-----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, GECOftxKvQtVav5Sf5RUt5bNIhRIlW6zyM39dTjp7KOaE/HYrl+omvBUPBTlR4qb 3inkAnWD4zTTXFPQn4rckQ== 0000950144-99-004471.txt : 19990415 0000950144-99-004471.hdr.sgml : 19990415 ACCESSION NUMBER: 0000950144-99-004471 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990414 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-05531 FILM NUMBER: 99593537 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 10QSB 1 FLORAFAX INTERNATIONAL INC. FORM 10QSB FOR 2/28/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 28, 1999 [ ] Transition Report Under Section 13 or 15(d) of the Exchange Act For the transition period from _______________ to __________________ Commission File Number: 0-5531 FLORAFAX INTERNATIONAL, INC. ----------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Delaware 41-0719035 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8075 20th Street, Vero Beach, Florida 32966 (Address of principal executive offices) 561-563-0263 ------------ (Issuer's telephone number) (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- The registrant had 8,673,503 shares of common stock, $0.01 par value, issued at April 9, 1999. Transitional Small Business Disclosure Format (Check one): Yes ; No X 2 INDEX
PART I FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets February 28, 1999 and August 31, 1998 1 - 2 Consolidated Statements of Operation and Accumulated Deficit Three and Six Months Ended February 28, 1999 and February 28, 1998 3 - 4 Consolidated Statements of Cash Flows Six Months Ended February 28, 1999 and February 28, 1998 5 - 6 Notes to Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis or Plan of Operation 11 - 15 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 - 19 Signatures 20
3 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) FEBRUARY 28 AUGUST 31 1999 1998 ------------------------ (Unaudited) RESTATED ASSETS SEE NOTE 7 CURRENT ASSETS: Cash and cash equivalents $ 3,649 $ 3,438 Restricted cash 146 106 Accounts receivable: Trade, less allowances of $465 at February 28, 1999 and $482 at August 31, 1998 3,052 1,421 Charge card issuers 421 211 Other 153 110 --------------------- 3,626 1,742 Deferred tax asset 262 301 Prepaid and other assets 228 165 --------------------- TOTAL CURRENT ASSETS 7,911 5,752 Property and equipment, at cost: Fixtures and equipment 1,604 1,594 Computer systems 1,020 977 Communication systems 1,263 1,121 Land, building and leasehold improvements 1,309 1,282 --------------------- 5,196 4,974 Accumulated depreciation and amortization 3,172 2,992 --------------------- 2,024 1,982 Excess of cost over net assets of acquired business 1,995 1,995 Deferred tax asset, net of allowance 1,895 1,881 Other 154 276 --------------------- 4,044 4,152 TOTAL ASSETS $13,979 $11,886 =====================
See accompanying notes 1 4 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS) FEBRUARY 28 AUGUST 31 1999 1998 -------------------------- (Unaudited) RESTATED LIABILITIES AND STOCKHOLDERS' EQUITY SEE NOTE 7 CURRENT LIABILITIES: Current maturities of long-term debt 80 Accounts payable $ 6,035 $ 3,986 Accrued expenses 2,823 1,077 Member benefits 118 116 ------------------------ TOTAL CURRENT LIABILITIES 8,976 5,259 Long term debt, less current maturities 1,000 2,018 Membership security deposits 48 52 ------------------------ TOTAL LIABILITIES 10,024 7,329 STOCKHOLDERS' EQUITY Preferred stock ($10 par value, 600,000 shares authorized at February 28, 1999 and August 31, 1998, none issued) Common stock - ($.01 par value, 70,000,000 shares authorized, 8,673,503 and 8,449,198 shares issued at February 28, 1999 and August 31, 1998, respectively 87 85 Additional paid-in capital 11,857 10,211 Treasury stock at cost (1,616) (1,616) Accumulated deficit (6,373) (4,123) ------------------------ TOTAL STOCKHOLDERS' EQUITY $ 3,955 $ 4,557 ------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,979 $ 11,886 ========================
See accompanying notes 2 5 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATION AND ACCUMULATED DEFICIT (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 1999 1998 1999 1998 -------------------------------------------------------- NET REVENUES: Member dues and fees $ 758 $ 723 $ 1,458 $ 1,352 Floral and other order Processing 3,466 3,218 5,348 5,031 Publication and advertising fees 375 464 1,054 824 Charge card processing 486 483 949 907 Other revenue 46 47 77 80 -------------------------------------------------------- 5,131 4,935 8,886 8,194 EXPENSES: General and administrative 1,924 1,876 3,355 3,212 Selling and advertising 2,137 2,269 3,520 3,539 Stock Option Compensation 1,373 1,373 Publications 85 140 264 231 Depreciation, amortization and retirements 147 82 300 151 -------------------------------------------------------- 5,666 4,367 8,812 7,133 -------------------------------------------------------- OPERATING INCOME (LOSS) (535) 568 74 1,061 OTHER INCOME (EXPENSE) Merger related expenses (2,170) (2,255) Interest expense (22) (1) (48) (3) Other 6 8 Interest income 29 40 46 76 -------------------------------------------------------- (2,163) 45 (2,257) 81 -------------------------------------------------------- INCOME (LOSS) BEFORE TAXES (2,698) 613 (2,183) 1,142 Income tax expense (benefit) (161) 233 67 424 -------------------------------------------------------- NET INCOME (LOSS) $(2,537) $ 380 $(2,250) $ 718
