<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission File Number
33-91582
--------
FTD CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3711271
- - ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
3113 WOODCREEK DRIVE
DOWNERS GROVE, IL 60515-5420
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(630) 719-7800
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Action of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
As of November 1, 1999, there were 12,380,270 outstanding shares of the
Registrant's class A common stock, par value $.01 per share, and 2,948,750
outstanding shares of the Registrant's class B common stock, par value $.0005
per share.
<PAGE> 2
FTD CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and June 30, 1999................................................................... 3
Condensed Consolidated Statements of Operations
for the three month periods ended September 30, 1999 and 1998....................... 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended September 30, 1999 and 1998............................... 5
Notes to Consolidated Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 14
Part II. Other Information
Item 1. Legal Proceedings....................................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................................ 16
Signatures......................................................................................... 17
Exhibit Index...................................................................................... 18
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FTD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 JUNE 30,
ASSETS (UNAUDITED) 1999
----------------------- -----------------------
(IN THOUSANDS)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 8,900 $ 2,468
Accounts receivable, less allowance for doubtful accounts
of $1,803 at September 30, 1999 and $1,681 at June 30, 1999 26,398 22,813
Receivable from underwriters 33,480 -
Inventories, net 13,419 13,641
Deferred income taxes 3,045 3,045
Prepaid expenses 2,794 4,088
----------------------- -----------------------
TOTAL CURRENT ASSETS 88,036 46,055
Property and equipment, less accumulated depreciation
of $34,318 at September 30, 1999 and $33,504 at June 30, 1999 15,891 15,984
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $515 at September 30, 1999 and $445 at June 30, 1999 989 1,059
Deferred income taxes 3,135 1,440
Other noncurrent assets 9,569 8,429
Goodwill and other intangibles, less accumulated amortization
of $14,418 at September 30, 1999 and $13,654 at June 30, 1999 70,966 71,730
----------------------- -----------------------
TOTAL OTHER ASSETS 84,659 82,658
TOTAL ASSETS $ 188,586 $ 144,697
======================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 32,439 $ 32,425
Customer deposits and accrued customer incentive programs 15,539 15,751
Other accrued liabilities 8,037 6,164
----------------------- -----------------------
TOTAL CURRENT LIABILITIES 56,015 54,340
Long-term debt 66,000 51,750
Post-retirement benefits, less current portion 5,258 5,345
Accrued pension obligations, less current portion 410 410
Preferred stockholders' equity in a subsidiary company Series A 8% Cumulative
Redeemable Convertible Preferred Stock, $.01 par value; 90,000 shares
issued and outstanding at
September 30, 1999 and June 30, 1999 9,074 9,074
Minority interest in subsidiary 31,757 -
STOCKHOLDERS' EQUITY:
Common stock:
Class A 123 123
Class B 2 2
Paid-in capital 37,018 37,018
Accumulated deficit (14,422) (10,648)
Accumulated other comprehensive income (91) (96)
Unamortized restricted stock (850) (913)
Treasury stock (1,708) (1,708)
----------------------- -----------------------
TOTAL STOCKHOLDERS' EQUITY 20,072 23,778
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 188,586 $ 144,697
======================= =======================
</TABLE>
See accompanying notes to consolidated financial statements.
