<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended February 28, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________ to __________________
Commission File Number: 0-5531
FLORAFAX INTERNATIONAL, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 41-0719035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8075 20th Street, Vero Beach, Florida 32966
(Address of principal executive offices)
561-563-0263
------------
(Issuer's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The registrant had 8,673,503 shares of common stock, $0.01 par value, issued at
April 9, 1999.
Transitional Small Business Disclosure Format (Check one):
Yes ; No X
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page No.
--------
<S> <C> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets
February 28, 1999 and August 31, 1998 1 - 2
Consolidated Statements of Operation and
Accumulated Deficit
Three and Six Months Ended February 28, 1999
and February 28, 1998 3 - 4
Consolidated Statements of Cash Flows
Six Months Ended February 28, 1999
and February 28, 1998 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis or
Plan of Operation 11 - 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16 - 19
Signatures 20
</TABLE>
<PAGE> 3
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FEBRUARY 28 AUGUST 31
1999 1998
------------------------
(Unaudited) RESTATED
ASSETS SEE NOTE 7
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,649 $ 3,438
Restricted cash 146 106
Accounts receivable:
Trade, less allowances of $465
at February 28, 1999 and $482 at
August 31, 1998 3,052 1,421
Charge card issuers 421 211
Other 153 110
---------------------
3,626 1,742
Deferred tax asset 262 301
Prepaid and other assets 228 165
---------------------
TOTAL CURRENT ASSETS 7,911 5,752
Property and equipment, at cost:
Fixtures and equipment 1,604 1,594
Computer systems 1,020 977
Communication systems 1,263 1,121
Land, building and leasehold improvements 1,309 1,282
---------------------
5,196 4,974
Accumulated depreciation
and amortization 3,172 2,992
---------------------
2,024 1,982
Excess of cost over net assets
of acquired business 1,995 1,995
Deferred tax asset, net of allowance 1,895 1,881
Other 154 276
---------------------
4,044 4,152
TOTAL ASSETS $13,979 $11,886
=====================
</TABLE>
See accompanying notes
1
<PAGE> 4
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS)
FEBRUARY 28 AUGUST 31
1999 1998
--------------------------
(Unaudited) RESTATED
LIABILITIES AND STOCKHOLDERS' EQUITY SEE NOTE 7
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt 80
Accounts payable $ 6,035 $ 3,986
Accrued expenses 2,823 1,077
Member benefits 118 116
------------------------
TOTAL CURRENT LIABILITIES 8,976 5,259
Long term debt, less current maturities 1,000 2,018
Membership security deposits 48 52
------------------------
TOTAL LIABILITIES 10,024 7,329
STOCKHOLDERS' EQUITY
Preferred stock ($10 par value, 600,000 shares
authorized at February 28, 1999
and August 31, 1998, none issued)
Common stock - ($.01 par value, 70,000,000 shares
authorized, 8,673,503 and 8,449,198 shares
issued at February 28, 1999 and August 31, 1998,
respectively 87 85
Additional paid-in capital 11,857 10,211
Treasury stock at cost (1,616) (1,616)
Accumulated deficit (6,373) (4,123)
------------------------
TOTAL STOCKHOLDERS' EQUITY $ 3,955 $ 4,557
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,979 $ 11,886
========================
</TABLE>
See accompanying notes
2
<PAGE> 5
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATION AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28
1999 1998 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
NET REVENUES:
Member dues and fees $ 758 $ 723 $ 1,458 $ 1,352
Floral and other order
Processing 3,466 3,218 5,348 5,031
Publication and advertising fees 375 464 1,054 824
Charge card processing 486 483 949 907
Other revenue 46 47 77 80
--------------------------------------------------------
5,131 4,935 8,886 8,194
EXPENSES:
General and administrative 1,924 1,876 3,355 3,212
Selling and advertising 2,137 2,269 3,520 3,539
Stock Option Compensation 1,373 1,373
Publications 85 140 264 231
Depreciation, amortization and
retirements 147 82 300 151
--------------------------------------------------------
5,666 4,367 8,812 7,133
--------------------------------------------------------
OPERATING INCOME (LOSS) (535) 568 74 1,061