See accompanying notes 3 6 FLORAFAX INTERNATIONAL ,INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 FEBRUARY 28 1999 1998 1999 1998 ------------------------------------------------------- NET INCOME (LOSS): $(2,537) $ 380 $(2,250) $ 718 Accumulated deficit at Beginning of period (3,836) (3,162) (4,123) (3,500) ------------------------------------------------------- ACCUMULATED DEFICIT AT END OF PERIOD $(6,373) $(2,782) $(6,373) $(2,782) ------------------------------------------------------- Basic earnings (loss)per common share: $ (0.31) $ 0.05 $ (0.28) $ 0.09 WEIGHTED AVERAGE SHARES OUTSTANDING 8,101 7,345 8,022 7,677 Fully diluted earnings (loss) per common share: $ (0.31) $ 0.04 $ (0.28) $ 0.08 WEIGHTED AVERAGE SHARES OUTSTANDING 8,101 8,722 8,022 8,714
See accompanying notes 4 7 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED ------------------------- FEBRUARY 28 FEBRUARY 28 1999 1998 ------------------------- OPERATING ACTIVITIES Net income (loss) $(2,250) $ 718 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Depreciation, amortization, and retirements 300 120 Provision for doubtful accounts 78 86 Deferred income taxes 25 364 Increase (decrease) in cash flows due to changes in: Accounts receivable (1,962) (1,279) Prepaid and other assets (63) (254) Other assets 2 31 Accounts payable 2,049 1,921 Accrued liabilities 1,748 (40) Non cash compensation 1,373 Membership security deposits (4) 7 ------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,296 1,674 INVESTING ACTIVITIES Capital expenditures (222) (1,171) Purchase of common stock (100) (Increase) decrease in restricted cash (40) (2) ------------------------- NET CASH (USED IN) INVESTING ACTIVITIES $ (262) $(1,273)
See accompanying notes (CONTINUED) 5 8 FLORAFAX INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) SIX MONTHS ENDED ------------------------- FEBRUARY 28 FEBRUARY 28 1999 1998 ------------------------- FINANCING ACTIVITIES Purchases of treasury stock (178) Proceeds from issuing stock 275 12 Payments of debt (1,098) ---------------------- NET CASH (USED IN) FINANCING ACTIVITIES $ (823) (166) ---------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 211 235 Cash and cash equivalents at beginning of year 3,438 4,170 ---------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,649 $ 4,405 ====================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 49 Cash paid during the period for income tax 42 $ 60 ====================== See accompanying notes 6 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE (1) MANAGEMENT'S OPINION AND ACCOUNTING POLICIES The accompanying interim financial statements should be read in conjunction with the Florafax International, Inc. (the Company's) Form10-KSB and 10-KSB/A (Also see Note 7) for the year ended August 31, 1998. In the opinion of Management the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's consolidated financial position as of February 28, 1999 and the consolidated results of operations and cash flows for the three and six months ended February 28, 1999. For the quarter and six months ended February 28, 1998, certain income statement items have been reclassified to conform to current period presentation. Historically, the Company's flowers-by-wire operation is seasonal in that its member florists send a much larger volume of orders during Thanksgiving, the Christmas season, Valentine's Day, Easter and Mother's Day. Therefore, the results of operations of an interim period may not necessarily be indicative of the results expected for a full year. In an effort to increase orders to member florists, the Company continues to engage in non traditional campaigns through it's wholly owned subsidiary, The Flower Club. The Flower Club was formed to generate additional orders by pursuing relationships with nationally recognized corporations. The Company engages in joint marketing campaigns with these corporations not only during holidays, but also during non-seasonal periods in an effort to provide member florists with orders during slow periods of the year. NOTE (2) YEAR 2000 ISSUE The Company operates three primary information technology computer systems, which are a main frame, a network based order entry system, and a telephone system. A year 2000 discussion of each of these systems is as follows. The Company operates a main frame computer system that processes floral orders, credit card transactions, and performs the Company's monthly billings to its member florists. The year 2000 software upgrade has been installed, tested, and is currently in use. The manufacturer of the software has provided the Company with the year 2000 upgrade at no charge. In addition, all internally developed software applications have been modified to be year 2000 compliant, and are currently in use. The cost to update these applications was less than $50,000. 