<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 MARCH 31, 1999
Commission File Number
33-91582
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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
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(Address of Principal Executive Offices) (Zip Code)
(630) 719-7800
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(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 April 30, 1999, there were outstanding 12,385,370 shares of the
Registrant's class A common stock, par value $.01 per share, and 2,948,750
shares of the Registrant's class B common stock, par value $.0005 per share.
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FTD CORPORATION
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1999
and June 30, 1998 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended March 31, 1999 and
1998 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FTD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
1999 JUNE 30,
ASSETS (UNAUDITED) 1998
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,016 $13,615
Accounts receivable, less allowance for doubtful accounts
of $2,169 at March 31, 1999 and $1,854 at June 30, 1998 27,758 24,104
Inventories, principally finished goods, net 11,126 13,261
Deferred income taxes 5,216 5,216
Other current assets 2,195 857
----------- ----------
TOTAL CURRENT ASSETS 47,311 57,053
Property and equipment, less accumulated depreciation
of $32,465 at March 31, 1999 and $30,108 at June 30, 1998 15,520 15,693
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $374 at March 31, 1999 and $4,861 at June 30, 1998 1,129 2,711
Deferred income taxes 836 -
Other noncurrent assets 7,127 4,244
Goodwill and other intangibles, less accumulated amortization
of $12,890 at March 31, 1999 and $10,599 at June 30, 1998 72,494 74,785
----------- ----------
TOTAL OTHER ASSETS 81,586 81,740
----------- ----------
TOTAL ASSETS $144,417 $154,486
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $33,167 $29,863
Customer deposits and accrued customer incentive programs 16,753 24,009
Other accrued liabilities 9,260 7,329
----------- ----------
TOTAL CURRENT LIABILITIES 59,180 61,201
Long-term debt 54,750 58,130
Post-retirement benefits, less current portion 5,310 5,572
Accrued pension obligations, less current portion 497 497
Deferred income taxes - 1,162
STOCKHOLDERS' EQUITY:
Common stock:
Class A 123 126
Class B 2 2
Paid-in capital 37,104 36,741
Accumulated deficit (9,792) (7,812)
Unamortized restricted stock (1,071) (511)
Treasury stock (1,686) (622)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 24,680 27,924
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $144,417 $154,486
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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FTD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
-------------------- ---------------------
1999 1998 1999 1998
-------- --------- ---------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES:
Technology products and services $30,134 $24,856 $83,719 $72,324
Marketplace and Other 16,979 15,759 45,324 43,509
Direct to Consumer 11,380 7,659 28,587 19,082
-------- --------- ---------- --------
Total revenues 58,493 48,274 157,630 134,915
COSTS:
Technology products and services 5,991 5,105 16,125 17,850
Marketplace and Other 11,957 11,405 30,915 31,531
Direct to Consumer 10,125 6,827 25,099 17,031
-------- --------- ---------- --------
Total costs of goods sold and services
provided 28,073 23,337 72,139 66,412
Selling, general and administrative expenses 27,525 22,385 77,028 62,063
-------- --------- ---------- --------
Income from operations 2,895 2,552 8,463 6,440
OTHER INCOME AND EXPENSES:
Interest income 102 164 418 770
Interest expense (1,048) (2,422) (5,589) (8,209)
Foreign exchange gain (loss) 155 (154) 28 139
Other income 0 0 200 0
-------- --------- ---------- --------
Total other income and expenses (791) (2,412) (4,943) (7,300)
Income (loss) before income tax expense
and extraordinary item 2,104 140 3,520 (860)
Income tax expense 1,135 185 1,760 313
-------- --------- ---------- --------
Net income (loss) before extraordinary item 969 (45) 1,760 (1,173)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt (net of income tax benefit) - - (3,714) (835)
-------- --------- ---------- --------
Net income (loss) $969 ($45) ($1,954) ($2,008)
======== ========= ========== ========
INCOME (LOSS) PER SHARE:
Basic and Diluted before extraordinary item $0.06 $0.00 $0.11 ($0.08)
Extraordinary item $0.00 $0.00 ($0.24) ($0.05)
-------- --------- ---------- --------
Basic and Diluted $0.06 $0.00 ($0.13) ($0.13)
====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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FTD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
MARCH 31,
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities ($944) $5,526
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (6,314) (3,163)
-------- --------
Net cash used in investing activities (6,314) (3,163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt, net (4,051) (26,106)
Issuance (repurchase) of common stock, net (1,264) 5
Payments received from stockholders - 32
-------- --------
Net cash used in financing activities (5,315) (26,069)
Effect of foreign exchange rate changes on cash (26) (24)
-------- --------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (12,599) (23,730)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 13,615 28,294
-------- --------
END OF PERIOD $1,016 $4,564
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $5,243 $5,283
======== ========
Income taxes paid $0 $107
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
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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 and nine month periods ended March 31, 1999, include the accounts of
FTD Corporation and its wholly-owned subsidiary, Florists' Transworld Delivery,
Inc. (collectively, the "Company" or "FTD"). 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,
1998. 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 and nine month periods ended March 31, 1999 are not
necessarily indicative of the results that might be expected for the year ended
June 30, 1999.
