fair market
value exercise prices ranging from $3.52 to $6.30, with 3,307 of these options
subsequently cancelled during the period. As of February 28, 1999, none of the
options
F-19
<PAGE> 96
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted were exercisable. The weighted average remaining contractual life of
these options as of February 28, 1999 and August 31, 1998 is approximately 9.5
and 10 years, respectively.
The occurrence of certain events may terminate the unvested options,
including, but not limited to, termination of employment, as defined in the New
Plan.
Pursuant to the New Plan, in the event of certain defined transactions
after the effective date of the New Plan, the number and kinds of shares for the
purchase of which options may be granted under the New Plan will be adjusted
proportionately by Gerald Stevens. 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.
Information regarding stock options for fiscal years 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE PRICE TOTAL AVERAGE
NUMBER OF RANGE PER EXERCISE EXERCISE
SHARES SHARE PRICE PRICE
--------- -------------- -------- --------
<S> <C> <C> <C> <C>
Shares under option at August 31,
1998..................................... 1,159,500 $0.72 to $5.88 $3,136 $2.71
1997..................................... 888,000 $1.41 to $4.00 $2,529 $2.85
Options granted during year ended August
31,
1998..................................... 282,500 $0.72 to $5.88 $ 628 $2.22
1997..................................... 668,000 $2.66 to $4.00 $2,204 $3.30
Options exercised during year ended August
31,
1998..................................... 11,000 $1.41 to $2.66 $ 20 $1.82
1997..................................... 1,000 $1.41 $ 1 $1.41
Options expired or canceled during year
ended August 31,
1998..................................... 1,000 $1.41 $ 1 $1.41
1997..................................... -- -- $ -- $ --
Options exercisable at August 31, 1998..... 560,000 $1.41 to $5.88 $1,651 $2.95
Shares reserved at August 31, 1998 for:
Director stock option plan............... 500,000
Management stock option plan............. 988,000
New stock option plan.................... 5,400,000
---------
6,888,000
=========
</TABLE>
During the six month period ended February 28, 1999, 61,250 options were
exercised for total proceeds of $112.
In October 1995, the FASB issued SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation (SFAS No. 123), which encourages but does not require
companies to recognize compensation expense for 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 SFAS No. 123, which also requires that the information be determined
as if Gerald Stevens had accounted for its employee stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value for these options was estimated at the date of grant using a
Black-
F-20
<PAGE> 97
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scholes option pricing model with the following weighted-average assumptions for
1998 and 1997: risk free interest rates from 4.7% to 6.0%; dividend yield of
zero; volatility factors of the expected market price of Gerald Stevens' 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 Gerald Stevens' employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. Gerald
Stevens' pro forma information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Pro forma net income (loss)..................... $(2,766) $3,016 $1,955
Pro forma earnings (loss) per share:
Basic......................................... $ (0.32) $ 0.37 $ 0.33
Diluted....................................... (0.32) 0.35 0.31
Weighted average shares:
Basic......................................... 8,581 8,076 5,988
Diluted....................................... 8,581 8,715 6,375
</TABLE>
10. INCOME TAXES
The components of the income tax provision (benefit) as of August 31, 1998,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Current income taxes....................................... $ -- $ 118 $ 46
Deferred income taxes...................................... (682) (637) (863)
----- ----- -----
Income tax provision....................................... $(682) $(519) $(817)
===== ===== =====
</TABLE>
F-21
<PAGE> 98
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
Gerald Stevens' 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.................................... $ 182 $ 191
Accrued liabilities and other............................... 110 73
Depreciation and amortization............................... 180 216
Net operating losses........................................ 1,070 1,110
General business credits.................................... 232 456
Basis difference in intangible assets....................... 1,432 --
------- -------
3,206 2,046
Valuation allowance......................................... (1,024) (546)
------- -------
Total deferred taxes.............................. $ 2,182 $ 1,500
======= =======
</TABLE>
SFAS 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 $1,024 consists of $430
for net operating losses and $439 of basis differences in assets 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 $478 as compared to change of
$1,606 in the prior year.
As of August 31, 1998, Gerald Stevens has available net operating loss
carryforwards of $2,843, which expire as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
- --------------- ------
<S> <C>
2007...................................................... $ 252
2008...................................................... 1,625
2009...................................................... 486
2018...................................................... 480
------
$2,843
======
</TABLE>
SFAS 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 anticipated that $2,060 of
the net operating losses would be used to offset income in 1999, therefore $775
of the deferred tax assets relating to carryforwards were classified as current
and the balance as noncurrent as of August 31, 1998.