OTHER INCOME (EXPENSE)
Merger related expenses (2,170) (2,255)
Interest expense (22) (1) (48) (3)
Other 6 8
Interest income 29 40 46 76
--------------------------------------------------------
(2,163) 45 (2,257) 81
--------------------------------------------------------
INCOME (LOSS) BEFORE TAXES (2,698) 613 (2,183) 1,142
Income tax expense (benefit) (161) 233 67 424
--------------------------------------------------------
NET INCOME (LOSS) $(2,537) $ 380 $(2,250) $ 718
</TABLE>
See accompanying notes
3
<PAGE> 6
FLORAFAX INTERNATIONAL ,INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS): $(2,537) $ 380 $(2,250) $ 718
Accumulated deficit at
Beginning of period (3,836) (3,162) (4,123) (3,500)
-------------------------------------------------------
ACCUMULATED DEFICIT AT
END OF PERIOD $(6,373) $(2,782) $(6,373) $(2,782)
-------------------------------------------------------
Basic earnings (loss)per common
share: $ (0.31) $ 0.05 $ (0.28) $ 0.09
WEIGHTED AVERAGE
SHARES OUTSTANDING 8,101 7,345 8,022 7,677
Fully diluted earnings (loss) per common
share: $ (0.31) $ 0.04 $ (0.28) $ 0.08
WEIGHTED AVERAGE SHARES
OUTSTANDING 8,101 8,722 8,022 8,714
</TABLE>
See accompanying notes
4
<PAGE> 7
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
FEBRUARY 28 FEBRUARY 28
1999 1998
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(2,250) $ 718
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation, amortization, and
retirements 300 120
Provision for doubtful accounts 78 86
Deferred income taxes 25 364
Increase (decrease) in cash flows due to changes in:
Accounts receivable (1,962) (1,279)
Prepaid and other assets (63) (254)
Other assets 2 31
Accounts payable 2,049 1,921
Accrued liabilities 1,748 (40)
Non cash compensation 1,373
Membership security deposits (4) 7
-------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,296 1,674
INVESTING ACTIVITIES
Capital expenditures (222) (1,171)
Purchase of common stock (100)
(Increase) decrease in restricted cash (40) (2)
-------------------------
NET CASH (USED IN) INVESTING ACTIVITIES $ (262) $(1,273)
</TABLE>
See accompanying notes
(CONTINUED)
5
<PAGE> 8
FLORAFAX INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
-------------------------
FEBRUARY 28 FEBRUARY 28
1999 1998
-------------------------
FINANCING ACTIVITIES
Purchases of treasury stock (178)
Proceeds from issuing stock 275 12
Payments of debt (1,098)
----------------------
NET CASH (USED IN)
FINANCING ACTIVITIES $ (823) (166)
----------------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 211 235
Cash and cash equivalents
at beginning of year 3,438 4,170
----------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD 3,649 $ 4,405
======================
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ 49
Cash paid during the period for
income tax 42 $ 60
======================
See accompanying notes
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES
The accompanying interim financial statements should be read in conjunction with
the Florafax International, Inc. (the Company's) Form10-KSB and 10-KSB/A (Also
see Note 7) for the year ended August 31, 1998.
In the opinion of Management the unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position as of
February 28, 1999 and the consolidated results of operations and cash flows for
the three and six months ended February 28, 1999. For the quarter and six months
ended February 28, 1998, certain income statement items have been reclassified
to conform to current period presentation.
Historically, the Company's flowers-by-wire operation is seasonal in that its
member florists send a much larger volume of orders during Thanksgiving, the
Christmas season, Valentine's Day, Easter and Mother's Day. Therefore, the
results of operations of an interim period may not necessarily be indicative of
the results expected for a full year. In an effort to increase orders to member
florists, the Company continues to engage in non traditional campaigns through
it's wholly owned subsidiary, The Flower Club. The Flower Club was formed to
generate additional orders by pursuing relationships with nationally recognized
corporations. The Company engages in joint marketing campaigns with these
corporations not only during holidays, but also during non-seasonal periods in
an effort to provide member florists with orders during slow periods of the
year.