As a result of adopting Statement of Financial Accounting Standards
("SFAS") No. 131, (see Note 6. Segment Information), significant changes were
made to the classification of accounts for the three and nine month periods
ended March 31, 1999. In evaluating the costs associated with the three business
segments, several items which were previously reported as costs of goods sold
and services provided in the condensed consolidated statement of operations for
the three and nine month periods ended March 31, 1998 have been reclassified to
conform to the current year presentation as selling, general and administrative
expenses. Additionally, certain revenues from Direct to Consumer activities
which were previously reported net of costs relating to processing and
fulfillment have been recorded on a gross basis for the three and nine month
periods ended March 31, 1998. The corresponding costs representing the amount
paid for processing and fulfillment have been reclassified to conform to the
current year presentation as Direct to Consumer cost of goods sold.
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. In the three and nine month periods ended March 31, 1999, revenue
from such FSG sales totaled $0.02 million and $2.7 million, respectively. In
prior periods, FTD offered a product guide for sale to its members on an
optional basis. This predecessor guide was published on a two year cycle, with
updates throughout the cycle. Accordingly such revenue was previously recognized
ratably over the two year cycle. Revenue from the predecessor guide during the
three and nine month periods ended March 31, 1998, was $0.5 million and $0.9
million, respectively.
Note 3. Capital Transactions
FTD repurchased into treasury 34,502 Class A shares during the three
month period ended March 31, 1999. Also, during the three month period ended
March 31, 1999, pursuant to the terms of FTD's 1994 Stock Award and Incentive
Plan, options to purchase 25,000 Class A shares were granted, 17,500 options
were exercised and 61,750 options previously granted were canceled. During the
nine month period ended March 31, 1999 pursuant to the terms of FTD'S 1994 Stock
Award and Incentive Plan options to purchase 162,100 Class A shares were
granted, 19,000 options were exercised and 74,850 options previously granted
were canceled. In addition, during the nine month period ended March 31, 1999,
70,000 Class A shares were issued to officers as restricted stock and 10,000
restricted shares were canceled.
6
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Note 4. 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 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. Basic and diluted earnings (loss) per common share for the three
month periods ended March 31, 1999 and 1998 has been computed based on the
weighted average number of common and common equivalent shares outstanding of
15,447,704 and 15,209,426, respectively. Basic and diluted earnings (loss) per
common share before extraordinary item, for extraordinary item and for net loss
for the nine month periods ended March 31, 1999 and 1998, has been computed
based on the weighted average number of common and common equivalent shares
outstanding of 15,466,289 and 15,219,166, respectively.
Note 5. Comprehensive Income
The Financial Accounting Standards Board ("FASB") issued, SFAS No. 130,
"Reporting Comprehensive Income" in June 1997. Effective July 1, 1998 the
Company adopted SFAS No. 130. SFAS No. 130 requires the Company to disclose
non-owner changes in equity which are not included in net income (loss).
During the three and nine month periods ended March 31, 1999 and 1998,
the Company engaged in transactions involving foreign currency which are
immaterial in the calculation of comprehensive income (loss). Accordingly, other
accumulated comprehensive income (loss) is not included on the balance sheet.
Comprehensive income (loss) for the three and nine month periods ended March 31,
1999 was $1.0 million and ($2.0) million, respectively. Accumulated
comprehensive loss for the three and nine month periods ended March 31, 1998 was
($0.04) million and ($2.0) million, respectively.
Note 6. Segment Information
The FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" in February 1998. SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. Effective July 1, 1998 the Company
adopted SFAS No. 131.