3
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FTD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
1999 1998
------------------ ------------------
(In thousands, except per share amounts)
<S> <C> <C>
REVENUES:
Technology products and services $ 28,355 $ 23,987
Marketplace and Other 12,302 14,853
Direct to Consumer 10,776 5,575
------------------ ------------------
Total revenues 51,433 44,415
------------------ ------------------
COSTS OF GOODS SOLD AND SERVICES PROVIDED:
Technology products and services 7,082 5,360
Marketplace and Other 9,445 10,424
Direct to Consumer 8,491 4,395
------------------ ------------------
Total costs of goods sold and services
provided 25,018 20,179
------------------ ------------------
Selling, general and administrative expenses 30,608 23,744
------------------ ------------------
Income (loss) from operations (4,193) 492
------------------ ------------------
OTHER INCOME AND EXPENSES:
Interest income 182 175
Interest expense (1,253) (2,378)
Foreign exchange gain (loss) (137) 47
------------------ ------------------
Total other income and expenses (1,208) (2,156)
------------------ ------------------
Loss before income tax expense and minority interest (5,401) (1,664)
Income tax benefit (1,619) (819)
Minority interest in loss of subsidiary (8) -
------------------ ------------------
Net loss $ (3,774) $ (845)
================== ==================
Other Comprehensive Loss:
Foreign currency translation adjustments 5 (58)
------------------ ------------------
Comprehensive loss $ (3,769) $ (903)
================== ==================
LOSS PER SHARE:
Basic and diluted $ (0.25) $ (0.05)
================== ==================
Common shares used in the calculation of basic and diluted earnings
(loss) per share 15,345 15,365
================== ==================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
FTD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
1999 1998
-------------------- ---------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (5,694) $ (1,721)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (2,192) (2,278)
-------------------- ---------------------
Net cash used in investing activities (2,192) (2,279)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit borrowings 14,250 -
Issuance (repurchase) of common stock, net 63 (795)
-------------------- ---------------------
Net cash (used in) provided by financing activities 14,313 (795)
Effect of foreign exchange rate changes on cash 5 (58)
-------------------- ---------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 6,432 (4,853)
Cash and cash equivalents at beginning of period 2,468 13,615
-------------------- ---------------------
Cash and cash equivalents at end of period $ 8,900 $ 8,762
==================== =====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 873 $ -
Income taxes paid $ 69 $ 19
Non-cash financing activities:
Receivable from underwriters of subsidiary stock offering $ 33,480 $ -
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
FTD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements as of and for
the three month period ended September 30, 1999, include the accounts of FTD
Corporation and its wholly-owned subsidiary, Florists' Transworld Delivery, Inc.
("the Operating Company"), (collectively the "the Company" or "FTD"). The
Operating Company includes its wholly owned subsidiaries Renaissance Greeting
Cards, Inc. and FTD Canada, Inc. as well as its majority owned subsidiary
FTD.COM INC. ("FTD.COM"). These statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
pursuant to the rules and regulations of the Securities and Exchange Commission
and do not contain all information included in the audited consolidated
financial statements and notes for the year ended June 30, 1999. The interim
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K. In the
opinion of FTD management, all adjustments necessary for a fair presentation of
the financial position and results of operations have been included (and any
such adjustments are of a normal, recurring nature except as disclosed herein).
Due to seasonal variations in FTD's business, operating results for the three
month period ended September 30, 1999, are not necessarily indicative of the
results that might be expected for the year ended June 30, 2000.
Certain amounts in the condensed consolidated statements of operations
and comprehensive income for the three month period ended September 30, 1998
have been reclassified to conform to the current period presentation which
includes the reclassification of certain revenues generated from Direct to
Consumer activities which were previously reported net of costs relating to
processing and fulfillment and are now recorded on a gross basis. The
corresponding costs representing the amounts paid for processing and fulfillment
have been reclassified as Direct to Consumer costs of goods sold and services
provided. The Company has also made other reclassifications of costs of goods
sold and services provided and selling, general and administrative expenses in
order to conform to the current period presentation. In addition, certain
amounts in the condensed consolidated statements of cash flows for the three
month period ended September 30, 1998 relating to other non-current assets which
were previously classified as operating activities have been reclassified as
investing activities to conform to the current period presentation.
Note 2. Revenues from Sale of the Floral Selections Guide ("FSG")
Effective with the 1999 fiscal year, as a condition of FTD affiliation,
all FTD florists must purchase a FSG and related workbook. The purchase of such
FSG entitles the FTD florist to a non-exclusive, non-transferable right for on
premises use of the FSG for as long as the purchaser remains an FTD florist in
good standing. FTD will revise this FSG for new FTD products every other fiscal
year and recognize the related revenue at the time of shipment to all FTD
florists. In the three month period ended September 30, 1999 and 1998 revenue
from such FSG sales totaled $0.02 million and $2.6 million, respectively.
Note 3. Capital Transactions
During the three month period ended September 30, 1999, no options were
granted to employees pursuant to the terms of FTD's 1994 Stock Award and
Incentive Plan. The Company did not repurchase into treasury any shares of
outstanding common stock or issue any shares to officers as restricted stock
during the three month period ended September 30, 1999. During the three month
period ended September 30, 1998, pursuant to the terms of FTD's 1994 Stock Award
and Incentive Plan, options to purchase 127,100 Class A shares were granted and
options to purchase 2,000 Class A shares previously granted, were canceled. Also
during the three month period ended September 30, 1998, FTD repurchased into
treasury 26,494 Class A shares and 51,250 Class B shares and issued 70,000 Class
A shares to officers as restricted stock.
6
<PAGE> 7
Note 4. Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", basic earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding
and excludes the dilutive effect of unexercised common stock equivalents.
