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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 2, 2001
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
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GERALD STEVENS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
FLORIDA 7389 65-0971499
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code) Identification No.)
</TABLE>
GERALD STEVENS, INC.
1800 ELLER DRIVE, SUITE 300
FORT LAUDERDALE, FLORIDA 33316
(954) 627-1000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JEFFREY M. MATTSON
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1800 ELLER DRIVE, SUITE 300
FORT LAUDERDALE, FLORIDA 33316
(954) 627-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES OF ALL COMMUNICATIONS TO:
JONATHAN L. AWNER, ESQ.
AKERMAN, SENTERFITT & EIDSON, P.A.
ONE S.E. 3RD AVENUE, 28TH FLOOR
MIAMI, FLORIDA 33131-1714
(305) 374-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per
share............................ 1,107,387 Shares $0.7025 $777,939.36 $194.48
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act.
(2) Includes 1,098,560 shares issuable upon the exercise of warrants that were
granted in connection with the amendment of our credit facility.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
SUBJECT TO COMPLETION, DATED JANUARY 2, 2001.
PROSPECTUS
1,107,387 SHARES
GERALD STEVENS, INC.
COMMON STOCK, PAR VALUE $0.01 PER SHARE
The selling stockholders identified in the table beginning on page 37 of
this prospectus are offering all of the shares. We will not receive any proceeds
from the sale of the shares.
Our common stock trades on the Over-the-Counter Bulletin Board under the
symbol "GIFT." On December 28, 2000, the closing sale price of the common stock
on the Over-the-Counter Bulletin Board was $.625 per share.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT WE DESCRIBE IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 3 OF THIS PROSPECTUS.
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 DATE OF THIS PROSPECTUS IS , 2000.
<PAGE> 3
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that reflect our current
views with respect to future events and financial performance. Forward-looking
statements include all statements regarding our expected financial position,
results of operations, cash flows, dividends, financing plans, strategy,
budgets, capital and other expenditures, competitive positions, growth
opportunities, benefits from new technology, plans and objectives of management
and markets for stock. Like any other business, we are subject to risks and
other uncertainties that could cause these forward-looking statements to prove
incorrect. In addition to general economic, business and market conditions, we
are subject to risks and uncertainties that could cause these forward-looking
statements to prove incorrect, including those stated in the "Risk Factors"
section of this prospectus and the following:
- Our ability to integrate acquired businesses.
- Our ability to create and implement a revised business plan that will
generate positive cash flows.
- Our ability to satisfy restrictions in our credit agreement.
- Our need to improve our information systems.
- Unexpected liabilities incurred in our acquisitions.
- Our dependence on additional capital for any future growth.
- A decline in customer discretionary spending.
- Fluctuations in our revenue due to weather, consumer demand and
seasonality.
- Weather, governmental regulations, transportation problems or other
factors that could prevent us from obtaining sufficient products when
needed.
- Our ability to maintain business relationships within the industry,
including relationships with wire services, wholesalers, growers,
importers and other florist shops.
- Our ability to develop relationships with supermarkets, mass merchants,
department stores and other businesses to expand our store-in-store
operations.
- Our ability to develop a profitable Internet business.
* * * * *
You should rely only on the information contained or incorporated by
reference in this prospectus. We 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 making an offer
to sell these securities in any jurisdiction where their 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. We are not incorporating any information from our
websites into this document.
<PAGE> 4
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 this entire
prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements.
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 over 300 retail locations across the country. We believe we are
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. We believe our execution of this integrated
operating model will make our stores synonymous with superior service, quality
and value.
Our order generation division permits us, through multiple marketing
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; Calyx &
Corolla, the largest direct marketer of flowers; The Flower Club, a leading
corporate affinity marketer; and three primary websites. To ensure superior
customer service and efficient order processing, we operate three call centers.
To distribute orders in markets where we do not have our own stores, we use
several floral wire services, including our own Florafax floral wire service,
which has approximately 6,000 member florists covering all 50 states.
We operate a leading floral importer and wholesaler, AGA Flowers, which 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 help us to eliminate several steps in the
floral distribution chain and ensure a reliable source of high-quality products
at favorable prices.
Gerald Stevens was incorporated in Delaware in 1970, and reincorporated in
Florida in 2000. Our principal executive offices are located at 1800 Eller
Drive, Fort Lauderdale, Florida 33316, and our telephone number is (954)
627-1000.
RECENT DEVELOPMENTS
On December 4, 2000, our common stock was delisted from the Nasdaq National
Market because we did not meet the listing requirements. Our common stock
initiated quotation on the NASD OTC Bulletin Board on that date.
<PAGE> 5
THE OFFERING
Common Stock Offered.......... 1,107,387 shares(1)
Use of Proceeds............... We will not receive any proceeds from the sale
of common stock by the selling shareholders
listed in this prospectus.
Over-the-Counter Bulletin
Board symbol.................. "GIFT"
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(1) Includes 1,098,560 shares of common stock issuable upon the exercise of
warrants that were issued in connection with the amendment of our credit
facility on November 6, 2000.
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RISK FACTORS
An investment in our common stock involves various risks, including those
described in the risk factors 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 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
material, develop into actual events, then our business, financial condition,
results of operations, or prospects could be materially adversely affected, the
market price of our common stock could decline and you could lose all or part of
your investment.
WE WILL DEPEND ON ADDITIONAL CAPITAL
Our ability to implement our strategy and expand our operations largely
depends on our access to capital. We expect to make expenditures to continue
integrating the acquired floral businesses with our existing businesses. To
implement our long-term strategy, we plan to acquire additional floral
businesses, which will require ongoing capital expenditures. To date, we have
financed capital expenditures and acquisitions primarily through private equity,
a public offering and our revolving bank credit facility. We have a $36 million
revolving credit facility and a $7 million working capital facility under which
we have aggregate outstanding borrowings of approximately $32.8 million on
December 27, 2000. The working capital facility expires on February 28, 2001,
and the revolving capital facility expires on June 30, 2002. Further, mandatory
prepayments are required upon sales of certain assets and issuances of debt and
equity. Asset sales through December 27, 2000 have reduced the commitment under
the working capital facility to $6.1 million. As a result, we have limited
options for raising capital without the consent of our existing lenders. In
addition, to execute our growth strategy and meet our capital needs, we may
issue additional equity securities as part of the purchase price of future
acquisitions and we may issue additional debt or equity securities for cash in
public or private offerings. Any of these transactions may have a dilutive
effect on the interests of our stockholders. Further, our recent delisting from
the Nasdaq National Market may make it more difficult to raise capital in the
public markets, and, otherwise, additional capital may not be available on terms
acceptable to us. Our failure to obtain sufficient additional capital could
continue to curtail or alter our growth strategy or further delay needed capital
expenditures.
WE NEED TO IMPROVE OUR INFORMATION SYSTEMS
To implement our long-term strategy, we need to improve existing
information systems and install and integrate uniform information systems. We
estimate that it would cost between $4 million and $6 million to install common
point-of-sale systems in our existing stores, and we believe this installation
is an important step in implementing our long-term strategy. We may experience
delays, disruptions and unanticipated expenses in improving, installing and
integrating our information systems. Failure to improve existing information
systems and install and integrate uniform information systems could have a
material adverse effect on our business, financial condition, results of
operations and growth prospects.
WE MAY HAVE DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES WITH OUR COMPANY
Until we complete and install our information systems, we will use and
depend 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 we may have
difficulties managing, operating and integrating our businesses.
As part of our long-term strategy, we intend to convert our retail stores,
nearly all of which we have acquired, using a retail store concept that we have
designed. We also intend to open new stores using our retail store concept, and
we intend to convert any subsequently acquired stores to this concept. We do not
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currently have sufficient capital available to implement this strategy. To the
extent that we are able to secure sufficient capital to convert some or all of
our retail sales, the conversion of these stores and opening of new stores may
not have the positive effect on our business that we expect. The conversion of
stores may cause us to lose customers that were loyal to the former store brand,
and customers may not respond positively to the concept store. Conversion and
new store opening processes, we may incur other unanticipated difficulties,
including delays in project completion, unexpected or excessive costs, and
zoning or other regulatory problems.
OUR POTENTIAL INABILITY TO IMPLEMENT OUR GROWTH STRATEGY
Our near-term business strategy will focus on growing our revenue and
operations internally by improving our existing retail operations and expanding
sales through order-generation businesses, including our websites. In the
long-term, we seek to open or acquire additional retail locations. The success
of our growth strategy will depend on a number of factors including our ability
to:
- obtain financing to support this growth;
- successfully integrate acquired businesses and new retail locations with
existing operations;
- retain experienced management and other key personnel;
- expand our customer base;
- market our products and services effectively through traditional media
and over the Internet;
- assess the value, strengths and weaknesses of acquisition candidates and
new store locations;
- evaluate the costs and projected returns of expanding our operations; and
- lease desirable store locations on suitable terms and complete
construction on a timely basis.
We may expand our operations not only within our current lines of business,
but also into other related and complementary businesses. Our entry into any new
lines of business may not be successful, as we may lack the understanding and
experience to operate profitably in new lines of business.
DEMANDS ON OUR RESOURCES
Our operations could place significant demands on our management and our
operational, financial and marketing resources. These demands are primarily due
to our plans to:
- expand the scope of our operating and financial systems;
- increase the complexity of our operations;
- increase the level of responsibility of management personnel;
- continue to train and manage our employee base;
- acquire and integrate numerous floral and gift retailers;
- open new locations;
- increase the number of our employees; and
- broaden the geographic area of our operations.
Our management and resources, now and in the future, may not be adequate to
meet the demands resulting from our plans.
CONTINUED NET LOSSES COULD HINDER OUR STRATEGY
We have experienced losses during our most recent fiscal year. Our net loss
for fiscal 2000 was $42.6 million, which included a charge of $28.6 million for
the impairment of long-lived assets. If we incur net
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losses in future periods, we may not be able to implement our business strategy
in accordance with our present plans.
OUR FINANCIAL RESULTS MAY NOT BE INDICATIVE OF FUTURE RESULTS
The financial statements in this report cover periods when Gerald Stevens
and some of our acquired businesses were not under common control or management.
These financial statements may not be indicative of our future financial
condition, operating results, growth trends or prospects. We acquired our
initial retail operations in our April 1999 merger with Gerald Stevens Retail,
Inc. 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.
You should 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 national floral and gift retailer
and marketer may not lead to growth or profitability.
WE MAY INCUR UNEXPECTED LIABILITIES WHEN WE ACQUIRE BUSINESSES
During the acquisition process, we may not discover some of the liabilities
of 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 an acquired
business to indemnify us against undisclosed liabilities. In most cases, this
indemnification obligation will 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 acquired business.
DEBT COVENANTS MAY RESTRICT OUR GROWTH AND IMPLEMENTATION OF OUR BUSINESS
STRATEGY
Restrictive covenants contained in our credit facility may limit our
ability to make capital expenditures, finance acquisitions, build new locations
and finance other expansion of our operations. These covenants also require us
to achieve specific financial ratios. Credit facilities obtained in the future
likely will contain similar covenants.
In particular, consolidated earnings before interest, taxes, depreciation
and amortization must equal or exceed $7.2 million in the fiscal quarter ending
February 28, 2001; $14 million in the six-month fiscal period ending May 31,
2001; $13.2 million in the nine-month fiscal period ending August 31, 2001; and
$13.75 million in any four-quarter fiscal period on or after November 30, 2001.
Further, our aggregate capital expenditures may not exceed $500,000 in any
fiscal quarter, except that we may also spend up to $3.8 million for a
standardized point-of-sale and management information system.
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 acquisitions
that are important to our long-term 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.
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OUR QUARTERLY OPERATING RESULTS WILL FLUCTUATE DUE TO SEASONALITY
The floral industry has historically been seasonal, with higher revenue
generated during holidays such as Christmas, Valentine's Day, Easter and
Mother's Day. Given the importance of holidays to the floral industry, a change
in the date (in the case of a "floating" holiday such as Easter) or day of the
week on which a holiday falls may also have a substantial impact on our
business. During the summer and fall months, floral retailers tend to experience
a decline in revenue. As a result, we currently expect the period from June
through November (encompassing our fourth and first fiscal quarters) to be a
period of lower revenue and unprofitable operations. In addition, the floral
industry is affected by economic conditions and other factors, including, but
not limited to, competition and weather conditions that impact other retail
businesses. 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.
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.
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 wire service business,
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. 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.
CUSTOMERS MAY REDUCE DISCRETIONARY PURCHASES OF FLOWERS AND GIFTS
We believe that the floral and gift industry is influenced by general
economic conditions, 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.
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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.
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(SM) 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.
GOODWILL RESULTING FROM ACQUISITIONS MAY ADVERSELY AFFECT OUR RESULTS
Goodwill resulting from our acquisitions of retail floral businesses, and
the amortization of this 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 and order generation businesses.
Except to the extent we recorded impairment charges in our 2000 fiscal fourth
quarter, we do not believe that any material portion of the goodwill related to
any of these acquisitions will dissipate over a period shorter than the expected
useful life. However, our earnings in future years could be materially adversely
affected if management later determines either that the remaining balance of
goodwill is impaired or that a shorter amortization period is applicable.
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
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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.
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
countries' economies, 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. There may be
disruptions in service at ports of entry, fuel shortages, work stoppages in the
air charter or trucking industries or other problems encountered in transporting
flowers.
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.
WE MAY FACE INCREASED GOVERNMENT REGULATIONS 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 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.
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OUR DIRECTORS AND EXECUTIVE OFFICERS HAVE LIMITED INDUSTRY EXPERIENCE
Many of our directors and executive officers have no significant experience
in the floral and gift industry. Accordingly, our management 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 have acquired.
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 executive officers and the senior management of the
companies that we acquire. While we have entered into employment agreements with
our executive officers and the senior management of some companies we have
acquired, these individuals may not remain with us throughout the term of the
agreements or thereafter. We do not have "key person" life insurance policies
covering any of our employees. 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 owns
approximately 1.48 million shares, or approximately 15.0% of our outstanding
common stock. In addition, our Chairman of the Board controls the managing
general partner of New River Capital Partners. Our directors and executive
officers are deemed to beneficially own approximately 2.82 million shares, or
approximately 28.3%, of our outstanding common stock (which include the shares
owned by New River Capital Partners). Although there are no agreements or
understandings between New River Capital Partners and our executive officers as
to voting, if these parties voted in concert they would exert significant
influence over us.
Under the November 6, 2000 amendment to our credit agreement, we issued
three-year warrants to purchase up to 10% of our diluted common stock to the
bank and three members of management who were required to participate in the
credit facility. We also provided the bank with the right to appoint a director
on our board of directors. These provisions, as well as other covenants and
restrictions in the credit agreement, may provide the bank with the ability to
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.
PENNY STOCK RULES MAY DECREASE THE LIQUIDITY OF OUR COMMON STOCK
Our delisting from the Nasdaq National Market and subsequent quotation on
the OTC Bulletin Board brings our common stock within the definition of a "penny
stock." As a result, our common stock is subject to the penny stock rules and
regulations that require additional disclosure by broker-dealers in connection
with any trades involving a penny stock. The additional burdens imposed on
broker-dealers may restrict the ability of broker-dealers to sell our common
stock and may affect your ability to resell our common stock.
9
<PAGE> 13
POSSIBLE DEPRESSING EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
We have issued a substantial number of shares of our common stock in
connection with past acquisitions. The shares of common stock issued pursuant to
these acquisitions generally have been registered with the Commission after the
acquisition, making them available for resale. We have issued to our employees,
officers and directors options to purchase shares of our common stock. The
shares issuable upon exercise of the options have been registered with the
Commission. We have also issued a significant number of warrants to purchase
shares of our common stock to our primary lender and three members of management
pursuant to an amendment to our credit agreement in November 2000. 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 and could impair our
ability to raise capital through an offering of equity securities.
POSSIBLE DILUTION IN VALUE OF COMMON STOCK AND VOTING POWER
If we issue additional shares of common stock, 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.
10
<PAGE> 14
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the Over-the-Counter Bulletin Board on
December 4, 2000 under the symbol "GIFT." Before that date, our common stock
traded on the Nasdaq National Market under the symbol "GIFT" beginning May 3,
1999. Before that date, our common stock traded on the Nasdaq SmallCap Market
under the symbol "FIIF" beginning on May 30, 1997. Before that date, our common
stock traded in the "Over-the-Counter" or "Pink Sheet" market. The number of
record stockholders of our common stock on December 23, 2000 was 1,465 based on
information furnished by our transfer agent.
The table below sets forth by quarter, for the fiscal years ended August
31, 1999 and 2000 and the first and second quarters of our fiscal year 2001, the
high and low intra-day sale prices for our common stock as reported by Nasdaq or
the Over-the-Counter Bulletin Board, as the case may be. This information has
been adjusted to reflect the effects of a one-for-five reverse stock split that
we completed on November 14, 2000.
<TABLE>
<CAPTION>
SALE PRICES
-----------
HIGH LOW
---- ---
<S> <C> <C>
1999:
First quarter............................................... $ 36 1/4 $20
Second quarter.............................................. 109 3/8 32 3/16
Third quarter............................................... 93 3/4 51 7/8
Fourth quarter.............................................. 80 45 5/8
2000:
First quarter............................................... 72 13/16 46 1/4
Second quarter.............................................. 59 3/8 30
Third quarter............................................... 47 3/16 7 3/16
Fourth quarter.............................................. 13 1/8 3 3/4
2001:
First quarter............................................... 5 1 23/32
Second quarter (through December 28, 2000).................. 2 5/8 19
</TABLE>
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.
11
<PAGE> 15
SELECTED FINANCIAL DATA
The following data has been derived from our audited consolidated financial
statements and should be read in conjunction with those statements. The
financial statements for the periods ended August 31, 2000, 1999, and 1998 are
included in this registration statement. On April 30, 1999 we completed a merger
with Gerald Stevens Retail, Inc. which was accounted for as a pooling of
interests. From October 1, 1998 through August 31, 2000 we acquired 157 retail
florist businesses, one import business and two order generation businesses, all
of which were accounted for under the purchase method of accounting, and as a
result are included in our consolidated results from the date of acquisition.
See Note 2 -- "Acquisitions," in the accompanying financial statements.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, 2000 1999 1998 1997 1996
---------------------- -------- -------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Revenue........................................ $267,053 $110,596 $16,221 $13,911 $11,955
Operating income (loss)........................ (42,196) (9,420) (3,076) 1,918 1,562
Net income (loss).............................. (42,572) (12,307) (2,268) 3,433 2,262
Earnings (loss) per share:
Basic........................................ $ (4.57) $ (1.75) $ (1.32) $ 2.13 $ 1.89
Diluted...................................... $ (4.57) $ (1.75) $ (1.32) $ 1.97 $ 1.77
Weighted-average common and common equivalent
shares outstanding:
Basic........................................ 9,314 7,029 1,717 1,616 1,198
Diluted...................................... 9,314 7,029 1,717 1,743 1,275
AT YEAR-END
Working capital (deficiency)................... $ (3,148) $ (6,508) $ 7,548 $ 1,116 $ 488
Intangible assets.............................. 152,143 129,897 3,791 2,090 2,256
Total assets................................... 205,830 173,023 21,335 10,594 8,822
Long-term debt................................. 35,975 4,340 2,018 80 334
Total liabilities.............................. 73,161 37,050 8,585 5,341 5,585
Stockholders' equity........................... 132,669 135,973 12,750 5,253 3,237
</TABLE>
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
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 over 300 retail locations across the country. We believe we are
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 own and operate our own import operation and have relationships with leading
growers around the world. 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.
On April 30, 1999, we completed a merger with Gerald Stevens Retail, Inc.
("Gerald Stevens Retail") 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 should be read in
conjunction with our accompanying Consolidated Financial Statements. In the
merger, we issued approximately 5.6 million shares of our common stock to the
stockholders of Gerald Stevens Retail, resulting in the former Gerald Stevens
Retail stockholders owning approximately 77.5% of the shares of our common stock
immediately following the merger.
On November 14, 2000, we effected a 1-for-5 reverse split of the
outstanding shares of our common stock. Accordingly, all data shown in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and in the accompanying consolidated financial statements and notes,
has been retroactively adjusted to reflect this reverse stock split.