As a result of adopting SFAS No. 131, the Company has identified three
reportable business segments which are evaluated regularly by management in
deciding how to allocate resources and assess performance. 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, Advantage systems, and 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 and greeting cards offered to our customers for resale as well as other
miscellaneous income items. Direct to Consumer includes floral gift order
capabilities to the public through Direct Access (1-800-SEND-FTD) and FTD's
Internet site www.ftd.com.
The Company's accounting policies for segments are the same as those
described in Note 1., Basis of Presentation.
The Company does not measure the assets of the Company by reportable
business segment for purposes of assessing performance and making operating
decisions.
7
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Note 7. Extinguishment of Long-Term Debt
On December 15, 1998, the Company repaid the $60.0 million aggregate
principle amount of 14% Senior Subordinated Notes due December 15, 2001 (the
"Notes"). The reacquisition price totaled $64.2 million and consisted of the
$60.0 million principle on the Notes and a $4.2 million premium. The Company
used its existing Bank Credit Facilities, as hereinafter defined, as well as
cash on hand to provide funds for the reacquisition of the Notes. These new
borrowings consisted of $50.0 million from the Multiple Draw Term Loan Facility
and $12.0 million from the Revolving Credit Facility (see Liquidity and Capital
Resources). As a result of the reacquisition of the Notes, $1.7 million of
unamortized discount and $1.2 million of deferred financing costs associated
with the Notes were expensed in December, 1998. Accordingly, the loss on the
reacquisition of the Notes totaled $7.1 million. The related income tax benefit
attributable to the reacquisition of the Notes was $3.4 million, for a net
tax-affected loss on reacquisition of the Notes of $3.7 million which is shown
as an extraordinary item in the accompanying condensed consolidated statements
of operations.
Note 8. New Accounting Pronouncements
The Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP")
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" on March 4, 1998. This SOP applies to all non-governmental
entities and is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company has adopted this SOP effective July 1, 1998
due to the implementation of the Company's new enterprise software.
The Accounting Standards Executive Committee of the AICPA issued SOP
97-2 "Software Revenue Recognition" which supersedes SOP 91-1, in October 1997.
This SOP was effective for fiscal years beginning after December 31, 1997. The
Company has adopted this SOP effective July 1, 1998 due to the recognition of
revenues related to the sale of the new Mercury Wings (TM) systems. As of March
31, 1999, the adoption of SOP 97-2 has not had a material impact on the
Company's results of operations.
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" on June 16, 1998. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999. The Company is presently evaluating the
impact of SFAS No. 133.
8
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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 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 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, Advantage Systems, and Mercury Wings(TM)
systems sales which includes both sales and leasing 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
participating florists receive various types of orders and
messages such as consumer or florist to florist, for a fee paid
per transaction.
- Publications which consists of the FTD Directory published on a
quarterly basis on CD ROM as well as paper book and the set up and
maintenance of florists web sites for FTD Florists' Online through
FTD's Internet site www.ftd.com.
- Credit Card processing which is a service offered to participating
FTD 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. which 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 the Americas.
The Marketplace and Other segment primarily represents FTD's wholesale
distribution of hardgoods, including greeting cards and the Floral Selections
Guide, to retail florists in North America.
The Direct to Consumer segment represents revenue which is derived from
consumer orders generated by the 1-800-SEND-FTD direct marketing business and
FTD's Internet site www.ftd.com.
9
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THREE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTH PERIOD ENDED
MARCH 31, 1998.
During the three month period ended March 31, 1999, the Company made
significant changes in the classification of accounts amongst revenue, costs of
goods sold and services provided and selling, general and administrative
expenses. Prior year balances have been reclassified to conform to the current
year presentation.
The following is a discussion of changes in the Company's financial
condition and results of operations for the three month period ended March 31,
1999, compared with the three month period ended March 31, 1998.
Revenue increased by $10.2 million, or 21.1%, to $58.5 million for the
three month period ended March 31, 1999 compared to $48.3 million for the three
month period ended March 31, 1998. This increase in revenue was primarily the
result of increases in all of the Company's business segments.
Technology products and services segment revenue increased by $5.2
million, or 20.9%, to $30.1 million for the three months ended March 31, 1999
compared to $24.9 million for the three months ended March 31, 1998. This
increase is primarily due to increases in Clearinghouse, Advantage system sales,
and Credit Cards.
