-----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, K6JVlDiRS4Wrz2dyhC2xfRQoGbsdjbu1V+T+RzXLPR9L/lzKnHXkTZiQ28lueTn0 WNlzKtAyjSsjS2SpC4RCnQ== 0000950144-96-008030.txt : 19961115 0000950144-96-008030.hdr.sgml : 19961115 ACCESSION NUMBER: 0000950144-96-008030 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961113 SROS: NONE 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-05531 FILM NUMBER: 96661436 BUSINESS ADDRESS: STREET 1: 8075 20TH STREET CITY: VERO BEACH STATE: FL ZIP: 32966 BUSINESS PHONE: 4075630263 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 1 FLORAFAX INTERNATIONAL FORM 10-KSB 08/31/96 1 United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-KSB (Mark One) [X] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended August 31, 1996 ------------------------------------------------------ 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 of (I.R.S. Employer incorporation or organization) Identification No.) 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. [X] Yes [ ] 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 $10,299,000. On October 10, 1996, 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 $17,446,000. As of October 10, 1996, 8,209,727 common shares were outstanding. Documents Incorporated by Reference None Transitional Small Business Disclosure Format (Check One): Yes ; No X ------ ----- 2 Florafax International, Inc. Index
Reference Page --------- ---- PART I Item 1 Description of Business........................................................... 1 Item 2 Description of Property........................................................... 4 Item 3 Legal Proceedings................................................................. 5 Item 4 Submission of Matters to a Vote of Security Holders............................... 6 PART II Item 5 Market for Common Equity and Related Stockholder Matters........................................................................ 7 Item 6 Management's Discussion and Analysis of Financial Condition and Results of Operations and Selected Financial Data........................................................ 8 Item 7 Financial Statements: Report of Independent Certified Public Accountants............................. 15 Consolidated Balance Sheets.................................................... 16 Consolidated Statements of Operations.......................................... 18 Consolidated Statements of Changes in Stockholders' Equity (Deficiency)......................................... 20 Consolidated Statements of Cash Flows.......................................... 21 Notes to Consolidated Financial Statements..................................... 23 Item 8 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 37 PART III Items 9, 10, 11 and 12 are incorporated by reference to the Company's definitive proxy statement, pursuant to Regulation 14A, which will involve the election of directors. However, if such definitive proxy statement is not filed with the Securities and Exchange Commission within 120 days following August 31, 1996, such items will be filed as an amendment to this Form 10-KSB under a cover of a Form 8 not later than the end of the 120 day period................................................ 38 Item 13 Exhibits and Reports on Form 8-K.................................................. 39
3 PART I ITEM 1. DESCRIPTION OF BUSINESS Florafax International, Inc. is principally engaged in the business of generating floral orders and providing floral order placement services to retail florists. The Company is also a third-party processor of credit cards. As used herein, the terms "Florafax" and "Company" mean Florafax International, Inc. (the Registrant), its divisions and subsidiaries, unless the context requires otherwise. 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. The Company's order allocation system has the ability to distribute orders ratably to Florafax member florists. Once an order is taken, the system analyzes the area to ascertain which member florists will deliver to that location. The system then determines which florist should receive that order based on certain criteria. The most important of the distribution criteria is that all florists are to receive an equitable number of orders. Once the system determines which florist is to receive the order it is sent via facsimile or telephone. Management believes that the Company's order allocation system is presently the only system in the industry that is capable of distributing orders equitably to member florists. Historically, floral orders have usually originated with one florist and were then filled by another florist. However, during the past two 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 allows The Flower Club to generate orders by marketing directly to the customers of these companies. These orders do not require individuals to initiate the floral order at a flower shop. Instead, the consumer dials a toll free number and places the order at the Company's order entry department. These orders are then transmitted to member florists via the order allocation system. Flowers-by-wire is the Company's primary business, accounting for 88% of net revenues in 1996, 85% in 1995 and 84% in 1994. 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. -1- 4 When a member florist sends a floral order, he or she selects another florist from the Florafax Directory near the desired point of delivery and contacts the selected florist by use of the telephone or fax machine. In the event a florist cannot find a fulfilling florist in the area they wish to send an order, they can call the Company's order entry department and the Company will place the order. The sending florist is paid by the customer for the purchase and the receiving (or fulfilling) florist is responsible for designing and delivering the flowers to the recipient, and will be paid by Florafax. The Company is capable of placing floral orders virtually anywhere in the world. 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 normally occur until the order is reported to the Company. Included in floral order processing are revenues generated by The Flower Club. As more fully discussed in Management's Discussion and Analysis, these revenues have a significantly greater profit margin (before marketing expenses) when compared to traditional processing services. Consequently, net revenues from floral order processing have been much higher than 9%, and increase in proportion to Flower Club generated orders. 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. 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. The Company's flowers-by-wire operation 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 the upward trend in orders from nontraditional campaigns to continue. No one Florafax member florist accounts for as much as 5% of the Company's annual flowers-by-wire revenue. -2- 5 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 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 service, Florafax Delivery, Inc., which had been incorporated in Arkansas since 1961. In 1974, Florafax sold Spotts International, Inc. In April 1992, the Company incorporated Credit Card Management System, Inc., an Oklahoma corporation formed to provide credit card processing services to both floral and nonfloral businesses. In March 1994, the Company incorporated The Flower Club, Inc. to generate additional orders for its member florists. EMPLOYEES As of August 31, 1996, the Company had approximately 150 employees of which 74 are full time. COMPETITION The flowers-by-wire industry is principally comprised of six 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. 