ACQUISITIONS
From October 1, 1998 through August 31, 1999 we acquired 69 retail florist
businesses with 231 stores located in 28 markets throughout the United States
for aggregate consideration of $98.7 million, consisting of $66.8 million in
cash and 1,412,187 shares of our common stock valued at share prices ranging
from $17.60 per share to $76.50 per share. Previously, in July 1998, the Company
had purchased letter of intent rights totaling $1.5 million related to 8 of
these retail florist businesses. These costs were subsequently allocated as an
additional component of the cost of acquiring these businesses. Additionally, in
October 1998, we acquired AGA Flowers, Inc., a floral import business located in
Miami, Florida for total consideration of $2.9 million, consisting of $1.5
million in cash and 83,416 shares of our common stock valued at $17.60 per
share.
In March 1999, we acquired National Flora, Inc., a floral order generation
business, for aggregate consideration of $19.7 million, consisting of $10.0
million in cash and 310,500 shares of our common stock valued at $31.50 per
share.
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for aggregate consideration of
$11.6 million, consisting of approximately $0.1 million in cash, 186,891 shares
of our common stock valued at $54.00 per share, and the assumption of stock
option and warrant obligations which converted into rights to acquire 30,417
shares of our common stock at share exercise prices ranging from $1.80 per share
to $47.20 per share.
During the year ended August 31, 2000, we acquired an additional 88 retail
florist businesses located in existing markets and seven new markets for
aggregate consideration of $36.7 million, consisting of $20.5 million in cash
and 398,912 shares of our common stock valued at share prices ranging from
$27.15 to $57.65 per share.
13
<PAGE> 17
All of the acquisitions discussed in the preceding paragraphs were
accounted for as business combinations under the purchase method of accounting
and are included in our consolidated financial statements from the date of
acquisition.
During the years ended August 31, 1999 and 2000, we also acquired certain
intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets related principally to customer
lists, telephone numbers and yellow page advertising contractual rights.
Aggregate consideration paid for all such intangible asset acquisitions during
the year ended August 31, 1999 was $4.5 million, consisting of $2.8 million in
cash and 31,965 shares of our common stock at a share price of $50.70 per share.
Aggregate consideration paid for intangible asset acquisitions during the year
ended August 31, 2000 was $0.2 million in cash.
The net book value of goodwill and other specifically identifiable
intangible assets at August 31, 2000 totaled $152.1 million, which represents
73.9% of total assets and 114.7% of total stockholders equity at that date. The
amortization of this $152.1 million balance will result in future annual
amortization expense of approximately $4.7 million, based principally upon the
amortization of goodwill related to the acquisition of retail floral businesses
over useful lives of 40 years, the amortization of goodwill related to the
acquisition of order generation businesses over useful lives of 20 to 40 years
and the amortization of other intangible assets over useful lives of 5 to 10
years. 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, we periodically analyze the carrying value of our
goodwill and other intangible assets to assess the recoverability from future
operations using estimated undiscounted cash flow projections. In fiscal 2000,
we also analyzed the carrying value relative to the selling price of businesses,
properties and assets we have sold or expect to sell in fiscal 2001. As a
result, we recorded a permanent impairment charge for goodwill and other
intangible assets of $19.5 million in the quarter ended August 31, 2000. This
charge consists of $15.5 million relating to ongoing businesses based on
estimated undiscounted cash flow projections and $4.0 million relating to
businesses, properties and assets we have sold or expect to sell. Earnings in
future years could be materially adversely affected if management later
determines either that the remaining goodwill or other intangible asset balances
are impaired or that a shorter amortization period is applicable.
Our strategic plan contemplated the closing or relocation of a number of
our acquired retail stores within each of our targeted market areas. Assessments
of which retail stores to close or relocate for all acquisitions consummated
prior to August 31, 1999 were completed as of May 31, 2000. As a result of these
assessments, additional purchase liabilities of $1.6 million and $1.3 million
for fiscal 1999 and 2000, respectively, were recorded and included in accrued
liabilities as of August 31, 2000. These liabilities relate to costs associated
with the closing and consolidation of certain acquired retail stores
(considering existing contractual lease obligations and management's estimate of
future operating lease costs).
During the fourth quarter of fiscal 2000, we reassessed our strategic
objectives and announced plans to significantly slow the pace of expansion of
our business over the next 12 to 18 months compared to our previous plans. This
change in strategy included a reassessment of our market development plans and
resulted in a significant reduction in the number of stores initially identified
for closure or relocation. Therefore the additional purchase liability and
goodwill were reduced by $1.6 million.
RESULTS OF OPERATIONS
Upon consummation of our merger with Gerald Stevens Retail, we redefined
the manner in which we evaluate and report the operating results of our newly
combined business for internal purposes. In this regard, we have chosen to break
down our component businesses into two segments: (1) Retail and (2) Order
Generation. The Retail segment consists of all retail and import businesses and
operations while the Order Generation segment consists of all non-retail order
generation and fulfillment businesses and operations.
Retail segment results for the year ended August 31, 2000 include the
operating results of the 69 retail florist businesses and one import business
acquired during the year ended August 31, 1999 and the
14
<PAGE> 18
post-acquisition operating results of 88 retail florist businesses acquired
during the year ended August 31, 2000. Retail segment results for the year ended
August 31, 1999 include only post-acquisition operating results of the initial
69 retail florist businesses and one import business acquired by the Company
from October 1, 1998 to August 31, 1999.
Order Generation segment results for the year ended August 31, 2000 include
the operating results of the Company's Internet, wire service, credit and charge
card processing, The Flower Club, National Flora and Calyx & Corolla business
units. Order Generation segment results for the years ended August 31, 1999 and
1998 include the operating results of the Company's wire service, credit and
charge card processing and The Flower Club business units. The Order Generation
segment 1999 results additionally include the post-acquisition operating results
of National Flora and Calyx & Corolla and the operating results of Gerald
Stevens' Internet-based order generation business unit. Prior to the acquisition
of our initial retail florist businesses on October 1, 1998, we operated only in
the Order Generation segment.
The tables below present the results of operations of the Company's Retail
and Order Generation segments and Corporate for the years ended August 31, 2000,
1999 and 1998, respectively.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
2000 1999
-------------------------------------------- -------------------------------------------
ORDER ORDER
RETAIL GENERATION CORPORATE TOTAL RETAIL GENERATION CORPORATE TOTAL
-------- ---------- --------- -------- ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product sales, net....... $188,484 $ 17,658 $ -- $206,142 $76,047 $ 1,412 $ -- $ 77,459
Service and other
revenue................ 23,312 37,599 -- 60,911 7,924 25,213 -- 33,137
-------- -------- -------- -------- ------- ------- -------- --------
211,796 55,257 -- 267,053 83,971 26,625 -- 110,596
-------- -------- -------- -------- ------- ------- -------- --------
Operating costs and
expenses:
Cost of product sales.... 69,566 6,219 -- 75,785 31,937 396 -- 32,333
Operating expenses....... 102,187 -- -- 102,187 36,816 -- -- 36,816
Selling, general and
admin expenses......... 29,036 43,687 20,118 92,841 7,970 22,348 12,305 42,623
Depreciation and
amortization........... 5,584 3,124 1,175 9,883 2,146 1,302 154 3,602
Impairment of long-lived
assets................. 9,400 12,912 6,241 28,553 -- -- -- --
Merger expenses.......... -- -- -- -- -- -- 4,642 4,642
-------- -------- -------- -------- ------- ------- -------- --------
215,773 65,942 27,534 309,249 78,869 24,046 17,101 120,016
-------- -------- -------- -------- ------- ------- -------- --------
Operating income (loss).... $ (3,977) $(10,685) $(27,534) $(42,196) $ 5,102 $ 2,579 $(17,101) $ (9,420)
======== ======== ======== ======== ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
-----------------------------------------
(DOLLARS IN THOUSANDS)
ORDER
RETAIL GENERATION CORPORATE TOTAL
------ ---------- --------- -------
<S> <C> <C> <C> <C>
Revenue:
Product sales, net........................................ $ -- $ -- $ -- $ --
Service and other revenue................................. -- 16,221 -- 16,221
---- ------- ------- -------
-- 16,221 -- 16,221
---- ------- ------- -------
Operating costs and expenses:
Cost of product sales..................................... -- -- -- --
Operating expenses........................................ -- -- -- --
Selling, general and admin expenses....................... -- 12,797 2,123 14,920
Depreciation and amortization............................. -- 802 80 882
Contract modification charge.............................. -- 3,495 -- 3,495
---- ------- ------- -------
-- 17,094 2,203 19,297
---- ------- ------- -------
Operating loss.............................................. $ -- $ (873) $(2,203) $(3,076)
==== ======= ======= =======
</TABLE>
15
<PAGE> 19
Year Ended August 31, 2000 Compared to Year Ended August 31, 1999
Overview. Excluding the impairment charges in fiscal 2000 and the merger
expenses in fiscal 1999, operating loss increased to $13.6 million in fiscal
2000 compared to $4.8 million in fiscal 1999. This increase was due primarily to
a $6.3 million increase in depreciation and amortization and a $7.8 million
increase in corporate selling, general and administrative expenses. Excluding
the impairment charges, we experienced relatively flat operating results in our
Retail and Order Generation segments despite the effects from a substantial
number of acquisitions in fiscal 2000 and 1999.
Retail Segment. Product sales within the Retail segment include sales of
floral and gift products at retail businesses and sales of floral product by the
Company's import business. Product sales at Retail businesses increased by
$112.5 million, or 168.9% to $179.1 million for the year ended August 31, 2000,
compared to the same period in the prior year, due principally to significant
increases in the number of stores operated in the current year. Product sales at
retail businesses in the 2000 fiscal third quarter were adversely affected by a
late Easter holiday, poor weather in certain regions of the country, and new
national advertising programs that were less effective than anticipated. In
connection with our integration strategy, we also closed retail stores during or
before the 2000 fiscal third quarter, and our other nearby retail stores did not
achieve anticipated revenue increases.
Product sales at the Company's import business were $9.4 million for each
of the years ended August 31, 2000 and 1999. Given that we owned the import
business for only eleven months in the year ended August 31, 1999, this
represents a slight decrease in sales due to the expected loss of certain
wholesale business from wholesalers who previously sold to our florists prior to
our acquisition of such florists.
Service and other revenue within the Retail segment is generated at the
Company's retail businesses and consists of delivery and other service fees
charged to customers and commissions on orders transmitted to and fulfilled by
other retail florists. Total Retail segment revenue for the year ended August
31, 2000 increased by $127.8 million or 152.2%, to $211.8 million compared to
the same period in the prior year.
Comparative same store sales have not been reported due to the fact that we
did not own any retail store locations for the entire year ended August 31,
1999. Additionally, we have made substantial operational changes in essentially
every market in which we operate. These changes include transferring phone lines
and/or wire activity from one store to another, or from one store to a hub
facility, centralizing phone and delivery activity, and transferring orders from
one store to another based upon more efficient delivery. These changes render
same store sales data not comparable.
Cost of product sales within the Retail segment includes the cost of
products sold at retail businesses and at the Company's import business. For the
year ended August 31, 2000, cost of product sales at our retail businesses and
our import business were $63.6 million and $6.0 million, respectively, compared
to $24.9 million and $7.0 million, respectively, for the same period in the
prior year. The increases in cost of product sales is due to the significant
increases in the number of stores operated.
Retail segment gross margins as a percentage of total revenue for the year
ended August 31, 2000 increased by 5.2% to 67.2% compared to the same period in
the prior year. The majority of the gross margin percentage increases are
related to changes in the mix between revenue at the Company's retail stores and
revenue at its import business. As a result of acquisitions, higher margin
retail store revenue has increased significantly more than lower margin import
revenue over the prior year. Additionally, gross margins have improved by
approximately 2.0% due to the implementation of various national product
purchasing programs at the Company's retail stores, including the sourcing of
floral product from the Company's import business. Retail segment operating
expenses for the year ended August 31, 2000 increased by $65.4 million or 177.6%
to $102.2 million compared to the same period in the prior year, due principally
to significant increases in the number of stores operated in the current versus
prior year period.
Retail segment operating expenses as a percentage of total revenue for the
years ended August 31, 2000 and 1999 were 48.2% and 43.8%, respectively. The
majority of the operating expense percentage increase in the year ended August
31, 2000 compared to the same period in the prior year is due to higher
16
<PAGE> 20
labor expenses incurred at the Company's retail outlets, particularly during the
three months ended May 31, 2000. Labor hours scheduled were significantly in
excess of requirements, particularly in light of the lower than expected revenue
levels. The disproportionate relationship between retail labor costs and retail
revenue for the quarter adversely impacted our profitability for the year ended
August 31, 2000. Additionally, the period-to-period change in mix between our
retail store and import businesses described above, and the fact that operating
expenses as a percentage of revenue are significantly higher at our retail
stores compared to our import business, also contributed to the higher operating
expense percentage in the current year.
In order to better align labor and other operating costs with revised
near-term revenue projections, we implemented a plan to reduce operating costs
at all field operating units. The implementation of this plan, which began
shortly after the spring holiday season, was completed during the fourth quarter
of fiscal 2000 and first quarter of fiscal 2001. We also have just completed the
implementation of improved labor hour scheduling processes at all retail
operating units. Additionally, we hired executives with significant multi-store
retail experience and reorganized our field operations into five divisional
units to be overseen by these new executives.
Retail segment selling, general and administrative expenses for the year
ended August 31, 2000 increased by $21.1 million, or 264.3% to $29.0 million
compared to the same period in the prior year due principally to significant
increases in the number of acquired stores operated in the current versus the
prior year. Retail segment selling, general and administrative expenses as a
percentage of total revenue for the years ended August 31, 2000 and 1999 were
13.7% and 9.5%, respectively. The level of advertising and wire commission
expenses incurred during the current year were disproportionately high compared
to the revenue generated at our retail outlets. The higher advertising expenses
were due mainly to the implementation of new national direct-mail programs,
which we have discontinued in fiscal 2001. Higher wire commission expenses
relate principally to increased in-bound wire orders from national order
generation and retail florist businesses, for which the Company pays customary
commission and wire service fees. To a lesser extent, higher insurance and other
general and administrative expenses also contributed to the selling, general and
administrative percentage increases in the current year.
Order Generation Segment. Product sales for the years ended August 31,
2000 and 1999 were $17.7 million and $1.4 million, respectively. Product sales
within the Order Generation segment represent sales made by Calyx & Corolla,
which was acquired in July, 1999. Service and other revenue within the Order
Generation segment consists of order generation commissions and processing fees,
wire service dues and fees, and credit card processing fees. Total Order
Generation segment service and other revenue for the year ended August 31, 2000
increased by $12.4 million, or 49%, to $37.6 million, compared to the same
period in the prior year. This increase is due primarily to incremental revenue
resulting from a full year of operation of National Flora, which was acquired in
March 1999 and Calyx & Corolla. To a lesser extent, continued increases in The
Flower Club revenue and revenue from our Internet-based order generation
business unit also contributed to the current year increase.
Cost of goods sold within the Order Generation segment for the years ended
August 31, 2000 and 1999 were $6.2 million and $0.4 million, respectively, all
of which were incurred at Calyx & Corolla. Calyx & Corolla gross margins as a
percentage of product sales revenue for the years ended August 31, 2000 and 1999
were 64.8% and 72.0%, respectively.
Total Order Generation segment selling, general and administrative expenses
for the year ended August 31, 2000 increased by $21.3 million, or 95.5% to $43.7
million, compared to the same period in the prior year. Selling, general and
administrative expenses increased by $20.2 million at Calyx & Corolla and
National Flora, reflecting a full year of operations during the current year. To
a lesser extent, expense increases related to the expansion of The Flower Club
and Internet-based business units also contributed to the higher current period
expenses.
Corporate. Total Corporate selling, general and administrative expenses
for the year ended August 31, 2000 increased by $7.8 million, or 63.5%, to $20.1
million, compared to the same period in the
17
<PAGE> 21
prior year. These increases were due primarily to expenses incurred to expand
our corporate infrastructure in Fort Lauderdale, Florida and to support our
expanded business units and anticipated future acquisitions.
Based upon capital constraints and strategic reasons, we chose not to
initiate a number of previously planned retail acquisitions during the six
months ended August 31, 2000 and further decided to significantly reduce or
eliminate planned expansion activities in the short-term. Based upon the
expansion slowdown, we significantly reduced personnel, technology, and other
related general and administrative costs at our Fort Lauderdale, Florida
corporate headquarters in order to align our organizational and cost structure
with the size and scope of the business we currently own and operate. A
significant portion of the reductions in personnel, technology, and other
related general and administrative costs at our corporate headquarters was
completed in the fourth quarter of fiscal 2000, and the remaining cost reduction
programs are expected to be completed in the first half of fiscal 2001.
Depreciation and Amortization. Depreciation and amortization for the year
ended August 31, 2000 increased by $6.3 million, or 174.4%, to $9.9 million,
compared to the same period in the prior year, due principally to amortization
related to fiscal 2000 acquisitions and a full-year amortization of fiscal 1999
acquisitions. Additionally, the impact of capital expenditures of $16.5 million
and $6.8 million in fiscal years 2000 and 1999, respectively, resulted in
increased depreciation expense.
Impairment of Long-Lived Assets. 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, we periodically
analyze the carrying value of our store-level goodwill and other intangible
assets to assess the recoverability from future operations using estimated
undiscounted cash flow projections. In fiscal 2000, we also analyzed the
carrying value relative to the selling price of businesses, properties and
assets we have sold or expect to sell in the first quarter or second quarter of
fiscal 2001. As a result, we recorded a permanent impairment charge for goodwill
and other intangible assets of $19.5 million in the quarter ended August 31,
2000. This charge consists of $15.5 million relating to ongoing businesses based
on estimated undiscounted cash flow projections and $4.0 million relating to
businesses we have sold or expect to sell.
In the quarter ended August 31, 2000, we also recorded an impairment charge
of $9.1 million, consisting primarily of assets associated with our catalog
business, as well as development costs for our retail point-of-sale system,
which we have abandoned due to the high cost of deployment and our cash flow
constraints. We are considering lower cost alternatives, including point-of-sale
systems currently used in some of our retail stores.
Interest. Interest expense for the year ended August 31, 2000 increased by
$1.8 million, or 209.8%, to $2.6 million, compared to the same period in the
prior year. The increase in interest expense during the current period is due
primarily to increased borrowings under the Company's revolving credit facility
to finance the expansion of its business activities and to provide working
capital and, to a lesser extent, increases in interest rates.
Other Income (expense). Other income for the year ended August 31, 2000
increased to $2.7 million, including a $2.4 million gain on the sale of our
credit card business, compared to other expense of $0.1 million for the year
ended August 31, 1999.
Income Taxes. We have significant operating loss carryforwards available
to offset future federal taxable income. Because of our current financial
position, we have provided a full valuation allowance against the deferred tax
asset account. Accordingly, we have recorded no federal income tax provision or
benefit for the year ended August 31, 2000. However, the Company currently pays
income tax in certain states and as a result, recorded a provision of $0.5
million for the year ended August 31, 2000. For the year ended August 31, 1999,
our provision for income taxes was $2.3 million due principally to (i) the
establishment of a deferred tax asset valuation allowance of $1.4 million which,
because of the expected future combined operating results of the merged company,
was required, (ii) the amortization of a deferred tax asset related to the
utilization of net operating loss carryforwards of $0.8 million and (iii) state
income tax provisions of $0.1 million.
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Our 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.
Year Ended August 31, 1999 Compared to Year Ended August 31, 1998
Retail Segment. Product sales within the Retail segment for the year ended
August 31, 1999 include sales of floral and gift products at our retail
businesses of $66.6 million and sales of floral product by our import business
of $9.4 million. Service and other revenue within the Retail segment is
generated at the Company's retail businesses and consists 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 within the Retail segment for the year ended August
31, 1999 include cost of products sold at retail businesses of $24.9 million and
cost of products sold at our import business of $7.0 million. Gross margins as a
percentage of total revenue for the year ended August 31, 1999 averaged 66.6% at
retail businesses and 25.5% at our import business.
Retail segment operating expenses for the year ended August 31, 1999
include expenses at retail businesses of $37.5 million and expenses at our
import business of $1.5 million. Operating expenses are comprised primarily of
salaries and benefit expenses, and to a lesser extent include occupancy,
vehicle, depreciation and amortization expenses.
Retail segment selling, general and administrative expenses for the year
ended August 31, 1999 include expenses at retail businesses of $7.8 million and
expenses at our import business of $0.2 million. Selling, general and
administrative expenses consist primarily of advertising expense, commissions
paid on orders transmitted from third parties, and legal and accounting fees and
related expenses.
