-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SBdjT+Sej1eLQbiDypTZmnppjLX3F2Nr0lJY5YzjcRlF4Qs28R1oNkS3fKEDDgZM I2ro9vq9V1gwKVM1K1kElQ== 0000950133-99-001277.txt : 19990413 0000950133-99-001277.hdr.sgml : 19990413 ACCESSION NUMBER: 0000950133-99-001277 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19990412 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLORAFAX INTERNATIONAL INC CENTRAL INDEX KEY: 0000037525 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 410719035 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-05531 FILM NUMBER: 99591282 BUSINESS ADDRESS: STREET 1: 8075 20TH STREET CITY: VERO BEACH STATE: FL ZIP: 32966 BUSINESS PHONE: 5615630263 MAIL ADDRESS: STREET 1: 8075 20TH STREET CITY: VERO BEACH STATE: FL ZIP: 32966 FORMER COMPANY: FORMER CONFORMED NAME: SPOTTS FLORAFAX CORP DATE OF NAME CHANGE: 19740924 FORMER COMPANY: FORMER CONFORMED NAME: SPOTTS CORP DATE OF NAME CHANGE: 19671205 FORMER COMPANY: FORMER CONFORMED NAME: SPOTTS MAILING CORP DATE OF NAME CHANGE: 19671205 10KSB/A 1 FORM 10-KSB/A AMENDMENT NO.1 FLORAFAX INT'L 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-KSB/A AMENDMENT NO. 1 (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended August 31, 1998 or [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission File Number 0-5531 FLORAFAX INTERNATIONAL, INC. (Name of small business issuer in its charter) DELAWARE 41-0719035 (State or other jurisdiction (I.R.S. Employer Identification of incorporation or organization) 8075 20TH STREET, VERO BEACH, FLORIDA 32966 (Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 563-0263 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock par value of $.01 (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO_ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.[ ] State issuers' revenues for its most recent fiscal year $13,391,000. On October 7, 1998, the aggregate market value of the Common Stock based upon the average bid and asked prices as reported by the NASD held by nonaffiliates was approximately $13,416,000, based upon the assumption that only officers, directors and 10% shareholders are affiliates. As of October 7, 1998, 7,929,223 common shares were outstanding. Documents Incorporated by Reference Portions of the Company's definitive proxy statement relating to the 1998 annual meeting of shareholders are incorporated by reference into Part III of this form 10-KSB. Transitional Small Business Disclosure Format (Check One): Yes [__]; No [ X ] 2 FLORAFAX INTERNATIONAL, INC. EXPLANATORY NOTE TO FORM 10-KSB/A This Annual Report on Form 10-KSB/A amends and supersedes, to the extent set forth herein, the Registrant's Annual Report on Form 10-KSB for the year ended August 31, 1998 previously filed on November 25, 1998. As more fully set forth below, the following financial and related information has been updated in connection with the filing of the restated financial statements included herein. The items of Form 10-KSB affected by this Amendment No. 1 on Form 10-KSB/A are as follows: Part I -- Item 1. Description of Business Part II -- Item 6. Management's Discussion and Analysis or Plan of Operation and Selected Financial Data Item 7. Financial Statements The Registrant has restated certain of it historical fiscal year ended August 31, 1998 audited financial statements to modify its accounting for the transaction with Marketing Projects, Inc. as more fully discussed in Note 15 to the consolidated financial statements. Listed below are the consolidated financial statements that are responsive to Item 7 of Form 10-KSB. Report of Independent Certified Public Accountants Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Part III -- Item 13. Exhibits and Reports on Form 8-K: Exhibit 23 Consent of Independent Certified Public Accountants All page numbers for the amended Items set forth in this Form 10-KSB/A correspond to the page numbering of the same Items in the original Form 10-KSB. 3 PART I ITEM 1. DESCRIPTION OF BUSINESS Florafax International, Inc. is principally engaged in the flowers-by-wire business of generating floral orders and providing floral order placement services to retail florists throughout the United States. The Company is also engaged in the business of credit and charge card processing for third parties. As used herein, the terms "Florafax" and "Company" mean Florafax International, Inc. (the Registrant), its divisions and subsidiaries, unless the context requires otherwise. All forecasts and projections in this document are "forward looking statements" as defined in the Private Securities Litigation Reform Act of 1995, and are based on management's current expectations of the Company's near term results, based on current information available and pertaining to the Company. Actual results may differ materially from those projected in the forward-looking statements. FLOWERS-BY-WIRE The Company operates a flowers-by-wire business which enables Florafax member florists (independent owners) to send and deliver floral orders throughout the United States. Floral orders between florists are transacted primarily by telephone or by the Company's order allocation system. Flowers-by-wire is the Company's primary business segment, accounting for 91% of net revenues in 1998 and 90% in 1997. The Company's order allocation system has the ability to distribute orders ratably to Florafax member florists. Once an order is taken, the system analyzes the area to ascertain which member florists will deliver to that location. The system then determines which florist should receive that order based on certain criteria, which include the zip codes a shop will deliver to, the number of orders a shop has previously received, the number of orders that a florist has sent to the Company, and whether the florist has a fax machine. Once the system determines which florist is to receive the order, it is sent via facsimile or telephone. Management believes that the Company's order allocation system is presently the only system in the industry that is capable of distributing orders fairly to member florists. Traditionally, floral orders originated with one florist and were then filled by another florist. However, during the past several years the Company has been generating a significant portion of floral orders through its wholly owned subsidiary, The Flower Club. The Flower Club has arrangements with numerous nationally recognized companies which allow The Flower Club to generate orders by marketing directly to the customers of these companies. To order through The Flower Club, the consumer dials a toll free number and places the order at one of the Company's order entry locations. These orders are then transmitted to member florists via the order allocation system. Florists, and their advertisements, are listed in the "Florafax Directory," which is published and distributed several times a year. The Company produces the "Florafax Directory," brochures, and sales and promotional materials for use by the Company and its member florists. The Company's flowers-by-wire business is dependent upon an adequate base of member florists. The Company recruits member florists principally through advertisement and direct solicitation. A florist applying to become a Florafax member is evaluated to determine his or her ability to operate in accordance with the Company's rules and regulations, to provide a quality product and to comply with the credit policies established by the Company. Member florists are eligible to receive orders from, and send orders to, any other member or directly to Florafax order entry locations. When a member florist places a floral order, he or she selects another florist from the Florafax Directory near the desired point of delivery and contacts the selected florist by use of the telephone or fax machine. In the event a florist cannot find a fulfilling florist in the area they wish to send an order, they can call the Company's order entry department and the Company will place the order. The sending florist is paid by the customer for the purchase and the receiving (or fulfilling) florist is responsible for designing and delivering the 3 4 flowers to the recipient, and will be paid by Florafax. The Company is capable of placing floral orders virtually anywhere in the world. Member florists are on a "reporting plan" under which the sending florist, who collects the price of the flowers from the customer, normally pays the Company 80% of the sales price and the Company generally pays the receiving florist 71% of the sales price, retaining 9% for its processing services. Under this "reporting plan" the Company is normally not aware of the transaction until the receiving florist reports the order. Accordingly, accounting recognition of the revenue on floral shop to floral shop transactions does not occur until the order is reported to the Company. Included in floral order processing are revenues generated by The Flower Club. Revenues and associated costs related to floral orders generated by The Flower Club are recorded in the month that the order was filled, as the revenue process is complete and the Company has the information needed to record the transaction. The flowers-by-wire business is seasonal in that its member florists send a much higher volume of orders during Thanksgiving, Christmas, Valentine's Day, Easter and Mother's Day. In response to this seasonality and to generate additional business for its member florists, the Company formed The Flower Club to generate additional orders by pursuing relationships with nationally recognized corporations. The Company engages in joint marketing campaigns with these corporations not only during holidays, but also during nonseasonal periods in an effort to provide member florists with orders during slow periods of the year. Management expects to continue to generate a significant number of the Company's orders through The Flower Club. Historically, the corporate relationships involving The Flower Club have been established and