11. RELATED PARTY TRANSACTIONS
During 1998, Gerald Stevens 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. See Note 12 for
information regarding a service agreement with a related party.
F-22
<PAGE> 99
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
Employment Agreements
Gerald Stevens has entered into employment agreements with certain of its
officers and executives. The agreements expire on dates ranging until 2000 and
also include non-compete provisions. The aggregate minimum annual payments under
these agreements are $2,491 and $1,945 for the years ended December 31, 1999 and
2000, respectively.
Key employees of each of the acquired companies have agreed to enter into
2-year employment agreements with Gerald Stevens effective as of the closing
date of each respective acquisition. The annual salaries range from $20 to $150.
In addition, some of the employment agreements provide for the employee to
receive a bonus beginning in Gerald Stevens' 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 Gerald Stevens.
The employment agreements include non-compete clauses of up to two years after
the employment period. In addition, the former owners of each of the acquired
companies have agreed to non-compete agreements, effective as of the closing of
the acquisition, ranging from 2 to 5 years.
Services Agreement
On May 7, 1998, Gerald Stevens 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 Gerald Stevens, with the cost of such items to be reimbursed by
Gerald Stevens to SBMC. Gerald Stevens 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 Gerald Stevens, not to
exceed $200. One hundred percent of all out-of-pocket costs and fees paid to
advisors in connection with services to Gerald Stevens are to be reimbursed in
an amount not to exceed $500 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 Gerald Stevens for out-of-pocket costs and fees paid to
advisors. The agreement may be terminated at any time by Gerald Stevens or SBMC
upon thirty days prior written notice.
As of August 31, 1998, SBMC had incurred approximately $540 of expenses on
behalf of Gerald Stevens which is included in selling, general, and
administrative expenses in the accompanying supplemental consolidated statement
of operations. These expenses included payment of certain of Gerald Stevens'
employees' salaries and travel expenses and is included in accrued expenses in
the accompanying supplemental consolidated balance sheet at August 31, 1998 and
was subsequently paid.
In addition, SBMC leases office space which is also occupied by certain
employees of Gerald Stevens. SBMC does not allocate any of the rent expense for
this space to Gerald Stevens. The approximate annual rent expense to SBMC is
$61.
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. Gerald Stevens currently estimates and remits
F-23
<PAGE> 100
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Consulting Agreements
On October 1, 1998, Gerald Stevens 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.
Services Agreement
On October 1, 1998, Gerald Stevens entered into a service agreement with a
Colombian farm (the "Provider") to provide services to A.G.A. Flowers, Inc., an
acquired subsidiary of Gerald Stevens. The agreement provides for compensation
to the Provider in the amount of $6 per month, plus any out-of-pocket costs
incurred by the Provider in providing services to Gerald Stevens. The agreement
was terminated on March 31, 1999.
Supply Agreement
On October 1, 1998, Gerald Stevens entered into a five-year supply
agreement with flower farms (the "Farms") which are affiliated with two of
Gerald Stevens' stockholders. The agreement requires that the Farms provide to
Gerald Stevens on a consignment basis a certain percentage of their flowers. The
Farms must produce and deliver a minimum number of stems for Gerald Stevens
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.
Gerald Stevens has no obligation to pay for any flowers it receives from
the Farms unless and until such flowers are sold by Gerald Stevens.
13. FOURTH QUARTER ADJUSTMENTS
As more fully discussed in Note 10, Gerald Stevens reduced its valuation
allowance against deferred tax assets in 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 Gerald Stevens.
14. RETIREMENT PLAN
Gerald Stevens 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. Gerald Stevens matches contributions up to a
maximum of 3% of compensation. In connection with the matching contribution,
Gerald Stevens' contribution in 1998 and 1997 was $41 and $30, respectively.
Subsequent to the merger between Florafax and Gerald Stevens, provisions have
been made to terminate this plan.
On December 1, 1998, Gerald Stevens adopted another 401(k) Plan, effective
January 1, 1999. All employees who have met minimum age and length of service
requirements are eligible to
F-24
<PAGE> 101
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
participate. Employer matching contributions are fifty percent of the first
three percent of compensation contributed by the employee to the plan and
generally require yearend employment and 1,000 hours worked during the calendar
year. An additional contribution is made at the discretion of Gerald Stevens.
Employees of Gerald Stevens did not participate in both 401(k) plans
simultaneously.