Order Generation Segment. Product sales within the Order Generation
segment for the year ended August 31, 1999 reflect $1.4 million of sales made by
Calyx & Corolla from date of acquisition. Service and other revenue within the
Order Generation segment consists of order generation commissions and processing
fees, wire service dues and fees, and credit card processing fees. Total Order
Generation segment service and other revenue for the year ended August 31, 1999
increased by $9.0 million, or 55.4% to $25.2 million compared to the same period
in the prior year. This significant increase in revenue is due primarily to our
acquisition of National Flora, which generated $5.4 million in revenue following
its acquisition. Additionally, continued increases in The Flower Club revenue,
revenue from our newly formed Internet-based order generation business unit, and
other revenue generated at Calyx & Corolla following its acquisition also
contributed to the current year's service and other revenue increase.
Cost of goods sold within the Order Generation segment for the year ended
August 31, 1999 reflect $0.4 million of costs incurred at Calyx & Corolla
following its acquisition. Calyx & Corolla gross margins as a percentage of
total revenue averaged 76.0% following its acquisition.
Total Order Generation segment selling, general and administrative expenses
for the year ended August 31, 1999 increased by $9.6 million or 74.6%, to $22.3
million compared to the same period in the prior year. Selling, general and
administrative expenses incurred by National Flora and Calyx & Corolla following
its acquisition totaled $5.9 million and represent a significant portion of the
expense increase in the current year. Additionally, start-up costs incurred in
connection with our newly formed Internet-based order generation business unit
this year of approximately $2.3 million also caused current year expenses to be
higher. To a lesser extent, expense increases related to the expansion of The
Flower Club business unit and expenses related to our acquired Flowerlink
website also contributed to the higher fiscal 1999 expense levels.
During the year ended August 31, 1998, we recorded an expense of $3.5
million related to the modification of 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, we
began interfacing with the corporate customers directly, thereby strengthening
these relationships.
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Corporate. Total Corporate selling, general and administrative expenses
for the year ended August 31, 1999 increased to $12.3 million from $2.1 million
in the same period in the prior year due primarily to expenses incurred at our
corporate headquarters in Ft. Lauderdale, Florida and related to the significant
expansion of the Company into retail and other related segments of the floral
industry. Additionally, non-cash compensation expense of $1.4 million recorded
in connection with the vesting of certain non-plan stock options also
contributed to the current year expense increase. The non-plan stock options are
fully vested and will cause no further compensation expense to be recorded in
future periods.
During the year ended August 31, 1999, we incurred a total of $4.6 million
in investment banking, accounting and legal costs in connection with our 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.
Depreciation and Amortization. Depreciation and amortization for the year
ended August 31, 1999 increased by $2.7 million, or 308.4%, to $3.6 million,
compared to the same period in the prior year, due principally to amortization
related to fiscal 1999 acquisitions. Additionally, the impact of capital
expenditures of $6.8 million in fiscal year 1999, resulted in increased
depreciation expense.
Interest. Interest expense for the year ended August 31, 1999 was $0.8
million compared to interest expense of $82,000 in the same period of the prior
year. The increase in interest expense during fiscal 1999 is due to increased
borrowings under our revolving credit facilities to finance the expansion of our
business activities. Interest income for the year ended August 31, 1999 was $0.4
million compared to interest income of $0.2 million in the same period of the
prior year. The increase in interest income this year is related primarily to
earnings from the short-term investment of proceeds received in connection with
common stock sold during fiscal 1999.
Income Taxes. The provision for income taxes for the year ended August 31,
1999 was $2.3 million compared to an income tax benefit of $0.7 million in the
same period of the prior year. The current period expense is due principally to
(i) the establishment of a deferred tax asset valuation allowance of $1.4
million which, because of the expected future combined operating results of the
merged company, is now required, (ii) the amortization of a deferred tax asset
related to the utilization of net operating loss carryforwards of $0.8 million
and (iii) state income tax provisions of $0.1 million. We recorded an income tax
benefit of $0.7 million from the utilization of net operating loss carryforwards
during the same period of the prior year.
Our 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.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $1.4 million as of August 31, 2000 and
$4.6 million as of August 31, 1999. Cash and cash equivalents decreased by $3.2
million and $2.5 million during the years ended August 31, 2000 and 1999,
respectively, and increased by $2.9 million during the year ended August 31,
1998. The major components of these changes are discussed below.
Cash used in operating activities during the year ended August 31, 2000 was
$19.8 million. The operating loss before interest, taxes, depreciation,
amortization (EBITDA), and impairment charges was $3.8 million. The difference
between the negative EBITDA of $3.8 million and the cash used in operations of
$19.8 million is a result of several factors. We acquired 105 retail floral
shops in the fourth quarter of 1999, as well as 123 retail floral shops in
fiscal 2000, and we are paying our vendors in a more timely fashion than the
floral shops paid vendors prior to acquisition. Much of the advertising and
purchasing of our acquired shops were centralized in fiscal 2000, and although
favorable pricing was achieved, we made substantial up-front payments that
further affected working capital. Further, we believe that the businesses
acquired in the 1999 and 2000 fiscal years had working capital that was
approximately $2.0 million less
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than their historical operations; we are proceeding against many former owners
of these businesses in an attempt to collect the working capital shortfalls. We
may not be successful in such attempt.
The cash portion of the purchase prices for all acquisitions completed by
the Company during the years ended August 31, 2000, 1999 and 1998, net of cash
acquired, aggregated $22.4 million, (including any remaining payments for retail
floral shops acquired in fiscal 1999) $74.9 million and $1.5 million,
respectively, as more fully described in the preceding section entitled
"Acquisitions." Capital expenditures during the year ended August 31, 2000
totaled $16.5 million compared to capital expenditures of $6.8 million and $1.4
million during the years ended August 31, 1999 and 1998, respectively. Capital
expenditures during fiscal 2000 include $9.6 million in computer hardware,
software and communication systems, $3.0 million in new store design,
development and construction, and $3.9 million primarily in leasehold
improvements to our retail stores, as well as our corporate headquarters.
Capital expenditures during fiscal 1999 primarily include computer hardware,
software, and communication system expenditures related to the planned expansion
of our retail and order generation businesses. Capital expenditures during
fiscal 1998 relate principally to the purchase of the land and building that
were previously leased as the Company's former corporate headquarters, and other
facility and equipment expansion costs.
During the year ended August 31, 2000, we received net proceeds of $4.7
million from the sale of our credit card processing business, as well as the
sale of certain properties which we subsequently leased back.
In March 2000, we issued 651,400 shares of our common stock in a private
placement transaction for total consideration of $22.0 million net of fees and
expenses. Additionally, during the year ended August 31, 2000, we issued a total
of 87,869 shares of common stock for total consideration of $1.2 million in
connection with stock options and warrants exercised during the year. We
borrowed a net amount of $31.6 million on our revolving credit facilities and
repaid $3.9 million of debt incurred in connection with certain retail florist
acquisitions during the year ended August 31, 2000.
In July 1999, we completed a public equity offering in which we sold
1,000,000 shares of our common stock. Proceeds received from the offering, net
of underwriting discounts and expenses, were approximately $55.2 million.
Additionally, during the year ended August 31, 1999, we issued 1,243,908 shares
of our common stock in private placement transactions for total consideration of
$21.1 million, net of placement fees and expenses. A total of 142,461 shares of
common stock were also issued for total consideration of $1.6 million in
connection with the exercise of stock options and warrants during fiscal 1999.
We borrowed a net amount of $4.3 million on our revolving credit facilities
during the year ended August 31, 1999.
In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 2,572,658 shares of common stock were issued to
various founding stockholders for total consideration of $9.3 million, with
proceeds totaling $5.1 million received in fiscal 1998 and $4.2 million in stock
subscription balances received at the beginning of fiscal 1999. In August 1998,
we also paid $1.5 million in cash and issued 128,400 shares of our common stock
in connection with the acquisition of a business whose assets consisted solely
of rights to acquire 33 retail florist businesses under non-binding letters of
intent with the owners of those businesses. A total of 39,200 shares of common
stock were issued for total consideration of $29,000 in connection with the
exercise of stock options and warrants during fiscal 1998.
In May 1998, the Company borrowed $2.5 million to finance a portion of the
MPI contract modification costs. During the fourth quarter of fiscal 1998, $0.5
million of the loan was repaid, with the balance of $2.0 million repaid during
fiscal 1999. During fiscal 1998, we also repurchased 11,455 shares of treasury
stock at a total cost of $0.2 million.
In September 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank whereby such 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. In June 1999,
Gerald Stevens Retail and its primary lender amended and restated their existing
$40.0 million revolving credit agreement and Gerald Stevens, the parent of
Gerald Stevens Retail, agreed to guarantee payment of all obligations under the
amended and restated agreement and terminated their existing $5.0 million line
of credit. On July 31, 2000, we entered into Amendment Agreement No. 2 to
Amended
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and Restated Credit Agreement with our primary lender. The amendment reduced the
line of credit to $36.0 million, increased the interest rates, and amended the
financial covenants.
For the years ended August 31, 2000, 1999 and 1998, we experienced net
losses of approximately $42.6 million, $12.3 million and $2.3 million,
respectively, and required net cash to fund our operations of approximately
$19.8 million, $5.0 million and $1.1 million, respectively. As of August 31,
2000, we had a working capital deficiency of approximately $3.1 million and had
no availability on our revolving credit facility.
On November 6, 2000, we entered into Amendment Agreement No. 3 to Amended
and Restated Credit Agreement with our primary lender. The amendment provides a
new $7.0 million working capital line of credit through February 28, 2001 to
fund seasonal cash requirements, at which date repayment is required. The
amendment also eliminates $16.0 million in scheduled reductions to our $36.0
million revolving credit facility, which were previously to occur in the second
and third quarters of fiscal 2001, until June 30, 2002 and relaxes certain
financial covenants. Borrowings under the amended and restated credit agreement
are secured by all of our current and future assets, including a pledge of the
stock of each subsidiary.
All borrowing under the amended and restated credit agreement will bear
interest at a base rate of prime, plus 2%, payable monthly in arrears. At
November 6, 2000, outstanding borrowings under the revolving credit facility
were $36.0 million, including $11.0 million in base rate borrowing at prime plus
2% and $25.0 million in three Libor notes bearing interest at a weighted average
of 10.14%. Each Libor note terminates in December 2000, when they will convert
to base rate borrowings in accordance with Amendment No. 3.
The amended and restated agreement also requires mandatory prepayments in
the event of asset sales or equity offerings subsequent to November 6, 2000.
Mandatory prepayments are required at 100% of the first $10.0 million of net
proceeds from asset sales; 0% of the next $5.0 million; 100% of the next $13.0
million and 80% thereafter; and 75% of the net proceeds from any equity
offering. These prepayments will first permanently reduce the working capital
line of credit, then the revolving credit facility. Through November 16, 2000,
we made mandatory prepayments of $0.6 million from net proceeds received from
asset sales.
The amended and restated agreement also requires minimum consolidated
earnings before interest, taxes, depreciation and amortization (EBITDA)
threshold. We must generate consolidated EBITDA of $7.2 million in the three
months ending February 28, 2001; $14.0 million in the six months ending May 31,
2001; $13.2 million in the nine months ending August 31, 2001; and $13.8 million
in any four quarter period ending on or after November 30, 2001. Additionally,
our capital expenditures cannot exceed $0.5 million in any fiscal quarter,
provided that we may spend up to $3.8 million for the acquisition and
implementation of a standardized point-of-sale and management information
system. All other prior financial covenants have been eliminated.
In connection with the amendment, we issued three-year warrants for 10% of
our common stock on a diluted basis at an exercise price of $.01 per share. If
we repay all borrowings under the credit agreement prior to June 30, 2001, 75%
of the warrants will terminate, and if we repay all borrowings prior to December
31, 2001, 50% of the warrants will terminate. Pursuant to a participation
agreement, three members of management will participate in $1.0 million of the
$7.0 million working capital line and will receive a proportionate share of the
warrants. The fair market value of the warrants, estimated using a Black-Scholes
option pricing model, will be amortized to interest expense over the term of the
facility beginning in November 2000.
As of November 27, 2000, approximately $3.1 million in borrowings were
drawn on the new $7.0 million working capital line. During the remainder of the
second quarter of fiscal 2001, we expect to draw the remainder of the
availability to position ourselves for expected increased business during the
Christmas holidays and on Valentine's Day.
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Our fiscal 2000 loss from operations was primarily due to lower than
expected revenue, less effective than expected national advertising programs and
higher labor costs. In order to improve revenue, we have implemented sales
incentives and training programs designed to increase our average sale. We have
shifted responsibility for retail advertising from a centralized group at our
corporate headquarters to individual markets and believe that we will improve
revenue as a result of this locally focused advertising. Additionally, we
believe the date of Easter and the day of the week on which Valentine's Day
falls in fiscal 2001 are more favorable as compared to fiscal 2000.
We have reduced retail headcount and implemented a labor scheduling process
in our retail operations to help insure that labor costs are in proportion with
revenue. We believe that our new retail management team will be able to focus on
the implementation of each initiative to improve market profitability as new
acquisitions have been suspended in the near-term. Additionally, we have
significantly reduced personnel, technology and other general and administrative
costs at our corporate headquarters in order to align our organization and cost
structure with the size and scope of the business we currently own and operate.
We believe that the working capital line of credit will allow us to meet
our expected obligations through the beginning of our strong seasonal period. We
believe that, by implementing our near-term strategy to improve the
profitability of each of our markets through the initiatives described above, we
will generate sufficient cash flows from operating activities to meet the
ongoing cash requirements of our existing business over the next 12 months.
Specifically, we believe that funds generated from operations during the second
quarter of fiscal 2001 will be sufficient to repay amounts then outstanding on
our $7.0 million working capital line by February 28, 2001 as well as provide
the necessary working capital to position ourselves for the expected increased
business during the third quarter of fiscal 2001 associated with Easter,
Secretary's Day and Mother's Day. Moreover, we expect to generate sufficient
positive net cash from operations in the third quarter of fiscal 2001 to fund
our expected net operating cash requirements during the fourth quarter of fiscal
2001, which is traditionally a slow quarter in the retail floral business.
However, these initiatives may not be successful in generating the required cash
flows.
Other than our existing credit facility, we have no current arrangements
for additional financing. In the event that we cannot generate sufficient cash
flows from operating activities, we would be required to obtain additional bank
financing or sell assets. We may not be able to negotiate additional bank
financing on terms acceptable to us. Additionally, it is possible that assets
may be sold at prices lower than their current carrying amount.
INFLATION
Our business will be affected by general economic trends. Because some of
our 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, we have not experienced noticeable effects of inflation and
believe that cost increases due to inflation should be able to be passed on to
our customers.
SEASONALITY
The floral industry has historically been seasonal, with higher revenue
generated during holidays such as Christmas, Valentine's Day, Easter and
Mother's Day. Given the importance of holidays to the floral industry, a change
in the date (in the case of a "floating" holiday such as Easter) or day of the
week on which a holiday falls may also have a substantial impact on our
business. During the summer and fall months, floral retailers tend to experience
a decline in revenue. As a result, we currently expect the period from June
through November (encompassing our fourth and first fiscal quarters) to be a
period of lower revenue and unprofitable operations. In addition, the floral
industry is affected by economic conditions and other factors, including, but
not limited to, competition and weather conditions that impact other retail
businesses.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB Statement No. 133. SFAS No. 137 defers for one year
the effective date of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. As a result, SFAS No. 133 applies to all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended by SFAS
No. 138, requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001. The adoption of SFAS No. 133 is not
expected to have a material effect on the financial statements of the Company,
as we currently have no derivatives.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. SAB
101 will be effective for the Company during the three months ended November 30,
2000. Specific items discussed in SAB 101 include bill-and-hold transactions,
long-term service transactions, refundable membership fees, contingent rental
income, up-front fees when the seller has significant continuing involvement and
the amount of revenue recognized when the seller is acting as a sales agent or
in a similar capacity. SAB 101 also provides guidance on disclosures that should
be made for revenue recognition policies and the impact of events and trends on
revenue. The adoption of SAB 101 is not expected to have a material effect on
the financial statements of the Company, as we believe our revenue recognition
policies are in conformity with SAB 101.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
quarters beginning after June 30, 2000. The consensus states that the accounting
for specific web site development costs should be based on a model consistent
with AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Accordingly, certain web site
development costs that are currently expensed as incurred may be capitalized and
amortized. EITF Issue No. 00-2 will be effective for the Company during the
three months ended November 30, 2000. The adoption of EITF Issue No. 00-2 is not
expected to have a material effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14, Accounting
for Certain Sales Incentives ("EITF Issue No. 00-14"), which addresses the
recognition, measurement, and income statement classification for sales
incentives offered by vendors to customers. The Company adopted EITF Issue No.
00-14 during the three months ended August 31, 2000. Sales incentives within the
scope of this Issue include offers that can be used by a customer to receive a
reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized, the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 did not have a material effect on
our financial statements.
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BUSINESS
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 over 300 retail locations across the country. We believe we are
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. We believe our execution of this integrated
operating model will make our stores synonymous with superior service, quality
and value.
Our order generation division permits us, through multiple marketing
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; Calyx &
Corolla, the largest direct marketer of flowers; The Flower Club, a leading
corporate affinity marketer; and three primary websites. To ensure superior
customer service and efficient order processing, we operate three call centers.
To distribute orders in markets where we do not have our own stores, we use
several floral wire services, including our own Florafax floral wire service,
which has approximately 6,000 member florists covering all 50 states.
We operate a leading floral importer and wholesaler, AGA Flowers, which 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 help us to eliminate several steps in the
floral distribution chain and ensure a reliable source of high-quality products
at favorable prices.
INDUSTRY OVERVIEW
Supply Chain. The majority of cut flowers sold at retail in the United
States are grown outside of the United States, principally in Colombia, Ecuador
and the Netherlands. Flowers grown outside of the United States are shipped from
farms and exporters to importers in the United States. European products arrive
in multiple ports of entry, and most Central American and South American
products arrive in Miami. After clearing customs and inspections, floral
importers divide the flowers into smaller lot sizes and ship them to
wholesalers, bouquet companies and mass-market retailers. Wholesalers market the
flowers to retail florists, supermarkets, other mass-market outlets, and bouquet
companies. Bouquet companies make arrangements and bouquets that are sold to
supermarkets, convenience stores and mass-market retailers. Mass-market
retailers and supermarkets use internal systems for further distribution. In
aggregate, the supply chain typically delivers a flower to the retailer
approximately 10 to 12 days after the flower is first cut. Moreover, the
extensive handling of the 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 and direct mail.
Because order generators typically lack fulfillment capabilities, they forward
floral orders through a wire service to a retail florist for delivery. Order
generators usually receive a commission equal to 20% of the order for their
services and may also impose a service charge on the customer for handling the
order. Large order generators typically receive rebates from wire services for
sending orders through them.
Wire Services. Wire services establish networks of retail florists and
facilitate the transmission and financial settlement of floral orders among the
network members. Wire services publish a membership directory that enables a
sending florist to select which florist will deliver an arrangement outside the
sending florist's own delivery area. Alternatively, a sending florist may allow
the wire service to choose which florist will deliver an arrangement.
Wire services typically collect a clearinghouse fee of 7% to 9% of the
value of an order exchanged via the wire service; however, the fee collected
from larger florists and order generators is often offset by a rebate. Wire
services typically charge a monthly membership fee to member florists. Wire
services seek to control the quality of products and services provided by member
florists by denying membership or imposing fines on member florists violating
the wire service's standards.
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Retail. Retail floral shops sell flowers, plants and, in certain cases,
complementary gifts and decorative accessories to customers. Floral shops also
receive orders for out-of-town delivery that they forward, typically through
wire services, to other floral shops for fulfillment and local delivery.
Direct from Farm. The direct-from-farm business consists of order
generators, primarily catalogs and websites, that use third-party overnight
shippers like FedEx to distribute products directly from importers or growers to
consumers. This business, while growing, accounts for less than 1% of overall
floral purchases. The majority of direct-from-farm flowers are pre-made
"bunches" of flowers requiring the recipient to arrange them into a bouquet.
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 floral and floral-related products, providing superior customer
service and building strong customer loyalty. Key elements of our strategy
include:
Strengthen Our Existing Operations
In the near-term, we are developing and implementing market-by-market plans
intended to maximize the profitability of each retail market using our current
hub facilities and satellite stores. In our effort to improve revenue, we have
implemented sales incentives and training programs designed to increase our
average sale. We have shifted responsibility for retail advertising from
corporate to the retail markets and believe that we will improve revenue as a
result of this locally focused advertising. We have reduced retail headcount and
implemented a labor scheduling process in our retail operations to insure that
labor costs are in proportion with revenue. Additionally, we have significantly
reduced personnel, technology and other general and administrative costs at our
corporate headquarters in order to align our organization and cost structure
with the size and scope of the business we currently own and operate. Upon
completion of these near-term objectives to maximize profitability of our
existing businesses, we intend to pursue our long-term strategy, which is set
forth below.