NOTE (2) YEAR 2000 ISSUE
The Company operates three primary information technology computer systems,
which are a main frame, a network based order entry system, and a telephone
system. A year 2000 discussion of each of these systems is as follows.
The Company operates a main frame computer system that processes floral orders,
credit card transactions, and performs the Company's monthly billings to its
member florists. The year 2000 software upgrade has been installed, tested, and
is currently in use. The manufacturer of the software has provided the Company
with the year 2000 upgrade at no charge. In addition, all internally developed
software applications have been modified to be year 2000 compliant, and are
currently in use. The cost to update these applications was less than $50,000.
7
<PAGE> 10
The Company operates a network based order entry system. The manufacturers
operating system software is year 2000 compliant. However, not all internally
developed software applications have been modified to be year 2000 compliant.
The Company is in the process of modifying its internally developed software
applications and expects to complete the modifications no later than June 30,
1999. These internal programs are being modified by current employees and, as a
result, the cost of these modifications is not expected to be material.
The Company operates a telephone system which is integrated with the order entry
system discussed in the preceding paragraph. The Company recently learned that a
primary component of this system will need to be upgraded or replaced to be year
2000 compliant. The Company is in the process of evaluating whether to upgrade
or replace this component. Regardless of which option is selected by the
Company, this component is expected to be operational no later than, July 31,
1999, at a cost not to exceed $200,000.
Currently the company does not operate any significant non-information
technology systems.
Management believes the most reasonably likely worst case year 2000 scenario
would occur if the order entry system failed, which would prevent automated
processing of floral orders. At this time, there is no indication that this will
happen. However, should this occur, the Company would be forced to process
incoming floral orders manually, until such time that the failure could be
corrected. This could cause labor costs to double or triple during the time
period while the system failure was being corrected.
The Company relies on two main vendors to operate the credit card portion of its
business. Both of these vendors have represented that they are year 2000
compliant. One vendor has provided the Company written certification of their
year 2000 readiness. The other vendor has provided the Company limited written
certification regarding a particular type of credit card terminal used by
merchants who process transactions with the Company.
Other significant vendors include certain third party service providers, such as
those supplying electricity, water or telephone service. If these vendors
experience year 2000 difficulties this could result in disruption of service to
the Company, and a shutdown of the Company's facilities could occur for the
duration of the disruption. None of these vendors have certified that their
systems are year 2000 compliant.
8
<PAGE> 11
NOTE (3) CONTRACT MODIFICATION
As a result of the Companies contract modification with Marketing Projects Inc.
("MPI") during 1998 the Company is required to make additional contingent
payments to MPI, contingent upon the attainment of quarterly revenue targets. If
made, these payments will be recorded as commission expense in the period in
which they are earned. For the quarter and six months ended February 28, 1999,
the Company recorded commission expense related to these contingent payments of
$124,000 and $246,000, respectively.
NOTE (4) CREDIT FACILITY
During the second quarter of 1998 the Company secured a $5 million revolving
credit facility with First Union National Bank of Florida. The credit facility,
collateralized by all the Company's assets, is for two years at the bank's prime
rate of interest. A $2 million sublimit is also available for general working
capital. As of February 28, 1999 the Company has outstanding $1,000,000 under
this credit facility.
NOTE (5) SUBSEQUENT EVENTS
On December 9, 1998 the Company entered into a definitive merger agreement with
privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of
flowers, floral-related merchandise and gifts. Under terms of the agreement,
Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the
Company for each common share of Gerald Stevens share owned. The exchange rate
will be determined based on the average closing sales price of Florafax common
stock for the 45 consecutive trading days prior to the third trading day before
the merger is completed. Depending on the conversion ratio, Gerald Stevens'
shareholders will own approximately 75% to 80% of the Company's common stock
after the merger. The parties expect the transaction to be treated as a
pooling-of-interests for accounting purposes and anticipate that the merger will
be completed by the end of April 1999. Merger related expenses for the quarter
and six months ended February 28, 1999 amounted to $2,170,000 and $2,255,000,
respectively. Prior to the consummation of the merger the Company may incur
additional significant merger related expenses. These expenses could result in
the Company reporting a net loss for that quarter.