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. -3- 6 ITEM 2. DESCRIPTION OF PROPERTY The Company's corporate headquarters were moved from Tulsa, Oklahoma, to Vero Beach, Florida, in 1994. The Company's primary computer operations and order entry system remain in Tulsa, Oklahoma. The Vero Beach facilities are leased under an operating lease agreement expiring March 1, 2000. The lease agreement requires monthly payments of $2,750, plus utilities and property taxes. The Tulsa facilities are leased under a three-year operating lease agreement expiring August 31, 1997. The lease agreement requires monthly payments of $9,650, which includes utilities. As a result of the Company's growth in revenue, and to avoid using outside third parties to handle excess call volumes during the peak holiday periods, the Company has added an order entry center at its Vero Beach location. In addition, the Company is planning to expand this call center by adding an additional 7,000 square feet. Construction is scheduled to begin in fiscal 1997. The Company estimates the cost to expand the order entry center will be $400,000. -4- 7 ITEM 3. LEGAL PROCEEDINGS The Company is involved in the following proceedings and litigation: In October 1989, Bellerose Floral, Inc. (Bellerose) of Bayside, N.Y., an affiliate of 800-FLOWERS, Inc., became a Florafax member florist, and Florafax agreed to provide certain telecommunication services to Bellerose for a fee. GTE Market Resources, Inc. (GTE/MR) was engaged by Florafax to provide order-entry services for Florafax and to customers of Florafax, including Bellerose. In 1990, certain disputes arose among Florafax, Bellerose and GTE/MR regarding the services to be performed by GTE/MR. As a result, in 1990 Florafax filed an action in Tulsa County (Oklahoma) District Court against GTE/MR and Bellerose. Bellerose then filed an action in New York Federal Court against Florafax. Subsequently, Florafax and Bellerose settled their claims against each other. Florafax pursued its claim against GTE/MR for damages suffered as a result of GTE/MR's breach of the telecommunications service agreement. On November 23, 1993 a jury awarded Florafax $1,481,000 in net damages against GTE/MR. GTE/MR appealed this case and posted bond with the Court in order to do so. On December 22, 1994 this case was assigned to the Oklahoma Court of Appeals by the Oklahoma Supreme Court. On April 4, 1995, the Court of Appeals of the State of Oklahoma released for publication its decision on the appeal filed by GTE/MR. The award to the Company of $743,117 for consequential damages was affirmed. To the extent that the Company was awarded lost profits for two years in the amount of $750,000, the judgment was reversed and remanded for a determination of lost profits as limited by Oklahoma law. The award to GTE/MR of a set-off amount of $88,750 for unpaid invoices was affirmed, a contractual rate of 18% per annum applied for pre-judgment interest was applied and the case remanded for a determination of an award of GTE's reasonable attorney's fees, expenses and other collection costs incurred in recovering the unpaid invoice amounts, but not their fees or expenses in defending against the claims of the Company or in pursuing other unsuccessful aspects of GTE/MR's counterclaim. The denial of the Company's request for attorney's fees was affirmed. The Company and GTE/MR have each petitioned the Oklahoma Supreme Court for writ of certiorari to review the portions of the Oklahoma Court of Appeals decision adverse to their respective interests, and both of the parties appeals have been granted. There are no assurances that the Company will obtain a favorable ruling from the Oklahoma Supreme Court. The Company's legal counsel has tried this case on a contingency fee basis and, accordingly, the Company has incurred minimal expenses related to this litigation. However, the agreement between the Company and its legal counsel stipulates that the Company's attorneys are to receive 40% of the net proceeds now that the case has reached the appellate court. Consequently, the Company is to receive 60% of the ultimate proceeds. Recognition of any of these amounts will not be reflected in the financial statements until ultimate resolution. -5- 8 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders of the Company in the fourth quarter of fiscal 1996. -6- 9 PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Florafax Common Stock is traded on the over-the-counter market, on a secondary listing service, referred to as the "bulletin board" by the National Association of Securities Dealers, Inc. (NASD), with a symbol of FIIF. The number of registered shareholders of Common Stock at October 16, 1996 was 1,264 based on information furnished by the Company's transfer agent. In addition, the Company believes that, at October 16, 1996, there were an additional 500 to 1,000 holders of Common Stock who held in "street" or "nominee" name, based on the number of proxies and annual reports requested by brokers, dealers, banks and voting trustees of which the Company is aware. The table below sets forth by quarter for its fiscal years ended August 31, 1996 and 1995, the high and low bid prices for the Florafax Common Stock as reported by the NASD. The quotations represent prices in the over-the-counter market between dealers in securities, which prices are not necessarily representative of actual transactions, and do not include retail markups, markdowns or commissions.
Bid Prices ------------------------ High Low ------------------------ 1996 First quarter $ 1-7/8 $ 9/16 Second quarter 1-3/4 3/4 Third quarter 2-3/16 1-3/8 Fourth quarter 2-3/8 1-11/16 1995 First quarter $ 5/16 $ 5/32 Second quarter 7/16 5/32 Third quarter 5/16 7/32 Fourth quarter 3/4 1/4
On October 10, 1996, the closing bid quotation of Florafax Common Stock as reported by published financial sources was $2.125. Florafax has never paid dividends on its Common Stock. Payment of dividends on its Common Stock in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's earnings, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. -7- 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND SELECTED FINANCIAL DATA LIQUIDITY AND CAPITAL RESOURCES For fiscal 1996, operating activities provided cash of $1,845,000, investing activities provided cash of $277,000 and financing activities used cash of $423,000, resulting in a net increase in cash of $1,699,000. 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 both collecting and settling funds, the timing of these cash flows has a significant impact on the Company's liquidity. During 1996 and 1995, 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 most of the money from these orders within days after processing the transaction. Gross floral orders and related handling fees generated by The Flower Club in 1996 were in excess of $15,400,000 (approximately 318,000 orders) which generated net revenues of $4,417,000. Gross floral orders and related handling fees generated by The Flower Club in 1995 were in excess of $10,100,000 (approximately 210,000 orders) which generated net revenues of $2,767,000. During fiscal 1993, the Company began developing and marketing the FloraNet 5000 terminal. The FloraNet 5000 terminal is a point-of-sale credit card terminal that allows for florists to send and receive orders on the same terminal. The cost of developing the FloraNet 5000 terminal was approximately $73,000 in fiscal 1993. During 1994, the Company completed the development of the FloraNet 5000 terminal. Expenditures related to development of the terminal amounted to approximately $41,000 in 1994. In addition, during 1994 the Company spent $312,000 purchasing and deploying the FloraNet 5000 terminals. The Company used $112,000 from operations and borrowed $200,000 to fund the purchase and deployment of the FloraNet 5000 terminals. This loan is secured by certain assets of the Company and is guaranteed by the Chairman of the Board. During September 1996 the Company repaid this loan in full. During 1995, management analyzed the marketing program for the FloraNet 5000 terminals. The analysis indicated that the FloraNet 5000 terminals were not achieving the results that the Company had expected when the program was implemented. Consequently, after careful consideration the Company decided to discontinue further -8- 11 funding of the FloraNet 5000 program. During fiscal 1996, the Company terminated the FloraNet 5000 program in its entirety. During 1996, the cost of computer systems declined as the Company retired certain fully depreciated computer hardware. Communication systems reflect a decline as well due to the termination of the FloraNet 5000 program, for which both software and hardware were retired. In addition, the Company wrote off fully depreciated leasehold improvements related to a portion of the Tulsa, Oklahoma, facility that is no longer in use. During 1996, the Company continued making only necessary capital expenditures, spending $190,000 compared to $136,000 in 1995 and $394,000 in 1994. However, due to the increase in order volume and maintaining two separate order centers it became necessary for the Company to install a new order entry computer system. The new system allows for much faster processing of orders and is better suited for