7 10 The Company operates a network based order entry system. The manufacturers operating system software is year 2000 compliant. However, not all internally developed software applications have been modified to be year 2000 compliant. The Company is in the process of modifying its internally developed software applications and expects to complete the modifications no later than June 30, 1999. These internal programs are being modified by current employees and, as a result, the cost of these modifications is not expected to be material. The Company operates a telephone system which is integrated with the order entry system discussed in the preceding paragraph. The Company recently learned that a primary component of this system will need to be upgraded or replaced to be year 2000 compliant. The Company is in the process of evaluating whether to upgrade or replace this component. Regardless of which option is selected by the Company, this component is expected to be operational no later than, July 31, 1999, at a cost not to exceed $200,000. Currently the company does not operate any significant non-information technology systems. Management believes the most reasonably likely worst case year 2000 scenario would occur if the order entry system failed, which would prevent automated processing of floral orders. At this time, there is no indication that this will happen. However, should this occur, the Company would be forced to process incoming floral orders manually, until such time that the failure could be corrected. This could cause labor costs to double or triple during the time period while the system failure was being corrected. The Company relies on two main vendors to operate the credit card portion of its business. Both of these vendors have represented that they are year 2000 compliant. One vendor has provided the Company written certification of their year 2000 readiness. The other vendor has provided the Company limited written certification regarding a particular type of credit card terminal used by merchants who process transactions with the Company. Other significant vendors include certain third party service providers, such as those supplying electricity, water or telephone service. If these vendors experience year 2000 difficulties this could result in disruption of service to the Company, and a shutdown of the Company's facilities could occur for the duration of the disruption. None of these vendors have certified that their systems are year 2000 compliant. 8 11 NOTE (3) CONTRACT MODIFICATION As a result of the Companies contract modification with Marketing Projects Inc. ("MPI") during 1998 the Company is required to make additional contingent payments to MPI, contingent upon the attainment of quarterly revenue targets. If made, these payments will be recorded as commission expense in the period in which they are earned. For the quarter and six months ended February 28, 1999, the Company recorded commission expense related to these contingent payments of $124,000 and $246,000, respectively. NOTE (4) CREDIT FACILITY During the second quarter of 1998 the Company secured a $5 million revolving credit facility with First Union National Bank of Florida. The credit facility, collateralized by all the Company's assets, is for two years at the bank's prime rate of interest. A $2 million sublimit is also available for general working capital. As of February 28, 1999 the Company has outstanding $1,000,000 under this credit facility. NOTE (5) SUBSEQUENT EVENTS On December 9, 1998 the Company entered into a definitive merger agreement with privately held Gerald Stevens Inc., a Fort Lauderdale, Florida based retailer of flowers, floral-related merchandise and gifts. Under terms of the agreement, Gerald Stevens' shareholders will receive 1.25 to 1.35 common shares of the Company for each common share of Gerald Stevens share owned. The exchange rate will be determined based on the average closing sales price of Florafax common stock for the 45 consecutive trading days prior to the third trading day before the merger is completed. Depending on the conversion ratio, Gerald Stevens' shareholders will own approximately 75% to 80% of the Company's common stock after the merger. The parties expect the transaction to be treated as a pooling-of-interests for accounting purposes and anticipate that the merger will be completed by the end of April 1999. Merger related expenses for the quarter and six months ended February 28, 1999 amounted to $2,170,000 and $2,255,000, respectively. Prior to the consummation of the merger the Company may incur additional significant merger related expenses. These expenses could result in the Company reporting