NOTE (6) STOCK OPTION COMPENSATION EXPENSE
Certain options granted by the Company in 1997 created a variable stock
compensation plan. As a result the, Company is required to recognize non cash
compensation expense when the price of the Company's common stock reaches
certain prices for a specified number of trading days. The current rise in the
price of the Company's common stock caused the Company to record non-cash
compensation expense, in addition to ordinary salaries and wages, of
approximately $1,373,000 for the quarter and six months ended February 28, 1999,
with no similar expense recorded during the previous year.
9
<PAGE> 12
NOTE(7) RESTATEMENT
Effective May 1, 1998 the Company entered into a contract modification agreement
with MPI. At that time the contract was accounted for as a business combination.
However, subsequent to the original accounting of the transaction the Company
had several discussions with the Securities and Exchange Commission. As a result
of these conversations, the Company re-evaluated the facts and circumstances
surrounding the MPI transaction and concluded that the transaction should be
accounted for as a contract modification rather than a business combination.
Consequently, the Company has restated it's financial statements for the year
ended August 31, 1998 to account for the transaction as a contract modification.
NOTE (8) RECENT PRONOUNCEMENTS
For a discussion of recent accounting pronouncements please refer to the
Company's 10-KSB/A for the year ended August 31, 1998.
10
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows historically have been generated primarily from processing
floral orders and charge card transactions for the Company's member florists, as
well as collecting dues, fees and directory advertising from the members. Floral
order processing may require settlement with the fulfilling florist before
collection of funds from the sending florist. Charge card processing, however,
generally allows the Company to collect funds from the charge card issuer prior
to settlement with the merchant. Since in both types of transactions the Company
is both collecting and settling funds, the timing of these cash flows has a
significant impact on the Company's liquidity.
As discussed in Note 1 to the consolidated financial statements the Company
continues to engage in non traditional campaigns through it's wholly owned
subsidiary, The Flower Club. This has helped to improve the Company's cash flow
as the majority of orders generated through The Flower Club are paid for by
credit cards. This allows the Company to receive a significant portion of its
funds within days after processing the transaction.
The Company is reporting a significant loss for the quarter and six months ended
February 28, 1999, which is primarily a result of merger related expenses (See
note 5), and option related compensation expense (See note 6). Of the merger
related expenses, approximately $1,600,000 is accrued as a liability as of
February 28, 1999, and is expected to be paid in the quarter ended May 31, 1999.
The Company expects to fund these expenditures with cash flow from operations.
However, the option related compensation expense is a non cash item and had no
impact on the Company's cash position.
In addition, during the six months ended February 28, 1999 the company retired
in excess of $1,000,000 of long-term debt.
During the second quarter of 1998 the Company purchased the land and building
which were previously leased as the Company's corporate headquarters. The
purchase price was $672,500. In addition, the Company purchased a new telephone
switch in the amount of $220,000. As a result of the Company's cash position,
both of these purchases were funded with operating cash flows.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
GENERAL COMMENTS
The company is reporting a net loss for the quarter and six months ended
February 28, 1999, due to merger related expenses and non cash compensation
expense. However, revenues are up for both the quarter and six months ended
February 28, 1999 when compared to the same periods in the previous year. In
addition, exclusive of the merger and non cash compensation expenses incurred in
1999, the Company's operating income would have improved for both the quarter
and six months ended February 28, 1999 when compared to the prior year.
NET REVENUES
Revenue from member dues and fees has increased for both the quarter and six
months ended February 28, 1999, when compared to the same periods in the prior
year. This increase is primarily attributable to an increase in member florists
and an increase in dues.
Floral order revenue increased for both the quarter and six months ended
February 28, 1999, when compared to the same periods last year. This is
attributable primarily to an increase in Flower Club revenues, as well as an
increase in shop to shop revenues. In addition, the Company is experiencing
positive results from its gift basket program.