operating more than one order entry center. Of the $190,000 in capital expenditures incurred during 1996, $159,000 was spent on computer hardware and software. On November 30, 1995, the Company restructured the outstanding $2,921,000 balance of its 9-1/2% convertible subordinated notes such that the notes would mature on September 15, 1996, except for $354,000 which was due December 31, 1995. Prior to the restructuring, the notes were to mature on June 30, 1996. As more fully discussed in Note 2 to the consolidated financial statements, on February 28, 1996 the Company issued a $2,500,000 (face value) convertible promissory note bearing interest at 7%, maturing on February 28, 1997, plus warrants to acquire 650,000 shares of common stock of the Company. The proceeds of this 7% convertible promissory note were used to retire the outstanding balance of the 9-1/2% convertible subordinated notes. In connection with the repayment of the 9 1/2% notes, the Company negotiated a discount of $128,000, which was reported as an extraordinary gain. On August 30, 1996, the holder of the $2,500,000 convertible promissory note converted the note plus approximately $89,000 of accrued interest to 2,071,000 shares of common stock of the Company. In addition, the unamortized value of the warrants amounting to $97,000 was charged to interest expense upon conversion. However, the warrants which had an exercise price of one dollar per share remain unexercised. In September of 1996, the Company repaid all but $80,000 of its long-term debt. RESULTS OF OPERATIONS GENERAL COMMENTS The Company completed its most profitable fiscal year since 1983. The Company had operating income of $1,562,000 for 1996 compared to operating income of $952,000 in 1995 and $20,000 in 1994. Revenues for 1996 are up over the prior year in every category except one. Management attributes the increase in revenues to the Company's ability to generate orders through The Flower Club, while increasing its number of floral members as a result of providing quality service and maintaining the lowest dues structure in the industry. -9- 12 NET REVENUES Net revenues from member dues and fees during 1996 increased by 3% from 1995 compared to a 10% decline from 1994 to 1995. During 1996, the Company began to experience an increase in its dues-paying floral members. Dues-paying members at August 31, 1996 totaled 4,298 compared to 3,984 at August 31, 1995. 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 add new members. Floral order processing revenue has experienced significant growth over the past three years, increasing by 68% from 1994 to 1995 and by 50% from 1995 to 1996. The increase is due 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. Since its formation in 1994 The Flower Club has experienced considerable growth, generating floral orders and handling fees of approximately $15,400,000 during 1996, $10,100,000 during 1995 and $4,300,000 in 1994. The gross amount of floral orders recorded by the Company totaled $27,484,000 in 1996, $21,978,000 in 1995, and $18,731,000 in 1994. The average amount of each order reported to the Company by its members in 1996 increased to $41.24 (3.5% increase) compared to $39.83 (3.3% increase) in 1995 and $38.54 in 1994. Directory and advertising fees generally fluctuate in connection with the number of dues paying member florists that belong to the Company's floral network at a given point in time. During 1995, the Company was experiencing a decline in its members causing directory and advertising fees to fall. However, during 1996 the Company began to see an increase in its members, which the Company believes is the reason that the decline in directory and advertising fees appears to have subsided. Directory and advertising fees remained fairly constant in 1996 compared to 1995, while 1995 revenues experienced a decline when compared to 1994 revenues. As previously discussed, the increase in member florists has allowed the Company to increase or, in the case of directory and advertising fees, maintain the level of revenue experienced in the prior year. Management continues to engage in campaigns that encourage advertising by member florists. Net revenues from charge card processing decreased by 4% from 1995 to 1996, compared to a 9% decrease from 1994 to 1995. The decline in revenues is a result of a combination of several factors. Gross charge cards dollars processed were $261,000,000 in 1996, $210,000,000 in 1995 and $161,000,000 in 1994. However, the Company has had to lower the discount rate it charges customers to remain competitive. In addition, the Company has experienced an increase in cost from both the credit card companies themselves as well as a cost increase from its sponsoring bank. The Company also earns revenue from the sale and lease of credit card terminals and printers. Sale and lease revenue amounted to $293,000 in 1996, $349,000 in 1995 and $389,000 in 1994. -10- 13 EXPENSES Member support, general and administrative expenses were $5,123,000 in 1996, compared to $4,553,000 in 1995. General and administrative expenses were higher in 1996 for several reasons. A significant reason for the 1996 increase was the need for additional personnel to handle the order revenue generated by The Flower Club, which increased by over 50% when compared to 1995. In addition, a portion of the increase is due to a general increase in salaries and related expenses. The Company also used only its own facilities during 1996 to place Flower Club orders, whereas in 1995 the Company contracted with certain third parties to handle excess order volume. Legal fees were higher than anticipated in 1996. In 1996 the Company restructured and later retired its primary debt, filed several registration statements, and explored a potential acquisition, all of which necessitated expenditures on legal fees. 1996 also had greater postage and freight expense than 1995 because of the Company's growing membership. For 1996, the Company did not experience an expected increase in telephone cost related to Flower Club orders because of a new telephone contract which reduced per minute phone cost on most Flower Club orders. Member support, general and administrative expenses were $4,553,000 in 1995 compared, to $4,726,000 in 1994. The Company managed to decrease 1995 salaries and contract labor costs by $236,000 when compared to 1994. This is attributable to two primary factors. First, the Company restructured its management and consolidated certain departments thereby eliminating a number of personnel. Second, the Company hired more employees to place orders generated by The Flower Club, which eliminated a significant portion of its high cost contract labor that was incurred during 1994. In addition to lower salaries and contract labor, the Company also experienced a decrease in equipment lease and maintenance cost. This was primarily attributable to the conversion of the Company's outdated Sperry mainframe computer to an up-to-date, more efficient main frame. The Company also reduced its 1995 legal expense by $95,000 when compared to 1994. Even though the Company managed to reduce the aforementioned expenses, it did experience a significant increase in telephone expense during 1995. Telephone expense for 1995 increased by $308,000 over 1994 telephone expense, primarily as a result of the orders generated by The Flower Club. Selling and advertising expenses have experienced a steady increase from 1994 to 1996. The primary cause for this increase are the marketing expenses associated with generating and maintaining The Flower Club order volume. The Flower Club expenses included in selling expenses are commissions paid to 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. -11- 14 The provision for doubtful accounts was $210,000, $173,000 and $413,000 for fiscal years 1996, 1995 and 1994, respectively. The primary reason for the 1996 increase over 1995 is the general increase in revenues during 1996. The primary reason for the decrease in 1995 provision for doubtful accounts when compared to 1994 is the orders generated by The Flower Club, which became substantial in 1995. These orders are paid for with credit cards which reduced potential collection problems associated with shop-to-shop orders. Depreciation, amortization and retirements were $393,000, $490,000 and $427,000 for 1996, 1995 and 1994, respectively. Depreciation and amortization expense for 1995 is greater than 1994 due to a full year's worth of amortization in 1995, of