a net loss for that quarter. NOTE (6) STOCK OPTION COMPENSATION EXPENSE Certain options granted by the Company in 1997 created a variable stock compensation plan. As a result the, Company is required to recognize non cash compensation expense when the price of the Company's common stock reaches certain prices for a specified number of trading days. The current rise in the price of the Company's common stock caused the Company to record non-cash compensation expense, in addition to ordinary salaries and wages, of approximately $1,373,000 for the quarter and six months ended February 28, 1999, with no similar expense recorded during the previous year. 9 12 NOTE(7) RESTATEMENT Effective May 1, 1998 the Company entered into a contract modification agreement with MPI. At that time the contract was accounted for as a business combination. However, subsequent to the original accounting of the transaction the Company had several discussions with the Securities and Exchange Commission. As a result of these conversations, the Company re-evaluated the facts and circumstances surrounding the MPI transaction and concluded that the transaction should be accounted for as a contract modification rather than a business combination. Consequently, the Company has restated it's financial statements for the year ended August 31, 1998 to account for the transaction as a contract modification. NOTE (8) RECENT PRONOUNCEMENTS For a discussion of recent accounting pronouncements please refer to the Company's 10-KSB/A for the year ended August 31, 1998. 10 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION LIQUIDITY AND CAPITAL RESOURCES Operating cash flows historically have been generated primarily from processing floral orders and charge card transactions for the Company's member florists, as well as collecting dues, fees and directory advertising from the members. Floral order processing may require settlement with the fulfilling florist before collection of funds from the sending florist. Charge card processing, however, generally allows the Company to collect funds from the charge card issuer prior to settlement with the merchant. Since in both types of transactions the Company is both collecting and settling funds, the timing of these cash flows has a significant impact on the Company's liquidity. As discussed in Note 1 to the consolidated financial statements the Company continues to engage in non traditional campaigns through it's wholly owned subsidiary, The Flower Club. This has helped to improve the Company's cash flow as the majority of orders generated through The Flower Club are paid for by credit cards. This allows the Company to receive a significant portion of its funds within days after processing the transaction. The Company is reporting a significant loss for the quarter and six months ended February 28, 1999, which is primarily a result of merger related expenses (See note 5), and option related compensation expense (See note 6). Of the merger related expenses, approximately $1,600,000 is accrued as a liability as of February 28, 1999, and is expected to be paid in the quarter ended May 31, 1999. The Company expects to fund these expenditures with cash flow from operations. However, the option related compensation expense is a non cash item and had no impact on the Company's cash position. In addition, during the six months ended February 28, 1999 the company retired in excess of $1,000,000 of long-term debt. During the second quarter of 1998 the Company purchased the land and building which were previously leased as the Company's corporate headquarters. The purchase price was $672,500. In addition, the Company purchased a new telephone switch in the amount of $220,000. As a result of the Company's cash position, both of these purchases were funded with operating cash flows. 11 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION RESULTS OF OPERATIONS GENERAL COMMENTS The company is reporting a net loss for the quarter and six months ended February 28, 1999, due to merger related expenses and non cash compensation expense. However, revenues are up for both the quarter and six months ended February 28, 1999 when compared to the same periods in the previous year. In addition, exclusive of the merger and non cash compensation expenses incurred in 1999, the Company's operating income would have improved for both the quarter and six months ended February 28, 1999 when compared to the prior year. NET REVENUES Revenue from member dues and fees has increased for both the quarter and six months ended February 28, 1999, when compared to the same periods in the prior year. This increase is primarily attributable to an increase in member florists and an increase in dues. Floral order revenue increased for both the quarter and six months ended February 28, 1999, when compared to the same periods last year. This is attributable primarily to an increase in Flower Club revenues, as well as an increase in shop to shop revenues. In