Build a National Network of Retail Stores.
Expand Our Retail Store Base. Our long-term strategy is to develop a
retail network in the country's largest markets. From October 1998 through April
2000, we acquired many of the top floral retailers in the United States,
providing us with over 300 retail locations. We believe these initial
acquisitions have provided us with a significant competitive advantage in
developing a national retail network. In the spring of 2000, we decided to
suspend our acquisition program due to capital constraints and for strategic
reasons. We do not expect to resume retail store acquisitions in the near-term.
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 floral retail chains, several of
which we have acquired. A hub facility serves as a distribution center and
warehouse for surrounding satellite stores within a market. In the long-term, we
plan to have at least one hub facility in each of the markets in which we
operate, either through acquisition or construction. We believe that a hub
facility eliminates cost redundancies and delivery inefficiencies that exist at
decentralized retail floral shops. Satellite stores are retail stores or
store-in-store retail outlets in supermarkets and department stores. Ideally,
our satellite stores will be located in high-traffic, high-visibility areas to
service walk-in business and promote brand awareness.
Create an Innovative In-Store Experience. We have developed a concept
store that is designed to maximize revenue at the satellite stores by catering
to the walk-in customer. This store offers a unique and enhanced floral shopping
experience through an expanded product mix, innovative merchandising and store
design, a knowledgeable staff of professional florists and exceptional customer
service.
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Build Our Order-Generation Businesses
Build Our Traditional Order-Generation Businesses. We own several
order-generation businesses, allowing us to serve customers who do not visit or
phone our retail stores. In addition, we have a national customer database that
allows us to target 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 affinity partners. Where
possible, we distribute orders generated by these businesses through our retail
store network, to provide consistency of product quality and customer service.
We believe our retail stores provide us with a significant competitive advantage
over order generators who lack fulfillment capabilities, particularly at
holidays and other peak times.
Promote E-Commerce Operations. Similar to traditional order-generation
businesses, we believe that our online flower order generation business has a
competitive advantage because it is coupled with an owned local delivery
network. This approach provides the greatest ability to manage all aspects of an
order, from order taking to delivery confirmation, and ensures consistency of
product quality and customer service. Our e-commerce strategy is to position our
Company as a premier online floral and related gift marketer through a
multi-branded strategy targeted at specific audiences.
OPERATIONS
Retail Network
Our retail stores are among the leading retail floral operations in their
markets, with over 300 retail locations in 35 markets on August 31, 2000. In
most cases, our initial market entry has been through the acquisition of key
existing retailers followed by the acquisition of smaller retailers. Our
acquisition of key existing retailers has focused on the most respected and
established retailers in a market. We have retained the management of many of
these well-run retailers to benefit from their market knowledge, name
recognition and local reputation, and to promote greater levels of customer
retention and loyalty. Some smaller acquired stores have been in non-strategic
locations and therefore have been moved to a better location or integrated into
a hub facility. We have kept the telephone numbers of acquired companies to
maximize customer retention. We believe that by acquiring existing stores, we
acquire the continuing business of loyal customers in a cost-efficient manner.
Hub Facilities. Hub facilities are up to 40,000 square foot facilities
that provide a market with centralized call-in order taking, floral arranging
and delivery. A typical market ideally will have one or two hub facilities. Hub
facilities eliminate cost redundancies 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. Depending on the location, a portion of a
hub facility may also serve as a retail location. On August 31, 2000, we had a
total of nine "full-service" hub facilities in nine markets, two of which we
built and the rest we acquired. We also have five other hub facilities that
provide some, but not all, of the services provided at full-service hub
facilities.
Satellite Stores. Our "satellite" stores are either traditional retail
floral shops or store-in-store outlets located in high-traffic, high-visibility
areas to service walk-in business. We intend for our satellite stores to
differentiate themselves from our competitors by offering an enhanced customer
experience within the floral shop through superior products, merchandising and
service. We believe that we have designed an attractive, well-merchandised
retail store concept that will help promote growth in the walk-in segment of the
floral and gift industry. Because we can vary our store size and format while
maintaining a consistent look and feel, our retail stores can be located in a
variety of convenient settings, including downtown and suburban retail centers,
office buildings, hospitals, airports and university campuses. Each store will
vary its product mix depending upon the size of the store, its location and
customer preferences.
Our store-in-store locations bring quality floral products and services to
supermarkets, grocery stores and department stores. These locations benefit from
the high traffic and brand appeal of the store in which they are located. These
store-in-store locations are operated by our employees to ensure quality and
consistency of product and service, as well as to promote our brand.
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As of the date of this prospectus, we have converted one acquired retail
store and two acquired "store-in-store" locations, and built two new retail
stores and two new store-in-store locations, using the concept-store design and
the Gerald Stevens(sm) brand name.
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 all of our retail stores currently
offer, through our call centers, 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, The Flower Club and Calyx & Corolla. These
businesses generate floral orders primarily through mailing inserts for
corporate affinity programs, yellow page advertisements and catalogs.
National Flora. National Flora is the largest U.S. yellow page advertiser
of floral products. National Flora generates orders through a variety of
additional advertising efforts, including Internet websites, affinity
partnerships, corporate programs and direct mail marketing. National Flora
forwards these orders primarily to National Flora's preferred network of stores,
giving priority to our retail stores and our Florafax wire service.
Flower Club. The Flower Club has relationships with major corporate
partners to engage in joint marketing campaigns throughout the year. Orders
generated by The Flower Club are transmitted by our Florafax wire service
business to member florists. The corporate partners include many nationally
recognized companies, including airlines, credit card issuers, retailers and
other businesses. The Flower Club markets directly to the customers of these
companies by inserting marketing materials into their customers' periodic
statements.
Calyx & Corolla. Calyx & Corolla is a leading direct marketer of flowers,
generating orders through a combination of catalog mailings and e-commerce
marketing. Orders are fulfilled through a network of 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 while
at the same time giving customers fresh, just-cut flowers.
Internet businesses. We believe our Internet operations will further
develop our existing customer relationships, introduce new customers to our
products, and reduce the cost and risk of product introductions. We intend to
become a premier floral and gift marketer on the Internet, an area of the floral
and gift business that we expect to continue to grow rapidly in the next several
years.
We will focus our development and marketing efforts on the
geraldstevens.com, calyxandcorolla.com and flowerclub.com websites. We have
designed each of these websites to appeal to a different customer segment and
offer users targeted content and products. We believe this multi-brand strategy
will increase the number of floral and gift transactions, provide repeat sales
and improve the percentage of purchases per "visit" on the sites. Marketing
initiatives for our websites include promotions in our retail stores, in
traditional advertising mediums, and on strategic or high-traffic websites, as
well as links from our corporate affinity program partners and e-mail campaigns
to our customer database and the databases of companies participating in our
corporate affinity programs.
Call Centers. Our order-generation businesses are currently supported by
three call centers with a total of approximately 400 call stations in three time
zones. Our call centers are located in Vero Beach, Florida; Tulsa, Oklahoma; and
Medford, Oregon. We also use telemarketing companies to answer calls,
particularly during peak periods. Our call centers and these telemarketing
companies 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.
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Floral Wire Service
We operate Florafax, a floral wire service business that enables member
florists to send and deliver floral orders throughout the United States. We act
as an intermediary among our 6,000 member florists, approximately 200 of which
are our own retail floral shops, and we receive and send their orders primarily
by telephone and fax. We list our member florists and their advertisements in
the Florafax Directory, which is published and distributed five times a year for
use by us and our member florists.
Our order-allocation system has the ability to distribute orders ratably to
our member florists. On our system, once an order is taken, the system
ascertains which member florists deliver to that location. The system determines
which florist should receive the order based on distribution criteria and 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.
Import
AGA Flowers, our leading Miami-based importer, primarily imports cut
flowers, principally from Colombia and Ecuador. 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. These relationships allow us to obtain high-quality flowers in
large quantities and when needed.
AGA Flowers also supplies fresh-cut flowers and bouquets to wholesalers,
distributors and large retailers. During the 2000 fiscal year, approximately 53%
of the floral products imported by AGA Flowers were sold to these third parties.
We expect this percentage to decrease as a result of acquisitions of floral
shops made in the 2000 fiscal year, AGA's fulfillment of more of our shops'
floral product needs, and AGA's sales to third parties remaining relatively
constant.
SUPPLIERS
In addition to obtaining flowers from AGA Flowers, we enter into standing
order arrangements with other floral importers, growers 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. We believe that we have good relationships with our
suppliers and that the large number of current and potential suppliers should
continue to make perishable floral products, as well as our other gift products
and decorative accessories, available to us as needed.
We also rely on floral wire services, including our Florafax wire service,
to facilitate the transmission and financial settlement of floral orders
generated by our order-generation businesses and our retail operations. In
August 2000, we agreed with Teleflora, LLC to send a minimum of 500,000 floral
orders annually through Teleflora's wire service over the next two years. As
part of the agreement, we agreed to increase our use of Teleflora's proprietary
Dove(R) electronic transmission network to send orders to Teleflora members. We
believe that we have good relationships with the floral wire services that we
rely on.
INFORMATION SYSTEMS
Developing uniform information systems for all of our stores remains an
important part of our strategy. We believe that our stores' current information
systems are adequate for our current needs and the implementation of our
near-term strategy. For the implementation of our long-term strategy, we seek to
install a uniform point-of-sale and management information system.
COMPETITION
We face competition throughout the retail floral industry. Our retail
stores compete with traditional floral shops, supermarkets, garden centers,
vendors and other retailers based upon price, breadth of product offering,
product quality, customer service, location and credit terms. We also compete
with gift and other specialty retailers for sales of our non-floral products.
Both our traditional and our Internet order-generation businesses face
significant competition from others providing similar services. In particular,
dial-
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up numbers and websites in the retail floral industry have become significantly
more competitive in recent years. We compete by buying large yellow pages
advertisements with priority placement, by marketing our numbers and websites in
various media, and by offering call center service 24 hours a day, 7 days a
week. Our floral wire service business is one of five national wire services in
the country, three of which are larger than Florafax and have substantial market
share. While we believe that we compete effectively within each segment in the
retail floral industry, additional competitors with greater resources may enter
the industry and compete effectively against us. 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.
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 the
Gerald Stevens(sm) name and leaf logo.
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 that would
negatively impact our continuing use of any of our service marks, trademarks or
trade names.
EMPLOYEES
On November 30, 2000 we employed approximately 2,900 full-time and 1,900
part-time employees. We also employ approximately 1,000 part-time employees
during peak seasonal periods. Of our non-seasonal employees, approximately 100
are corporate personnel. None of our employees are represented by unions. We
consider our employee relations to be good.
REGULATION
We are 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.
Our import operations are generally subject to United States federal
regulations governing international trade and the importation 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 that 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 that 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 products' home market value. The
anti-dumping duties generally are paid by the importer.
We are also 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 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.
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MANAGEMENT
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven R. Berrard.................... 46 Chairman of the Board and Director
John G. Hall......................... 37 Chief Executive Officer, President and Director
Gerald R. Geddis..................... 50 President of Retail Division
Thomas W. Hawkins.................... 39 Senior Vice President and Chief Administrative Officer
Wayne Moor........................... 48 Senior Vice President and Chief Financial Officer
Gregory J. Royer..................... 42 Senior Vice President and Chief Operating Officer of
Retail Division
Andrew W. Williams................... 48 President and Chief Operating Officer of Order
Generation Division and Director
Robert L. Johnson.................... 54 Director
Ruth M. Owades....................... 52 Director
Kenneth G. Puttick................... 53 Director
Kenneth Royer........................ 69 Director
</TABLE>
Steven R. Berrard has served as a member of our board of directors since
May 1999, and as Chairman of the Board since October 1999. In 1997, Mr. Berrard
co-founded 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 Capital's managing general partner. Mr. Berrard served as
Co-Chief Executive Officer of AutoNation, Inc. from October 1996 until September
1999. During his tenure, AutoNation became the world's largest automotive
retailer with over 380 dealerships throughout the United States and also owned
and operated the Alamo Rent-A-Car and National Car Rental System businesses.
From September 1994 through March 1996, Mr. Berrard served as President and
Chief Executive Officer of Blockbuster Entertainment Group, a division of Viacom
Inc. and the world's largest video store operator. From January 1993 to
September 1994, Mr. Berrard served as President and Chief Operating Officer of
Blockbuster Entertainment Corporation. 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 as 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 serves as a director of
Birmingham Steel Corporation, a steel producer, and of Boca Resorts, Inc., which
owns and operates luxury resorts, arena and entertainment facilities and a
professional sports franchise.
John G. Hall has served as our President and Chief Executive Officer and as
a Director since July 2000. Mr. Hall is also a partner in New River Capital
Partners, which he joined in December 1999. From 1993 to December 1999, he was a
principal of Allen & Company Incorporated where he provided growth capital and
investment banking services to public and private companies, including Gerald
Stevens and Gerald Stevens Retail, Inc. Prior to joining Allen & Company, Mr.
Hall was a Vice President of Chemical Bank, where he specialized in
restructurings and workouts from 1991 through 1993.
Gerald R. Geddis has served as President of Retail Operations since July
2000. He served as our President, Chief Executive Officer and a Director from
May 1999 to July 2000. He co-founded Gerald Stevens Retail in May 1998 and
served as its Chief Executive Officer and President until its merger with us in
April 1999. From 1988 to 1996, Mr. Geddis served in various executive positions
at Blockbuster Entertainment Group. He served at Blockbuster as President from
1995 to 1996, and as Chief Operating Officer in 1996. 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 1988, Mr. Geddis served in various positions with Tandy
Corporation.
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Thomas W. Hawkins has served as our Senior Vice President and Chief
Administrative Officer since September 2000. Mr. Hawkins is also a partner at
New River Capital Partners, which he joined in January 2000. From May 1996
through December 1999, he served as Senior Vice President -- Corporate
Development at AutoNation, Inc. where he was responsible for mergers and
acquisitions, business development and strategic planning for the nation's
leading automotive retail company. From 1989 until 1996, Mr. Hawkins held
various positions with Blockbuster Entertainment Group, including Executive Vice
President from 1994 through 1996, and managed legal, finance, corporate
relations and information services.
Wayne Moor has served as our Senior Vice President and Chief Financial
Officer since October 2000. From January 2000 until joining Gerald Stevens, he
was Chief Executive Officer of Onloan.com, where he led the transformation of
the internet start-up into a data integration and software company. From
February 1997 through January 2000, Mr. Moor was Executive Vice President and
Chief Financial Officer for US Diagnostics, Inc., a public company that operated
over 120 medical imaging locations in 20 states. In 1996, Mr. Moor was an
independent accounting consultant. Mr. Moor, who is a certified public
accountant, began his career with Arthur Andersen LLP. He has also held senior
financial positions with large savings and loan associations, a real estate
investment trust, and a real estate development company.
Gregory J. Royer has served as our Senior Vice President and Chief
Operating Officer of our Retail Division since May 2000. Prior to that, Mr.
Royer served as our senior vice president of retail operations since May 1999.
Prior to joining Gerald Stevens, Mr. Royer served as the president of Royer's
Flowers, one of the largest and most profitable retail floral chains in the
country. Gerald Stevens Retail acquired Royer's Flowers from Mr. Royer and his
family in October 1998. Under Mr. Royer's leadership, Royer's Flowers grew to
operate 36 retail locations.
Andrew W. Williams has served as President and Chief Operating Officer of
our Order Generation Division since July 2000 and 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 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. He
has served as President and Director of Confidential Investment Services, Inc.,
a privately owned investment company, since April 1999.
Robert L. Johnson has served as a member of our board of directors since
October 1999. In 1980, Mr. Johnson founded BET Holdings, Inc., a diversified
media holding company that owns Black Entertainment Television. He has served as
BET's Chairman and Chief Executive Officer since March 1996, and prior to that,
also as its President. Mr. Johnson is also Chairman and President of District
Cablevision, Inc., a cable operator in the District of Columbia. He is a
director of U.S. Airways Group, Inc., Hilton Hotels Corp. and General Mills,
Inc.
Ruth M. Owades has served as a member of our board of directors since
August 1999 following our acquisition of Calyx & Corolla, Inc. Ms. Owades
founded Calyx & Corolla in 1988 and has served as its Chief Executive Officer
since that time. Ms. Owades has served as a director of Providian Financial
Corp. from May 1998 until present and of J. Jill Group, Inc. from June 1997
until present.
Kenneth G. Puttick has served as a member of our board of directors since
January 1995. Mr. Puttick is President and owner of Tiffany Scott Cadillac in
Vero Beach, Florida. Mr. Puttick has been in the retail automobile business
since 1968. Mr. Puttick also has owned and operated several retail and real
estate businesses.
Kenneth Royer has served as a member of our board of directors since May
1999. Prior to joining Gerald Stevens Retail in October 1998, Mr. Royer was 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 as
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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 in 1998 authored a book on the floral industry
entitled Retailing Flowers Profitably.
Kenneth Royer is the father of Gregory J. Royer.
Directors' Compensation
Under the compensation program for nonemployee directors, each nonemployee
director receives (a) an annual retainer of $20,000; (b) an additional $1,000
for each board meeting in excess of four meetings per year; (c) $750 for each
committee meeting attended (except that committee chairs receive $1,000 per
committee meeting); and (d) an annual grant of options to purchase up to 2,500
shares of common stock at the fair market value of the stock on the date of
grant. The annual retainer and meeting fees may be paid in cash or our common
stock.
Nonemployee directors are reimbursed for expenses they incur in attending
board of directors and committee meetings.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following Summary Compensation Table
contains information concerning the compensation of (a) Gerald R. Geddis, who
served as Chief Executive Officer through July 17, 2000; (b) John G. Hall, who
has served as Chief Executive Officer since July 17, 2000; and (c) our other
three executive officers who were serving as such at the end of our 2000 fiscal
year. Information that is not applicable or not required under the rules of the
Securities and Exchange Commission has been omitted from the Summary
Compensation Table.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------
------------------------------------------ NO. OF SHARES
OTHER UNDERLYING ALL
FISCAL ANNUAL OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION
--------------------------- ------ -------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gerald R. Geddis(a).............. 2000 $150,000 $ 0 $ 0 20,000 $ 0
President of Retail Division 1999 50,000 0 0 0 0
and Former 1998 -- -- -- -- --
Chief Executive Officer
John G. Hall(b).................. 2000 17,789 0 0 70,000 0
Chief Executive Officer, 1999 -- -- -- -- --
President 1998 -- -- -- -- --
and Director
Adam D. Phillips(c).............. 2000 132,692 0 0 8,000 1,471(f)
Senior Vice President, 1999 33,333 0 0 0 0
Chief Administrative Officer, 1998 -- -- -- -- --
Secretary and Director
Gregory J. Royer(c).............. 2000 154,615 10,000 0 17,000 64,401(g)
Senior Vice President and Chief 1999 46,154 0 0 0 0
Operating Officer of Retail 1998 -- -- -- -- --
Division
Andrew W. Williams(d)............ 2000 16,154 0 0 50,000 50,000(h)
President and Chief Operating 1999 81,729 53,818 3,200(e) 0 2,042(f)
Officer of Order Generation 1998 127,042 20,000 4,800(e) 0 2,856(f)
Division and Director
</TABLE>
---------------
(a) Mr. Geddis became President and Chief Executive Officer on May 1, 1999 upon
completion of the merger with Gerald Stevens Retail, and served as such
through July 17, 2000, at which time he
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became President of the Retail Division. No information is provided for
periods prior to May 1, 1999, because Mr. Geddis was not employed by Gerald
Stevens prior to such date.
(b) Mr. Hall became President and Chief Executive Officer on July 17, 2000.
(c) Messrs. Phillips and Royer became senior vice presidents on May 1, 1999
upon completion of our merger with Gerald Stevens Retail. No information is
provided for periods prior to May 1, 1999, because Messrs. Phillips and
Royer were not employed by Gerald Stevens prior to such date.
(d) Mr. Williams served as President and Chief Executive Officer through April
30, 1999. He was not an employee of Gerald Stevens from May 1, 1999 through
July 17, 2000. On July 17, 2000, Mr. Williams became President and Chief
Operating Officer of the Order Generation Division.