Diluted earnings (loss) per share is calculated by dividing net income by the
weighted average number of common shares outstanding and includes the dilutive
effect of unexercised common stock equivalents to the extent that they are not
anti-dilutive. Basic and diluted earnings per common share for the three month
periods ended September 30, 1999 and 1998 have been computed based on the
weighted average number of common shares outstanding of 15,344,870 and
15,364,586, respectively.
Shares issuable from securities that could potentially dilute basic
earnings per share which were not included in the calculation of diluted
earnings per share because their effect was anti-dilutive consisted of
approximately 85,000 shares and 150,000 shares in the three month periods ended
September 30, 1999 and 1998, respectively.
Note 5. Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company has identified three reportable
business segments based on the nature of its products and services and financial
reports which are evaluated regularly by management in deciding how to allocate
resources and assess performance. For purposes of managing the Company, the
chief operating decision maker reviews segment financial performance to the
gross margin level.
These business segments include Technology products and services,
Marketplace and Other, and Direct to Consumer. Technology products and services
consists of technology based products and services offered to the Company's
customers. This includes the Company's Mercury equipment, Mercury Advantage
systems, Mercury Wings TM systems, Mercury Network, Clearinghouse, Flowers After
Hours, Publications, Credit Card processing and Interflora, Inc. Marketplace and
Other consists of floral related products, specialty gift products and greeting
cards offered to our customers for resale as well as the FSG and other
miscellaneous income items. Direct to Consumer includes floral and specialty
gift order capabilities offered directly to the consumer through the
1-800-SEND-FTD toll-free telephone number and the www.FTD.COM Internet site.
7
<PAGE> 8
The following table details segment revenues and costs of goods sold
and services provided for the three month periods ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SEPTEMBER 30,
1999 1998
---- ----
------------ ---------------- ----------------- ---------------- ---------------- ---------------
Gross Gross
Segment Elimination's Consolidated Segment Elimination's Consolidated
------------ ---------------- ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Technology products and
services $ 28,824 $ (469) $ 28,355 $ 24,165 $ (178) $ 23,987
Marketplace and Other 12,302 - 12,302 14,853 - 14,853
Direct to Consumer 12,443 (1,667) 10,776 6,105 (530) 5,575
------------ ---------------- ----------------- ---------------- ---------------- ---------------
Total revenues 53,569 (2,136) 51,433 45,123 (708) 44,415
Costs of Goods Sold and Services
Provided:
Technology products and services 7,641 (559) 7,082 5,360 - 5,360
Marketplace and Other 9,445 - 9,445 10,424 - 10,424
Direct to Consumer 8,960 (469) 8,491 4,860 (465) 4,395
------------ ---------------- ----------------- ---------------- ---------------- ---------------
Total costs of goods sold and
services provided 26,046 (1,028) 25,018 20,644 (465) 20,179
Selling, General and
Administrative expenses 31,716 (1,108) 30,608 23,987 (243) 23,744
---------------
Operating Income (Loss) $ (4,193) $ - $ (4,193) $ 492 $ - $ 492
============ ================ ================= ================ ================ ===============
Gross Margin by Segment:
Technology products and services $ 21,183 $ 90 $ 21,273 $ 18,805 $ (178) $ 18,627
Marketplace and Other 2,857 - 2,857 4,429 - 4,429
Direct to Consumer 3,483 (1,198) 2,285 1,245 (65) 1,180
</TABLE>
The Company's accounting policies for segments are the same as those on
a consolidated basis described in Note 1, Basis of Presentation. The Company
evaluates segment profit or loss on the basis of gross profit.
The Company does not measure total assets by reportable business
segment for purposes of assessing performance and making operating decisions.
Note 6. Initial Public Offering of FTD.COM
On September 28, 1999, the Company's subsidiary FTD.COM agreed to issue
and sell 4,500,000 shares of its Class A common stock to the public in an
Initial Public Offering (IPO) transaction at a price of $8.00 per share,
resulting in gross proceeds from the offering of $36.0 million. The IPO closed
on October 4, 1999, at which time FTD.COM collected the gross proceeds of $36.0
million less underwriting discounts of $2.5 million. In addition, the $33.5
million net cash received from the underwriters was reduced by other offering
expenses of $1.7 million. The offset of this is reflected as $31.8 million of
minority interest in subsidiary. Prior to the IPO, the Company owned 100% of the
outstanding common stock of FTD.COM. Post IPO and as of September 30, 1999, the
Company owns 90% of the outstanding common stock of FTD.COM. There was no gain
recorded by the Company upon sale of FTD.COM's stock. The Company's accounting
policy is to account for a subsidiary direct sale of unissued shares as a
capital transaction.