addition, the Company is experiencing positive results from its gift basket program. Net revenues from credit card operations increased slightly for the six months ended February 28, 1999 and remained relatively constant for the quarter ended February 28, 1999 when compared to the same periods in the prior year. The Company continues to experience an increase in gross dollars processed, however; margins have not increased proportionately. Publication and advertising fees decreased for the quarter February 28, 1999 when compared to the same period in the prior year, due to the issuance of an additional directory in the quarter ended February 28, 1998 when compared to the same quarter in 1999. For the six months ended February 28, 1999 the Company experienced an increase in publications and advertising revenues as a result of the publication of a new selection guide. Selection guides are recipe books and sales materials used by member florists when producing the various flower arrangements that the Company advertises throughout the country. New selection guides are published approximately every three years. EXPENSES Member support, general and administrative expenses increased for both the quarter and six months ended February 28, 1999 when compared to the same periods in the prior year. The primary component of the increase was labor costs, which increased as a result of increased Flower Club order volume and general wage increases. Conversely, the Company experienced a decline in telephone related expenses as a result of a new contract with the Company's long distance carrier. 12 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Selling and advertising expenses experienced a moderate decline for the quarter ended February 28, 1999, when compared to the prior year, but remained relatively constant for the six months ended February 28, 1999, when compared to the previous year. However, there were several components that changed within the selling and advertising expense category, as follows. For the quarter and six months ended February 28, 1999 the Company reduced commission expenses paid to an outside marketing firm resulting from a contract modification (See note 7). This marketing function is now performed internally by the Company's in house marketing department. The decreased commission expenses from the contract modification were offset somewhat by expenses related to the Company's in house marketing department. For both the quarter and six months ended February 28, 1999 the Company experienced an increase in amounts paid to Flower Club corporate partners, as a result of increased order volume and due to several new contracts that call for additional commissions to these partners. As a result of the vesting of certain non plan stock options, the Company recorded non cash compensation expense in the amount of $1,373,000. These options are now fully vested, and will cause no further compensation expense in the future. Publication expense decreased for the quarter February 28, 1999 when compared to the same period in the prior year, due to the issuance of an additional directory in the quarter ended February 28, 1998 when compared to the same quarter in 1999. However, for the six months ended February 28, 1999 the Company experienced and increase in publication expenses as a result of the publication of a new selection guide. Selection guides are recipe books and sales materials used by member florists when producing the various flower arrangements that the Company advertises throughout the country. New selection guides are published approximately every three years. Depreciation and amortization increased during the quarter and six months ended February 28, 1999 when compared to the prior year. During 1998 the Company purchased it's corporate headquarters as well as purchased new computer and telephone equipment, thereby causing an increase in depreciation. In addition, the contract modification agreement with Marketing Projects, Inc. during 1998 (See note 3) caused the Company to record certain intangible assets. The amortization of these intangible assets increased amortization expense for the quarter and six months ended February 28, 1999, when compared to the prior year. OTHER INCOME (EXPENSE) The primary component of other income (expense) for both the quarter and six months ended February 28, 1999 was merger related expenses (See note 5). 