serviced by an independent marketing firm. However, the Company believes that it can achieve greater growth by operating their own marketing department. Accordingly, during 1998 the Company acquired the operations of the independent marketing firm and now manages its own primary marketing functions internally. For further discussion on this acquisition please refer to Management's Discussion and Analysis or Plan of Operation contained in this document. During 1997, the Company developed and began marketing a new product called Talking Bouquet. Talking Bouquets allow the sender of a flower arrangement to record a personal voice greeting to be retrieved by the recipient of the flower arrangement. In addition, the Company had formed a marketing alliance with a firm in the gift basket industry. This alliance allows the Company to offer products other than flowers to The Flower Club customers as well as member florists. Gift baskets are distributed through member florists and also by direct shipment to the consumer. CREDIT AND CHARGE CARD PROCESSING Through its wholly-owned subsidiary, Credit Card Management System, Inc. (CCMS), the Company makes available to its members an electronic credit card and charge card processing system, FloraCash. FloraCash automatically provides authorization codes for each transaction and captures all the transaction data electronically, which can allow florists and non floral merchants to receive frequent, automatic deposits directly to their bank accounts. FloraCash terminals and optional printers are sold or leased by the Company at competitive rates. HISTORY Florafax was incorporated under the laws of Delaware in 1970 as the successor to Spotts International, Inc., a company engaged in the premium promotion business. In 1970, Florafax acquired a flowers-by-wire business, Florafax Delivery, Inc., which had been incorporated in Arkansas since 1961. In April 1992, the Company incorporated Credit Card Management System, Inc., an Oklahoma corporation formed to provide credit card processing services to both floral and nonfloral businesses. In March 1994, the Company incorporated The Flower Club, Inc. to generate additional orders for its member florists. 4 5 EMPLOYEES As of August 31, 1998, the Company had approximately 194 employees of which 98 are full time. Virtually all of the Company's employees support the flowers-by-wire business to some extent. COMPETITION The flowers-by-wire industry is principally comprised of five companies. Because many florists subscribe to more than one flowers-by-wire service, competition is intense. Usage can be affected by the quality and cost of services offered by each company, promotional programs, industry reputation and traditional patterns of usage employed by the sending florist. The Company believes that its flowers-by-wire service is competitive in the industry. The direct marketing to consumers of flowers and gift baskets has become intense. There are several other nationally recognized firms that compete with the company for the consumer direct market. Several of these are larger than the Company including firms such as Florists Transworld Delivery (FTD) and 800 Flowers. In the credit card industry there are many banks and other companies which process credit and charge card transactions on behalf of their business clients. Most of these companies have greater revenues and process more transactions than the Company. In addition, some of the Company's flowers-by-wire industry competitors provide credit card processing services to their members. The selection of one credit card processor over another can be affected by a variety of factors including price, services offered and the capability of providing specialized functions to accommodate the particular credit card processing requirements of certain businesses. The Company believes that its credit card processing services are competitive in the retail and wholesale floral industry in particular and in the general credit card processing industry as a whole. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Dollar amounts discussed in Item 6 are expressed in thousands. LIQUIDITY AND CAPITAL RESOURCES During 1998, the Company had three primary events which consumed cash flows, as discussed below. Prior to May 1, 1998, under the terms of an existing joint marketing services agreement, the Company was required to pay Marketing Projects, Inc. ("MPI") commissions equaling 8% of floral orders generated from marketing partners solicited by MPI. During the years ended August 31, 1998, 1997 and 1996 the Company recorded commissions expense of $1,050, $1,455 and $1,219 relative to the agreement. Effective May 1, 1998, the Company entered into an agreement with MPI that (1) modified the rights and obligations of both parties under the existing joint marketing servicing agreement and (2) provided for the acquisition of MPI's proprietary marketing systems by the Company. Also on May 1, 1998, the Company entered into a non-compete and non-disclosure agreement with MPI and the principal employees of MPI. Total consideration of $3,670 was paid to MPI at the time of closing and the Company is further obligated to pay up to $125 in cash in each of the following eight fiscal quarters, contingent upon the attainment of quarterly revenue targets. Of total consideration paid, $150 has been allocated to the purchase of MPI's proprietary marketing systems and $100 has been allocated to the non-compete agreement, with amortization provided over useful lives of 1 and 2 years, respectively. These assets, net of accumulated amortization of $62, are included in other intangible assets at August 31, 1998. As a result of the contract modification, the Company is no longer obligated to pay commissions to MPI on future floral orders generated from marketing partners solicited by MPI prior to May 1, 1998. Additionally, the Company's obligations to support such marketing partners has not been substantially increased. As the Company believes that its future revenue stream from these marketing partner arrangements will be 5 6 unaffected by the contract modification, the Company determined that the remainder of the consideration paid to MPI has no benefit to future periods and should be expensed at the date of the contract modification. Accordingly, $3,495 of the total consideration paid has been recognized as a contract modification expense during year ended August 31, 1998. The Company will expense all quarterly contingent payments to the extent and at the time they become earned. For the quarter ended August 31, 1998, the first contingent payment of $125 was earned and paid, and is included within selling, advertising, and promotion expenses. Second, capital expenditures for the purchase of the corporate offices and other operational equipment (totaling $1,318,000) were paid for from operating cash. Third, during the third quarter of 1997 the Company began repurchasing shares of it's common stock under a Board approved plan that was announced in 1997. During 1998, the Company purchased $178,000 of it's stock under this plan. As of August 31, 1998, the Company has 519,975 shares of it's own common stock held as treasury shares at a cost of $1,616,000. During 1998, the Company entered into a credit agreement with First Union National Bank, which provides for borrowings of up to $5,000,000, subject to certain terms and conditions which the Company is in compliance with. The facility bears interest at 8 1/2% and will remain in force until February 16, 2000. No principal payments are due until the end of the period at which time any principal amounts outstanding will convert to a 36-month fully amortizing loan based on level principal payments plus interest. In addition to the business purchase noted above, the Company plans to use the facility from time to time for operating activities and strategic business acquisitions as considered necessary. Other events involving the Company's indebtedness are discussed below. First, during the first quarter of 1997 the Company retired $333,000 of long-term debt bearing interest at 10%, thereby substantially reducing interest expense in 1997. Management believes that this 10% interest rate was well in excess of the short-term rates the Company would be able to obtain if it chose to hold and invest this cash. Second, while the Company's loan agreement does not call for principal payments until the year 2000, the Company made principal payments of $482,000 and approximately $1,000,000 during the last quarter of 1998 and the first month of 1999, respectively. It is anticipated that the Company will fully retire this note in 1999. Operating cash flow historically has been generated primarily from processing floral orders and charge card transactions for the Company's member florists, as well as collecting dues, fees and directory advertising from the members. Floral order processing may require settlement with the fulfilling florist before collection of funds from the sending florist. The terms of the Company's receivables are 30 days, which management believes are consistent within the industry. Charge card processing, however, generally allows the Company to collect funds from the charge card issuer prior to settlement with the member florist. Since in both types of transactions the Company is collecting and settling funds, the timing of these cash flows has a significant impact on the Company's liquidity. During 1998 and 1997, cash flows benefited significantly from orders generated by The Flower Club. All Flower Club orders are paid for by credit cards, which allows the Company to receive a significant portion of the money from these orders within days after processing the transaction. In 1998 and 1997 the Company incurred significant capital expenditures for facilities and related equipment necessary to handle the growth of the Company. While the Company is expected to incur additional capital expenditures in the upcoming year, these expenditures are expected to be less than the 1998 and 1997 amounts. 