8
<PAGE> 9
Note 7. Minority Interest in Subsidiary
The Company's condensed consolidated financial statements as of and for
the three month period ended September 30, 1999, reflect the minority interest
in the Company's subsidiary FTD.COM from the date of the IPO. The Company's
accounting policy is to deduct the minority interest in net income (loss) to
arrive at consolidated net income. The minority interest represents the loss
attributable to the 10% shareholders for the time period of September 29, 1999
and September 30, 1999.
Note 8. Subsequent Events
Upon the closing of the IPO of FTD.COM on October 4, 1999, the 90,000
shares of Series A 8% Cumulative Redeemable Convertible Preferred Stock were
automatically converted into 1,384,614 shares of FTD.COM Class A common stock.
Upon conversion, the Company reclassified the preferred stockholders' equity in
a subsidiary of $9.0 million to minority interest in subsidiary and the accrued
and unpaid dividends of $74,301 were offset against the retained earnings of
FTD.COM.
On October 6, 1999, the underwriters exercised their one time option to
purchase 495,000 additional shares of FTD.COM Class A common stock at the IPO
price of $8.00 per share, representing a portion of the over-allotment option
granted to the underwriters in connection with the IPO. The net proceeds to
FTD.COM from this issuance and sale of 495,000 shares of Class A common stock
were $3.7 million after deducting underwriting discounts and commissions.
Upon completion of the above events, the Operating Company owns
approximately 87% of the outstanding common stock of FTD.COM through its
ownership of 40,920,000 shares of Class B common stock (as adjusted for the
12-for-1 stock split on July 30, 1999). In addition, the minority interest of
13% is represented by the 4,500,000 shares of Class A common stock sold to the
public, the 1,384,614 shares from the conversion of the Series A preferred stock
into shares of Class A common stock and the issuance and sale of 495,000 shares
of Class A common stock to the underwriters pursuant to the underwriters'
exercise of their over-allotment option.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained in this report, certain
statements made herein are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that reflect the Company's
expectations regarding its future growth, results of operations, performance and
business prospects and opportunities. Words such as "anticipates," "believes,"
"plans," "expects," "estimates," and similar expressions have been used to
identify these forward looking statements, but are not the exclusive means of
identifying these statements. These statements reflect the Company's current
beliefs and are based on information currently available to the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by, these statements. These risks, uncertainties,
and other factors include the Company's ability to develop and market existing
and acquired products, the Company's ability to adjust to changes in technology,
customer preferences, enhanced competition and new competitors in the floral
services industry, current exchange rate and interest rate fluctuations,
collection of receivables, the Company's ability to address internal and
external Year 2000 issues and risks associated with general economic and
business conditions, which may reduce or delay customers' purchases of the
Company's products and services. The Company is not obligated to update or
revise these forward-looking statements to reflect new events or circumstances.
FTD generates its revenue from three principal areas of operation.
These areas have been identified as Technology products and services,
Marketplace and Other and Direct to Consumer.
- Technology products and services consists primarily of:
Mercury equipment, Mercury Advantage systems and Mercury Wings TM
systems sales which includes both sales and leases of hardware and
software to FTD florists.
-
Mercury Network which is FTD's proprietary telecommunications
network used by florists to transmit orders through FTD or through
competing clearinghouses.
-
Clearinghouse, which provides order billing and collection
services to both the sending and receiving florists, for which FTD
receives a percentage of the sales price for the service.
-
Flowers After Hours which is FTD's call forwarding service whereby
FTD receives orders for participating florists when that florists'
shop is closed or otherwise unavailable. FTD charges a fee for
each transaction processed.
-
Publications which consists of the FTD Directory published on a
quarterly basis on CD ROM as well as paper book. Publications also
includes revenues attributable to the set up and maintenance of
florists' Web sites for FTD Florists' Online through FTD.COM's
Internet site www.FTD.COM.
-
Credit Card processing which is a service offered to participating
florists whereby FTD pools the credit card transactions of such
florists to secure more favorable terms on credit card
transactions than the FTD florists could secure individually.
- - - Interflora, Inc. is a joint venture between FTD,
Fleurop-Interflora and the Interflora British Unit. The joint
venture provides a floral services organization with non-FTD
member florists to enable florists to transmit and receive orders
outside North America.