13 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION YEAR 2000 ISSUE The Company operates three primary information technology computer systems, which are a main frame, a network based order entry system, and a telephone system. A year 2000 discussion of each of these systems is as follows. The Company operates a main frame computer system that processes floral orders, credit card transactions, and performs the Company's monthly billings to its member florists. The year 2000 software upgrade has been installed, tested, and is currently in use. The manufacturer of the software has provided the Company with the year 2000 upgrade at no charge. In addition, all internally developed software applications have been modified to be year 2000 compliant, and are currently in use. The cost to update these applications was less than $50,000. The Company operates a network based order entry system. The manufacturers operating system software is year 2000 compliant. However, not all internally developed software applications have been modified to be year 2000 compliant. The Company is in the process of modifying its internally developed software applications and expects to complete the modifications no later than June 30, 1999. These internal programs are being modified by current employees and, as a result, the cost of these modifications is not expected to be material. The Company operates a telephone system which is integrated with the order entry system discussed in the preceding paragraph. The Company recently learned that a primary component of this system will need to be upgraded or replaced to be year 2000 compliant. The Company is in the process of evaluating whether to upgrade or replace this component. Regardless of which option is selected by the Company, this component is expected to be operational no later than, July 31, 1999, at a cost not to exceed $200,000. Currently the company does not operate any significant non-information technology systems. Management believes the most reasonably likely worst case year 2000 scenario would occur if the order entry system failed, which would prevent automated processing of floral orders. At this time, there is no indication that this will happen. However, should this occur, the Company would be forced to process incoming floral orders manually, until such time that the failure could be corrected. This could cause labor costs to double or triple during the time period while the system failure was being corrected. The Company relies on two main vendors to operate the credit card portion of its business. Both of these vendors have represented that they are year 2000 compliant. One vendor has provided the Company written certification of their year 2000 readiness. The other vendor has provided the Company limited written certification regarding a particular type of credit card terminal used by merchants who process transactions with the Company. 14 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Other significant vendors include certain third party service providers, such as those supplying electricity, water or telephone service. If these vendors experience year 2000 difficulties this could result in disruption of service to the Company, and a shutdown of the Company's facilities could occur for the duration of the disruption. None of these vendors have certified that their systems are year 2000 compliant. FORWARD-LOOKING STATEMENTS When used in this report, the words "plan(s)", "intends(s)", "expect(s)", "feel(s)", "will", "may", "believe(s)", "anticipate(s)", and similar expressions are intended to identify forward-looking statements. The events described in such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the factors which affect the Company's business, including the disclosures made under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the report, as well as the Company's periodic reports on Form 10-KSB, 10-QSB and 8-K filed with the Securities and Exchange Commission. The events described in such statements, and the success of the management strategies described by those statements, are subject to certain risks and uncertainties which could cause actual results to differ from those discussed; among those risks and uncertainties which are particular to the Company are: continued consumer spending on discretionary items such as flowers and gifts, the success of the Company in maintaining relations with corporate marketing partners, the success of the Company in maintaining a strong membership base, the continued use of credit cards as the preferred method of payment by customers of members, increased labor costs and the health of the retail flower industry as a whole. 15 18 PART II OTHER INFORMATION Item 1. Legal Proceedings For a summary of legal proceedings, reference is made to Item 3, Legal Proceedings, included in the Company's annual report on Form 10-KSB/A for the year ended August 31, 1998. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. The Submission of Matters to a Vote of Security Holders Item 5. Other Information None Item 6. Exhibits and Reports on form 8-K Exhibits EXHIBIT REFERENCE (27) Financial Data Schedule (for SEC use only). The following items have been included as exhibits in filings by the Company in a previous filing and, accordingly, are incorporated here by reference. EXHIBIT REFERENCE (3) Articles of incorporation and Bylaws of the Registrant, as amended. (10) Material Contracts (a) Convertible subordinated notes due to Clark Estates maturing June 30, 1996. (b) Subordinated debentures maturing in 1998. 