(e) Represents payments made for a company-provided vehicle.
(f) Represents company-matching contributions under a 401(k) plan.
(g) Represents reimbursement of relocation expenses and $656 in company
matching contributions under a 401(k) plan.
(h) Represents consulting fees paid for services from April 1, 2000 through
July 17, 2000.
GERALD STEVENS, INC. 2000 STOCK OPTION PLAN
Our board of directors adopted the Gerald Stevens, Inc. 2000 Stock Option
Plan effective January 1, 2000. Our stockholders approved this plan on January
18, 2000. Under this plan, we may grant options to purchase our common stock to
our employees, consultants and non-employee directors. Under this plan, we have
reserved 600,000 shares of common stock for issuance upon the exercise of
options. Our Compensation Committee selects the employees, consultants and
non-employee directors to whom options will be granted. We may grant options to
purchase no more than 30,000 shares of our common stock to any person in any
calendar year. The exercise price of the options granted under the plan may not
be less than 100% of the fair market value of our common stock on the date of
grant (or 110% in the case of an incentive stock option granted to a beneficial
owner of more than 10% of our outstanding common stock). The maximum option term
is ten years (or five years in the case of an incentive stock option granted to
a beneficial owner of more than 10% of our outstanding common stock). Options
vest and become exercisable to the extent of 25% of the shares covered thereby
on the first four anniversaries of the date of grant, except as otherwise
determined by the Compensation Committee and provided in the particular option
agreement. Under this plan, the Compensation Committee has the discretion to
accelerate the vesting of, and ability to exercise, options.
We believe that stock options are important to attract, and to encourage
the continued employment and service of employees, consultants and non-employee
directors. Stock options also align the interests of the option holders with
those of our stockholders. To date, we have granted 359,595 options to purchase
common stock under this plan.
EMPLOYMENT AND OTHER AGREEMENTS
We have employment agreements with Messrs. Geddis, Moor and Gregory Royer
and Ms. Owades. Mr. Geddis's employment agreement provides for an annual base
salary of $150,000. In addition, Mr. Geddis will be eligible for an annual bonus
of up to 20% of base salary, based on the achievement of certain corporate goals
and objectives. If Mr. Geddis is terminated "without cause" or if he elects to
terminate employment for "good reason," in each case as defined in the
employment agreement, then he would be entitled to continue to receive the base
salary and bonus through the end of the employment term, and all unvested stock
options would automatically vest on the date of termination and would be
exercisable in full. He is also subject to confidentiality obligations as well
as to non-compete and non-solicitation covenants during the term of employment
and for two years thereafter. Mr. Geddis's employment agreement expires on
December 31, 2000.
The employment agreements with Ms. Owades and Messrs. Moor and Gregory
Royer are on substantially the same terms as Mr. Geddis's employment agreement,
except that (a) the annual base salaries are $185,000 for Ms. Owades, $160,000
for Mr. Royer and $225,000 for Mr. Moor; (b) the expiration dates are July 30,
2001 for Ms. Owades' agreement, March 31, 2002 for Mr. Royer's agreement,
34
<PAGE> 38
and October 23, 2002 for Mr. Moor's agreement; and (c) upon termination "without
cause" or for "good reason," the payments to Mr. Royer would consist of his base
salary (but not his bonus) through the shorter of the end of the employment term
or one year.
We have Confidentiality and Noncompete Agreements with Messrs. Hall,
Hawkins and Williams, which provide for confidentiality obligations and
non-compete and non-solicitation covenants that are similar to those contained
in the employment agreements described above.
CERTAIN TRANSACTIONS
In connection with our acquisition of Royer's Flower Shops, we assumed five
leases that 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 we own and operate in central Pennsylvania. The aggregate annual
rent payable by us to Mr. and Mrs. Royer for the 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.
In September 2000, we sold four properties to a company controlled by Mr.
Berrard for aggregate consideration of $2.0 million. We simultaneously leased
back one of such properties for a ten-year term at $115,000 per year plus annual
adjustments based on the consumer price index. We believe the terms of these
transactions are no less favorable than we could have obtained from third
parties for comparable retail space in the same market. We also assigned to the
purchaser company contracts with a third party to purchase three of the
properties, and we agreed to continue to market the fourth property. We will
receive any gain, and pay for any loss, resulting from any sale of the
properties to a third party pursuant to any contract signed prior to December
31, 2000 (including the contracts assigned to the purchaser company).
In connection with Amendment No. 3 to Amended and Restated Credit Agreement
with our primary lender, we issued three-year warrants for 10% of our common
stock on a diluted basis at an exercise price of $.01 per share. If we repay all
borrowings under the credit agreement prior to June 30, 2001, 75% of the
warrants will terminate, and if we repay all borrowings prior to December 31,
2001, 50% of the warrants will terminate. Pursuant to a participation agreement,
Messrs. Berrard, Hall and Hawkins were required to participate in $1.0 million
of the $7.0 million working capital line provided by the Amendment and received
a proportionate share of the warrants.
35
<PAGE> 39
PRINCIPAL STOCKHOLDERS
The following table sets forth the shares of our common stock beneficially
owned, directly or indirectly, on December 1, 2000, by (1) each person that we
know to beneficially own more than 5% of our outstanding common stock, (2) each
current director and nominee, (3) each of the executive officers named in the
Summary Compensation Table and (4) all directors, nominees and executive
officers as a group. The table also includes shares that the individuals have
the right to acquire within 60 days pursuant to outstanding options. Unless
otherwise indicated, the address of each party is 1800 Eller Drive, Suite 300,
Fort Lauderdale, Florida 33316, our principal business address.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT
---------------- ------------------ -------
<S> <C> <C>
New River Capital Partners, L.P............................. 1,478,303 15.0%
100 S.E. Third Avenue
Ft. Lauderdale, Florida 33394
Gerald R. Geddis(1)......................................... 596,751 6.0
John G. Hall(2)............................................. 51,828 *
Adam D. Phillips(3)......................................... 105,600 1.1
Gregory J. Royer(4)......................................... 133,074 1.4
Andrew W. Williams(5)....................................... 90,533 *
Steven R. Berrard(6)........................................ 1,505,105 15.3
Robert L. Johnson(7)........................................ 125 *
Ruth M. Owades(8)........................................... 73,295 *
Kenneth G. Puttick(9)....................................... 231,000 2.3
Kenneth Royer(10)........................................... 11,191 *
All Directors and Executive Officers as a Group(11)......... 2,822,340 28.3
</TABLE>
---------------
* Indicates less than 1%
(1) Includes 6,350 shares of our common stock subject to options that are
exercisable within 60 days.
(2) Includes 40,000 shares of our common stock subject to options that are
exercisable within 60 days and 6,179 shares of our common stock subject to
warrants that are exercisable within 60 days.
(3) Includes 14,150 shares of our common stock subject to options that are
exercisable within 60 days.
(4) Includes 7,357 shares of our common stock subject to options that are
exercisable within 60 days.
(5) Includes 17,177 shares of our common stock held for the benefit of Mr.
Williams' children; 7,077 shares owned by Mr. Williams' wife; 432 shares
owned by Mr. Williams' son; 14,403 shares owned by Williams Family
Foundation, of which Mr. Williams is president and director; and 15,400
shares owned by Confidential Investment Services, Inc., of which Mr.
Williams is sole owner, president and director.
(6) Consists of 1,478,303 shares of our common stock owned by New River Capital
Partners, 24 shares owned by SRB Investments, Inc., and 26,778 shares
subject to warrants that are exercisable within 60 days. Mr. Berrard
controls and beneficially owns his interests in New River Capital Partners
and SRB Investments indirectly through other entities; Mr. Berrard
disclaims beneficial ownership of these shares except to the extent of any
pecuniary interest.
(7) Consists of 125 shares of our common stock subject to options that are
exercisable within 60 days.
(8) Includes 1,000 shares subject to options that are exercisable within 60
days, and 1,068 shares subject to options owned by her husband that are
exercisable within 60 days.
(9) Includes 127,400 shares held by Puttick Enterprises, of which Mr. Puttick
is President, director and owner. Includes 12,000 shares of our common
stock subject to options that are exercisable within 60 days.
(10) Includes 1,784 shares of our common stock subject to options that are
exercisable within 60 days.
(11) Includes 110,384 shares of our common stock subject to options that are
exercisable within 60 days and 41,196 shares subject to warrants that are
exercisable within 60 days.
36
<PAGE> 40
SELLING STOCKHOLDERS
The following table sets forth the name of each selling stockholder, the
total number of shares of common stock beneficially owned by each selling
stockholder as of the date of this prospectus and the total number of shares of
common stock that each selling stockholder may offer and sell pursuant to this
prospectus. Because the selling stockholders may offer all or a portion of the
shares at any time and from time to time after the date of this prospectus, we
cannot determine at this time the exact number of shares that each selling
stockholder may retain upon completion of the offering. To our knowledge, none
of the selling stockholders has had any material relationship with us, our
predecessors or affiliates, other than these relationships described in the
footnotes.
To our knowledge, none of the selling stockholders has had any material
relationship with us during the past three years, except as set forth in the
footnotes to the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES AFTER THE
BENEFICIALLY OWNED NUMBER OF OFFERING(1)
BEFORE THE SHARES ------------------
SELLING STOCKHOLDERS OFFERING(1) BEING OFFERED NUMBER %
-------------------- ------------------ ------------- ---------- -----
<S> <C> <C> <C> <C>
Bank of America, N.A. ............................ 233,444(2) 933,775 0 *
Steven R. Berrard................................. 1,505,105(3) 107,110 1,478,327 15.0
John G. Hall...................................... 51,828(4) 24,718 45,649 *
Thomas G. Hawkins................................. 129,439(5) 32,957 121,200 1.2
Walter Hyman(6)................................... 2,721 2,721 0 *
Hildegard McShane(7).............................. 1,284 1,284 0 *
Jack McShane(7)................................... 1,284 1,284 0 *
Karl McShane(7)................................... 1,165 1,165 0 *
Israel Sands(8)................................... 2,373 2,373 0 *
</TABLE>
---------------
* Indicates less than 1%.
(1) As used herein, beneficial ownership means the sole power to vote, or direct
the voting of, a security, or the sole or shared power to dispose, or direct
the disposition of, a security. Except as otherwise indicated, each selling
stockholder has beneficial ownership with respect to his, her or its shares
of common stock.
(2) Represents shares of common stock issuable upon the exercise of presently
exercisable warrants, which shares are being registered hereby. Does not
include 700,331 shares of common stock issuable upon the exercise of
warrants that are not exercisable within 60 days of the date of this
prospectus, but which shares are being registered hereby.
(3) Includes 26,778 shares of common stock issuable upon the exercise of
presently exercisable warrants, which shares are being registered hereby.
Does not include 80,332 shares of common stock issuable upon the exercise of
warrants that are not exercisable within 60 days of the date of this
prospectus, but which shares are being registered hereby.
(4) Includes 6,179 shares of common stock issuable upon the exercise of
presently exercisable warrants, which shares are being registered hereby.
Does not include 18,359 shares of the common stock issuable upon the
exercise of warrants that are not exercisable within 60 days of the date of
this prospectus, but which shares are being registered hereby.
(5) Includes 8,239 shares of common stock issuable upon the exercise of
presently exercisable warrants, which shares are being registered hereby.
Does not include 24,718 shares of common stock issuable upon the exercise of
warrants that are not exercisable within 60 days of the date of this
prospectus, but which shares are being registered hereby.
(6) Held ownership interest in Downstairs Greenery & Florist, Inc. prior to
Gerald Stevens' acquisition of certain assets thereof.
(7) Held ownership interest in McShane Florist & Greenhouse, Inc. prior to
Gerald Stevens' acquisition of certain assets thereof.
(8) Held ownership interest in Flowers & Flowers, Inc. prior to Gerald Stevens'
acquisition of certain assets thereof.
37
<PAGE> 41
DESCRIPTION OF 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. The following description gives effort to our
reverse stock split that was effective on November 14, 2000.
We have authorized capital stock consisting of 50,000,000 shares of our
common stock, par value $0.01 per share, and 120,000 shares of our preferred
stock, par value $10 per share. On December 27, 2000, 9,838,404 shares of common
stock were outstanding. No shares of preferred stock were outstanding on that
date.
COMMON STOCK
Subject to the prior rights of shareholders of any preferred stock that may
be outstanding from time to time, the shareholders 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
December 27, 2000 are fully paid and non-assessable.
PREFERRED STOCK
Our board of directors is empowered, without approval of the shareholders,
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.
CERTAIN PROVISIONS OF FLORIDA LAW
In our articles of incorporation, we have expressly elected not to be
governed by Sections 607.0901 and 607.0902 of the Florida Business Corporation
Act, which relate to affiliated transactions and control-share acquisitions,
respectively. Application of either of these sections may have otherwise been
viewed as having an anti-takeover effect.
SHARES ELIGIBLE FOR FUTURE SALE
As of December 27, 2000, we have 9,838,404 shares of common stock
outstanding. All of these shares 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
38
<PAGE> 42
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 757,153 shares of common stock issuable under our
stock option plans and up to 1,126,957 shares issuable under outstanding
warrants (including the shares issuable upon exercise of the warrants being
registered in this Registration Statement) 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.
PLAN OF DISTRIBUTION
The selling stockholders may sell or distribute some or all of the shares
of common stock offered by this prospectus from time to time through
underwriters, dealers, brokers, or other agents or directly to one or more
purchasers, including pledgees, in privately negotiated transactions, or in the
over-the-counter market, or in a combination of such transactions, or by any
other legally available means. These transactions may be effected by the selling
stockholders at market prices prevailing at the time of sale, at prices related
to prevailing market prices, at negotiated prices, or at fixed prices, which may
be changed. Underwriters, brokers, dealers, or other agents participating in
these transactions as agent for the selling stockholder may receive compensation
in the form of discounts, concessions, or commissions from the selling
stockholders, and, if they act as agent for the purchaser of the shares being
sold, from the purchaser. The discounts, concessions, or commissions given to a
particular underwriter, broker, dealer, or other agent might be in excess of
those customary in the type of transaction involved. This prospectus also may be
used, with our consent, by donees and pledges of the selling stockholders, or by
other persons acquiring shares offered by this prospectus and who wish to offer
and sell these acquired shares under circumstances requiring or making desirable
its use. If required, we will file, during any period in which offers or sales
are being made, one or more supplements to this prospectus to set forth the
names of donees of selling stockholders and any other material information with
respect to the plan of distribution not previously disclosed.
The selling stockholders and any underwriters, brokers, dealers or other
agents that participate in a distribution of the shares offered by this
prospectus may be deemed to be "underwriters" within the meaning of the
Securities Act, and any discounts, commissions, or concessions received by any
underwriters, brokers, dealers or agents might be deemed to be underwriting
discounts and commissions under the Securities Act. Neither we nor the selling
stockholders can presently estimate the amount of such compensation. We know of
no existing arrangements between the selling stockholders and any underwriter,
broker, dealer or other agent relating to the sale or distribution of the shares
offered by this prospectus.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of any of the shares offered by this prospectus may
not simultaneously engage in market activities with respect to our common stock
for a period of nine business days prior to the commencement of such
distribution. In addition and without limiting the foregoing, the selling
stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation Rule 10b-5
and Regulation M, which provisions may limit the timing of purchases and sales
of any of the shares offered by this prospectus. Any of those rules or
regulations may affect the marketability of our common stock.
We will pay substantially all of the expenses incident to the offering of
the shares offered by the selling stockholders to the public pursuant to this
prospectus other than commissions and discounts of underwriters, brokers,
dealers, or other agents. The selling stockholders may indemnify any
underwriter, broker, dealer, or other agent that participates in transactions
involving sales of these shares against certain liabilities, including
liabilities arising under the Securities Act. We have agreed to indemnify the
selling stockholders against some of the liabilities they may incur, including
certain liabilities under the Securities Act.
39
<PAGE> 43
Although we have no obligation to permit the selling stockholders to offer
shares under this prospectus in an underwritten offering, if any shares offered
by the prospectus are sold in an underwritten offering, those shares may be
acquired by the underwriters for their own account and may be further resold
from time to time in one or more transactions, including negotiated
transactions, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices, at negotiated prices, or at fixed prices. The
names of the underwriters with respect to any offering of this kind and the
terms of the transactions, including any underwriting discounts, concessions or
commissions and other items constituting compensation of the underwriters and
broker-dealers, if any, will be set forth in a supplement to this prospectus
relating to that offering. Any public offering price and any discounts,
concessions or commissions allowed or reallowed or paid to broker-dealers may be
changed from time to time. Unless otherwise set forth in a supplement to this
prospectus, the obligations of the underwriters to purchase the shares will be
subject to certain conditions precedent and the underwriters will be obligated
to purchase all of the shares specified in the supplement if any shares are
purchased.
If any shares offered by this prospectus are sold in an underwritten
offering, the underwriters and selling group members, if any, may engage in
passive market making transactions in our common stock immediately prior to the
commencement of the sale of shares in such offering, in accordance with
Regulation M under the Exchange Act. Passive market making presently consists of
displaying bids limited by the bid prices of market makers not connected with
the offering and purchases limited by these prices and effected in response to
order flow. Net purchases by a passive market maker on each day are limited in
amount to 30% of the passive market maker's average daily trading volume in the
common stock during the period of the two full consecutive calendar months prior
to the filing with the Commission of the Registration Statement of which this
prospectus is a part and must be discontinued when that limit is reached.
Passive market making may stabilize the market price of the common stock at a
level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.
In order to comply with certain states' securities laws, if applicable, the
shares offered by this prospectus will be sold in those jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
states our common stock may not be sold unless it has been registered or
qualified for sale in the state or an exemption form registration or
qualification is available and we comply with the exemption.
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. Some attorneys employed by Akerman, Senterfitt & Eidson,
P.A. own shares of our common stock.
EXPERTS
The consolidated financial statements as of August 31, 2000 and 1999 and
for each of the three years in the period ended August 31, 2000 of Gerald
Stevens, Inc., included in this registration statement have been audited by
Arthur Andersen LLP, independent certified public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on Form S-1 with the Securities and
Exchange Commission with respect to the common stock offered by this prospectus.
This prospectus does not contain all of the information included in the
registration statement because the Commission's rules and regulations permit us
to omit some of the information. For further information pertaining to our
company and the securities offered by this prospectus, reference is made to the
registration statement, including the exhibits and the financial statements,
notes and schedules filed as a part of or incorporated by reference into the
registration
40
<PAGE> 44
statement. Statements contained in this prospectus regarding the content 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 the contract or other document filed as an exhibit to this
registration statement, and each statement is qualified in all respects by
reference to the contract or other document.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and we 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 a website
that contains reports, proxy and information statements and other information,
regarding issuers that file electronically with the Commission. You can access
the Commission's website at http://www.sec.gov.
41
<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Consolidated Balance Sheets as of August 31, 2000 and August
31, 1999.................................................. F-3
Consolidated Statements of Operations for the Years Ended
August 31, 2000, 1999 and 1998............................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended August 31, 2000, 1999 and 1998........ F-5
Consolidated Statements of Cash Flows for the Years Ended
August 31, 2000, 1999 and 1998............................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 46
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Gerald Stevens, Inc.:
We have audited the accompanying consolidated balance sheets of Gerald
Stevens, Inc. (a Florida corporation) and subsidiaries as of August 31, 2000 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended August 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gerald Stevens,
Inc. and subsidiaries, as of August 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 2000, in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Miami, Florida,
November 27, 2000.