15. OTHER INCOME
Other income in 1997 of $819 consists primarily of the GTE/MR lawsuit
settlement proceeds (see Note 7), reduced by a charge to earnings of the
unamortized balance of a terminated consulting agreement and a contingency
reserve.
16. BUSINESS SEGMENTS
Gerald Stevens has historically operated 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 1996
------- ------- -------
<S> <C> <C> <C>
Net revenues:
Flowers-by-wire....................................... $12,119 $10,416 $ 9,041
Charge card processing................................ 1,272 1,193 1,258
------- ------- -------
$13,391 $11,609 $10,299
======= ======= =======
Operating profit (loss) after allocation of general and
administrative expenses:
Flowers-by-wire.................................... $ (52) $ 2,690 $ 2,176
Charge card processing............................. 68 98 233
------- ------- -------
Operating profit before allocation of Corporate
overhead...................................... 16 2,788 2,409
Corporate overhead................................. (3,092) (870) (847)
------- ------- -------
$(3,076) $ 1,918 $ 1,562
======= ======= =======
Identifiable assets:
Flowers-by-wire....................................... $ 5,992 $ 4,139 $ 3,737
Charge card processing................................ 569 472 325
General corporate assets.............................. 14,774 5,983 4,760
------- ------- -------
$21,335 $10,594 $ 8,822
======= ======= =======
Depreciation expense:
Flowers-by-wire....................................... $ 221 $ 146 $ 272
Charge card processing................................ 59 33 19
------- ------- -------
$ 280 $ 179 $ 291
======= ======= =======
Capital expenditures:
Flowers-by-wire....................................... $ 1,021 $ 625 $ 162
Charge card processing................................ 297 219 28
General corporate..................................... 64 -- --
------- ------- -------
$ 1,382 $ 844 $ 190
======= ======= =======
</TABLE>
F-25
<PAGE> 102
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. MARKETING PROJECTS, INC. AGREEMENT
Prior to May 1, 1998, under the terms of an existing marketing services
agreement, Gerald Stevens 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 Gerald Stevens recorded
commissions expense of $1,050, $1,455 and $1,219 relative to the agreement.
Effective May 1, 1998, Gerald Stevens 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 Gerald Stevens. Also on May 1, 1998, Gerald Stevens 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 Gerald Stevens 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 intangible assets, net at August 31, 1998.
Under the original marketing services agreement, Gerald Stevens 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, Gerald
Stevens 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.
Gerald Stevens 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. Gerald Stevens 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 Gerald
Stevens' contractual relationship was directly with the respective marketing
partners and MPI was not expected to perform continuing services with regards to
these partners, Gerald Stevens believes that the MPI contract modification
represents the termination of a marketing agreement.
Based upon the above, Gerald Stevens 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, Gerald Stevens allocated no value to this contract provision.
Since the quarterly contingent payments are based upon the attainment of
future revenue targets, Gerald Stevens will record such payments as sales
commissions to the extent and at the time they
F-26
<PAGE> 103
GERALD STEVENS, INC.
(FORMERLY FLORAFAX INTERNATIONAL, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
become earned. For the quarter ended August 31, 1998, the first contingent
payment of $125 was earned and paid, and is included within selling, general and
administrative expenses.
18. SUBSEQUENT EVENT (UNAUDITED)
Acquisitions
From March 1, 1999 through June 25, 1999, Gerald Stevens acquired 13 retail
florist businesses, National Flora, a floral order generation business and a
small order generation business, for total consideration of $41,832, consisting
of $28,411 in cash and 2,172 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
DATE OF -----------------
COMPANY ACQUISITION TOTAL CASH STOCK SHARES PRICE
------- ----------- ------- ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Phoebe's Floral Shop................. 3/31/99 $ 2,817 $ 2,195 $ 622 99 $ 6.30
National Flora....................... 3/03/99 19,727 9,952 9,775 1,553 6.30
Exotic Gardens, Inc. and Kuhn
Flowers, Inc....................... 4/30/99 6,200 5,580 620 49 12.59
Other acquisitions................... Various 13,088 10,684 2,404 471 5.10
------- ------- ------- ------
Total post February 28,
1999 acquisitions........ $41,832 $28,411 $13,421 2,172
======= ======= ======= ======
</TABLE>
- -------------------------
Stock Options
Subsequent to February 28, 1999, Gerald Stevens issued 33,660 options at
fair market value price of $12.59 per share and 6,750 options were exercised at
a price of $3.52 per share.
F-27
<PAGE> 104
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
(GERALD STEVENS, INC. LOGO)
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
ALLEN & COMPANY
INCORPORATED
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
JUNE 29, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