16 19 EXHIBIT REFERENCE (c) Agreement dated December 3 1993, Addendum, Second Addendum, Third Addendum, Fourth Addendum and Fifth Addendum thereto by and between the Registrant and Citizens Fidelity Bank and Trust Company (now PNC Bank, Kentucky, Inc.). (d) Purchase Agreement for certain assets formerly owned by Savannah Floral Services, Inc. dated March 10, 1994. (e) Note Payable to Andrew Williams dated March 10, 1994. (f) Promissory Note to Citrus Bank dated November 9, 1993. (g) Promissory Note to Citrus Bank dated November 17, 1993. (h) Promissory Note to Citrus Bank dated January 25, 1994. (i) Loan to James H. West, Director, President and Chief Financial Officer, dated August 28, 1994. (j) Consulting agreement with David Harper of Ventura County California dated December 10, 1993. (k) Promissory Note to Citrus Bank dated August 31, 1995. (l) Operating lease agreement between Registrant and Alvin Wunderlich dated April 1995. (m) Agreement of Purchase and Sale made and entered into to be effective December 29, 1995 by and between Registrant and St. James Partners, LTD. 7% Convertible Promissory Note in the amount of $2,500,000 dated February 28, 1996 due February 28, 1997. (n) Security agreement dated February 28, 1996 executed in connection with the $2,500,000 Convertible Promissory Note. (o) Common Stock Purchase Warrant for 250,000 shares of the registrants common stock expiring January 1, 2001. (p) Common Stock Purchase Warrant for 400,000 shares of the registrants Common stock expiring January 1, 2001. (q) Construction Agreement dated September 30, 1996 between Registrant and C.E. Block, Architect of Vero Beach, Florida. (r) Building purchase Agreement between Registrant and Alvin Wunderlich Sr. Trust Number 1. (s) Building lease Agreement between Registrant and Verne W. Anderson and Mariella Anderson Living Trust (t) Nonqualified, Nonplan Option Agreement between Registrant and Andrew W. Williams, Chairman of the Board and CEO. 17 20 EXHIBIT REFERENCE (u) Nonqualified, Nonplan Option Agreement between Registrant and James H. West, President and CFO. (v) Nonqualified, Nonplan Option Agreement between Registrant and Kelly S. McMakin, Treasurer and Secretary. (w) Nonqualified, Nonplan Option Agreement between Registrant and James J. Pagano, Vice President and Marketing Director (x) Amendment dated January 7, 1998 to building purchase agreement between Registrant and Alvin Wunderlich Sr. Trust Number 1 (y) Promissory note agreement dated January 16, 1998 in the amount of $5,000,000 between Registrant and First Union National Bank (z) Loan agreement dated January 16, 1998 between Registrant and First Union National Bank. (aa) Security Agreement dated January 16, 1998 between Registrant and First Union National Bank. (bb) Closing Statement dated January 16, 1998 between Registrant and First Union National Bank. (cc) Asset purchase and sale agreement dated May 1, 1998 between Registrant and Marketing Projects Inc., of Westlake Village California (dd) Noncompetiton and nondisclosure agreement dated May 29, 1998 between Registrant and David Appell, Robert Bourdom, Randolph Commans and Phyllis Hooker of Westlake Village, California (ee) Bill of sale, assignment and assumption dated May 1, 1998 between Registrant and Marketing Projects, Inc., of Westlake Village, California. (ff) Escrow agreement dated May 29, 1998 between Registrant, Marketing Projects, Inc., and First Union National Bank. (gg) First amendment to escrow agreement dated May 29, 1998 between Registrant, Marketing Projects, Inc., and First Union National Bank. (hh) Management Incentive Stock Plan approved January 30, 1996 (ii) Non-Employee Director Stock Option Plan approved January 30, 1996. (jj) Agreement and Plan of Merger dated December 9, 1998 by and among Registrant, Red Cannon Acquisition Corp. and Gerald Stevens, Inc. (kk) Voting Agreement between affiliates of Registrant and Gerald Stevens, Inc. (ll) Voting Agreement between affiliates of Gerald Stevens, Inc. and Registrant 18 21 REPORTS ON FORM 8-K Reports on Form 8-K On December 11, 1998 the Company filed a Form 8-K announcing that effective December 9, 1998 the Company had entered into a merger agreement with Gerald Stevens, Inc. Under the terms of the agreement the Company is expected to issue additional shares of it's common stock that will result in Gerald Stevens, Inc. shareholders owning approximately 75% to 80% of the Company. 19 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Florafax International, Inc. Date: April 14, 1999 James H. West -------------- ------------- President and Chief Financial Officer 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 6-MOS AUG-31-1999 SEP-01-1998 NOV-30-1998 3,795,000 0 4,091,000 465,000 0 7,911,000 5,196,000 3,172,000 13,979,000 8,976,000 1,000,000 0 0 87,000 3,868,000 13,979,000 0 8,886,000 0 0 8,812,000 78,000 48,000 (2,183,000) 67,000 (2,250,000) 0 0 0 (2,250,000) (0.28) (0.28)
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