intangible assets related to the Flower Club. While 1996 has this same Flower Club amortization, many of the Company's assets with remaining book value became fully or mostly depreciated in 1995, resulting in a lower expense for 1996. The Company expects depreciation and amortization to continue to decline in the upcoming year. OTHER INCOME (EXPENSE) Interest expense for 1996 is greater when compared to prior years due to a loan obtained in 1996 with terms necessitating the recording of a note discount. This discount was to be amortized to interest expense over the life of the note, which had an original maturity date of February 28, 1997. However, prior to year end this note was converted to common stock of the Company and, accordingly, the entire unamortized discount was recorded as interest expense at that time. See Note 2 to the consolidated financial statements for a more complete discussion of this transaction. Interest income has increased over the past three years resulting from the Companies improved operations, that provided funds which were maintained in interest-bearing accounts. INCOME TAXES The Company recorded a net income tax benefit in 1996 of $817,000 consisting of a current provision for federal alternative minimum taxes of $46,000 and a benefit of $863,000 related to the reduction of the valuation allowance established in prior years. At August 31, 1995, the full valuation allowance was provided on net deferred tax assets of $3,543,000 based upon the Company's history of losses over several years and the uncertainty surrounding the Company's ability to recognize such assets. During the year ended August 31, 1996, management reevaluated its historical losses, which no longer resulted in a net cumulative loss position over the current and preceding two years, and its projected future earnings, and reached the conclusion that it was more likely than not that some portion of the deferred tax asset would be realized. In light of the continuing presence of certain of the underlying uncertainties that originally gave rise to the valuation allowance, management estimated the portion that was more likely than not expected to be recognized amounted to the benefit that would be realized on one year's projected net income, or $863,000. The remaining valuation allowance at August 31, -12- 15 1996 amounts to $2,152,000 related to net operating loss carryforwards, certain general business credits, depreciation and allowances for bad debts. INFLATION Over the past three years, inflation has not had a material effect on the Company's operations and is not anticipated to have an effect in the near future. A portion of the increase in the average dollar value of wire orders reported to the Company represents a response by florists to general price level increases. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 ------------------------------------------------------------ (In Thousands Except Per Share Amounts) Selected income statement data: Net revenues $ 10,299 $ 8,449 $ 7,567 $ 7,164 $ 7,041 ============================================================= Net income (loss) $ 2,262 $ 707 $ (311) $ (401) $(2,317) ============================================================= Primary earnings (loss) per share $ 0.36 $ 0.12 $ (0.06) $ (0.08) $ (0.45) ============================================================= Full diluted earnings (loss) per share $ 0.35 $ 0.12 $ (0.06) $ (0.08) $ (0.45) =============================================================
1996 1995 1994 1993 1992 ------------------------------------------------------------ (In Thousands Except Per Share Amounts) Selected balance sheet data: Current assets $ 5,686 $ 3,733 $ 2,847 $ 2,610 $ 3,128 Current liabilities 5,198 5,131 5,259 4,270 4,982 Working capital (deficiency) 488 (1,398) (2,412) (1,660) (1,854) Total assets 8,822 6,468 5,946 5,257 6,253 Long-term debt, less current maturities 334 3,034 3,142 3,007 3,026 Stockholders' equity (deficiency) 3,237 (1,756) (2,215) (2,209) (1,843)
-13- 16 ITEM 7. FINANCIAL STATEMENTS -14- 17 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, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity (deficiency), and cash flows for each of the three years in the period ended August 31, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1996, in conformity with generally accepted accounting principles. /s/ Ernst & Young, LLP Miami, Florida October 7, 1996 -15- 18 Florafax International, Inc. Consolidated Balance Sheets
August 31 1996 1995 ------------------------ (In Thousands, Except Share Amounts) ASSETS Current assets: Cash and cash equivalents $3,671 $1,972 Restricted cash 99 66 Restricted investment -- 500 Accounts receivable: Members, less allowances of $532 at August 31, 1996 and $706 at August 31, 1995 1,202 905 Charge card issuers 326 225 Other 73 34 ------------------------ 1,601 1,164 Deferred tax asset, net of allowance 261 -- Prepaid and other assets 54 31 ------------------------ Total current assets 5,686 3,733 Property and equipment, at cost: Fixtures and equipment 1,188 1,347 Computer systems 670 1,114 Communication systems 929 1,516 Leasehold improvements 25 311 ------------------------ 2,812 4,288 Accumulated depreciation and amortization 2,534 3,919 ------------------------ 278 369 Other assets: Excess of cost over net assets of acquired business 1,995 1,995 Deferred tax asset, net of allowance 602 -- Other 261 371 ------------------------ 2,858 2,366 ------------------------ Total assets $8,822 $6,468 ========================
See accompanying notes. -16- 19 Florafax International, Inc. Consolidated Balance Sheets (continued)
August 31 ----------------------------- 1996 1995 (In Thousands, Except Share Amounts) LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Current maturities of long-term debt $ 79 $ 466 Accounts payable 3,913 3,535 Accrued liabilities: Member benefits 170 150 Other 1,036 980 ------------------------------- Total current liabilities 5,198 5,131 Long-term debt, less current maturities: 9-1/2% convertible subordinated notes -- 2,567 Other 334 467 ------------------------------- 334 3,034 Membership security deposits 53 59 ------------------------------- Total liabilities 5,585 8,224 Stockholders' equity (deficiency): Preferred stock ($10 par value, 600,000 shares authorized at August 31, 1996 and 1995, respectively, none issued) -- -- Common stock ($.01 par value, 18,000,000 shares authorized, 8,232,727 and 5,793,874 issued at August 31, 1996 and 1995, respectively, 8,209,727 and 5,770,874 outstanding at August 31, 1996 and 1995, respectively) 83 58 Additional paid-in capital 10,087 7,381 Accumulated deficit (6,933) (9,195) Treasury stock, at cost (23,000 shares) -- -- ------------------------------- Total stockholders' equity (deficiency) 3,237 (1,756) ------------------------------- Total liabilities and stockholders' equity (deficiency) $8,822 $6,468 ===============================
See accompanying notes. -17- 20 Florafax International, Inc. Consolidated Statements of Operations
Year ended August 31 1996 1995 1994 ------------------------------------------- (In Thousands Except Per Share Data) Net revenues: Member dues and fees $ 2,013 $1,953 $2,172 Floral order processing 5,503 3,670 2,179 Directory and advertising fees 1,278 1,273 1,470 Charge card processing 1,459 1,519 1,670 Other revenue 46 34 76 ------------------------------------------ 10,299 8,449 7,567 Expenses: Member support, general and administrative 5,123 4,553 4,726 Selling, advertising and promotion 2,629 1,912 1,585 Provision for doubtful accounts 210 173 413 Directory publishing 382 369 396 Depreciation, amortization and retirements 393 490 427 ------------------------------------------ 8,737 7,497 7,547 ------------------------------------------ Operating income 1,562 952 20 Other income (expense): Interest expense (361) (309) (315) Interest income 115 60 - Other 1 4 36 Litigation costs and settlements - - (52) ------------------------------------------ (245) (245) (331) ------------------------------------------ Income (loss) before income taxes and 1,317 707 (311) extraordinary item Income taxes: Current income tax expense (46) - - Deferred income tax benefit 863 - - ------------------------------------------ 817 Income (loss) before extraordinary item 2,134 707 (311) Extraordinary item: Extraordinary gain from forgiveness of debt 128 - - ------------------------------------------ Net income (loss) $ 2,262 $ 707 $ (311) ========================================== See accompanying notes.