The Marketplace and Other segment primarily represents FTD's wholesale
distribution of floral related products to florists. This includes both
FTD-branded and non-branded holiday and everyday floral arrangement containers
and products, as well as packaging, promotional products and a wide variety of
other floral-related supplies. It also includes greeting cards, specialty gifts
and the FSG in addition to other miscellaneous income items.
10
<PAGE> 11
The Direct to Consumer segment represents revenue derived from our
direct marketing business, FTD.COM, which is a majority owned subsidiary of the
Operating Company. FTD.COM is an Internet and telephone marketer of flowers and
specialty gifts. This business segment includes consumer orders generated by the
1-800-SEND-FTD toll-free telephone number and the www.FTD.COM Web site.
FTD.COM's revenue includes the sales price of flowers and specialty gifts as
well as a service fee charged to the consumer.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, 1998.
The following is a discussion of changes in the Company's financial
condition and results of operations for the three month period ended September
30, 1999, compared with the three month period ended September 30, 1998.
Total revenues increased by $7.0 million, or 15.8%, to $51.4 million
for the three month period ended September 30, 1999 compared to $44.4 million
for the three month period ended September 30, 1998. This increase in revenue
was primarily the result of increases in the Technology products and services
and Direct to Consumer business segments offset in part by a decrease in the
Marketplace and Other business segment.
Technology products and services segment revenue increased by $4.4
million, or 18.3%, to $28.4 million for the three months ended September 30,
1999 compared to $24.0 million for the three months ended September 30, 1998.
This increase is primarily due to increases in Mercury Advantage system sales,
Clearinghouse, Mercury Wings TM system sales, and Publications.
Marketplace and Other segment revenue decreased by $2.6 million, or
17.4%, to $12.3 million for the three month period ended September 30, 1999
compared to $14.9 million for the three month period ended September 30, 1998.
The decrease from the prior year primarily was the result of the decrease in
revenue attributable to the Floral Selections Guide ("FSG") (See Note 2.
Revenues from Sale of the Floral Selections Guide).
Direct to Consumer segment revenue increased by $5.2 million, or 92.9%,
to $10.8 million for the three month period ended September 30, 1999 compared to
$5.6 million for the three month period ended September 30, 1999. The increase
from the prior year was the result of an increase in the number of orders placed
by consumers through the www.FTD.COM Internet site, as well as an increase in
average order value.
Costs of goods sold and services provided associated with Technology
products and services increased $1.7 million, or 31.5% to $7.1 million for the
three month period ended September 30, 1999 compared to $5.4 million for the
three month period ended September 30, 1998. This increase is primarily due to
increased costs associated with the Mercury Advantage and Mercury Wings TM
systems sales.
Costs of goods sold and services provided associated with Marketplace
and Other decreased $1.0 million, or 9.6%, to $9.4 million for the three month
period ended September 30, 1999, compared to $10.4 million for the three month
period ended September 30, 1998. This decrease is primarily due to the decrease
in production costs associated with the FSG.
Costs of goods sold and services provided associated with Direct to
Consumer increased $4.1 million, or 93.2%, to $8.5 million for the three month
period ended September 30, 1999, compared to $4.4 million for the three month
period ended September 30, 1998. The increase from the prior year was primarily
due to increased processing and fulfillment costs associated with the increase
in consumer orders placed through the www.FTD.COM Internet site.
As a percent of revenue, costs of goods sold and services provided
increased to 48.6% for the three month period ended September 30, 1999 from
45.5% for the three month period ended September 30, 1998. This is primarily due
to decreased gross margin relating to the Marketplace and Other business
segment.
Selling, general and administrative expenses increased $6.9 million, or
29.1%, to $30.6 million for the
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three month period ended September 30, 1999 from $23.7 million for the three
month period ended September 30, 1998. This is primarily due to FTD's increased
costs associated with Internet marketing, advertising, convention and trade
shows as well as increased travel and salary expenses associated with FTD.COM in
comparison to the previous three months ended September 30, 1998.
Net interest expense for the three month period ended September 30,
1999 was $1.1 million as compared to $2.2 million for the three month period
ended September 30, 1998. The decrease of $1.1 million resulted from lower
average interest rates for the three month period ended September 30, 1999 in
comparison to the three month period ended September 30, 1998.
Income tax for the three month period ended September 30, 1999 was a
benefit of $1.6 million compared to an income tax benefit of $0.8 million for
the comparable three month period ended September 30, 1998. The change resulted
from the decrease in taxable income.