Net revenues from credit card operations increased slightly for the six months
ended February 28, 1999 and remained relatively constant for the quarter ended
February 28, 1999 when compared to the same periods in the prior year. The
Company continues to experience an increase in gross dollars processed, however;
margins have not increased proportionately.
Publication and advertising fees decreased for the quarter February 28, 1999
when compared to the same period in the prior year, due to the issuance of an
additional directory in the quarter ended February 28, 1998 when compared to the
same quarter in 1999. For the six months ended February 28, 1999 the Company
experienced an increase in publications and advertising revenues as a result of
the publication of a new selection guide. Selection guides are recipe books and
sales materials used by member florists when producing the various flower
arrangements that the Company advertises throughout the country. New selection
guides are published approximately every three years.
EXPENSES
Member support, general and administrative expenses increased for both the
quarter and six months ended February 28, 1999 when compared to the same periods
in the prior year. The primary component of the increase was labor costs, which
increased as a result of increased Flower Club order volume and general wage
increases. Conversely, the Company experienced a decline in telephone related
expenses as a result of a new contract with the Company's long distance carrier.
12
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Selling and advertising expenses experienced a moderate decline for the quarter
ended February 28, 1999, when compared to the prior year, but remained
relatively constant for the six months ended February 28, 1999, when compared to
the previous year. However, there were several components that changed within
the selling and advertising expense category, as follows. For the quarter and
six months ended February 28, 1999 the Company reduced commission expenses paid
to an outside marketing firm resulting from a contract modification (See note
7). This marketing function is now performed internally by the Company's in
house marketing department. The decreased commission expenses from the contract
modification were offset somewhat by expenses related to the Company's in house
marketing department. For both the quarter and six months ended February 28,
1999 the Company experienced an increase in amounts paid to Flower Club
corporate partners, as a result of increased order volume and due to several new
contracts that call for additional commissions to these partners.
As a result of the vesting of certain non plan stock options, the Company
recorded non cash compensation expense in the amount of $1,373,000. These
options are now fully vested, and will cause no further compensation expense in
the future.
Publication expense decreased for the quarter February 28, 1999 when compared to
the same period in the prior year, due to the issuance of an additional
directory in the quarter ended February 28, 1998 when compared to the same
quarter in 1999. However, for the six months ended February 28, 1999 the Company
experienced and increase in publication expenses as a result of the publication
of a new selection guide. Selection guides are recipe books and sales materials
used by member florists when producing the various flower arrangements that the
Company advertises throughout the country. New selection guides are published
approximately every three years.
Depreciation and amortization increased during the quarter and six months ended
February 28, 1999 when compared to the prior year. During 1998 the Company
purchased it's corporate headquarters as well as purchased new computer and
telephone equipment, thereby causing an increase in depreciation. In addition,
the contract modification agreement with Marketing Projects, Inc. during 1998
(See note 3) caused the Company to record certain intangible assets. The
amortization of these intangible assets increased amortization expense for the
quarter and six months ended February 28, 1999, when compared to the prior year.
OTHER INCOME (EXPENSE)
The primary component of other income (expense) for both the quarter and six
months ended February 28, 1999 was merger related expenses (See note 5).
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
YEAR 2000 ISSUE
The Company operates three primary information technology computer systems,
which are a main frame, a network based order entry system, and a telephone
system. A year 2000 discussion of each of these systems is as follows.
The Company operates a main frame computer system that processes floral orders,
credit card transactions, and performs the Company's monthly billings to its
member florists. The year 2000 software upgrade has been installed, tested, and
is currently in use. The manufacturer of the software has provided the Company
with the year 2000 upgrade at no charge. In addition, all internally developed
software applications have been modified to be year 2000 compliant, and are
currently in use. The cost to update these applications was less than $50,000.
The Company operates a network based order entry system. The manufacturers
operating system software is year 2000 compliant. However, not all internally
developed software applications have been modified to be year 2000 compliant.
The Company is in the process of modifying its internally developed software
applications and expects to complete the modifications no later than June 30,
1999. These internal programs are being modified by current employees and, as a
result, the cost of these modifications is not expected to be material.