F-2
<PAGE> 47
GERALD STEVENS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,427 $ 4,602
Accounts receivable, net of allowance for doubtful
accounts of $2,109 and $1,872 at August 31, 2000 and
1999, respectively..................................... 12,039 10,074
Inventories, net.......................................... 13,675 8,454
Prepaid and other current assets.......................... 5,797 2,653
-------- --------
Total current assets.............................. 32,938 25,783
-------- --------
PROPERTY AND EQUIPMENT, net................................. 17,855 15,953
-------- --------
OTHER ASSETS:
Intangible assets, net.................................... 152,143 129,897
Other, net................................................ 2,894 1,390
-------- --------
Total other assets................................ 155,037 131,287
-------- --------
Total assets...................................... $205,830 $173,023
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 303 $ 2,009
Accounts payable.......................................... 14,864 12,551
Accrued liabilities....................................... 18,886 15,567
Deferred revenue.......................................... 2,033 2,164
-------- --------
Total current liabilities......................... 36,086 32,291
LONG-TERM DEBT.............................................. 35,975 4,340
Other..................................................... 1,100 419
-------- --------
Total liabilities................................. 73,161 37,050
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $10 par value, 120,000 shares authorized,
none issued............................................ -- --
Common stock, $0.01 par value, 50,000,000 shares
authorized, 9,836,466 and 8,802,280 shares issued and
outstanding on August 31, 2000 and 1999,
respectively........................................... 98 88
Additional paid-in capital................................ 193,218 155,576
Accumulated deficit....................................... (60,647) (18,075)
Treasury stock, 0 and 103,995 shares, at cost, at August
31, 2000 and 1999, respectively........................ -- (1,616)
-------- --------
Total stockholders' equity........................ 132,669 135,973
-------- --------
Total liabilities and stockholders' equity........ $205,830 $173,023
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-3
<PAGE> 48
GERALD STEVENS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
REVENUE:
Product sales, net........................................ $206,142 $ 77,459 $ --
Service and other revenue................................. 60,911 33,137 16,221
-------- -------- -------
267,053 110,596 16,221
-------- -------- -------
OPERATING COSTS AND EXPENSES:
Cost of product sales..................................... 75,785 32,333 --
Operating expenses........................................ 102,187 36,816 --
Selling, general and administrative expenses.............. 92,841 42,623 14,920
Depreciation and amortization............................. 9,883 3,602 882
Impairment of long-lived assets........................... 28,553 -- --
Merger expenses........................................... -- 4,642 --
Contract modification charge.............................. -- -- 3,495
-------- -------- -------
309,249 120,016 19,297
-------- -------- -------
Operating loss.................................... (42,196) (9,420) (3,076)
-------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (2,630) (849) (82)
Interest income........................................... 76 369 165
Other income (expense).................................... 2,650 (80) 43
-------- -------- -------
96 (560) 126
-------- -------- -------
Loss before provision (benefit) for income
taxes........................................... (42,100) (9,980) (2,950)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 472 2,327 (682)
-------- -------- -------
Net loss.......................................... $(42,572) $(12,307) $(2,268)
======== ======== =======
BASIC AND DILUTED LOSS PER SHARE............................ $ (4.57) $ (1.75) $ (1.32)
======== ======== =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING:
Basic and diluted......................................... 9,314 7,029 1,717
======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-4
<PAGE> 49
GERALD STEVENS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK
--------------
PAR ADDITIONAL ACCUMULATED TREASURY
SHARES VALUE PAID-IN CAPITAL DEFICIT STOCK TOTAL
------ ----- --------------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, August 31, 1997.................... 1,651 $17 $ 10,174 $ (3,500) $(1,438) $ 5,253
Sale of common stock, net................. 2,612 26 9,341 -- -- 9,367
Common stock issued in acquisitions....... 128 1 499 -- -- 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.................... 4,391 44 20,090 (5,768) (1,616) 12,750
Sale of common stock, net................. 2,386 24 77,922 -- -- 77,946
Common stock, options and warrants issued
in acquisitions......................... 2,025 20 56,191 -- -- 56,211
Compensation expense under stock option
plan.................................... -- -- 1,373 -- -- 1,373
Net loss.................................. -- -- -- (12,307) -- (12,307)
----- --- -------- -------- ------- --------
BALANCE, August 31, 1999.................... 8,802 88 155,576 (18,075) (1,616) 135,973
Sale of common stock, net................. 739 7 23,159 -- -- 23,166
Common stock issued in acquisitions....... 399 4 16,098 -- -- 16,102
Retirement of treasury stock.............. (104) (1) (1,615) -- 1,616 --
Net loss.................................. -- -- -- (42,572) -- (42,572)
----- --- -------- -------- ------- --------
BALANCE, August 31, 2000.................... 9,836 $98 $193,218 $(60,647) $ -- $132,669
===== === ======== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-5
<PAGE> 50
GERALD STEVENS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(42,572) $(12,307) $(2,268)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income tax (benefit) expense................... -- 2,182 (682)
Depreciation and amortization........................... 9,883 3,602 882
Gain on sale of businesses, property and equipment...... (2,387) -- --
Impairment of long-lived assets......................... 28,553 -- --
Compensation expense under stock option plan............ -- 1,373 76
Provision for doubtful accounts......................... 394 191 127
Changes in assets and liabilities, net of acquisitions:
Accounts receivable.................................. (842) (1,714) (115)
Inventories.......................................... (2,887) (102) --
Prepaid and other current assets..................... (2,968) 855 (649)
Other assets......................................... (2,140) 52 262
Accounts payable..................................... (4,417) (2,892) 582
Accrued liabilities.................................. (970) 4,853 644
Deferred revenue..................................... (156) (388) --
Other long-term liabilities.......................... 676 (705) --
-------- -------- -------
Net cash used in operating activities.............. (19,833) (5,000) (1,141)
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (16,542) (6,830) (1,382)
Collection of amounts due from former owners of acquired
subsidiary.............................................. -- 1,300 --
Net proceeds from sale of property and equipment.......... 4,706 -- --
Payments for acquisitions, net of cash acquired........... (22,448) (74,933) (1,500)
Investment in common stock................................ -- -- (100)
-------- -------- -------
Net cash used in investing activities.............. (34,284) (80,463) (2,982)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from credit facility............................. 121,425 52,780 --
Payment of credit facility................................ (89,790) (48,490) --
Proceeds from issuance of long-term debt.................. -- -- 2,500
Payments on long-term debt................................ (3,859) (2,798) (482)
Proceeds from issuance of common stock, net............... 23,166 77,946 5,184
Receipts from stock subscription receivables.............. -- 4,183 --
Purchase of treasury stock................................ -- -- (178)
Payment of credit facility commitment fees................ -- (704) (20)
-------- -------- -------
Net cash provided by financing activities.......... 50,942 82,917 7,004
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents...................................... (3,175) (2,546) 2,881
CASH AND CASH EQUIVALENTS, beginning of year................ 4,602 7,148 4,267
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year...................... $ 1,427 $ 4,602 $ 7,148
======== ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2,225 $ 574 $ 53
======== ======== =======
Cash paid for income taxes................................ $ 346 $ 451 $ 82
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Common stock, options and warrants issued in
acquisitions............................................ $ 16,102 $ 56,211 $ 500
======== ======== =======
Subscription receivable................................... $ -- $ -- $(4,183)
======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE> 51
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Gerald Stevens, Inc. ("Gerald Stevens", the "Company", or "We") is 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 over 300 retail
locations across the country.
OPERATING LOSSES & RECENT DEVELOPMENTS
For the years ended August 31, 2000, 1999 and 1998, we experienced net
losses of approximately $42.6 million, $12.3 million and $2.3 million,
respectively, and required net cash to fund our operations of approximately
$19.8 million, $5.0 million and $1.1 million, respectively. As of August 31,
2000, we had a working capital deficiency of approximately $3.1 million and had
no availability on our revolving credit facility.
Subsequent to August 31, 2000, on November 6, 2000, we entered into an
agreement to amend our revolving credit agreement with our primary lender. As
further discussed in Note 5, the amendment provides us with a new $7.0 million
working capital line of credit through February 28, 2001 to fund seasonal cash
requirements. Repayment of borrowings under the new line is required by February
28, 2001. The amendment also eliminates $16 million in scheduled reductions,
which were previously to occur in the second and third quarters of fiscal 2001,
until June 30, 2002. Borrowings under the amended agreement are secured by all
of our current and future assets, including a pledge of the stock of each
subsidiary.
As of November 27, 2000, $3.1 million in borrowings were drawn on the new
$7.0 million working capital line. During the remainder of the second quarter of
fiscal 2001, we expect to draw the remainder of the availability to position
ourselves for expected increased business during the Christmas holidays and on
Valentine's Day.
Our fiscal 2000 loss from operations was primarily due to lower than
expected revenue, less effective than expected national advertising programs and
higher labor costs. In order to improve revenue, we have implemented sales
incentives and training programs designed to increase our average sale. We have
shifted responsibility for retail advertising from a centralized group at our
corporate headquarters to individual markets and believe that we will improve
revenue as a result of this locally focused advertising. Additionally, we
believe the date of Easter and the day of the week on which Valentine's Day
falls in fiscal 2001 are more favorable as compared to fiscal 2000.
We have reduced retail headcount and implemented a labor scheduling process
in our retail operations to help insure that labor costs are in proportion with
revenue. We believe that our new retail management team will be able to focus on
the implementation of each initiative to improve market profitability as new
acquisitions have been suspended in the near-term. Additionally, we have
significantly reduced personnel, technology and other general and administrative
costs at our corporate headquarters in order to align our organization and cost
structure with the size and scope of the business we currently own and operate.
We believe that the working capital line of credit will allow us to meet
our expected obligations through the beginning of our strong seasonal period. We
believe that, by implementing our near-term strategy to improve the
profitability of each of our markets through the initiatives described above, we
will generate sufficient cash flows from operating activities to meet the
ongoing cash requirements of our existing business over the next 12 months.
Specifically, we believe that funds generated from operations during the second
quarter of fiscal 2001 will be sufficient to repay amounts then outstanding on
our $7.0 million working capital line by February 28, 2001 as well as provide
the necessary working capital to
F-7
<PAGE> 52
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
position ourselves for the expected increased business during the third quarter
of fiscal 2001 associated with Easter, Secretary's Day and Mother's Day.
Moreover, we expect to generate sufficient positive net cash from operations in
the third quarter of fiscal 2001 to fund our expected net operating cash
requirements during the fourth quarter of fiscal 2001, which is traditionally a
slow quarter in the retail floral business. However, these initiatives may not
be successful in generating the required cash flows.
Other than our existing credit facility, we have no current arrangements
for additional financing. In the event that we cannot generate sufficient cash
flows from operating activities, we would be required to obtain additional bank
financing or sell assets. We may not be able to negotiate additional bank
financing on terms acceptable to us. Additionally, it is possible that assets
may be sold at prices lower than their current carrying amount, or that certain
long-lived assets may be deemed to be impaired, thereby requiring losses to be
recognized in the financial statements of future periods.
On July 5, 2000, the Nasdaq Stock Market advised us that it may delist our
common stock from trading on or about October 3, 2000 if the minimum bid price
of our common stock does not equal or exceed $1.00 for a minimum of ten
consecutive trading days. We filed an appeal and a request for a hearing in
connection with Nasdaq's decision to delist our common stock from trading on the
Nasdaq National Market. A hearing was held on November 2, 2000 and the appeal
remains pending. We have filed applications for quotation of our common stock on
the Nasdaq SmallCap Market or the American Stock Exchange. Our common stock does
not currently satisfy the requirements for listing on either the Nasdaq SmallCap
Market or the American Stock Exchange and we may not receive listing approval
from either market after reviewing any application we submit.
On November 14, 2000, we effected a 1-for-5 reverse split of the
outstanding shares of our common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect this reverse stock split.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Principal estimates and assumptions include, but are not limited to,
allowances for doubtful accounts, inventory reserves, self-insurance reserves
and the period of realization for goodwill and property and equipment.
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, 2000 and 1999, cash and cash equivalents included $1.4 million and $4.2
million, respectively, of interest bearing cash. Also included in cash and cash
equivalents as of August 31, 1999, was $224,000 of restricted cash relating to
Gerald Stevens' credit card processing agreement with its sponsoring bank. There
was no restricted cash as of August 31, 2000.
F-8
<PAGE> 53
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts for the Company's cash and cash equivalents, accounts
receivable, notes payable, accounts payable, accrued liabilities and long-term
debt are reflected in the consolidated financial statements at cost, which
approximates fair value.
INVENTORIES
Inventories are stated at lower of cost or market, with cost determined
principally by the first-in, first-out (FIFO) basis using the retail method. We
believe that the FIFO retail method provides adequate information for the
operation of our business in a manner consistent with the method used widely in
the retail industry.
We had net inventories at August 31, 2000 and 1999 of $13.7 million and
$8.5 million, respectively, including reserves for obsolescence and shrink of
$603,000 and $300,000 at August 31, 2000 and 1999, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Gerald Stevens to a
concentration of credit risk consist primarily of accounts receivable.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the Company's large number of repeat customers throughout the
United States. A portion of receivables are related to balances owed by major
credit card companies. The timing of the related cash realization and fees
accrued are determined based upon agreements with these companies. Allowances
relating to accounts receivable have been recorded based upon previous
experience and other relevant factors, in addition to management's periodic
evaluation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major renewals and improvements
are capitalized; maintenance and repairs are charged to expense as incurred.
Gain or loss on disposition of property and equipment is recorded at the time of
disposition. On September 1, 1998, Gerald Stevens adopted the provisions of
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which governs the accounting
for costs incurred in connection with developing or obtaining software for
internal use.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets, generally 30 years for buildings,
3 to 10 years for furniture, fixtures, and equipment, and 3 to 5 years for
vehicles, computer hardware, software and communication systems. Leasehold
improvements are amortized over the lesser of useful lives or lease terms.
F-9
<PAGE> 54
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill.................................................... $153,653 $126,999
Other....................................................... 5,194 4,926
-------- --------
158,847 131,925
Less: Accumulated amortization.............................. (6,704) (2,028)
-------- --------
$152,143 $129,897
======== ========
</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 (See Note 2). Included in goodwill for both periods is $2.0
million from an acquisition prior to October 31, 1970, which is not required to
be amortized. Otherwise, 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.
Other intangible assets represent primarily contractual rights related to
customer lists, telephone numbers and yellow page advertisements that were
acquired by the Company from floral businesses that have discontinued their
operations. Other intangible assets are amortized over periods ranging from 5 to
10 years.
Amortization expense related to goodwill and other intangible assets was
$5.0 million, $2.0 million, and $63,000 for the years ended August 31, 2000,
1999, and 1998, respectively.
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, we periodically analyze the carrying value of our store-level
goodwill and other intangible assets to assess the recoverability from future
operations using estimated undiscounted cash flow projections. In fiscal 2000,
we also analyzed the carrying value relative to the selling price of businesses
we have sold or expect to sell in the first quarter or second quarter of fiscal
2001. As a result, we recorded a permanent impairment charge for goodwill and
other intangible assets of $19.5 million in the quarter ended August 31, 2000.
This charge consists of $15.5 million relating to ongoing businesses based on
estimated undiscounted cash flow projections and $4.0 million relating to
businesses we have sold or expect to sell. Earnings in future years could be
materially adversely affected if management later determines either that the
remaining goodwill or other intangible asset balances are impaired or that a
shorter amortization period is applicable.
DEFERRED FINANCING COSTS
Deferred financing costs, net of accumulated amortization, were $1.9
million and $657,000 at August 31, 2000 and 1999, respectively. These costs are
included in other assets and relate to amounts incurred in connection with
amendments to our bank credit facilities. Amortization is included in interest
expense ($0.3 million and $55,000 in fiscal 2000 and 1999, respectively) and is
recorded on a straight-line basis over the term of the financing agreement,
which closely approximates the interest method.
F-10
<PAGE> 55
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue from sales of products, delivery fees, and order generation
commissions and fees are recognized at the time of product delivery. Revenue
from wire service and credit card processing dues and fees are recognized at the
time that services are provided. Payments received from customers in advance of
product delivery are recorded as deferred revenue, which is classified within
the current liabilities section of the consolidated balance sheets.
STOCK-BASED COMPENSATION
We account for stock-based awards to employees using the intrinsic value
method. Accordingly, compensation cost for stock options issued is measured as
the excess, if any, of the fair value of the Company's common stock at the date
of grant over the exercise price of the options. This compensation cost is
recognized over the period of performance or the vesting period. The pro forma
net earnings (loss) per common share amounts as if the fair value method had
been used are presented in Note 8.
ADVERTISING COSTS
Yellow page advertising costs are expensed on a straight-line basis over
the life of the directory, which is generally one year. Internet portal
advertising costs are expensed on a straight-line basis over the term of the
portal agreement. The costs of producing and distributing mail order catalogs
are capitalized and amortized proportionately over the period that catalog sales
are expected to be generated. All other advertising costs are expensed at the
time the advertisement is first shown. Advertising expense totaled $27.5
million, $11.7 million and $1.4 million in the years ended August 31, 2000, 1999
and 1998, respectively.
INCOME TAXES
We account 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.
SEASONALITY
The floral industry has historically been seasonal, with higher revenue
generated during holidays such as Christmas, Valentine's Day, Easter and
Mother's Day. Given the importance of holidays to the floral industry, a change
in the date (in the case of a "floating" holiday such as Easter) or day of the
week on which a holiday falls may also have a substantial impact on our
business. During the summer and fall months, floral retailers tend to experience
a decline in revenue. As a result, Gerald Stevens currently expects the period
from June through November (encompassing our fourth and first fiscal quarters)
to be periods of lower revenue and unprofitable operations. In addition, the
floral industry is affected by economic conditions and other factors, including,
but not limited to, competition and weather conditions that impact other retail
businesses.
SEGMENTS
We have adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, for the year ended August 31, 1999. The Statement
requires management approach to report
F-11
<PAGE> 56
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company management.
See Note 13.
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, 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. Comprehensive loss is equal to net
loss for all periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB Statement No. 133. SFAS No. 137 defers for one year
the effective date of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. As a result, SFAS No. 133 applies to all fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended by SFAS
No. 138, requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. The Company will adopt SFAS No. 133 as required for its first
quarterly filing of fiscal year 2001. The adoption of SFAS No. 133 is not
expected to have a material effect on the financial statements of the Company,
as we currently have no derivatives.
On December 3, 1999, the staff of the SEC published Staff Accounting
Bulletin 101, "Revenue Recognition," ("SAB 101") to provide guidance on the
recognition, presentation and disclosure of revenue in financial statements. SAB
101 will be effective for the Company during the three months ended November 30,
2000. Specific items discussed in SAB 101 include bill-and-hold transactions,
long-term service transactions, refundable membership fees, contingent rental
income, up-front fees when the seller has significant continuing involvement and
the amount of revenue recognized when the seller is acting as a sales agent or
in a similar capacity. SAB 101 also provides guidance on disclosures that should
be made for revenue recognition policies and the impact of events and trends on
revenue. The adoption of SAB 101 is not expected to have a material effect on
the financial statements of the Company, as we believe our revenue recognition
policies are in conformity with SAB 101.
In March 2000, the Emerging Issues Task Force (the "EITF") reached a
consensus on Issue No. 00-2, Accounting for Web Site Development Costs ("EITF
Issue No. 00-2"), which applies to all web site development costs incurred for
quarters beginning after June 30, 2000. The consensus states that the accounting
for specific web site development costs should be based on a model consistent
with AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Accordingly, certain web site
development costs that are currently expensed as incurred may be capitalized and
amortized. EITF Issue No. 00-2 will be effective for the Company during the
three months ended November 30, 2000. The adoption of EITF Issue No. 00-2 is not
expected to have a material effect on the financial statements of the Company.
In May 2000, the EITF reached a consensus on Issue No. 00-14, "Accounting
for Certain Sales Incentives," ("EITF Issue No. 00-14") which addresses the
recognition, measurement, and income statement classification for sales
incentives offered by vendors to customers. The Company adopted EITF Issue No.
00-14 during the three months ended August 31, 2000. Sales incentives within the
scope of this Issue include offers that can be used by a customer to receive a
reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is
F-12
<PAGE> 57
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
offered. The consensus also states that when recognized, the reduction in or
refund of the selling price should be classified as a reduction of revenue.
However, if the sales incentive is a free product or service delivered at the
time of sale the cost should be classified as an expense. The adoption of EITF
Issue No. 00-14 did not have a material effect on our financial statements.
2. ACQUISITIONS
In April 30, 1999, we completed a merger with Gerald Stevens Retail, Inc.
("Gerald Stevens Retail"). 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, we issued 5.6 million shares of 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.
Accordingly, our consolidated financial statements give retroactive effect to
the merger. Details of the separate results of operations of Gerald Stevens and
Gerald Stevens Retail prior to the merger are as follows:
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED YEAR ENDED
APRIL 30, 1999 AUGUST 31, 1998
------------------ ---------------
<S> <C> <C>
Revenue:
Gerald Stevens, as previously reported.............. $11,638 $16,221
Gerald Stevens Retail............................... 48,860 --
------- -------
$60,498 $16,221
======= =======
Net loss:
Gerald Stevens, as previously reported.............. $(4,257) $ (623)
Gerald Stevens Retail............................... (3,014) (1,645)
------- -------
$(7,271) $(2,268)
======= =======
</TABLE>
From October 1, 1998 through August 31, 1999 we acquired 69 retail florist
businesses with 231 stores located in 28 markets throughout the United States
for aggregate consideration of $98.7 million, consisting of $66.8 million in
cash and 1,412,187 shares of our common stock valued at share prices ranging
from $17.60 per share to $76.50 per share. Previously, in July 1998, the Company
had purchased letter of intent rights totaling $1.5 million related to 8 of
these retail florist businesses. These costs were subsequently allocated as an
additional component of the cost of acquiring these businesses. Additionally, in
October 1998, we acquired AGA Flowers, Inc., a floral import business located in
Miami, Florida for total consideration of $2.9 million, consisting of $1.5
million in cash and 83,416 shares of our common stock valued at $17.60 per
share.