-18- 21 Florafax International, Inc. Consolidated Statements of Operations (continued)
Year ended August 31 1996 1995 1994 ------------------------------------------- (In Thousands Except Per Share Data) Weighted average common and common equivalent shares outstanding: Primary 6,279 5,777 5,532 Fully diluted 6,375 5,872 5,532 Primary earnings (loss) per share: Income (loss) before extraordinary item $ 0.34 $ 0.12 $ (0.06) Extraordinary gain from forgiveness of debt 0.02 0.00 0.00 ------------------------------------------- Net income (loss) $ 0.36 $ 0.12 $(0.06) =========================================== Full diluted earnings (loss) per share: Income (loss) before extraordinary item $ 0.33 $ 0.12 $(0.06) Extraordinary gain from forgiveness of debt 0.02 0.00 0.00 ------------------------------------------- Net income (loss) $ 0.35 $ 0.12 $(0.06) ===========================================
See accompanying notes. -19- 22 Florafax International, Inc. Consolidated Statements of Changes in Stockholders' Equity (Deficiency)
Common Stock ----------------------- Number of Additional Shares Par Paid-In Accumulated Outstanding Value Capital Deficit Total (In Thousands) --------------------------------------------------------------------- Balance at August 31, 1993 5,499 $55 $7,327 $(9,591) $(2,209) Issuance of common stock 50 1 4 - 5 Relinquishment of common stock by a shareholder (23) - - - - Net loss - - - (311) (311) --------------------------------------------------------------------- Balance at August 31, 1994 5,526 56 7,331 (9,902) (2,515) Issuance of common stock 245 2 50 - 52 Net income - - - 707 707 --------------------------------------------------------------------- Balance at August 31, 1995 5,771 58 7,381 (9,195) (1,756) Issuance of common stock 368 4 41 - 45 Issuance of warrants - - 97 - 97 Conversion of debt 2,071 21 2,568 - 2,589 Net income - - - 2,262 2,262 --------------------------------------------------------------------- Balance at August 31, 1996 8,210 $83 $10,087 $(6,933) $ 3,237 =====================================================================
See accompanying notes. -20- 23 Florafax International, Inc. Consolidated Statements of Cash Flows
Year ended August 31 1996 1995 1994 -------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income (loss) $2,262 $ 707 $ (311) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary gain from forgiveness of debt (128) - - Deferred income tax benefit (863) - - Depreciation and amortization 391 490 423 Equipment retirements - - 4 Provision for doubtful accounts 210 173 413 Noncash compensation expense - 62 - Amortization of discount on debt 97 - - Accrued interest converted in connection with debt conversion 89 - - Changes in operating assets and liabilities: Accounts receivable (647) 8 (79) Inventories - - 65 Prepaid and other assets (23) (1) 73 Other assets - - (87) Accounts payable 378 821 (4) Accrued liabilities 76 147 227 Unearned directory income - - (125) Membership security deposits (6) (1) (4) -------------------------------------- Net cash provided by operating activities 1,836 2,406 595 INVESTING ACTIVITIES Capital expenditures (190) (136) (394) Acquisition of certain assets - - (100) Decrease (increase) in restricted cash (33) 464 (451) Sale (purchase) of restricted investment 500 (500) - -------------------------------------- Net cash provided by (used in) investing activities 277 (172) (945)
-21- 24 Florafax International, Inc. Consolidated Statements of Cash Flows (continued)
Year ended August 31 1996 1995 1994 ------------------------------------- (In Thousands) FINANCING ACTIVITIES Proceeds from issuance of long-term debt and warrants $2,500 $ 356 $200 Proceeds from issuing stock options and warrants 45 - 5 Increase (reduction) in bank overdraft - (1,065) 671 Payments of long-term debt (2,959) (111) (75) ------------------------------------- Net cash (used in) provided by financing activities (414) (820) 801 ------------------------------------- Net increase in cash and cash equivalents 1,699 1,414 451 Cash and cash equivalents at beginning of year 1,972 558 107 ------------------------------------- Cash and cash equivalents at end of year $3,671 $1,972 $558 ===================================== Supplemental disclosures of cash flow information: Cash paid during the year for interest $ 317 $ 310 $309 ===================================== Supplemental financing noncash transaction: Conversion of long-term debt plus related accrued interest of $89 to common stock $2,589 $ - $ - =====================================
See accompanying notes. -22- 25 Florafax International, Inc. Notes to Consolidated Financial Statements August 31, 1996 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. (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 and Investment Restricted cash at August 31, 1996 and 1995 pertains to the Company's credit card processor agreement with the Company's credit card sponsoring bank totaling $99,000 and $31,000, respectively. Additionally, at August 31, 1995, restricted cash related to the Company's overdraft facility totaled $35,000. At August 31, 1995, the restricted investment consisted of a $500,000 par value FNMA discount note which was held by a bank as collateral pursuant to an overdraft facility that expired on September 30, 1995. On August 31, 1995, the carrying value approximated the market value of the note. The FNMA discount note matured and was redeemed on September 8, 1995. (d) Floral Orders The flowers-by-wire service comprises the Company's primary business. The Company generates and distributes floral orders for its members and produces membership directories which are distributed to the members. -23- 26 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Floral order processing net revenues are generally recorded upon receipt of a reporting document prepared by the florist who delivers the order to the ultimate recipient. In most instances the florist delivers the order prior to notifying the Company of the delivery. Net revenues represent gross amounts of floral orders and related fees charged by the florist who takes the order, less amounts due to the florist who ultimately fills the order. For floral orders taken directly from customers by the Company's order entry department, net revenues and related costs are recorded upon receipt of the order from the customer. (e) Member Dues and Directory Advertising Member dues, fees and advertising are billed monthly and recognized as income at that time. Billings for directories occur twice per year, while the actual directories are produced and distributed several times per year. Directory revenues are recognized as the directories are distributed. (f) Recognition of Service and Collection Fees The service and collection fees and interest income relating to accounts that have been canceled are not recognized as income until collected since collection is not certain. (g) Concentration of Credit Risk 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. -24- 27 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (h) Property and Equipment Depreciation The provisions for depreciation and amortization are computed using the straight-line method for financial reporting purposes with the following estimated useful lives:
Description Estimated Useful Lives ---------------------------------------------------------------- Fixtures and equipment 2 to 10 years Computer systems 3 to 10 years Communication systems 2 to 5 years Leasehold improvements 3 to 13 years