6 7 RESULTS OF OPERATIONS GENERAL COMMENTS 1998 revenues reached ten year record highs. 1998 revenues are up over the prior year in every major category. 1997 revenues were also up over the prior year in every major category. Net income declined from $3,433,000 in 1997 to a net loss of $ 623,000 in 1998, due primarily to the following two reasons. First, the Company recorded $ 3,495,000 as contract modification expense related to the MPI transaction, as more fully discussed in note ( 13) to the consolidated financial statements. Second, in 1997 the Company recorded other income of $819,000 resulting primarily from litigation proceeds (see note 11 to the consolidated financial statements). NET REVENUES Net revenues from member dues and fees during 1998 increased by 16% from 1997, compared to a 19% increase from 1996 to 1997. During 1998, the Company continued to experience an increase in its dues-paying floral members. Dues-paying members at August 31, 1998 totaled approximately 5,200 compared to 4,850 at August 31, 1997, and 4,300 at August 31, 1996. Management believes that the increased number of orders the Company is providing to its members has assisted the Company in retaining its member florists as well as adding new members. Floral order processing revenue has continued to grow, increasing by 17% from 1997 to 1998 and by 10% from 1996 to 1997. The increase is due primarily to orders generated by The Flower Club. The Flower Club has established joint marketing campaigns with numerous nationally recognized companies which allows The Flower Club to market directly to the customers of these companies. In addition to the growth of Flower Club revenues, during 1998 the Company also experienced an increase in it's florist shop to shop orders, Talking Bouquet revenues and gift basket revenues. Directory fees and advertising revenues experienced a slight increase (5%) during 1998 due to moderate increases in both advertising and directory fees. During 1997 directory fees and advertising increased by 10%, which was primarily attributable to an increase in advertising revenues. Net revenues from charge card processing increased by 13% during 1998 compared to an increase of 17% during 1997. The increase in both 1998 and 1997 is attributable to an increase in dollar volumes processed. During 1998, gross dollars processed were $392,000,000 compared to $318,000,000 in 1997. The credit card processing industry continues to be extremely competitive with increasing costs from card issuers and demands by larger customers for lower discount rates. The Company continues to adjust the pricing of it's products to remain competitive in the market. The Company's response to the increased competition could lead to lower margins in the upcoming year. The Company also earns revenue from the sale and lease of credit card terminals and printers. Sale and lease revenues amounted to $256,000 in 1998 and $232,000 in 1997. EXPENSES General and administrative expenses increased by 12% $686,000 in 1998 and 9% $505,000 in 1997, when compared to the preceding years. For 1998 the two primary components of the increase were in salaries and wages, and telephone expense. Salaries and wages experienced an increase due to an increase in phone operators needed to handle the increased Flower Club volume, as well as general wage increases necessary to remain competitive in the job market. Telephone expense increased primarily due to the increase in Flower Club volume. Management is currently negotiating with several national long distance carriers in hopes of obtaining reduced long distance rates. If negotiations are successful the Company may not experience an increase in telephone expense in the upcoming year. The main component of the 1997 increase was in salaries and wages, which increased due to an increase in phone operators needed to handle the increased Flower Club volume, as well as general wage increases necessary to remain competitive in the job market. In addition to greater labor costs there was also an increase 7 8 in building rent necessary to accommodate the additional telephone operators. Conversely, the Company negotiated a new telephone contract with its long distance carrier thereby reducing telephone expense in 1997. Selling, advertising and promotion expense increased by 23% $751,000 during 1998. The increase was comprised of two main components. First, the Company established its own marketing department to interface with current Flower Club partners, as well as prospect for new partners. Second, the Company experimented with new ideas and campaigns during 1998, some of which were successful and some of which were not. This caused a significant increase in the cost of flyers. Campaigns which were not successful have been abandoned. However, the Company intends to continue attempting new ideas and programs in an effort to increase revenues. Conversely, the Company experienced a decline in commissions paid to an independent marketing firm which had been the Company's primary source of marketing until the third quarter of 1998, at which time the Company acquired the primary operations of this firm, thereby eliminating the commissions. As a result of this acquisition, the Company may experience a decline in selling expenses in the upcoming year. See Management's Discussion and Analysis of Plan of Operation for a more detailed discussion of this acquisition. Selling, advertising and promotion expenses increased by 22% $580,000 during 1997. The primary cause for this increase is the marketing expenses associated with generating and maintaining The Flower Club order volume. The Flower Club expenses included in selling expenses are commissions paid to an outside marketing firm whose responsibilities include attracting and maintaining new clients, printing costs for marketing pieces provided to The Flower Club members which assist them when ordering through The Flower Club, and certain promotional floral arrangements. In addition to Flower Club related expense increases, in 1997 the Company also incurred increased costs in sales salaries and commissions. The Company has hired a Marketing Director as well as additional sales persons, in an effort to continue the growth in revenues experienced over the past few years. Depreciation and amortization have increased during 1998 compared to 1997. During 1997 and 1998, the Company expanded it's facilities as well as purchased new computer and telephone equipment, thereby causing an increase in depreciation. In addition, the contract modification agreement entered into in 1998 with Marketing Projects, Inc. (see note 13 to the consolidated financial statements) caused the Company to record an intangible asset related to marketing techniques , as well as a noncompete agreement. The amortization of these intangible assets increased amortization expense in 1998. During 1998 the Company paid $3,495,000 to MPI to modify a servicing agreement with MPI. Prior to modifying this servicing agreement, MPI acted as an agent that interfaced with the Company's Flower Club corporate customers. By modifying the servicing agreement the Company began interfacing with the corporate customers directly, thereby strengthening these relationships. OTHER INCOME (EXPENSE) Interest expense for 1998 resulted from the note associated with the acquisition of MPI. Interest expense for 1997 was virtually eliminated, as the Company had total debt in 1997 of only $80,000 for the majority of the year. Other income for 1997 consisted of litigation proceeds (see Note 4 to the consolidated financial statements), which were offset by a charge to earnings for the unamortized balance of a consulting agreement, and a charge to earnings for a certain contingency reserve. INCOME TAXES During 1997, the Company recorded a net income tax benefit of $519,000, consisting of a deferred income tax benefit of $637,000 and a current income tax expense of $118,000. The valuation allowance at August 31, 1997 consists primarily of general business credits that may expire prior to the Company's ability to utilize them. As of August 31, 1997, the Company has available net operating loss carryforwards of $2,949,000, which expire in the year 2012. During 1998, the Company recorded a net income tax benefit of $ 682,000, all of which was recorded as a deferred income tax benefit. At August 31, 1998, the remaining valuation allowance of $ 405,000 consists 8 9 primarily of certain capital losses that do not meet the requirements for recognition as an asset, as well as income tax credits that the Company does not believe will be realized. As of August 31, 1998, the Company has available net operating loss carryforwards of $ 4,980,000 which expire in the year 2013. FASB 109 requires deferred tax assets related to net operating loss carryforwards to be allocated between current and noncurrent based upon the reversal date of the temporary differences. It was not anticipated that the majority of the net operating losses would be used to offset income in 1998 or 1999; therefore, the carryforwards were classified as noncurrent at August 31, 1998 and August 31, 1997. RECENT PRONOUNCEMENTS EARNINGS PER SHARE In February 1997, the FASB issued Statement No. 128, Earnings per Share, which is effective for years ending after December 15, 1997. Consequently, the Company has changed the method used to compute earnings per share and has restated all prior periods. Under the new requirements, primary earnings per share is replaced with basic earnings per share which excludes the dilutive effect of stock options and other common stock equivalents. SEGMENTS In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes FASB Statement No. 14. The Statement uses a management approach to report financial and descriptive information about a company's operating segments. Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company's management. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997. The Company does not believe that the new standard will significantly change its presentation of segment information. COMPREHENSIVE INCOME In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement requires that total comprehensive income and comprehensive income per share be disclosed with equal prominence as net income and earnings per share. Comprehensive income is defined as all changes in stockholders' equity exclusive of transactions with owners such as capital contributions and dividends. The statement is effective for fiscal years beginning after December 15, 1997. The Company believes that the future tax benefits for compensation deductions related to a variable stock option plan, in excess of amounts recorded for accounting purposes, which are reflected as additions to paid-in capital are the only differences between net income and comprehensive income. YEAR 2000 ISSUE The Company believes that it has adequately addressed the year 2000 issues. For externally purchased software the Company has performed various test transactions and concluded that these applications are ready for use in the year 2000. For internally developed software the Company has assessed the applications and determined that relatively minor changes will be required for the year 2000 at a minimal cost and effort. In addition, major vendors that the Company relies upon to operate the credit card segment of the Company's business have informed the Company that they are year 2000 compliant. FORWARD-LOOKING STATEMENTS When used in this report, the words "plan(s)," "intends(s)," "expect(s)," "feel(s)," "will," "may," "believe(s)," "anticipate(s)," and similar expressions are intended to identify forward-looking statements. The events described in such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to 9 10 republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including the disclosures made under the caption "Management's Discussion and Analysis or Plan of Operation" in the report, as well as the Company's periodic reports of Form 10-KSB, 10-QSB and 8-K filed with the Securities and Exchange Commission. The events described in such statements, and the success of the management strategies described by those statements, are subject to certain risks and uncertainties which could cause actual results to differ from those discussed; among those risks and uncertainties which are particular to the Company are: continued consumer spending on discretionary items such as flowers and gifts, the success of the Company in maintaining relations with corporate marketing partners, the success of the Company in maintaining a strong membership base, the continued use of credit cards as a preferred method of payment by customers of members, increased labor costs, constant competition, and the health of the retail flower industry as a whole. INFLATION Over the past two years, inflation has not had a material effect on the Company's operations and is not anticipated to have an effect in the near future. A portion of the increase in the average dollar value of wire orders reported to the Company represents a response by florists to general price level increases. SELECTED FINANCIAL DATA:
YEAR ENDED AUGUST 31, ------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ------- ------- ------ ------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (RESTATED SEE NOTE 4) SELECTED INCOME STATEMENT DATA: Net revenues................................... $13,391 $11,609 $10,299 $8,449 $7,567 Net income (loss) (1,2,3)...................... $ (623) $ 3,433 $ 2,262 $ 707 $ (311) Basic earnings (loss) per share................ $ (.08) $ 0.43 $ 0.38 $ 0.12 $(0.06) Diluted earnings (loss) per share.............. $ (.08) $ 0.39 $ 0.35 $ 0.12 $(0.06)
- --------------- 1) The Company recorded income of $1,041 in 1997 related to cash received from a court award. See Note 4 to the Notes to the Consolidated Financial Statements. 2) Net income in 1997 and 1996 includes income tax benefits of $637 and $863, respectively, primarily from the recognition of benefits related to net operating loss carryforwards. See note 6 to the Notes to the Consolidated Financial Statements. 3) Net income in 1996 includes an extraordinary gain of $128 from the forgiveness of certain debt. 4) See Note 15 to the financial statements relative to restatement of the Company's financial statements for the year ended August 31, 1998.
AUGUST 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ------- ------ ------- ------- (IN THOUSANDS) (RESTATED SEE NOTE 4 ABOVE) SELECTED BALANCE SHEET DATA: Current assets................................ $ 5,752 $ 6,325 $5,686 $ 3,733 $ 2,847 Current liabilities........................... 5,259 5,209 5,198 5,131 5,259 Working capital (deficiency).................. 493 1,116 488 (1,398) (2,412) Total assets.................................. 11,886 10,594 8,822 6,468 5,946 Long-term debt, less current maturities....... 2,018 80 334 3,034 3,142 Stockholders' equity (deficiency)............. 4,557 5,253 3,237 (1,756) (2,515)
10 11 ITEM 7. RESTATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Florafax International, Inc. We have audited the accompanying consolidated balance sheets of Florafax International, Inc. as of August 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Florafax International, Inc. at August 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. As more fully discussed in Note 15, the Company has restated its financial statements for the year ended August 31, 1998 with respect to its accounting for the Company's acquisition of the assets of Marketing Projects, Inc. (MPI), and cancellation of a Servicing Agreement between the Company and MPI . /s/ ERNST & YOUNG LLP Tampa, Florida October 8, 1998, except for Notes 14 and 15, as to which the dates are December 9, 1998 and April 6, 1999, respectively 11 12 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
AUGUST 31 ------------------------- 1998 1997 ------------ ------- (IN THOUSANDS, EXCEPT SHARE DATA) (RESTATED SEE NOTE 15) ASSETS Current assets: Cash and cash equivalents................................. $ 3,438 $ 4,170 Restricted cash........................................... 106 97 Accounts receivable: Trade, less allowances of $482 at August 31, 1998 and $509 at August 31, 1997........................................ 1,421 1,317 Charge card issuers.................................... 211 343 Other.................................................. 110 94 ------- ------- 1,742 1,754 Deferred tax asset, net of allowance........................ 301 264 Prepaid and other assets.................................... 165 40 ------- ------- Total current assets................................... 5,752 6,325 Property and equipment, at cost: Fixtures and equipment.................................... 1,594 1,324 Computer systems.......................................... 977 798 Communication systems..................................... 1,121 1,010 Land, building and leasehold improvements................. 1,282 524 ------- ------- 4,974 3,656 Accumulated depreciation and amortization................. 2,992 2,713 ------- ------- 1,982 943 Other assets: Excess of cost over net assets of acquired businesses....... 1,995 1,995 Marketing techniques, net of accumulated amortization of $50....................................................... 100 -- Deferred tax asset, net of allowance........................ 1,881 1,236 Other intangible assets..................................... 176 95 ------- ------- 4,152 3,326 ------- ------- Total assets........................................... $11,886 $10,594 ======= =======
See accompanying notes. 12 13 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
AUGUST 31 ---------------------- 1998 1997 -------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) (RESTATED SEE NOTE 15) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt........................ $ 80 $ -- Accounts payable............................................ 3,986 3,754 Accrued member benefits..................................... 116 147 Accrued credit card fees.................................... 440 359 Other accrued liabilities................................... 637 949 ------- ------- Total current liabilities.............................. 5,259 5,209 Long-term debt, less current maturities..................... 2,018 80 Membership security deposits................................ 52 52 ------- ------- Total liabilities...................................... 7,329 5,341 Stockholders' equity: Preferred stock ($10 par value, 600,000 shares authorized at August 31, 1998 and 1997)................................. -- -- Common stock ($0.01 par value, 70,000,000 shares authorized, 8,449,198 and 8,253,004 issued at August 31, 1998 and 1997, respectively)....................................... 85 83 Additional paid-in capital.................................. 10,211 10,108 Accumulated deficit......................................... (4,123) (3,500) Treasury stock, at cost (519,975 and 480,975 shares at August 31, 1998 and 1997, respectively)................... (1,616) (1,438) ------- ------- Total stockholders' equity............................. 4,557 5,253 ------- ------- Total liabilities and stockholders' equity............. 11,886 $10,594 ======= =======