In March 1999, we acquired National Flora, Inc., a floral order generation
business, for aggregate consideration of $19.7 million, consisting of $10.0
million in cash and 310,500 shares of our common stock valued at $31.50 per
share.
In July 1999, we acquired Calyx & Corolla, Inc., a catalog and
Internet-based floral order generation business for aggregate consideration of
$11.6 million, consisting of approximately $0.1 million in cash, 186,891 shares
of our common stock valued at $54.00 per share, and the assumption of stock
option and warrant obligations which converted into rights to acquire 30,417
shares of our common stock at share exercise prices ranging from $1.80 per share
to $47.20 per share.
F-13
<PAGE> 58
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended August 31, 2000, we acquired an additional 88 retail
florist businesses located in existing markets and seven new markets for
aggregate consideration of $36.7 million, consisting of $20.5 million in cash
and 398,912 shares of our common stock valued at share prices ranging from
$27.15 to $57.65 per share.
All of the acquisitions discussed in the preceding paragraphs were
accounted for as business combinations under the purchase method of accounting
and are included in our consolidated financial statements from the date of
acquisition.
During the years ended August 31, 1999 and 2000, we also acquired certain
intangible assets related to floral businesses that discontinued their
operations. The acquired intangible assets are principally customer lists,
telephone numbers and yellow page advertising contractual rights. Aggregate
consideration paid for all such intangible asset acquisitions during the year
ended August 31, 1999 was $4.5 million, consisting of $2.8 million in cash and
31,965 shares of our common stock at a share price of $50.70 per share.
Aggregate consideration paid for intangible asset acquisitions during the year
ended August 31, 2000 was $0.2 million in cash.
Our strategic plan contemplated the closing or relocation of a number of
our acquired retail stores within each of our targeted market areas. Assessments
of which retail stores to close or relocate for all acquisitions consummated
prior to August 31, 1999 were completed as of May 31, 2000. As a result of these
assessments, additional purchase liabilities of $1.6 million and $1.3 million
for fiscal 1999 and 2000, respectively, were recorded and included in accrued
liabilities as of August 31, 2000. These liabilities relate to costs associated
with the closing and consolidation of certain acquired retail stores
(considering existing contractual lease obligations and management's estimate of
future operating lease costs).
During the fourth quarter of fiscal 2000, we reassessed our strategic
objectives and announced plans to significantly slow the pace of expansion of
our business over the next 12 to 18 months compared to our previous plans. This
change in strategy included a reassessment of our market development plans and
resulted in a significant reduction in the number of stores initially identified
for closure or relocation. Therefore the additional purchase liability and
goodwill were reduced by $1.6 million. The following table summarizes the closed
store liability activity for the year ended August 31, 2000:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Balance at August 31, 1999.................................. $ 1,632
Additional purchase liability recorded during the twelve
months ended August 31, 2000........................... 1,346
Cash payments for the twelve months ended August 31,
2000................................................... (367)
Adjustments............................................... (1,558)
-------
Balance at August 31, 2000.................................. $ 1,053
=======
</TABLE>
The preliminary purchase price allocation for business acquired in the year
ended August 31, 2000 under the purchase method of accounting is as follows:
<TABLE>
<CAPTION>
AUGUST 31, 2000
---------------
(IN THOUSANDS)
<S> <C>
Tangible assets (includes cash acquired of $389)............ $ 6,928
Intangible assets........................................... 41,833
Liabilities................................................. (12,101)
--------
$ 36,660
========
</TABLE>
F-14
<PAGE> 59
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results of operations, assuming each of the acquisitions
described above was consummated as of the beginning of the periods presented,
are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
--------------------
(UNAUDITED)
2000 1999
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $290,828 $297,337
======== ========
Net income (loss)........................................... $(41,302) $ 1,096
======== ========
Diluted net income (loss) per share......................... $ (4.37) $ 0.12
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land, building and leasehold improvements................... $ 7,077 $ 8,502
Furniture, fixtures and equipment........................... 8,167 3,497
Computer hardware and software.............................. 8,401 6,036
Communication systems....................................... 1,526 1,526
Vehicles.................................................... 960 925
------- -------
26,131 20,486
Less: Accumulated depreciation and amortization............. (8,276) (4,533)
------- -------
$17,855 $15,953
======= =======
</TABLE>
Computer software costs of $8.3 million and $2.8 million were capitalized
during the years ended August 31, 2000 and 1999, respectively. Depreciation and
amortization expense related to property and equipment was $4.8 million, $1.6
million and $0.8 million, for the years ended August 31, 2000, 1999 and 1998,
respectively. The reduction in land, building and leasehold improvements was the
result of sale-leaseback transactions completed in the fourth quarter of fiscal
2000. For the year ended August 31, 2000, we also recorded an impairment charge
of $9.1 million, consisting primarily of assets associated with our catalog
business, as well as, development costs for our retail point-of-sale system,
which we have abandoned due to the high cost of deployment and our cash flow
constraints. We are considering lower cost alternatives, including point-of-sale
systems currently used in some of our retail stores.
F-15
<PAGE> 60
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Salaries and benefits....................................... $ 3,673 $ 3,787
Wire service................................................ 2,750 3,104
Advertising................................................. 2,000 --
Store closure costs......................................... 1,053 1,632
Taxes -- non payroll/non income............................. 1,292 669
Acquired business consideration............................. 1,895 1,459
Insurance................................................... 872 448
Financing costs............................................. 1,680 400
Other....................................................... 3,671 4,068
------- -------
$18,886 $15,567
======= =======
</TABLE>
5. DEBT
NOTES PAYABLE
Notes payable at August 31, 2000 and 1999 were $0.3 million and $2.0
million, respectively. Notes payable at August 31, 2000 consists principally of
mortgage notes and vehicle, equipment, and leasehold improvement installment
notes assumed by the Company in connection with acquisitions completed during
the latter part of the fiscal year. Our general practice is to pay these notes
in full following the close of acquisitions.
LONG-TERM DEBT
In September, 1998, Gerald Stevens Retail entered into a revolving credit
agreement with a bank whereby such 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. In June 1999,
Gerald Stevens Retail and its primary lender amended and restated their existing
$40.0 million revolving credit agreement and Gerald Stevens, the parent of
Gerald Stevens Retail, agreed to guarantee payment of all obligations under the
amended and restated agreement and terminated their existing $5.0 million line
of credit. Additionally, the term was extended to June 3, 2002. On July 31,
2000, we entered into Amendment Agreement No. 2 to Amended and Restated Credit
Agreement with our primary lender. The amendment reduced the line of credit to
$36.0 million, increased the interest rates, and amended the financial
covenants. Outstanding borrowings were $36.0 million at August 31, 2000.
On November 6, 2000, we entered into Amendment Agreement No. 3 to Amended
and Restated Credit Agreement with our primary lender. The amendment provides a
new $7.0 million working capital line of credit through February 28, 2001 to
fund seasonal cash requirements, at which date repayment is required. The
amendment also eliminates $16.0 million in scheduled reductions to our $36.0
million revolving credit facility, which were previously to occur in the second
and third quarters of fiscal 2001, until June 30, 2002 and relaxes certain
financial covenants. Borrowings under the amended and restated credit agreement
are secured by all of our current and future assets, including a pledge of the
stock of each subsidiary.
All borrowing under the amended and restated credit agreement will bear
interest at a base rate of prime, plus 2%, payable monthly in arrears. At
November 6, 2000, outstanding borrowings under the
F-16
<PAGE> 61
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revolving credit facility were $36.0 million, including $11.0 million in base
rate borrowing at prime plus 2% and $25.0 million in three Libor notes bearing
interest at a weighted average of 10.14%. Each Libor note terminates in December
2000, when they will convert to base rate borrowings in accordance with
Amendment No. 3.
The amended and restated agreement also requires mandatory prepayments in
the event of asset sales or equity offerings subsequent to November 6, 2000.
Mandatory prepayments are required at 100% of the first $10.0 million of net
proceeds from asset sales; 0% of the next $5.0 million; 100% of the next $13.0
million and 80% thereafter; and 75% of the net proceeds from any equity
offering. These prepayments will first permanently reduce the working capital
line of credit, then the revolving credit facility. Through November 16, 2000,
we made mandatory prepayments of $0.6 million from net proceeds received from
asset sales.
The amended and restated agreement also requires us to meet minimum
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) thresholds. We must generate consolidated EBITDA of $7.2 million in the
three months ending February 28, 2001; $14.0 million in the six months ending
May 31, 2001; $13.2 million in the nine months ending August 31, 2001; and $13.8
million in any four quarter period ending on or after November 30, 2001.
Additionally, our capital expenditures cannot exceed $0.5 million in any fiscal
quarter, provided that we may spend up to $3.8 million for the acquisition and
implementation of a standardized point-of-sale and management information
system. All other prior financial covenants have been eliminated.
In connection with Amendment Agreement No. 3, we issued three-year warrants
for 10% of our common stock on a diluted basis at an exercise price of $.01 per
share. If we repay all borrowings under the credit agreement prior to June 30,
2001, 75% of the warrants will terminate, and if we repay all borrowings prior
to December 31, 2001, 50% of the warrants will terminate. Pursuant to a
participation agreement, three members of management were required to
participate in $1.0 million of the $7.0 million working capital line and
received a proportionate share of the warrants. The fair market value of the
warrants, estimated using a Black-Scholes option pricing model, will be
amortized to interest expense over the term of the facility beginning in
November 2000.
6. INCOME TAXES
The provision (benefit) for income taxes for the years ended August 31,
2000, 1999 and 1998 consists of the following:
<TABLE>
<CAPTION>
2000 1999 1998
---- ------ -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $ -- $ -- $ --
State..................................................... 472 145 --
---- ------ -----
472 145 --
---- ------ -----
Deferred:
Federal................................................... -- 1,971 (616)
State..................................................... -- 211 (66)
---- ------ -----
-- 2,182 (682)
---- ------ -----
Income tax provision (benefit).............................. $472 $2,327 $(682)
==== ====== =====
</TABLE>
F-17
<PAGE> 62
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the United States federal statutory tax rate to our
effective tax rate is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax benefit at statutory rate..................... $(14,314) $(3,393) $(1,067)
Non-deductible goodwill amortization..................... 6,215 312 3
Non-deductible merger costs.............................. -- 1,497 --
Increase in valuation allowance.......................... 8,099 1,588 478
Utilization of net operating losses...................... -- 2,182 --
State income taxes, net of federal tax benefit........... 472 145 (47)
Other, net............................................... -- (4) (49)
-------- ------- -------
Total provision................................ $ 472 $ 2,327 $ (682)
======== ======= =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
our net deferred income tax asset are as follows:
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Reserves.................................................... $ 148 $ 805
Accrued liabilities and other............................... 516 610
Depreciation and amortization............................... 645 162
Net operating losses........................................ 12,938 4,502
General business credits.................................... 90 101
Basis difference in intangible assets....................... 746 804
-------- -------
15,083 6,984
Valuation allowance......................................... (15,083) (6,984)
-------- -------
Net deferred income tax asset............................. $ -- $ --
======== =======
</TABLE>
SFAS No. 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.
Due to the uncertainty of our ability to generate sufficient taxable income in
the future, we have fully reserved our net deferred tax assets. At August 31,
2000 and 1999, the valuation allowance was $15.1 million and $7.0 million,
respectively, and is necessary as we believe that our net deferred tax asset
will not be realized. This represents a change in the valuation allowance for
the current year of $8.1 million.
As of August 31, 2000, Gerald Stevens has available net operating loss
carryforwards of $34.4 million which expire at various dates beginning from 2004
through 2020.
7. STOCKHOLDERS' EQUITY
On November 14, 2000, we effected a 1-for-5 reverse split of the
outstanding shares of our common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect this reverse stock split.
On January 28, 1997, the Company's stockholders approved an increase in the
number of shares of authorized common stock from 3,600,000 to 14,000,000. On
April 30, 1999, the Company's stockholders approved an increase in the number of
shares of authorized common stock from 14,000,000 to 50,000,000.
F-18
<PAGE> 63
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1998, in connection with the initial capitalization of Gerald
Stevens Retail, a total of 2,572,658 shares of common stock were issued to
various founding shareholders for total consideration of $9.3 million, with
proceeds totaling $5.1 million received in fiscal 1998 and $4.2 million in stock
subscription balances received at the beginning of fiscal 1999. In August 1998,
we also issued 128,400 shares of our common stock valued at $0.5 million in
connection with the acquisition of a business whose assets consisted solely of
rights to acquire 33 retail florist businesses under non-binding letters of
intent with the owners of those businesses. Additionally, during the year ended
August 31, 1998, we issued a total of 39,200 shares of our common stock for
total consideration of $29,000 in connection with the exercise of stock options
and warrants.
During the year ended August 31, 1999, we issued 1,243,908 shares of our
common stock in private placement transactions for total consideration of $21.1
million, net of placement fees and expenses. In July 1999, we sold 1,000,000
shares of our common stock in a public equity offering for total consideration
of $55.2 million, net of underwriting discounts and expenses. Additionally, a
total of 142,461 shares of common stock were issued for total consideration of
approximately $1.6 million in connection with the exercise of stock options and
warrants during this same period.
From October 1, 1998 to August 31, 1999, we issued 2,024,959 shares of our
common stock with an aggregate value of $54.8 million to fund the non-cash
portion of the total consideration for acquisitions completed during the period.
Options and warrants issued in connection with the acquisition of Calyx &
Corolla, Inc. resulted in additional consideration of $1.4 million based on the
fair value of such options and warrants at the closing date.
During the year ended August 31, 2000, we issued 398,912 shares of our
common stock with an aggregate value of $16.1 million to fund the non-cash
portion of the total consideration for acquisitions completed during the period.
Additionally, a total of 87,870 shares of common stock were issued for total
consideration of $1.2 million in connection with stock options and warrants
exercised during this same period. In March 2000, we issued 651,400 shares of
our common stock in a private placement transaction for total consideration of
$22.0 million net of fees and expenses and retired 103,995 shares of our
treasury stock, which had a carrying value of $1.6 million at that time.
As a result of the merger with Gerald Stevens Retail, we recorded
compensation expense and additional paid-in-capital of approximately $1.4
million in connection with the vesting of certain non-plan options.
8. STOCK OPTIONS AND WARRANTS
The Company has a 1996 Nonemployee Directors' Stock Option Plan ("Director
Plan") and a Management Incentive Stock Plan ("Management Plan"), which were
adopted by the Board of Directors in 1995 and approved by the shareholders in
1996. In 1998 and 2000, the Company approved two additional stock option plans
("1998 Plan" and "2000 Plan"). The Director Plan, Management Plan, 1998 Plan and
2000 Plan are collectively referred to as the "Plans." Under the Plans, the
Company has granted options to certain directors, officers and key employees to
purchase shares of the Company's common stock at a price equal to the fair
market value of the common stock at the date of the grant. Generally, options
have a term of ten years and vest (i) under the Director Plan, 100%, six months
after issuance, (ii) under the Management and 2000 Plans, 25% upon issuance with
additional vesting of 25% after each year of continuous employment, or, in
increments of 25% per year over a four-year period on the first anniversary of
the grant date and (iii) under the 1998 Plan, in increments of 25% per year over
a four-year period beginning on the first anniversary of the grant date.
On June 25, 1997, the Board of Directors granted options for the purchase
of 61,000 shares of common stock at fair market value to officers and key
employees of Gerald Stevens at an exercise price of
F-19
<PAGE> 64
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$20.00 per share. These options vest in 25% increments when the market price of
Gerald Stevens' common stock reaches $25.00, $37.50, $50.00 and $62.50 per
share, respectively, for twenty consecutive trading days. As of August 31, 1999,
all options had vested and were exercisable. As a result, compensation expense
of $1.4 million and $76,000 was recorded for the years ended August 31, 1999 and
1998, respectively.
In connection with the acquisition of Calyx & Corolla, Inc. the Company
assumed Calyx & Corolla options that converted into rights to purchase Gerald
Stevens common stock. Subsequent to the acquisition, no additional options may
be issued under the Calyx & Corolla plans.
A summary of the status of the Company's stock-based compensation plans as
of the end of the 2000, 1999 and 1998 fiscal years, and changes during the
fiscal years then ended is presented below:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year....................... 409,296 $22.10 231,800 $13.55 177,600 $14.25
Granted...................... 505,720 11.05 263,055 27.60 56,500 11.10
Assumed in the acquisition of
Calyx and Corolla, Inc..... -- -- 27,453 9.85 -- --
Exercised.................... (68,293) 16.25 (109,850) 14.15 (2,200) 9.10
Forfeited.................... (78,735) 18.30 (3,162) 14.20 (100) 7.05
-------- -------- -------
Outstanding, end of year..... 767,988 $15.75 409,296 $22.10 231,800 $13.55
======== ======== =======
Options exercisable.......... 207,944 104,579 112,000
======== ======== =======
</TABLE>
The following table summarizes information about stock options outstanding
under the Plans at August 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------------
AVERAGE WEIGHTED WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES AUGUST 31, 2000 LIFE PRICE AUGUST 31, 2000 PRICE
---------------- --------------- ----------- -------- --------------- ---------
(YEARS)
<S> <C> <C> <C> <C> <C>
$ 1.80 to $ 8.15 297,103 9.49 $ 6.15 42,769 $ 4.75
10.00 to 17.60 287,180 8.90 12.70 106,397 12.95
22.20 to 48.45 166,874 8.48 33.65 54,415 32.25
52.20 to 67.20 16,831 8.79 59.80 4,363 59.15
------- -------
$ 1.80 to $67.20 767,988 9.03 $15.75 207,944 $17.30
======= =======
</TABLE>
SFAS No. 123 requires pro forma information regarding net income and
earnings per share to be presented as if we had accounted for our employee stock
options granted subsequent to December 31, 1994 under the fair value method. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2000, 1999 and 1998: risk-free interest rates from 4.2% to 7.5%;
dividend yield of zero; volatility factors of 50% prior to 1998, 60% for 1998,
70% for 1999 and 80% for 2000; and weighted-average expected lives of the
options from five to six years.
F-20
<PAGE> 65
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' expected term to exercise.
Gerald Stevens' pro forma information required under SFAS No. 123 is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net loss:
As reported........................................... $(42,572) $(12,307) $(2,268)
Pro forma............................................. (44,587) (13,655) (2,617)
Diluted loss per share:
As reported........................................... $ (4.57) $ (1.75) $ (1.32)
Pro forma............................................. (4.79) (1.94) (1.52)
</TABLE>
In connection with the acquisition of Calyx & Corolla, Inc., the Company
assumed Calyx & Corolla warrants that converted into rights to acquire 2,963
shares of Gerald Stevens common stock at an exercise price of $47.20 per share.
During fiscal year 1998, 43,800 warrants were exercised in a cashless exercise,
as allowed in the warrant agreement for 35,200 shares of common stock.
Additionally, 1,800 warrants were exercised for total proceeds of $9,000. During
fiscal year 1999, 32,611 warrants were exercised for total proceeds of $163,000.
During fiscal year 2000, 19,577 warrants were exercised for total proceeds of
$97,882. Warrants assumed in the Calyx & Corolla acquisition expired on July 16,
2000. At August 31, 2000 and 1999, Gerald Stevens had 28,397 and 50,936 warrants
outstanding, respectively, all of which are currently exercisable. All remaining
warrants expire on January 1, 2001.
In connection with Amendment No. 3 to Amended and Restated Credit Agreement
with our primary lender, we issued three-year warrants for 10% of our common
stock on a diluted basis at an exercise price of $.01 per share. If we repay all
borrowings under the credit agreement prior to June 30, 2001, 75% of the
warrants will terminate, and if we repay all borrowings prior to December 31,
2001, 50% of the warrants will terminate (see Note 5).