(i) Amortization of Excess of Cost Over Net Assets (Goodwill) Goodwill of $1,995,000 arose prior to October 31, 1970 and, therefore, is not required to be amortized. At August 31, 1996 and 1995, the Company, in accordance with its policy, has analyzed the carrying value of its goodwill using an undiscounted cash flow approach, using expected future cash flows from operations. After reviewing the results and considering other qualitative factors, management is of the opinion that 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. -25- 28 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (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 and the weighted average conversion rights of convertible debt. (l) Reclassification of prior year balances In previous years, certain marketing expenses related to Flower Club revenues were recorded as a reduction of floral and other order processing revenues. The Company has reviewed the manner in which these expenses were reported and believes that a more appropriate and meaningful practice is to report these expenses in the selling, advertising and promotion line item in the consolidated statements of operations. The amount of these expenses were $1,901,000 in 1996, $1,403,000 in 1995 and $474,000 in 1994. In addition, the balance sheet as of August 31, 1995 includes a reclassification in the amount of $384,000 for accounts payable to members which will be settled as a reduction of accounts receivable from these members. (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 March 1995, the FASB issued Statement 121, Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of fiscal year end August 31, 1997 and, based on current circumstances, does not believe the effect of adoption will be material. -26- 29 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In October 1995, the FASB issued Statement 123, Accounting for Stock-Based compensation, which provides an alternative to APB 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation issued to employees. This Statement allows for a fair value based method of accounting for employee stock options and similar equity instruments. However, for companies that continue to account for stock-based compensation arrangements under Opinion 25, Statement 123 requires disclosure of the pro forma effect on net income and earnings per share of its fair value based accounting for those arrangements. These disclosure requirements are effective for fiscal years beginning after December 15, 1995, or upon initial adoption of the statement, if earlier. The Company continues to evaluate the provisions of Statement 123 and has not determined whether it will adopt the recognition and measurement provisions of that Statement, which the Company expects would result in increased compensation expense in future periods. 2. CONVERTIBLE SUBORDINATED AND OTHER DEBT In July 1986, the Company issued $4,000,000 in 9-1/2% convertible subordinated notes (the "9-1/2% Notes") with an original maturity date of June 30, 1996. Interest on the 9-1/2% Notes was payable semiannually on June 30 and December 31. When issued, the notes were convertible into 888,888 shares of common stock at a conversion price of $4.50 per share. The 9-1/2% Notes were convertible at any time prior to maturity and were callable by the Company. Under a restructuring agreement in December 1988, the Company exchanged $1 million of the 9-1/2% Notes for 627,451 shares of its common stock at an exchange price of $1.59 per share, which represented the average of the bid and asked prices of such common stock on November 1, 1988. The conversion price of the remaining 9-1/2% Notes outstanding was then reduced to $3.00 per share. Also, the Company agreed to redeem $1 million of the remaining 9-1/2% Notes from 50% of its net income beginning in 1989 and annually thereafter, until the $1 million is fully redeemed. On November 30, 1995, the Company restructured the outstanding $2,921,000 balance of the 9-1/2% Notes such that they would mature on September 15, 1996, except for $354,000 which matured on December 31, 1995. -27- 30 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 2. CONVERTIBLE SUBORDINATED AND OTHER DEBT (CONTINUED) On February 28, 1996, the Company issued a $2,500,000 secured convertible promissory note bearing interest at seven percent per annum with a maturity date of February 28, 1997 (the "7% Note"). The 7% Note was convertible into common stock of the Company at a rate of $1.25 per share on certain terms and conditions contained in the 7% Note. The proceeds from the 7% Note were used to repay the 9-1/2% Notes due to mature September 15, 1996. In connection with the repayment of the 9-1/2% Notes the Company negotiated a discount of $128,000 which is reported as an extraordinary item in the consolidated statement of operations. In conjunction with the issuance of the 7% Note, the Company issued warrants to purchase 650,000 shares of common stock of the Company with an exercise price of $1.00 per share, on terms and conditions contained in the warrants as well as certain registration rights for resale of the shares of common stock issuable upon exercise of the warrants. The warrants expire January 1, 2001. Proceeds attributable to the warrants, using an estimated fair value of $97,000, were recorded as a discount to the 7% Note with a credit to paid in capital. The discount was being amortized over the life of the 7% Note using the effective method. On August 30, 1996, the 7% Note plus accrued interest was converted to 2,071,166 common shares of the Company. As a condition to the 7% Note conversion, certain Board members and other shareholders purchased all but 71,166 of the shares issued. As a result of the 7% Note conversion the unamortized balance of the 7% Note discount was charged to interest expense. At August 31, 1996, other long-term debt includes: A note payable to Citrus Bank in the amount of $333,000, with principal and interest payments due monthly bearing interest at ten percent maturing August 30, 2000, and guaranteed by the Chairman of the Board of Directors. On September 16, 1996, the Company repaid the note although classification in the accompanying financial statements remains long-term in accordance with the original terms. At August 31, 1996, long-term debt also includes a 5% subordinated debenture in the amount of $80,000 maturing in 1998 with interest payable annually on December 31. -28- 31 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 2. CONVERTIBLE SUBORDINATED AND OTHER DEBT (CONTINUED) At August 31, 1995, other long-term debt includes: A 5% subordinated debenture in the amount of $80,000, maturing in 1998 with interest payable annually on December 31, a note payable to Andrew W. Williams, Chairman of the Board, in the amount of $68,000, with principal and interest payments due monthly, bearing interest at 8-1/2%, maturing December, 1999, and three promissory notes due to Citrus Bank of Vero Beach, Florida aggregating $103,000, bearing interest ranging from prime plus one to prime plus two percent (9.75% to 10.75% at August 31, 1995), guaranteed by the Chairman of the Board. Principal and interest payments on the Citrus Bank notes are due monthly and vary depending on the interest rate, with the final payment due November 9, 1998. A note payable to Citrus Bank in the amount of $216,000, with principal and interest payments due monthly, bearing interest at prime plus one percent (9.75% at August 31, 1995), maturing November 2000, guaranteed by the Chairman of the Board. At August 31, 1995, the Company had available a $575,000 line of credit with PNC Bank. This line matured on September 15, 1995 and was collateralized by investments and cash totaling $535,000. The line of credit was terminated during 1996. 3. LEASES Obligations of the Company for annual payments under various operating leases for buildings and equipment are as follows:
Minimum Lease Payments -------- 1997 $204,000 1998 83,000 1999 67,000 2000 26,000 -------- $380,000 ========