See accompanying notes. 13 14 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED AUGUST 31 ---------------------- 1998 1997 --------- ------- (IN THOUSANDS, EXCEPT SHARE DATA) (RESTATED SEE NOTE 15) Net revenues: Member dues and fees...................................... $ 2,778 $ 2,392 Floral order processing................................... 7,189 6,162 Directory and advertising fees............................ 1,476 1,405 Charge card processing.................................... 1,822 1,618 Other revenue............................................. 126 32 ------- ------- 13,391 11,609 Expenses: General and administrative................................ 6,524 5,838 Selling, advertising and promotion........................ 4,085 3,209 Directory publishing...................................... 315 383 Contract modification charge.............................. 3,495 Depreciation and amortization............................. 403 261 ------- ------- 14,822 9,691 ------- ------- Operating income (loss)..................................... (1,431) 1,918 Other income (expense): Interest expense.......................................... (82) (6) Interest income........................................... 165 183 Other..................................................... 43 819 ------- ------- 126 996 ------- ------- Income (loss) before income taxes........................... (1,305) 2,914 Income tax (expense) benefit: Current income taxes........................................ -- (118) Deferred income taxes....................................... 682 637 ------- ------- 682 519 ------- ------- Net income (loss)........................................... $ (623) $ 3,433 ======= ======= Weighted average common and common equivalent shares outstanding: Basic..................................................... 7,824 8,076 Diluted................................................... 7,824 8,715 Basic earnings (loss) per share: Net income................................................ $ (.08) $ 0.43 Diluted earnings (loss) per share: Net income................................................ $ (.08) $ 0.39
See accompanying notes. 14 15 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK --------------------- ADDITIONAL NUMBER OF PAR PAID-IN ACCUMULATED TREASURY SHARES ISSUED VALUE CAPITAL STOCK STOCK TOTAL ------------- ----- ---------- ----------- -------- ------- (IN THOUSANDS) Balance at August 31, 1996........ 8,233 $83 $10,087 $(6,933) $ -- $ 3,237 Issuance of common stock.......... 20 -- 21 -- -- 21 Purchase of treasury stock........ -- -- -- -- (1,438) (1,438) Net income........................ -- -- -- 3,433 -- 3,433 ----- --- ------- ------- ------- ------- Balance at August 31, 1997........ 8,253 83 10,108 (3,500) (1,438) 5,253 Issuance of common stock.......... 196 2 27 -- -- 29 Purchase of treasury stock........ -- -- -- -- (178) (178) Compensation expense under stock option plan..................... -- -- 76 -- -- 76 Net income........................ -- -- -- (623) -- (623) ----- --- ------- ------- ------- ------- Balance at August 31, 1998 (Restated See Note 15).......... 8,449 $85 $10,211 $(4,123) $(1,616) $(4,557) ===== === ======= ======= ======= =======
See accompanying notes. 15 16 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31 --------------------- 1998 1997 -------- ------- (IN THOUSANDS) (RESTATED SEE NOTE 15) OPERATING ACTIVITIES Net income................................................ $ (623) $3,433 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax expense (benefit).................. (682) (637) Depreciation........................................... 279 179 Amortization........................................... 124 82 Compensation expense under stock option plan........... 76 -- Provision for doubtful accounts........................ 127 170 Changes in operating assets and liabilities: Accounts receivable.................................... (115) (323) Prepaid and other assets............................... (125) 14 Other assets........................................... (205) 84 Accounts payable....................................... 232 (159) Accrued liabilities and member benefits................ (262) 249 Membership security deposits........................... (1) ------- ------ Net cash provided by operating activities................. (1,174) 3,091 ======= ====== INVESTING ACTIVITIES Capital expenditures...................................... (1,318) (844) Change in restricted cash................................. (9) 2 Investment in common stock................................ (100) -- ------- ------ Net cash used in investing activities..................... (1,427) (842) ======= ====== FINANCING ACTIVITIES Proceeds from issuance of long-term debt.................. $ 2,500 $ -- Proceeds from exercise of stock options and warrants...... 29 21 Purchase of treasury stock................................ (178) (1,438) Payments on long-term debt................................ (482) (333) ------- ------ Net cash used in financing activities..................... 1,869 (1,750) ------- ------ Net increase (decrease) in cash and cash equivalents...... (732) 499 Cash and cash equivalents at beginning of year............ 4,170 3,671 ------- ------ Cash and cash equivalents at end of year.................. $ 3,438 $4,170 ======= ====== Supplemental disclosures of cash flow information: Cash paid during the year for interest................. $ 53 $ 1 ------- ------ Cash paid during the year for income taxes............. 82 52
See accompanying notes. 16 17 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1998 (IN THOUSANDS, EXCEPT SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Florafax International, Inc. and its wholly-owned subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Florafax International, Inc. is principally engaged in the flowers-by-wire business of generating floral orders and providing floral order placement services to retail florists throughout the United States. The Company is also engaged in the business of credit and charge card processing for third-party companies. (B) CASH AND CASH EQUIVALENTS The Company considers as cash equivalents all highly liquid overnight investing accounts at banking institutions plus other interest bearing deposits having original maturities of less than three months. (C) RESTRICTED CASH Restricted cash at August 31, 1998 and 1997 pertains to the Company's credit card processing agreement with its sponsoring bank totaling $106 and $97, respectively. (D) FLORAL ORDER PROCESSING -- REVENUE RECOGNITION Floral order processing net revenues consist primarily of two types of transactions. First, there are orders placed through the Company's order center, which are recorded at the time the order is placed which coincides with delivery. Second, there are orders sent between the Company's member florists, which are recorded upon receipt of the reporting document, prepared by the delivering florist, that confirms delivery. (E) MEMBER DUES AND FEES AND DIRECTORY AND ADVERTISING FEES At the time a florist applies for membership they are billed a non refundable account set up fee. The account set up fee is ninety-nine dollars, and is recognized as revenue at the time the florist is accepted as a member to offset costs incurred. Once a florist has been accepted as a member, they are billed dues and advertising fees on a monthly basis, and those billings are recognized as income at that time. Monthly dues and advertising fees are billed at different rates and amounts, depending on the location of the florist and the size of the advertisement placed by the florist. The benefits of membership include the ability to send and receive orders to and from other members, receive orders generated by the Company via fax or telephone, the ability to send gift baskets anywhere in the country, and certain other benefits. A florist may cancel their membership at any time, but are responsible for monthly dues and advertising fees as long as they remain in the membership directory. Billings for directories occur twice per year, while the actual directories are produced and distributed several times per year. Directory revenues are deferred until the directories are distributed to member florists. (F) CHARGE CARD PROCESSING Charge card processing revenue represents fees for processing credit card transactions for members and others. Revenues are recognized when the service is provided. 17 18 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (g) CONCENTRATION OF CREDIT RISK A significant portion of the Company's accounts receivables are concentrated in the floral wire service industry. Credit risk is inherent in the floral wire service industry. Consequently, to reduce this risk the Company reviews new member applications for credit worthiness. If a florist applying for membership does not meet certain credit standards the florists application for membership is usually declined. Once a florist has been accepted as a member, the account is monitored by accounts receivable analysts who maintain continuous direct contact with the florist. If the account becomes delinquent, the florist is turned over to a collection agency to begin immediate collection procedures. (h) PROPERTY AND EQUIPMENT DEPRECIATION The provisions for depreciation and amortization are computed using the straight-line method for financial reporting purposes with the following estimated useful lives:
DESCRIPTION ESTIMATED USEFUL LIVES ----------- ---------------------- Fixtures and equipment.................................. 2 to 10 years Computer systems........................................ 3 to 10 years Communication systems................................... 2 to 5 years Building and leasehold improvements..................... 3 to 30 years