9. LOSS PER SHARE
The components of basic and diluted loss per share are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
AUGUST 31,
---------------------
2000 1999 1998
----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Basic average shares outstanding............................ 9,314 7,029 1,717
Common stock equivalents.................................... -- -- --
----- ----- -----
Diluted average shares outstanding.......................... 9,314 7,029 1,717
===== ===== =====
Common stock equivalents not included in the calculation of
diluted loss per share because their impact is
antidilutive.............................................. 797 460 313
===== ===== =====
</TABLE>
10. RELATED PARTY TRANSACTIONS
During fiscal 1998, Gerald Stevens purchased the land and buildings used
for its Vero Beach operations for approximately $0.7 million. The transaction
was financed with cash from operations. The property was previously leased from
a trust administered by a relative of the then current Chairman of the Board.
On May 7, 1998, we entered into a services agreement with a corporation
controlled by a member of our board of directors. This corporation provided
certain management services to the Company and
F-21
<PAGE> 66
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred certain expenses on our behalf, with the cost of such items reimbursed
us. Through May 31, 1999, a total of $0.9 million was paid for all such services
provided, as well as all expenses paid on our behalf and billed to us through
that date, which is included in selling, general, and administrative expenses in
the accompanying consolidated statement of operations. A total of $0.2 million,
representing expenses paid by this corporation on our behalf, is accrued and
included in accrued liabilities at August 31, 2000. The parties mutually agreed
to terminate the services agreement on May 31, 1999.
In connection with our acquisition of Royer's Flower Shops, we assumed five
leases that 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 we own and operate in central Pennsylvania. The aggregate annual
rent payable by us to Mr. and Mrs. Royer for the 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.
In September 2000, we sold four properties to a company controlled by our
Chairman of the Board for aggregate consideration of $2.0 million. We
simultaneously leased back one of such properties for a ten-year term at
$115,000 per year plus annual adjustments based on the consumer price index. We
believe the terms of these transactions are no less favorable than we could have
obtained from third parties for comparable retail space in the same market. We
also assigned to the purchaser company contracts with a third party to purchase
three of the properties, and we agreed to continue to market the fourth
property. We will receive any gain, and pay for any loss, resulting from any
sale of the properties to a third party pursuant to any contract signed prior to
December 31, 2000 (including the contracts assigned to the purchaser company).
In connection with Amendment No. 3 to Amended and Restated Credit Agreement
with our primary lender, we issued three-year warrants for 10% of our common
stock on a diluted basis at an exercise price of $.01 per share. If we repay all
borrowings under the credit agreement prior to June 30, 2001, 75% of the
warrants will terminate, and if we repay all borrowings prior to December 31,
2001, 50% of the warrants will terminate. Pursuant to a participation agreement,
three members of management were required to participate in $1.0 million of the
$7.0 million working capital line provided by the Amendment and received a
proportionate share of the warrants.
The Company also has a supply agreement with flower farms affiliated with
two of Gerald Stevens' stockholders as more fully described in Note 11.
11. COMMITMENTS AND CONTINGENCIES
LEASES
Noncancellable lease obligations of Gerald Stevens at August 31, 2000 call
for minimum annual lease payments under various operating leases for buildings,
vehicles and equipment as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2001........................................................ $14,227
2002........................................................ 12,138
2003........................................................ 9,774
2004........................................................ 6,453
2005........................................................ 3,518
Thereafter.................................................. 7,200
-------
$53,310
=======
</TABLE>
Total rent expense for fiscal years 2000, 1999, and 1998 was $13.9 million,
$4.0 million and $261,000, respectively.
F-22
<PAGE> 67
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLY AGREEMENT
On October 1, 1998, Gerald Stevens entered into a five-year supply
agreement with certain flower farms (the "Farms"). The agreement requires that
the Farms provide to Gerald Stevens a certain percentage of their flowers on a
consignment basis. The Farms must produce and deliver a minimum number of stems
for Gerald Stevens during the growing year commencing on October 1, and ending
on September 30. Each July, during the term of the agreement, the parties will
meet to establish the minimum stem obligation for each flower type 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.
BUSINESS COMBINATIONS
Gerald Stevens may be required to make additional payments of up to $0.8
million to the sellers of three of the businesses that it acquired. Because the
outcome of the contingencies underlying these payments are not yet determinable,
the payments have not been recorded as a component of the cost of these
acquisitions at August 31, 2000.
LITIGATION
There are various claims, lawsuits, and pending actions against Gerald
Stevens incident to the operations of its businesses. It is the opinion of
management, after consultation with counsel, that the ultimate resolution of
such claims, lawsuits and pending actions will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or liquidity.
12. RETIREMENT PLAN
During the 1998 and 1997 fiscal years, we sponsored a 401(k) retirement
plan covering all full-time employees who had completed one year of service.
Eligible employees could elect quarterly to contribute up to 15% of their
compensation, up to the maximum contribution allowed by law. We matched
contributions up to a maximum of 3% of compensation. This plan was terminated in
1999.
On December 1, 1998, we adopted a new 401(k) Plan, effective January 1,
1999. No employee participated in both plans simultaneously. All employees who
have met minimum age and length of service requirements are eligible to
participate. Employer matching contributions, which can be made at the
discretion of the plan's administrator, are in the form of cash or our common
stock with a value of up to fifty percent of the first 3% of compensation
contributed by the employee to the plan and generally require year-end
employment and 1,000 hours worked during the calendar year. An additional
contribution may be made at the discretion of the Company. In connection with
the matching contribution, our contribution in the 2000, 1999 and 1998 fiscal
years was $227,000, $232,000 and $41,000, respectively.
13. BUSINESS SEGMENTS
Gerald Stevens operates in two principal business segments: retail and
order generation. The Company's reportable segments are strategic business units
that offer different products and services. The Company evaluates the
performance of its segments based on revenue and operating income. The Company's
retail segment consists of our retail and import businesses. Our order
generation business consists primarily of Florafax, National Flora, Calyx &
Corolla and on-line businesses. Intersegment revenue is eliminated in
consolidation.
F-23
<PAGE> 68
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents financial information regarding the Company's
different business segments as of and for the years ended August 31:
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenue:
Retail........................................ $211,796 $ 83,971 $ --
Order generation.............................. 55,257 26,625 16,221
-------- -------- -------
$267,053 $110,596 $16,221
======== ======== =======
Operating income (loss):
Retail........................................ $ (3,977)(a) $ 5,102 $ --
Order generation.............................. (10,685)(b) 2,579 (873)
Corporate..................................... (27,534)(c) (17,101)(d) (2,203)
-------- -------- -------
$(42,196) $ (9,420) $(3,076)
======== ======== =======
Identifiable assets:
Retail........................................ $161,722 $117,177 $ --
Order generation.............................. 26,821 50,664 21,335
Corporate..................................... 17,287 5,182 --
-------- -------- -------
$205,830 $173,023 $21,335
======== ======== =======
Depreciation and amortization expense:
Retail........................................ $ 5,584 $ 2,146 $ --
Order generation.............................. 3,124 1,302 802
Corporate..................................... 1,175 154 80
-------- -------- -------
$ 9,883 $ 3,602 $ 882
======== ======== =======
Capital expenditures:
Retail........................................ $ 5,449 $ 1,705 $ --
Order generation.............................. 2,856 1,235 1,382
Corporate..................................... 8,237 3,890 --
-------- -------- -------
$ 16,542 $ 6,830 $ 1,382
======== ======== =======
</TABLE>
---------------
(a) Includes a charge for the permanent impairment of long-lived assets of
$9,400.
(b) Includes a charge for the permanent impairment of long-lived assets of
$12,912.
(c) Includes a charge for the permanent impairment of long-lived assets of
$6,241.
(d) Includes merger expenses of $4,642.
F-24
<PAGE> 69
GERALD STEVENS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue:
2000................................................ $49,204 $81,579 $83,735 $ 52,535
1999................................................ 13,223 26,772 36,287 34,314
1998................................................ 3,260 4,935 4,797 3,229
Operating income (loss)
2000................................................ $(3,902) $ 3,965 $(2,090) $(40,169)(a)
1999................................................ (402) (4,014) (792) (4,212)
1998................................................ 493 568 (2,714) (1,423)
Net income (loss)
2000................................................ $(4,299) $ 3,281 $(2,995) $(38,559)(a)
1999................................................ (333) (6,124) (1,229) (4,621)
1998................................................ 338 380 (1,446) (1,540)
Diluted income (loss) per share:
2000................................................ $ (0.50) $ 0.35 $ (0.30) $ (4.12)(a)
1999................................................ (0.05) (0.90) (0.15) (0.55)
1998................................................ 0.20 0.20 (0.90) (0.70)
</TABLE>
---------------
(a) Includes a charge for the impairment of long-lived assets of $28,553.
15. SUBSEQUENT EVENTS
Through November 22, 2000, we sold certain non-core assets for aggregate
net proceeds of $3.5 million, including four properties to a company controlled
by our Chairman of the Board as more fully discussed in Note 10 of these Notes
to Consolidated Financial Statements.
On November 6, 2000, we entered into Amendment No. 3 to Amended and
Restated Credit Agreement with our primary lender as more fully discussed in
Note 5 of these Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
On November 14, 2000, we effected a 1-for-5 reverse split of the
outstanding shares of our common stock. Accordingly, all data shown in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect this reverse stock split.
F-25
<PAGE> 70
------------------------------------------------------
------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............ (i)
Prospectus Summary.................... 1
Risk Factors.......................... 3
Use of Proceeds....................... 11
Price Range of Common Stock........... 11
Dividend Policy....................... 11
Selected Financial Data............... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 25
Management............................ 31
Executive Compensation................ 33
Certain Transactions.................. 35
Principal Stockholders................ 36
Selling Stockholders.................. 37
Description of Capital Stock.......... 38
Shares Eligible for Future Sale....... 38
Plan of Distribution.................. 39
Legal Matters......................... 40
Experts............................... 40
Where You Can Find More Information... 40
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
GERALD STEVENS, INC.
1,107,387 SHARES
COMMON STOCK
$.01 PAR VALUE
------------------------------------------------------
------------------------------------------------------
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of estimated expenses to be incurred by the Company
in connection with the registration of the shares of Common Stock registered
hereunder(1):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 194.48
Printing expenses........................................... 5,000.00
Legal fees and expenses..................................... 10,000.00
Accountants' fees and expenses.............................. 15,000.00
Miscellaneous............................................... 1,000.00
----------
Total............................................. $31,194.45
==========
</TABLE>
---------------
(1) Estimated except for SEC registration fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) The Florida Business Corporation Act permits a corporation to indemnify
a person who is a party to any proceeding by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is or was a
director, officer, employee or agent of another entity at the request of the
corporation. The indemnification may cover any liability incurred in connection
with such proceeding, including any appeal, if the person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
However, in connection with actions by or in the right of the corporation, such
indemnification is not permitted if such person has been adjudged liable to the
corporation unless the court determines that, under all of the circumstances,
such person is nonetheless fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
The FBCA also provides that a director, officer, employee, or agent of a
corporation who has been successful in defense of any proceeding referred to in
the preceding paragraph, or in defense of any claim, issue, or matter therein,
shall be indemnified against expenses incurred in connection with such defense.
Such expenses may be paid in advance of the final disposition of such
proceeding, if the indemnified party provides an undertaking to repay such
advanced amounts if ultimately found not to be entitled to indemnification for
such expenses.
The FBCA also permits a corporation to purchase and maintain insurance on
behalf of its directors and officers against any liability that may be asserted
against, or incurred by, such persons in their capacities as directors or
officers of the corporation whether or not the corporation would have the power
to indemnify such persons against such liabilities under the provisions of such
sections.
The FBCA further provides that the statutory provision is not exclusive of
any other right to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of stockholders or
independent directors, or otherwise, both as to action in such person's official
capacity and as to action in another capacity while holding such office.
(b) Our Articles of Incorporation permit, and our Bylaws provide for,
indemnification of directors, officers, employees and agents to the fullest
extent permitted by law.
(c) We maintain directors' and officers' liability insurance coverage for
our directors and officers and those of our subsidiaries and for certain other
executive employees. This coverage insures these persons against certain losses
that may be incurred by them in their respective capacities as directors,
officers or
II-1
<PAGE> 72
employees, with respect to which they may or may not be indemnified under the
provisions of our Articles of Incorporation or Bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the amendment to our credit facility on November 6,
2000, the Company issued warrants for 10% of our common stock on a diluted basis
at $.01 per share. If the Company repays all borrowings under the credit
agreement prior to June 30, 2001, 75% of the warrants will terminate, and if
repaid prior to December 31, 2001, 50% of the warrants will terminate. Certain
members of management participated in $1 million of the working capital line and
received a proportionate share of the warrants. The shares of common stock
underlying these warrants are being registered hereby.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
3.1 -- Restated Articles of Incorporation of the registrant
(incorporated by reference to Exhibit 3.1 to the
registrant's Quarterly Report on Form 10-Q, filed April 12,
2000).
3.2 -- Articles of Amendment to Restated Articles of Incorporation
of the registrant (incorporated by reference to Exhibit 3.2
to the registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 2000).
3.3 -- Amended and Restated Bylaws of the registrant (incorporated
by reference to Exhibit 3.3 to the registrant's Annual
Report on Form 10-K for the fiscal year ended August 31,
2000).
4.1 -- Amended and Restated Credit Agreement dated as of June 4,
1999 by and among Gerald Stevens Retail, Inc., Gerald
Stevens, Inc., NationsBank, N.A. and other lender parties
(incorporated by reference to Exhibit 4.1 to the
registrant's Registration Statement on Form S-3/A filed June
29, 1999).
4.2 -- Amendment Agreement No. 2 to Amended and Restated Credit
Agreement, dated as of July 31, 2000 (incorporated by
reference to Exhibit 4.1 to the registrant's Current Report
on Form 8-K filed November 8, 2000).
4.3 -- Amendment Agreement No. 3 to Amended and Restated Credit
Agreement, dated as of November 6, 2000 (incorporated by
reference to Exhibit 4.1 to the registrant's Current Report
on Form 8-K filed November 8, 2000).
4.4 -- Warrant Certificate No. 1 issued to Bank of America, N.A. on
November 6, 2000 (incorporated by reference to Exhibit 4.2
to the registrant's Current Report on Form 8-K filed
November 8, 2000).
4.5 -- Warrant Certificate No. 2 issued to Steven R. Berrard on
November 6, 2000 (incorporated by reference to Exhibit 4.3
to the registrant's Current Report on Form 8-K filed
November 8, 2000).
4.6 -- Warrant Certificate No. 3 issued to John G. Hall on November
6, 2000 (incorporated by reference to Exhibit 4.4 to the
registrant's Current Report on Form 8-K filed November 8,
2000).
4.7 -- Warrant Certificate No. 4 issued to Thomas W. Hawkins on
November 6, 2000 (incorporated by reference to Exhibit 4.5
to the registrant's Current Report on Form 8-K filed
November 8, 2000).
4.8 -- Participation Agreement, dated November 6, 2000, among Bank
of America, N.A., Steven R. Berrard, John G. Hall and Thomas
W. Hawkins (incorporated by reference to Exhibit 4.6 to the
registrant's Current Report on Form 8-K filed November 8,
2000).
5.1 -- Opinion of Akerman, Senterfitt & Eidson, P.A. as to the
validity of the shares of common stock to be registered.
</TABLE>
II-2
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <C> <S>
10.1 -- Employment Agreement with Gerald R. Geddis (incorporated by
reference to Exhibit 10.1 to the registrant's Registration
Statement on Form S-3/A filed June 29, 1999).
10.2 -- Employment Agreement with Ruth Owades (incorporated by
reference to Exhibit 10.5 to the registrant's Annual Report
on Form 10-K for the fiscal year ended August 31, 1999).
10.3 -- Employment Agreement with Gregory J. Royer (incorporated by
reference to Exhibit 10.3 to registrant's Annual Report on
Form 10-K for the fiscal year ended August 31, 2000).
10.4 -- Employment Agreement with Wayne Moor (incorporated by
reference to Exhibit 10.4 to registrant's Annual Report on
Form 10-K for the fiscal year ended August 31, 2000).
10.5 -- Noncompetition Agreement with Ruth Owades (incorporated by
reference to Exhibit 10.7 to the registrant's Annual Report
on Form 10-K for the fiscal year ended August 31, 1999).
10.6 -- Confidentiality and Noncompete Agreement with John G. Hall
(incorporated by reference to Exhibit 10.6 to registrant's
Annual Report on Form 10-K for the fiscal year ended August
31, 2000).
10.7 -- Confidentiality and Noncompete Agreement with Andrew W.
Williams (incorporated by reference to Exhibit 10.7 to
registrant's Annual Report on Form 10-K for the fiscal year
ended August 31, 2000).
10.8 -- Confidentiality and Noncompete Agreement with Thomas W.
Hawkins (incorporated by reference to Exhibit 10.8 to
registrant's Annual Report on Form 10-K for the fiscal year
ended August 31, 2000).
10.9 -- Management Incentive Stock Plan (incorporated by reference
to Exhibit B to registrant's Definitive Proxy Statement on
Schedule 14A filed January 8, 1996).
10.10 -- Gerald Stevens, Inc. 2000 Stock Option Plan (incorporated by
reference to Appendix C to registrant's Definitive Proxy
Statement on Schedule 14A dated January 18, 2000).
21.1 -- List of Subsidiaries of Gerald Stevens, Inc. (incorporated
by reference to Exhibit 21 to registrant's Annual Report on
Form 10-K for the fiscal year ended August 31, 2000).
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of Akerman, Senterfitt & Eidson, P.A. (included in
the opinion filed as Exhibit 5.1 of this Registration
Statement).
24.1 -- Powers of Attorney for the signatories listed on the
signature page to this Registration Statement.
</TABLE>
---------------
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the high or low end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
II-3
<PAGE> 74
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement;
(iii) To include any additional or changed material information on
the plan of distribution.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply
if the information required to be included in a post-effective amendment by
these paragraphs is contained in periodic reports filed with or furnished by the
Registrant pursuant to the Exchange Act that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, treat each such post-effective amendment as a new
Registration Statement of the securities offered, and the offering of the
securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the issuer of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-4
<PAGE> 75
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Lauderdale, State of Florida, on the 29th day of
December, 2000.
Gerald Stevens, Inc.
By: /s/ WAYNE MOOR
------------------------------------
Wayne Moor
Senior Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been duly signed by the following persons in the
capacities and on the dates indicated below:
<TABLE>
<CAPTION>
SIGNATURES TITLES DATE
---------- ------ ----
<C> <S> <C>
/s/ JOHN G. HALL President, Chief Executive December 29, 2000
----------------------------------------------------- Officer and Director
John G. Hall (Principal Executive
Officer)
/s/ WAYNE MOOR Senior Vice President and December 29, 2000
----------------------------------------------------- Chief Financial Officer
Wayne Moor (Principal Financial
Officer)
/s/ EDWARD J. BAKER Vice President and Corporate December 29, 2000
----------------------------------------------------- Controller (Principal
Edward J. Baker Accounting Officer)
* Chairman of the Board December 29, 2000
-----------------------------------------------------
Steven R. Berrard
* Director December 29, 2000
-----------------------------------------------------
Robert L. Johnson
* Director December 29, 2000
-----------------------------------------------------
Ruth M. Owades
* Director December 29, 2000
-----------------------------------------------------
Kenneth G. Puttick
* Director December 29, 2000
-----------------------------------------------------
Kenneth Royer
* Director December 29, 2000
-----------------------------------------------------
Andrew W. Williams
*By power of attorney
</TABLE>
II-5
<PAGE> 76
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE II
To the Board of Directors and Stockholder of
Gerald Stevens, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of Gerald Stevens, Inc. as
of August 31, 2000 and 1999 and for each of the three years in the period
ended August 31, 2000 included in this Form 10-K and have issued our report
thereon dated November 27, 2000. Our audits were made for the purpose of
forming an opinion on those basic financial statements taken as a whole. The
information listed under Schedule II of this Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
November 27, 2000.
<PAGE> 77
GERALD STEVENS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts(A) Deductions(B) Period
----------- ------------ ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended August 31, 2000 $ 1,871.8 $ 394.0 $ 1,370.0 $ (1,527.1) $ 2,108.7
Year ended August 31, 1999 $ 482.4 $ 191.3 $ 1,362.3 $ (164.2) $ 1,871.8
Year ended August 31, 1998 $ 508.7 $ 126.6 $ -- $ (152.9) $ 482.4
</TABLE>
Notes:
(A) Includes amounts charged to goodwill as part of the determination of the
fair value of net assets acquired.
(B) Includes amounts written off, net of recoveries.
S-2