The Company operates a telephone system which is integrated with the order entry
system discussed in the preceding paragraph. The Company recently learned that a
primary component of this system will need to be upgraded or replaced to be year
2000 compliant. The Company is in the process of evaluating whether to upgrade
or replace this component. Regardless of which option is selected by the
Company, this component is expected to be operational no later than, July 31,
1999, at a cost not to exceed $200,000.
Currently the company does not operate any significant non-information
technology systems.
Management believes the most reasonably likely worst case year 2000 scenario
would occur if the order entry system failed, which would prevent automated
processing of floral orders. At this time, there is no indication that this will
happen. However, should this occur, the Company would be forced to process
incoming floral orders manually, until such time that the failure could be
corrected. This could cause labor costs to double or triple during the time
period while the system failure was being corrected.
The Company relies on two main vendors to operate the credit card portion of its
business. Both of these vendors have represented that they are year 2000
compliant. One vendor has provided the Company written certification of their
year 2000 readiness. The other vendor has provided the Company limited written
certification regarding a particular type of credit card terminal used by
merchants who process transactions with the Company.
14
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Other significant vendors include certain third party service providers, such as
those supplying electricity, water or telephone service. If these vendors
experience year 2000 difficulties this could result in disruption of service to
the Company, and a shutdown of the Company's facilities could occur for the
duration of the disruption. None of these vendors have certified that their
systems are year 2000 compliant.
FORWARD-LOOKING STATEMENTS
When used in this report, the words "plan(s)", "intends(s)", "expect(s)",
"feel(s)", "will", "may", "believe(s)", "anticipate(s)", and similar expressions
are intended to identify forward-looking statements. The events described in
such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements which speak only
as of the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company which attempt to advise interested parties of the factors which affect
the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the report, as well as the Company's periodic reports on Form
10-KSB, 10-QSB and 8-K filed with the Securities and Exchange Commission.
The events described in such statements, and the success of the management
strategies described by those statements, are subject to certain risks and
uncertainties which could cause actual results to differ from those discussed;
among those risks and uncertainties which are particular to the Company are:
continued consumer spending on discretionary items such as flowers and gifts,
the success of the Company in maintaining relations with corporate marketing
partners, the success of the Company in maintaining a strong membership base,
the continued use of credit cards as the preferred method of payment by
customers of members, increased labor costs and the health of the retail flower
industry as a whole.
15
<PAGE> 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings
For a summary of legal proceedings, reference is made to Item 3, Legal
Proceedings, included in the Company's annual report on Form 10-KSB/A for the
year ended August 31, 1998.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. The Submission of Matters to a Vote of Security Holders
Item 5. Other Information
None
Item 6. Exhibits and Reports on form 8-K
Exhibits
EXHIBIT REFERENCE
(27) Financial Data Schedule (for SEC use only).
The following items have been included as exhibits in filings by the Company in
a previous filing and, accordingly, are incorporated here by reference.
EXHIBIT REFERENCE
(3) Articles of incorporation and Bylaws of the Registrant, as amended.
(10) Material Contracts
(a) Convertible subordinated notes due to Clark Estates maturing
June 30, 1996.
(b) Subordinated debentures maturing in 1998.
16
<PAGE> 19
EXHIBIT REFERENCE
(c) Agreement dated December 3 1993, Addendum, Second Addendum,
Third Addendum, Fourth Addendum and Fifth Addendum thereto by
and between the Registrant and Citizens Fidelity Bank and Trust
Company (now PNC Bank, Kentucky, Inc.).
(d) Purchase Agreement for certain assets formerly owned by Savannah
Floral Services, Inc. dated March 10, 1994.
(e) Note Payable to Andrew Williams dated March 10, 1994.
(f) Promissory Note to Citrus Bank dated November 9, 1993.
(g) Promissory Note to Citrus Bank dated November 17, 1993.
(h) Promissory Note to Citrus Bank dated January 25, 1994.
(i) Loan to James H. West, Director, President and Chief Financial
Officer, dated August 28, 1994.