As a result of the factors described above, net loss for the three
month period ended September 30, 1999 increased $3.0 million to $3.8 million
compared to a net loss of $0.8 million for the three month period ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Interest payments under the Company's $100 million Credit Agreement
dated November 20, 1997, (the "Bank Credit Facilities"), represents the most
significant component of liquidity. The Bank Credit Facilities consist of a
$50.0 million Multiple Draw Term Loan Facility and a $50.0 million Revolving
Credit Facility to finance working capital, acquisitions, certain expenses
associated with the Bank Credit Facilities and letter of credit needs.
As of September 30, 1999, $66.0 million is outstanding under the
Company's Bank Credit Facilities of which $46.3 million is outstanding under the
Multiple Draw Term Loan Facility. The amount outstanding under the Multiple Draw
Term Loan Facility is scheduled to be permanently reduced, over a period of
seventeen consecutive unequal quarterly installments continuing thereafter until
the termination date of December 31, 2003, through cash flow from operations and
the use of the Revolving Credit Facility. The amounts outstanding under the
Revolving Credit Facility will mature on December 31, 2003. As of September 30,
1999, the Company is in compliance with the covenants contained in the Bank
Credit Facilities.
In addition to its debt service obligations, FTD's remaining liquidity
demands are primarily capital expenditures, Year 2000 compliance costs and
working capital needs. For the three months ended September 30, 1999 and 1998,
the Company's net capital expenditures were $2.2 million and $2.3 million
respectively, of which $0.7 million and $0.2 million, respectively were for
depreciable fixed assets such as furniture and equipment and $1.5 million and
$2.1 million, respectively were for amortizable intangibles such as costs
relating to the development and implementation of a new software package and
other information technology costs. The Company's expected capital expenditures
for fiscal 2000 are estimated to be in the range of $5.0 to $7.0 million and
will primarily be used for continued implementation of the new software package
and information technology purchases.
The Company believes, based on current circumstances, that its cash
flow from operations, together with borrowings under the Revolving Credit
Facility, will be sufficient to fund its working capital needs, capital
expenditures, potential acquisitions and to make interest and principal
payments as they become due under the terms of the Bank Credit Facilities. The
Company also believes that the net proceeds from the IPO of FTD.COM will be used
to fund FTD.COM's anticipated capital expenditures and working capital needs.
Cash used in operating activities was $5.7 million for the three month
period ended September 30, 1999, compared to cash used in operating activities
of $1.7 million for the three month period ended September 30, 1998. The
increase in cash used in operating activities from the comparable period of the
prior year was primarily attributable to the increase in net loss from
operations incurred by the Company's subsidiary, FTD.COM. Depreciation and
amortization was $1.9 million for the three month period ended September 30,
1999 and $1.7
12
<PAGE> 13
million for the three month period ended September 30, 1998.
Cash used in investing activities, consisting of capital expenditures
net of disposal of assets, was $2.2 million for the three month period ended
September 30, 1999, compared to cash used in investing activities of $2.3
million for the three month period ended September 30, 1998.
Cash provided by financing activities was $14.3 million for the three
month period ended September 30, 1999, compared to cash used in financing
activities of $0.8 million for the three month period ended September 30, 1998.
The increase in cash provided by financing activities is primarily a result of
an increase in revolving credit borrowings during the three month period ended
September 30, 1999, as compared to the three month period ended September 30,
1998. At September 30, 1999, the net proceeds from the IPO are recorded as a
non-cash financing activity as the proceeds from the FTD.COM stock offering were
not collected until October 4, 1999.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems and has
identified information technology systems ("IT") as well as non-IT systems that
could be affected by the "Year 2000" issue. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculation. The Year
2000 issue is believed to affect virtually all companies and organizations which
would include the Company as well as systems and applications of the Company's
vendors or customers. The Company has identified certain IT systems, such as
those internal systems that reside on the mainframe, which are considered
"mission critical" and has developed a plan for converting these computer
systems for Year 2000 compliance.
FTD has contracted with an outside consulting firm which has assisted
FTD in the evaluation and selection of a compatible software package based on
FTD's IT system requirements. FTD is currently in the implementation and
training process for this new software package. There are three phases to the
software implementation process. Phase 1 consists of the software implementation
for the general ledger and accounts payable systems. Phase 2 consists of the
software implementation for Marketplace distribution, floral order processing
and accounts receivable. Phase 3 consists of the software implementation for
credit card processing and directory publications. As of September 30, 1999,
phase 1 and phase 2 have been completed and tested. The Company expects Phase 3
of the project to be completed and tested by November 15, 1999. This new
software package will allow the Company to improve its execution and efficiency
in recording financial and operational information in addition to providing a
solution to the Year 2000 issue with respect to the Company's IT computer
systems.