(i) AMORTIZATION OF EXCESS OF COST OVER NET ASSETS OF ACQUIRED BUSINESSES (GOODWILL) Goodwill of $1,995 arose prior to October 31, 1970 and, therefore, is not required to be amortized. In accordance with FASB 121, Accounting for the Impairment of Long-Lived Assets and Assets to be disposed of, the Company periodically analyzes the carrying value of its goodwill and other long-lived assets for indicators of impairment, using an undiscounted projected cash flow approach. If such cash flows indicate an impairment is present, the Company would make adjustments to the carrying value of long-lived assets based upon appraisals, discounted cash flows, or otherwise as the Company considers appropriate. After reviewing the results and considering other qualitative factors, management is of the opinion that the carrying amount of the goodwill has not been impaired. (j) INCOME TAXES The Company accounts for income taxes using Financial Accounting Standard Board (FASB) Statement No. 109, Accounting for Income Taxes. FASB Statement No. 109 requires the asset and liability method of accounting for income taxes. Under the asset and liability method of FASB Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. Under FASB Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recorded in income in the period that includes the enactment date. (k) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING The weighted average number of shares outstanding is adjusted to recognize the dilutive effect, if any, of outstanding stock options and warrants. 18 19 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) (l) RECLASSIFICATION OF PRIOR YEAR BALANCES Certain prior year balances have been reclassified in order to conform to current year presentation. (m) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (n) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, the FASB issued Statement No. 128, Earnings per Share, which is effective for years ending after December 15, 1997. As a result, the Company was required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share is replaced with basic earnings per share which excludes the dilutive effect of stock options and other common stock equivalents. Basic earnings (loss) per share is higher than primary earnings per share by $.(.01) and $.03 for the fiscal years ending August 31, 1998 and 1997, respectively. Diluted earnings per share was not different than fully diluted earnings per share. SEGMENTS In June 1997, the FASB issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes FASB Statement No. 14. The Statement uses a management approach to report financial and descriptive information about a company's operating segments. Operating segments are revenue-producing components of the enterprise for which separate financial information is produced internally for the Company's management. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997 and, accordingly, will apply to the Company's fiscal year ended August 31, 1999. The Company believes that its current segment disclosures will not be materially affected upon adoption. COMPREHENSIVE INCOME In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. The Statement requires that total comprehensive income and comprehensive income per share be disclosed with equal prominence as net income and earnings per share. Comprehensive income is defined as all changes in stockholders' equity exclusive of transactions with owners such as capital contributions and dividends. The statement is effective for fiscal years beginning after December 15, 1997, and accordingly will apply to the Company's fiscal year ended August 31, 1999. Currently, the Company believes that the future tax benefits for compensation deductions, related to the Management Plan (Note 5), in excess of amounts recorded for accounting purposes, which are reflected as additions to paid-in capital are the only differences between net income and comprehensive income. (o) STOCK-BASED COMPENSATION The Company accounts for stock-based compensation in accordance with APB No. 25, Accounting for Stock Issued to Employees, and, in cases where fixed plan exercise prices equal or exceed fair market value, recognizes no compensation expense for the stock option grants. 19 20 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) In cases where exercise prices are less than fair value, compensation is recognized over the period of performance or the vesting period or, in cases of the variable plan, compensation expense is recognized at the time when both exercise price and the number of shares are determinable. (p) ADVERTISING COSTS Advertising costs associated with related to the cost of coupons included in corporate partner advertising campaigns are expensed upon first showing. Advertising expense amounted to $1,350 and $881 in 1998 and 1997, respectively. 2. LONG-TERM DEBT At August 31, 1998, long-term debt consisted of a bank line of credit in the amount of $2,018 with interest payable monthly at the prime rate of the lending institution, currently 8 1/2%, collateralized by substantially all assets of the Company. Under the terms of the note, the Company may borrow up to $5,000 until February 16, 2000. No principal payments are due until February 16, 2000, at which time any principal amounts outstanding at the end of this period will convert to a 36-month fully amortizing loan based on level principal payments plus interest. A one-time commitment fee related to this note amounted to $13. Approximately $2,982 is available for future borrowings under the bank line of credit. At August 31, 1998 and 1997, current maturities of long-term debt included a 5% subordinate debenture in the amount of $80, maturing on December 27, 1998 with interest payable annually on December 31. Scheduled maturities of notes payable at August 31, 1998 for each of the next five years and thereafter are as follows: 1999........................................................ $ 80 2000........................................................ 336 2001........................................................ 673 2002........................................................ 673 2003........................................................ 336 ------ 2,098 Current portion............................................. 80 ------ $2,018 ======
3. LEASES Noncancelable lease obligations of the Company for annual payments under various operating leases for buildings and equipment are as follows:
MINIMUM LEASE PAYMENTS -------- 1999........................................................ $ 84 2000........................................................ 56 2001........................................................ 49 2002........................................................ 47 2003........................................................ 2 ---- $238 ====
20 21 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. LEASES -- (CONTINUED) Total rental expense for years 1998 and 1997, which includes other than noncancelable agreements, was $156 and $261, respectively. Of these amounts, annual rentals for office facilities for years 1998 and 1997 were $49 and $155, respectively. Until January 1998 the Company's building lease for its Vero Beach location (annual rental $33 plus sales tax) was with a relative of the Chairman of the Board of Directors. In January 1998, the company purchased this property (see note 8 to the consolidated financial statements). 4. CONTINGENCIES During 1990, the Company filed a lawsuit against GTE Market Resources, Inc. (GTE/MR) for failure on the part of GTE/MR to fulfill certain contractual telecommunication services on behalf of the Company. On November 23, 1993, a jury awarded the Company $1,481. GTE/MR appealed the case. In 1997 the Oklahoma Supreme Court upheld the decision of the trial court, and ruled in favor of the Company. The Company recognized a pretax gain, net of related legal fees, of $1,041 resulting from the award, which is included in other income in the Consolidated Statement of Income for 1997. 5. STOCKHOLDERS' EQUITY The Company has authorized a total of 600,000 shares of preferred stock with a par value of ten dollars. At August 31, 1998 and 1997, there were no shares of preferred stock issued. On October 26, 1995, the Board of Directors approved a Nonemployee Directors' Stock Option Plan ("Director Plan"). On January 30, 1996, the shareholders of the Company approved the Director Plan. Under the terms of the Director Plan each nonemployee director shall be granted an option to purchase 20,000 shares at fair market value as of the date the Director is elected as a Board member. After the initial grant to the directors, each director shall be granted additional options to purchase 20,000 shares upon each respective reelection to the Board of Directors. At August 31, 1998, 500,000 shares of the Company's common stock were authorized under the Director Plan, options covering 260,000 shares have been granted which expire on various due dates through January 30, 2008. As of August 31, 1998, none of the options have been exercised. On October 26, 1995, the Board of Directors approved a Management Incentive Stock Plan ("Management Plan"). On January 30, 1996, the shareholders of the Company approved the Management Plan. Under the terms of the Management Plan, the Board of Directors, at their discretion, may grant options to purchase common shares of the Company to various employees of the Company. The maximum number of options which may be granted under the Management Plan is 1,000,000. As of August 31, 1998, options covering 355,000 shares have been granted which expire on various dates through November 13, 2006. Options exercised under this plan during 1998 and 1997 were 11,000 and 1,000, respectively. Options granted to employees under the Management Plan vest 25% upon issuance with additional vesting of 25% after each year of continuous employment. As of August 31, 1998 and 1997, options exercisable under the Management Plan totaled 199,000 and 119,000, respectively. On November 16, 1996 the Board of Directors granted options to purchase 50,000 shares of common stock at fair market value to a Board member. This option vested 25% upon issuance with additional vesting of 25% each year. As of August 31, 1998, none of these options had been exercised. On June 25, 1997, the Board of Directors granted options for the purchase of 305,000 shares of common stock at fair market value to officers and key employees of the Company at an exercise price of $4 per share. These options vest in 25% increments when the market price of the Company's common stock reaches $5.00, $7.50, $10.00 and $12.50 per share, respectively, for twenty consecutive trading days. Unexercised vested options expire in 2006. The portion of unvested options, if any, expire in the year 2002. Compensation expense for these variable plan options is recorded when the option vests, at the amount that the targeted market price 21 22 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. STOCKHOLDERS' EQUITY -- (CONTINUED) exceeds the exercise price. As of August 31, 1998, 76,000 of these shares had vested and were exercisable (none at August 31, 1997). Compensation expense of $76 was recorded for the year ended August 31, 1998 (none at August 31, 1997). On January 28, 1997 the shareholders approved an increase in the number of shares of authorized common stock from 18,000,000 to 70,000,000. At August 31, 1998, the Company has outstanding 403,000 warrants for the purchase of common stock at a price of one dollar per share, all of which are currently exercisable. The warrants originated in connection with a previous financing. All of these warrants expire January 1, 2001. Information regarding stock options for years 1998 and 1997 is as follows:
NUMBER EXERCISE PRICE TOTAL OF SHARES RANGE PER SHARE EXERCISE PRICE --------- --------------- -------------- Shares under option at August 31, 1998............................................... 957,000 $1.41 to $5.88 $2,978 1997............................................... 888,000 $1.41 to $4.00 $2,529 Options granted during year ended August 31, 1998............................................... 80,000 $5.88 $ 470 1997............................................... 668,000 $2.66 to $4.00 $2,204 Options exercised during year ended August 31, 1998............................................... 11,000 $1.41 to $2.66 $ 20 1997............................................... 1,000 $1.41 $ 1 Options expired or canceled during year ended August 31, 1998............................................... 1,000 $1.41 $ 1 1997............................................... -- -- $ -- Options exercisable at August 31, 1998............. 560,000 $1.41 to $5.88 $ 659 Shares reserved at August 31, 1998 for: Director stock option plan....................... 500,000 --------- Management stock option plan..................... 988,000 --------- 1,488,000 =========
In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of Stock-Based Compensation (Statement 123), which encourages, but does not require companies to recognize stock awards based on their fair value at the date of grant. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998 and 1997: risk free interest rates of 6.0%; dividend yield of zero; volatility factors of the expected market price of the Company's common stock based on historical trends; and weighted-average expected lives of the options from four to ten years. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 22 23 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. STOCKHOLDERS' EQUITY -- (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information is as follows:
1998 1997 ------------ ------ (RESTATED SEE NOTE 15) Pro forma net income (loss)............................ $(1,339) $3,016 Pro forma earnings (loss) per share: Basic............................................. $ (0.17) $ 0.37 Diluted........................................... (0.17) 0.35 Weighted average shares: Basic............................................. 7,824 8,076 Diluted........................................... 7,824 8,715
6. INCOME TAXES The components of the income tax provision (benefit) as of August 31, 1998 and 1997 are as follows:
1998 1997 ------------ ----- (RESTATED SEE NOTE 15) Current income taxes................................... $ -- $ 118 Deferred income taxes.................................. (682) (637) ----- ----- Income tax provisions.................................. $(682) $(519) ===== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred income taxes as of August 31, 1998 and 1997 are as follows:
1998 1997 ------------ ------ (RESTATED SEE NOTE 15) Allowances for bad debts............................... $ 181 $ 191 Accrued liabilities and other.......................... 119 73 Depreciation and amortization.......................... 155 216 Net operating losses................................... 1,874 1,110 Compensation under stock option plan................... -- General business credits............................... 232 456 Basis difference in intangible assets.................. 26 -- ------ ------ 2,587 2,046 Valuation allowance.................................... (405) (546) ------ ------ Total deferred taxes.............................. $2,182 $1,500 ====== ======
FASB 109 requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At August 31, 1998, the remaining valuation allowance of $405 consists primarily of certain capital losses that do not meet the requirements for recognition as an asset, as well as tax credits in the amount of $155 that are not expected to be realized. This represents a change in the valuation allowance for the current year of $ 141 as compared to a change of $1,606 in the prior year. 23 24 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES -- (CONTINUED) As of August 31, 1998, the Company has available net operating loss carryforwards of $4,980, which expire as follows:
EXPIRATION DATE AMOUNT --------------- ------ 2002................................................... $ 135 2005................................................... 22 2007................................................... 1,473 2008................................................... 1,625 2009................................................... 486 2013................................................... 1,239 ------ $4,980 ======
FASB 109 requires deferred tax assets related to net operating loss carryforwards to be allocated between current and noncurrent based upon the reversal date of the temporary differences. It was not anticipated that the majority of the net operating losses would be used to offset income in 1998 and 1999, therefore the carryforwards were classified as non current as of August 31, 1998 and August 31, 1997. 7. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Accounts receivable and accounts payable: The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate their fair value. Long-term debt: The fair values of the Company's long-term debt are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts reported in the balance sheet for long-term debt approximate their fair value. 8. RELATED PARTY TRANSACTIONS During 1998, the Company purchased the land and buildings used for its Vero Beach operations for approximately $673. The transaction was financed with cash from operations. The property was previously leased from a trust administered by a relative of the Chairman of the Board. 9. FOURTH QUARTER ADJUSTMENTS As more fully discussed in Note 6, the Company reduced its valuation allowance against deferred tax assets 1997. The reduction resulted in a credit to income of $637 in 1997. The reduction was recorded in the fourth quarter of 1997, when all of the information upon which to make the estimate became available to management of the Company. 10. RETIREMENT PLAN The Company sponsors a 401(k) retirement plan covering all full-time employees who have completed one year of service. Eligible employees may elect quarterly to contribute up to 15% of their compensation, up to the maximum contribution allowed by law. The Company matches contributions up to a maximum of 3% of 24 25 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. RETIREMENT PLAN -- (CONTINUED) compensation. In connection with the matching contribution, the Company's contribution in 1998 and 1997 was $41 and $30, respectively. 11. OTHER INCOME Other income in 1997 of $819 consists primarily of the GTE/MR lawsuit settlement proceeds (see Note 4 to the consolidated financial statements), reduced by a charge to earnings of the unamortized balance of a terminated consulting agreement and a contingency reserve. 12. BUSINESS SEGMENTS The Company operates in two business segments: Flowers-by-wire services and charge card processing for member florists, and charge card processing for customers outside the floral industry. Net revenues, operating income before and after allocating general and administrative expenses, identifiable assets, depreciation expense and capital expenditures for the two segments are provided for below:
1998 1997 ------------ ------- (RESTATED SEE NOTE 15) Net revenues: Flowers-by-wire........................................... $12,119 $10,416 Charge card processing.................................... 1,272 1,193 ------- ------- $13,391 $11,609 ======= ======= Operating profit (loss) after allocation of general and administrative expenses: Flowers-by-wire........................................... $ (52) $ 2,690 Charge card processing.................................... 68 98 ------- ------- Operating profit before allocation of Corporate overhead............................................... 16 2,788 ------- ------- Corporate overhead........................................ 1,447 870 ------- ------- Operating income (loss)..................................... $(1,431) $ 1,918 ======= ======= Identifiable assets: Flowers-by-wire........................................... $ 5,992 $ 4,139 Charge card processing.................................... 569 472 General corporate assets.................................. 5,325 5,983 ------- ------- $11,886 $10,594 ======= ======= Depreciation expense: Flowers-by-wire........................................... $ 220 $ 146 Charge card processing.................................... 59 33 ------- ------- $ 279 $ 179 ======= ======= Capital expenditures: Flowers-by-wire........................................... $ 1,021 $ 625 Charge card processing.................................... 297 219 ------- ------- $ 1,318 $ 844 ======= =======