(j) Consulting agreement with David Harper of Ventura County
California dated December 10, 1993.
(k) Promissory Note to Citrus Bank dated August 31, 1995.
(l) Operating lease agreement between Registrant and Alvin
Wunderlich dated April 1995.
(m) Agreement of Purchase and Sale made and entered into to be
effective December 29, 1995 by and between Registrant and St.
James Partners, LTD. 7% Convertible Promissory Note in the
amount of $2,500,000 dated February 28, 1996 due February 28,
1997.
(n) Security agreement dated February 28, 1996 executed in
connection with the $2,500,000 Convertible Promissory Note.
(o) Common Stock Purchase Warrant for 250,000 shares of the
registrants common stock expiring January 1, 2001.
(p) Common Stock Purchase Warrant for 400,000 shares of the
registrants Common stock expiring January 1, 2001.
(q) Construction Agreement dated September 30, 1996 between
Registrant and C.E. Block, Architect of Vero Beach, Florida.
(r) Building purchase Agreement between Registrant and Alvin
Wunderlich Sr. Trust Number 1.
(s) Building lease Agreement between Registrant and Verne W.
Anderson and Mariella Anderson Living Trust
(t) Nonqualified, Nonplan Option Agreement between Registrant and
Andrew W. Williams, Chairman of the Board and CEO.
17
<PAGE> 20
EXHIBIT REFERENCE
(u) Nonqualified, Nonplan Option Agreement between Registrant and
James H. West, President and CFO.
(v) Nonqualified, Nonplan Option Agreement between Registrant and
Kelly S. McMakin, Treasurer and Secretary.
(w) Nonqualified, Nonplan Option Agreement between Registrant and
James J. Pagano, Vice President and Marketing Director
(x) Amendment dated January 7, 1998 to building purchase agreement
between Registrant and Alvin Wunderlich Sr. Trust Number 1
(y) Promissory note agreement dated January 16, 1998 in the amount
of $5,000,000 between Registrant and First Union National Bank
(z) Loan agreement dated January 16, 1998 between Registrant and
First Union National Bank.
(aa) Security Agreement dated January 16, 1998 between Registrant
and First Union National Bank.
(bb) Closing Statement dated January 16, 1998 between Registrant and
First Union National Bank.
(cc) Asset purchase and sale agreement dated May 1, 1998 between
Registrant and Marketing Projects Inc., of Westlake Village
California
(dd) Noncompetiton and nondisclosure agreement dated May 29, 1998
between Registrant and David Appell, Robert Bourdom, Randolph
Commans and Phyllis Hooker of Westlake Village, California
(ee) Bill of sale, assignment and assumption dated May 1, 1998
between Registrant and Marketing Projects, Inc., of Westlake
Village, California.
(ff) Escrow agreement dated May 29, 1998 between Registrant,
Marketing Projects, Inc., and First Union National Bank.
(gg) First amendment to escrow agreement dated May 29, 1998 between
Registrant, Marketing Projects, Inc., and First Union National
Bank.
(hh) Management Incentive Stock Plan approved January 30, 1996
(ii) Non-Employee Director Stock Option Plan approved January 30,
1996.
(jj) Agreement and Plan of Merger dated December 9, 1998 by and
among Registrant, Red Cannon Acquisition Corp. and Gerald
Stevens, Inc.
(kk) Voting Agreement between affiliates of Registrant and Gerald
Stevens, Inc.
(ll) Voting Agreement between affiliates of Gerald Stevens, Inc. and
Registrant
18
<PAGE> 21
REPORTS ON FORM 8-K
Reports on Form 8-K
On December 11, 1998 the Company filed a Form 8-K announcing that effective
December 9, 1998 the Company had entered into a merger agreement with Gerald
Stevens, Inc. Under the terms of the agreement the Company is expected to issue
additional shares of it's common stock that will result in Gerald Stevens, Inc.
shareholders owning approximately 75% to 80% of the Company.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Florafax International, Inc.
Date: April 14, 1999 James H. West
-------------- -------------
President and Chief
Financial Officer
20
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<PERIOD-START> SEP-01-1998
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