-29- 32 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 3. LEASES (CONTINUED) Total rental expense for years 1996, 1995, and 1994 was $245,000, $242,000, and $367,000, respectively. Of these amounts, annual rentals for office facilities for years 1996, 1995 and 1994 were $116,000, $123,000, and $185,000, respectively. The Company's building lease for its Vero Beach location (annual rental $33,000) is with a relative of the Chairman of the Board of Directors. 4. CONTINGENCIES In October 1989, Bellerose Floral, Inc. (Bellerose) of Bayside, N.Y., an affiliate of 800-FLOWERS, Inc., became a Florafax member florist, and Florafax agreed to provide certain telecommunications services to Bellerose for a fee. GTE/MR was engaged by Florafax to provide order-entry services to Florafax and to customers of Florafax, including Bellerose. In 1990, certain disputes arose among Florafax, Bellerose and GTE/MR regarding the services to be performed by GTE/MR. As a result, in 1990 Florafax filed an action in Tulsa County (Oklahoma) District Court against GTE/MR and Bellerose. Bellerose then filed an action in New York Federal Court against Florafax. Subsequently, Florafax and Bellerose settled their claims against each other. Florafax pursued its claim against GTE/MR for damages suffered as a result of GTE/MR's breach of the telecommunications service agreement. On November 23, 1993 a jury awarded Florafax $1,481,000 in net damages against GTE/MR. GTE/MR appealed this case and posted bond with the Court in order to do so. On December 22, 1994, this case was assigned to the Oklahoma Court of Appeals by the Oklahoma Supreme Court. On April 4, 1995, the Court of Appeals of the State of Oklahoma released for publication its decision on the appeal filed by GTE/MR. The award to the Company of $743,117 for consequential damages was affirmed. To the extent that the Company was awarded lost profits for two years in the amount of $750,000, the judgment was reversed and remanded for a determination of lost profits as limited by Oklahoma law. The award to GTE/MR of a set-off amount of $88,750 for unpaid invoices was affirmed, a contractual rate of 18% per annum applied for pre-judgment interest was applied and the case remanded for a determination of an award of GTE's reasonable attorney's fees, expenses and other collection costs incurred in -30- 33 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 4. CONTINGENCIES (CONTINUED) recovering the unpaid invoice amounts, but not their fees or expenses in defending against the claims of the Company or in pursuing other unsuccessful aspects of GTE/MR's counterclaim. The denial of the Company's request for attorney's fees was affirmed. The Company and GTE/MR have each petitioned the Oklahoma Supreme Court for writ of certiorari to review the portions of the Oklahoma Court of Appeals decision adverse to their respective interests, and both of the parties appeals have been granted. There are no assurances that the Company will obtain a favorable ruling from the Oklahoma Supreme Court. The Company's legal counsel has tried this case on a contingency fee basis and, accordingly, the Company has incurred minimal attorneys fees related to this litigation. However, the agreement between the Company and its legal counsel stipulates that the Company's attorneys are to receive 40% of the net proceeds from the case. Consequently, the Company is to receive 60% of the ultimate proceeds, less certain expenses. Recognition of any of these amounts will not be reflected in the financial statements until ultimate resolution. 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, 1996 and August 31, 1995, there were no shares of preferred stock issued. The Company had an incentive stock option plan (the "Plan") under which both qualified and nonqualified options were granted to key management personnel and to members of the Board of Directors. There had been no activity in connection with the Plan for the fiscal years ended August 31, 1995 and 1994 and for the five months ended January 30, 1996. On January 30, 1996, the plan was terminated. In November 1994, the Company granted options to purchase 300,000 shares of common stock at its fair market value on the date of grant ($0.20 per share) to certain officers and directors. As of August 31, 1996, all of these options had been exercised. In February 1995, the Company granted options to purchase 100,000 shares of common stock at its fair market value on the date of grant ($0.25 per share) to certain marketing consultants of the Company. As of August 31, 1996, all of these options had been exercised. -31- 34 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 5. STOCKHOLDERS' EQUITY (CONTINUED) On October 26, 1995, the Board of Directors adopted a Nonemployee Directors' Stock Option Plan ("Director Plan"), subject to shareholder approval. 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, 1996, 500,000 shares of the Company's common stock were authorized under the Director Plan, options covering 100,000 shares have been granted which expire on January 29, 2006. As of August 31, 1996, none of the options have been exercised. On October 26, 1995, the Board of Directors adopted a Management Incentive Stock Plan ("Management Plan"), subject to shareholder approval. 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 500,000. At August 31, 1996, options covering 121,000 shares have been granted which expire on January 29, 2006. As of August 31, 1996, none of the options have been exercised. Options granted to employees under the Management Plan vest 25% upon issuance with additional vesting of 25% after each year of continuous employment. At August 31, 1996, options exercisable under the Management Plan totaled 30,250. -32- 35 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 5. STOCKHOLDERS' EQUITY (CONTINUED) Information regarding stock options for years 1996, 1995 and 1994 is as follows:
Exercise Number Price Total of Range Per Exercise Shares Share Price ------------------------------------------------ Shares under option at August 31, 1996 221,000 $1.41 to $1.56 $ 327,000 1995 400,000 $.20 to $.25 85,000 1994 - - - Options granted during year ended August 31, 1996 221,000 $1.41 to $1.56 327,000 1995 400,000 $.20 to $.25 85,000 1994 - - - Options exercised during year ended August 31, 1996 400,000 $.20 to $.25 85,000 1995 - - - 1994 50,000 $0.10 5,000 Options expired or canceled during year ended August 31, 1996 - - - 1995 - - - 1994 65,000 $1.60 104,000 Options exercisable at August 31, 1996 130,250 Shares reserved at August 31, 1996 for: Director stock option plan 500,000 Management stock option plan 500,000 --------- 1,000,000 =========
-33- 36 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 5. STOCKHOLDERS' EQUITY (CONTINUED) During 1995, the Company granted a total of 245,000 shares of common stock to certain employees and marketing consultants of the Company. These grants were charged to expense based on the market price of the Company's stock on the date of the grant. During fiscal 1994, the Company's Chairman relinquished to the Company at nominal cost 23,000 shares of common stock which are held in treasury. 6. INCOME TAXES The Company recorded a net income tax benefit in 1996 of $817,000 consisting of a current provision for Federal alternative minimum taxes of $46,000 and a benefit of $863,000 related to the reduction of the valuation allowance established in prior years. At August 31, 1995, the full valuation allowance was provided on net deferred tax assets of $3,543,000 based upon the Company's history of losses over several years and the uncertainty surrounding the Company's ability to recognize such assets. During the year ended August 31, 1996, management reevaluated its historical losses, which no longer resulted in a net cumulative loss position over the current and preceding two years, and its projected future earnings and reached the conclusion that it was more likely than not that some portion of the deferred tax asset would be realized. In light of the continuing presence of some of the underlying uncertainties that originally gave rise to the valuation allowance, management estimated that it is more likely than not that it would realize a benefit of $863,000, based on the upcoming year's projected income. The remaining valuation allowance at August 31, 1996 amounts to $2,152,000 related to net operating loss carryforwards, certain general business credits, depreciation and allowances for bad debts. Significant components of the Company's net deferred tax assets as of August 31, 1996 and 1995 are as follows (in thousands):
1996 1995 ---------------------------------- Allowances for bad debts $ 184 $ 256 Accrued liabilities and other 87 95 Depreciation and amortization 217 213 Net operating losses 2,123 2,591 General business credits 404 388 ---------------------------------- 3,015 3,543 Valuation allowance (2,152) (3,543) ================================== $ 863 $ - ==================================