As part of the Company's Year 2000 compliance efforts, the Company's
plan includes contacting customers and third parties whose business interruption
could have a significant impact on FTD's business. The Company has not completed
its assessment of the Year 2000 issue as it relates to these customers and third
party vendors and suppliers. However, it should be noted that the Company has
over 19,000 customers none of which individually accounts for a material portion
of the Company's revenues or profits. As it relates to vendors and suppliers,
the Company has contacted the majority of key third parties in order to secure
appropriate representation of Year 2000 compliance and to address the
compatibility of systems. These vendors and suppliers include financial
institutions and communication and transportation providers with whom the
Company does business. The Company obtains its merchandise for resale and
supplies for operational purposes from a variety of vendors located both within
and outside the United States, of which no individual vendor or supplier is of
significant dependence to the Company's merchandise and supply purchases. As of
September 30, 1999, the Company has received appropriate representation of Year
2000 compliance from approximately 75% of the vendors and suppliers contacted
and does not have any reason to believe the remaining vendors and suppliers
contacted will suffer a business interruption as a result of the Year 2000
issue. In the event that a vendor or supplier is not able to supply the Company
with the appropriate representation of Year 2000 compliance, the Company will
establish alternative sources or strategies.
As it relates to customers, the Company has included in its Year 2000
compliance efforts FTD products such as Mercury 2000, 3000 and 4000 terminals,
Mercury Interface Boxes, Mercury Wings and Mercury Advantage
13
<PAGE> 14
(Solaris and SCO) computer systems. The Company is well along in its efforts to
test these systems and to remedy them, if necessary. The Company believes, based
on testing to date, that the Mercury 2000, 3000 and 4000 terminals, as well as
the Mercury Interface Boxes, Mercury Wings and release 7.0 of Mercury Advantage
(Solaris and SCO) systems are already Year 2000 compliant. In the event that
appropriate Year 2000 readiness is not achieved for a service or product
identified by FTD as Year 2000 compliant, the Company will use commercially
reasonable efforts to repair the affected portion of the service or product.
The Company has undertaken a review of its non-IT systems which rely on
embedded computer technology and consist primarily of those systems relating to
the building and facilities. As of September 30, 1999, the Company has received
appropriate Year 2000 representation from the suppliers of such systems and, at
this time, the Company believes these systems will not have a material effect on
the operations of the Company.
During the implementation of the new enterprise software package, the
Company has incurred and will continue to incur internal staff costs as well as
consulting and other costs. The total estimated cost to complete the project
over the next 3 months is expected to range between $1.0 and $3.0 million of
which approximately $2.0 million of these expenditures are expected to be
capital expenditures. The capitalized items include the costs related to
hardware, software and other external direct costs of material and services
consumed in developing the internal-use enterprise software. All of the
Company's Year 2000 compliance costs have been or are expected to be funded from
the Company's operating cash flow. The Company's Year 2000 budget has not
required the diversion of funds from or the postponement of the implementation
of other planned IT projects. If the Company is unsuccessful in implementing the
software or if the software does not function as it is expected to, the related
potential effect is expected to be material in terms of the Company's business,
financial condition and results of operations. As of September 30, 1999, all
scheduled implementation dates have been met, and the Company continues to
anticipate the implementation to be completed by November 15, 1999. The Company
intends to develop by December 15, 1999 and implement, if necessary, appropriate
contingency plans to mitigate, to the extent possible, any significant Year 2000
areas of noncompliance.
The economy in general may be adversely affected by risks associated
with the Year 2000 issue. The Company's business, financial condition, and
results of operations could be materially adversely affected if systems that it
operates or systems that are operated by other parties with whom the Company
does business, are not Year 2000 compliant in time. There can be no assurance
that these third party systems will continue to properly function and interface
and will otherwise be Year 2000 compliant. Although the Company is not aware of
any threatened claims related to the Year 2000, the Company may be subject to
litigation arising from such claims and, depending on the outcome, such
litigation could have a material adverse affect on the Company.
The expected costs and completion dates for the Year 2000 project are
forward looking statements based on management's best estimates, which were
derived using numerous assumptions of future events, including the continued
availability of resources, third party modification plans and other factors.
Actual results could differ materially from these estimates as a result of
factors such as the availability and cost of trained personnel, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk which primarily includes interest
rate risk. The Company's policy is to enter into certain derivative instruments
in an effort to hedge its underlying economic exposure and to manage these
instruments with the objective to reduce its exposure to changes in interest
rates. The Company currently does not use derivative instruments for trading
purposes.