25 26 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. MARKETING PROJECTS, INC. AGREEMENT Prior to May 1, 1998, under the terms of an existing marketing services agreement, the Company was required to pay Marketing Projects, Inc. ("MPI") commissions on orders generated from marketing partners solicited by MPI. During the years ended August 31, 1998, 1997 and 1996 the Company recorded commissions expense of $1,050, $1,455 and $1,219 relative to the agreement. Effective May 1, 1998, the Company entered into an agreement with MPI that (1) modified the rights and obligations of both parties under the marketing servicing agreement and (2) provided for the acquisition of MPI's proprietary marketing systems by the Company. Also on May 1, 1998, the Company entered into a non-compete and non-disclosure agreement with MPI and the principal employees of MPI. Total consideration of $3,670 was paid to MPI at the time of closing and the Company is further obligated to pay up to $125 in cash in each of the following eight fiscal quarters, contingent upon the attainment of quarterly revenue targets. Of total consideration paid, $150 has been allocated to the purchase of MPI's proprietary marketing systems and $100 has been allocated to the non-compete agreement, with amortization provided over useful lives of 1 and 2 years, respectively. These assets, net of accumulated amortization of $62, are included in other intangible assets at August 31, 1998. Under the original marketing services agreement, the Company was obligated to pay MPI commissions equaling 8% of floral orders generated from marketing partners solicited by MPI. This 8% commission was continuously payable to MPI even in the event the marketing services agreement was terminated by either party. As a result of the May 1, 1998 contract modification, the Company is no longer obligated to pay any commissions to MPI on future floral orders generated from marketing partners solicited by MPI prior to May 1, 1998. The Company believes that this contract modification will result in the realization of significant cost savings in future years due to the elimination of the 8% MPI commission obligation. The Company further believes that its future revenue stream and support requirements relative to these marketing partner arrangements will be generally unaffected by the contract modification. Further, the May 1, 1998 payment also served to compensate MPI for the loss of commissions that would have otherwise been payable to them. Since the Company's contractual relationship was directly with the respective marketing partners and MPI was not expected to perform continuing services with regards to these partners, the Company believes that the MPI contract modification represents the termination of a marketing agreement. Based upon the above, the Company determined that the remainder of the consideration paid to MPI has no benefit to future periods and should be expensed at the date of contract modification. Accordingly, $3,495 of the total consideration paid has been recognized as a contract modification expense during the year ended August 31, 1998. The MPI contract modification further provided that any orders generated from new marketing partners solicited by MPI after May 1, 1998 will be commissionable at a 4% rate. Because this commission rate approximates the current market rate within the floral industry and because of the uncertainty of the amount of floral orders to be generated in the future on this reduced commission basis, the Company allocated no value to this contract provision. Since the quarterly contingent payments are based upon the attainment of future revenue targets, the Company will record such payments as sales commissions to the extent and at the time they become earned. For the quarter ended August 31, 1998, the first contingent payment of $125 was earned and paid, and is included within selling, advertising, and promotion expenses. 26 27 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSEQUENT EVENT -- MERGER WITH GERALD STEVENS, INC. On December 9, 1998, the Company and Gerald Stevens, Inc. entered into a Merger Agreement that, if consummated, would result in Gerald Stevens, Inc. becoming a wholly owned subsidiary of the Company. The merger is planned to be effected by the issuance of our common stock. Depending on the market prices of our common stock in effect at the time of consummation of this merger, the Company will issue between 1.25 and 1.35 shares of our common stock for each share of outstanding Gerald Stevens, Inc. Common Stock. Based upon the current number of Gerald Stevens, Inc. common shares outstanding, the number of shares of our common stock issued will range from approximately 26.0 million shares to 28.1 million shares. 15. RESTATEMENT OF 1998 CONSOLIDATED FINANCIAL STATEMENTS As more fully discussed in Note 13, effective May 1, 1998 the Company entered into a contract modification agreement with MPI. At that time the contract was accounted for as a business combination. However, subsequent to the original accounting of the transaction the Company had several discussions with the Securities and Exchange Commission. As a result of these conversations, the Company re-evaluated the facts and circumstances surrounding the MPI transaction and concluded that the transaction should be accounted for as a contract modification rather than a business combination. Consequently, the Company has restated it's financial statements to account for the transaction as a contract modification. The following tables reflect the more significant effects of the restatements on certain components of operations and financial condition: EFFECTS ON OPERATIONS Operating income, as previously reported.................... $ 2,178 Adjustment related to: Adjustment to amortization expense........................ 11 Contingent commission expense............................. (125) Contract modification expense............................. (3,495) ------- Restated operating (loss)................................... (1,431) ======= Net (loss) income, as previously reported................... $ 1,768 Adjustment related to: Adjustment to amortization expense........................ 11 Contingent commission expense............................. (125) Contract modification expense............................. (3,495) Income tax effect of adjustments.......................... (1,218) ------- Restated net (loss) income.................................. (623) ======= Basic income, per share, as previously reported............. $ 0.23 Adjustment related to: Adjustment to amortization expense........................ -- Contingent commission expense............................. (0.02) Contract modification expense............................. (.45) Income tax effect of adjustments.......................... .16 ------- Restated basic income (loss) per share...................... (0.08) =======
27 28 FLORAFAX INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. RESTATEMENT OF 1998 CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Diluted income, per share, as previously reported........... $ 0.20 Adjustment related to: Adjustment to amortization expense........................ -- Contingent commission expense............................. (0.02) Contract modification expense............................. (0.40) ------- Income tax effect of adjustments.......................... .14 ------- Restated diluted income (loss) per share.................... (0.08) ======= EFFECTS ON FINANCIAL CONDITION Deferred tax assets-current, as previously reported......... $ 1,265 Adjustment related to: Reclassification of net operating loss carryforwards...... (967) Reclassification of tax credits........................... (247) Reclassification of valuation allowance................... 250 ------- Restated deferred tax assets-current........................ 301 ======= Excess of cost over net assets of acquired businesses, net of amortization, as previously reported................... $ 5,704 Adjustment related to: Adjustment to amortization expense........................ 61 Restatement of goodwill related to MPI.................... (3,770) ------- Restated excess of cost over net assets of acquired businesses, net of amortization........................... 1,995 ======= Accumulated deficit, as previously reported................. $(1,732) Adjustment related to: Adjustment to amortization expense........................ 11 Contingent commission expense............................. (125) Contract modification expense............................. (3,495) Income tax effect of adjustments.......................... 1,218 ------- Restated accumulated deficit................................ (4,123) =======
28 29 Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Florafax International, Inc. Date: April 8, 1999 /s/ ANDREW W. WILLIAMS -------------------------------------- Andrew W. Williams Chairman and Chief Executive Officer Date: April 8, 1999 /s/ JAMES H. WEST -------------------------------------- James H. West President and Chief Financial Officer Date: April 8, 1999 /s/ KELLY S. MCMAKIN -------------------------------------- Kelly S. McMakin Controller and Treasurer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ ANDREW W. WILLIAMS Chairman of the Board April 8, 1999 - ------------------------------------- Andrew W. Williams /s/ SOLOMON ODEN HOWELL, JR. Director April 8, 1999 - ------------------------------------- Solomon Oden Howell, Jr. /s/ WILLIAM E. MERCER Director April 8, 1999 - ------------------------------------- William E. Mercer /s/ KENNETH G. PUTTICK Director April 8, 1999 - ------------------------------------- Kenneth G. Puttick /s/ JAMES H. WEST Director April 8, 1999 - ------------------------------------- James H. West
EX-23 2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Form S-3, No. 333-10067), (Form S-8, No. 333-07271), and (Form S-8, No. 333-07267) of Florafax International, Inc. and in the related prospectuses of our report dated October 8, 1998, except for Notes 14 and 15 as to which the dates are December 9, 1998 and April 6, 1999, respectively, with respect to the consolidated financial statements of Florafax International, Inc. included in this Annual Report (Form 10-KSB/A) for the year ended August 31, 1998. /s/ ERNST & YOUNG LLP Tampa, Florida April 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----