-34- 37 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 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. ACQUISITIONS On March 10, 1994, the Company purchased from Andy Williams, Chairman of the Board, certain assets, primarily trademarks and rights to telephone numbers, of Savannah Floral Services, Inc. ("Savannah"). Subsequent to the purchase of these assets they were transferred to The Flower Club, Inc. ("Flower Club"), a subsidiary of the Company. The acquisition cost consisted of a $105,000 note payable to Mr. Williams and the satisfaction of $193,000 of accounts receivable from Savannah. In addition, the former owner of Savannah has executed a consulting and noncompete agreement with Florafax. 9. BUSINESS SEGMENTS The Company operates in two business segments: Flowers-by-wire services and charge card processing for member florists and charge care processing for customers not involved in 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: -35- 38 Florafax International, Inc. Notes to Consolidated Financial Statements (continued) 9. BUSINESS SEGMENTS (CONTINUED)
Year ended August 31 1996 1995 1994 ------------------------------------ Business Segments (In Thousands) Net revenues: Flowers-by-wire $ 9,041 $7,196 $ 6,335 Charge card processing 1,258 1,253 1,232 ------------------------------------ $10,299 $8,449 $ 7,567 ==================================== Operating profit before allocation of general and administrative expenses: Flowers-by-wire $ 5,587 $4,472 $ 3,792 Charge card processing 1,200 1,135 994 ------------------------------------ $ 6,787 $5,607 $ 4,786 ==================================== Operating profit (loss) after allocation of general and administrative expenses: Flowers-by-wire $ 2,176 $1,508 $ 762 Charge card processing 233 90 (365) ------------------------------------ $ 2,409 $1,598 $ 397 ==================================== Identifiable assets: Flowers-by-wire $ 3,737 $3,910 $ 4,144 Charge card processing 325 227 301 ------------------------------------ $ 4,062 $4,137 $ 4,445 ==================================== Depreciation expense: Flowers-by-wire $ 272 $ 333 $ 296 Charge card processing 19 55 91 ------------------------------------ $ 291 $ 388 $ 387 ==================================== Capital expenditures: Flowers-by-wire $ 162 $ 93 $ 363 Charge card processing 28 43 25 ------------------------------------ $ 190 $ 136 $ 388 ====================================
10. FOURTH QUARTER ADJUSTMENTS As more fully discussed in Note 6, the Company reduced its valuation allowance against deferred tax assets resulting in a deferred tax benefit of $863,000. This adjustment was recorded in the fourth quarter of the current fiscal year when all of the information upon which to make the estimate became available to management of the Company. -36- 39 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable -37- 40 PART III ITEMS 9, 10, 11, AND 12 ARE INCORPORATED BY REFERENCE TO THE COMPANY'S DEFINITIVE PROXY STATEMENT, PURSUANT TO REGULATION 14A, WHICH WILL INVOLVE THE ELECTION OF DIRECTORS. HOWEVER, IF SUCH DEFINITIVE PROXY STATEMENT IS NOT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS FOLLOWING AUGUST 31, 1996, SUCH ITEMS WILL BE FILED AS AN AMENDMENT TO THIS FORM 10-KSB UNDER A COVER OF A FORM 8 NOT LATER THAN THE END OF THE 120-DAY PERIOD. -38- 41 Item 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
Page (a) 1. Financial Statements Included in Part II of this report: Report of Independent Certified Public Accountants 15 Consolidated Balance Sheets at August 31, 1996 and 1995 16 Consolidated Statements of Operations for the years ended August 31, 1996, 1995 and 1994 18 Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years ended August 31, 1996, 1995 and 1994 20 Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995 and 1994 21 Notes to Consolidated Financial Statements 23
3. Exhibits Exhibit Reference The following items pertain to this report and, accordingly, are filed herewith (11) Computation of per share earnings (23) Consent of Independent Certified Public Accountants (27) Financial Data Schedule (For SEC use only) -39- 42 The following items have been included as exhibits in filings by the Company in a previous filing and, accordingly, are incorporated hereby reference. Exhibit Reference (3) Articles of incorporation and Bylaws of the Registrant, as amended. (10) Material Contracts (a) Convertible subordinated notes due to Clark Estates maturing June 30, 1996. (b) Subordinated debentures maturing in 1998. (c) Agreement dated December 3, 1993, Addendum, Second Addendum, Third Addendum, Fourth Addendum and Fifth Addendum thereto by and between the Registrant and Citizens Fidelity Bank and Trust Company (now PNC Bank, Kentucky, Inc.). (d) Purchase Agreement for certain assets formerly owned by Savannah Floral Services, Inc. dated March 10, 1994. (e) Note Payable to Andrew Williams dated March 10, 1994. (f) Promissory Note to Citrus Bank dated November 9, 1993. (g) Promissory Note to Citrus Bank dated November 17, 1993. (h) Promissory Note to Citrus Bank dated January 25, 1994. (i) Loan to James H. West, Director, President and Chief Financial Officer, dated August 28, 1994 (j) Consulting agreement with David Harper of Ventura County California dated December 10, 1993 (k) Promissory Note to Citrus Bank dated August 31, 1995. (l) Operating lease agreement between Registrant and Alvin Wunderlich dated April 1995. (m) Agreement of Purchase and Sale made and entered into to be effective December 29, 1995 by and between Registrant and St. James Partners, LTD. -40- 43 (10) Material Contracts (continued) (n) Convertible Promissory Note in the amount of $2,500,000 dated February 28, 1996 due February 28, 1997. (o) Security agreement dated February 28, 1996 executed in connection with the $2,500,000 Convertible Promissory Note. (p) Common Stock Purchase Warrants for 250,000 shares of the registrants common stock expiring January 1, 2001. (q) Common Stock Purchase Warrants for 400,000 shares of the registrants common stock expiring January 1, 2001. (22) Subsidiaries of the Registrant (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of fiscal 1996. -41- EX-11 2 COMPUTATION OF PER SHARE EARNINGS (LOSS) 1 Exhibit 11: Computation of Per Share Earnings (Loss)
Year ended August 31 1996 1995 1994 ------------------------------------------ (In Thousands Except Per Share Data) Primary Average shares outstanding 5,988 5,701 5,532 Net effect of dilutive stock options and warrants based on the treasury stock method using average market price 291 76 - ------------------------------------------ Total 6,279 5,777 55,532 ========================================== Net income (loss) $2,262 $ 707 $ (311) ========================================== Per share amount $ 0.36 $ 0.12 $(0.06) ========================================== Fully diluted Average shares outstanding 5,988 5,701 5,532 Net effect of dilutive stock options and warrants-based on the treasury stock method using the year-end market price 387 171 - ------------------------------------------ Total 6,375 5,872 5,532 ========================================== Per share amount $ 0.35 $ 0.12 $(0.06) ==========================================
-42- EX-23 3 CONSENT OF ERNST & YOUNG LLP 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 7, 1996, with respect to the consolidated financial statements of Florafax International, Inc. included in this Annual Report (Form 10-KSB) for the year ended August 31, 1996. /s/ Ernst & Young LLP Miami, Florida November 8, 1996 -43- EX-27 4 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR AUG-31-1996 SEP-01-1995 AUG-31-1996 1 3,770,000 0 2,133,000 532,000 0 5,686,000 2,812,000 2,534,000 8,822,000 5,198,000 334,000 0 0 83,000 3,154,000 8,822,000 0 10,299,000 0 0 8,737,000 210,000 361,000 1,317,000 (817,000) 2,134,000 0 128,000 0 2,262,000 0.36 0.35
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