The Company's exposure to interest rate risk is primarily a result of
borrowings under the Bank Credit Facilities, which are subject to interest rates
ranging from 6.8% to 7.0% at September 30, 1999. On December 15, 1998, the
Company entered into an interest rate swap agreement for a notional amount of
$23.1 million at a fixed rate of 5.74% plus a variable spread until December 31,
2000, in order to limit its exposure to interest rate fluctuations. At September
30, 1999, the variable spread was 1.5%.
14
<PAGE> 15
The Company believes that its exposure to interest rate fluctuations
will also be limited due to the Company's philosophy of maintaining a minimal
cash balance in an effort to effectively use any excess cash flows to reduce
outstanding debt. The Company believes that the continued decrease in the
balance of outstanding debt in addition to the terms of the interest rate swap
agreement are sufficient precautions to limit the Company's exposure to changing
interest rates.
At September 30, 1999, $66.0 million of debt was outstanding under the
Bank Credit Facilities. Since the interest rate for the portion of the debt that
is covered by the interest rate swap agreement is effectively fixed, changes in
interest rates would have no impact on actual future interest expense for that
portion of the debt. Therefore there is no earnings or liquidity risk associated
with either the interest rate swap agreement or that portion of the debt to
which the swap agreement relates. The fair market value of the interest rate
swap at September 30, 1999, was a loss of approximately $113 thousand and was
calculated based on future quarterly interest payments using the interest rate
effective at September 30, 1999. At September 30, 1999, a 100 basis point
decrease in interest rates would result in an approximate loss and payment to
the counterparty of $386 thousand on the interest rate swap agreement.
A portion of the Company's outstanding variable rate debt which totaled
$42.9 million as of September 30, 1999, is not covered by an interest rate swap
agreement. An adverse change in interest rates during the time that this portion
of the debt is outstanding would cause an increase in the amount of interest
paid. The Company may pay down the loan prior to expiration in December 2003.
However, if this portion of the Company's borrowings were to remain outstanding
for the remaining term of the borrowing agreement, a 100 basis point increase in
LIBOR would result in an increase of $429 thousand to the amount of annualized
interest paid on this portion of the debt and annualized interest expense
recognized in the financial statements.
The Company will continue to monitor changing economic conditions and
based on current circumstances, does not expect to incur a substantial loss in
future earnings or cash flows as a result of changing interest rates.
The Company is also exposed to foreign currency exchange rate risk with
respect to the Canadian dollar. The resulting Canadian exchange adjustments are
included in the accumulated other comprehensive income component on the
condensed consolidated statements of operations and did not have a material
effect on other comprehensive income for the three month periods ended September
30, 1999 and 1998. The Company does not expect to be materially affected by
foreign currency exchange rate fluctuations in the future based on historical
foreign currency exchange rate fluctuations. The Company therefore does not
currently enter into derivative financial instruments as hedges against foreign
currency fluctuations of the Canadian dollar.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
FTD is involved in various lawsuits and matters arising in the normal
course of business. In the opinion of the management of FTD, although the
outcomes of these claims and suits are uncertain, they should not have a
material adverse effect on FTD's business, financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule.
(b) Reports on Form 8-K
FTD did not file any reports on Form 8-K during the three month period ended
September 30, 1999.
16
<PAGE> 17
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 on the 12th day of November, 1999.
FTD CORPORATION
By: /s/ Francis C. Piccirillo
-------------------------
Francis C. Piccirillo
Treasurer
(Principal financial officer and officer duly
authorized to sign on behalf of registrant)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FTD
CORPORATION THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8900
<SECURITIES> 0
<RECEIVABLES> 28201
<ALLOWANCES> 1803
<INVENTORY> 13419
<CURRENT-ASSETS> 88036
<PP&E> 50209
<DEPRECIATION> 34318
<TOTAL-ASSETS> 188586
<CURRENT-LIABILITIES> 56015
<BONDS> 66000
9074
0
<COMMON> 125
<OTHER-SE> 19947
<TOTAL-LIABILITY-AND-EQUITY> 188586
<SALES> 12302
<TOTAL-REVENUES> 51433
<CGS> 9445
<TOTAL-COSTS> 25018
<OTHER-EXPENSES> 30608
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1253
<INCOME-PRETAX> (5401)
<INCOME-TAX> (1619)
<INCOME-CONTINUING> (3774)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3774)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