Marketplace and Other segment revenue increased by $1.2 million, or
7.6%, to $17.0 million for the three month period ended March 31, 1999 compared
to $15.8 million for the three month period ended March 31, 1998. The increase
from the prior year is primarily a result of an increase in the sale of
Marketplace products and Renaissance Greeting Cards partially offset by a
decrease in revenue from the sale of the newly published Floral Selections Guide
to all FTD Florists (see Note 2. Revenues from Sale of the Floral Selections
Guide "FSG").
Direct to Consumer segment revenue increased by $3.7 million, or 48.1%,
to $11.4 million for the three month period ended March 31, 1999 compared to
$7.7 million for the three month period ended March 31, 1998. The increase from
the prior year is primarily the result of an increase in consumer orders placed
through the www.ftd.com Internet site. Additionally, certain revenues from
Direct to Consumer activities which were previously reported net of costs
relating to processing and fulfillment have been recorded on a gross basis for
the three month periods ended March 31, 1998 and 1999. The corresponding costs
representing the amounts paid for processing and fulfillment have been
reclassified as Direct to Consumer cost of goods sold for the three month
periods ended March 31, 1999 and 1998.
The costs associated with Technology products and services increased
$0.9 million, or 17.6%, to $6.0 million for the three month period ended March
31, 1999 compared to $5.1 million for the three month period ended March 31,
1998. This increase is primarily due to increased costs associated with
Advantage system sales.
The costs associated with Marketplace and Other increased $0.6 million,
or 5.3%, to $12.0 million for the three month period ended March 31, 1999
compared to $11.4 million for the three month period ended March 31, 1998. This
increase is primarily associated with the increase in the sale of Marketplace
products partially offset by the decrease in production costs associated with
the new FSG.
The costs associated with Direct to Consumer increased $3.3 million, or
48.5%, to $10.1 million for the three month period ended March 31, 1999 compared
to $6.8 million for the three month period ended March 31, 1998. This increase
is primarily due to increased costs associated with the www.ftd.com Internet
site.
As a percent of revenue, cost of goods sold and services provided
decreased to 48.0% for the three month period ended March 31, 1999 from 48.2%
for the three month period ended March 31, 1998.
Selling, general and administrative expenses increased $5.1 million, or
22.8%, to $27.5 million for the three month period ended March 31, 1999 from
$22.4 million for the three month period ended March 31, 1998. This is primarily
due to FTD's increased costs associated with national advertising, public
relations, Direct to Consumer and other general and administrative expenses.
10
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Net interest expense for the three month period ended March 31, 1999
was $0.9 million as compared to $2.2 million for the three month period ended
March 31, 1998. The decrease of $1.3 million resulted from lower average debt
outstanding as well as the lower interest rate for the three month period ended
March 31, 1999.
Income taxes for the three month period ended March 31, 1999 were an
expense of $1.1 million compared to an expense of $0.2 million for the
comparable three month period ended March 31, 1998. The change in income tax
relates to the increase in taxable income.
Net income for the three month period ended March 31, 1999 was $1.0
million compared to a net loss of $0.05 million for the three month period ended
March 31, 1998. The increase in net income is attributable to the factors
previously discussed.
NINE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO THE NINE MONTH PERIOD ENDED
MARCH 31, 1998.
During the nine month period ended March 31, 1999, the Company made
significant changes in the classification of accounts amongst revenue, costs of
goods sold and services provided and selling, general and administrative
expenses. Prior year balances have been reclassified to conform to the current
year presentation.
The following is a discussion of changes in the Company's financial
condition and results of operations for the nine month period ended March 31,
1999, compared with the nine month period ended March 31, 1998.
Revenue increased by $22.7 million, or 16.8%, to $157.6 million for the
nine month period ended March 31, 1999 compared to $134.9 million for the nine
month period ended March 31, 1998. This increase in revenue was primarily the
result of increases in all of the Company's business segments.
Technology products and services segment revenue increased by $11.4
million, or 15.8%, to $83.7 million for the nine months ended March 31, 1999
compared to $72.3 million for the nine months ended March 31, 1998. This
increase is primarily due to increases in Clearinghouse, Advantage system sales
and Credit Cards.
Marketplace and Other segment revenue increased by $1.8 million, or
4.1%, to $45.3 million for the nine month period ended March 31, 1999 compared
to $43.5 million for the nine month period ended March 31, 1998. The increase
from the prior year was primarily the result of an increase in the sale of a
newly published FSG.
Direct to Consumer segment revenue increased by $9.5 million, or 49.7%,
to $28.6 million for the nine month period ended March 31, 1999 compared to
$19.1 million for the nine month period ended March 31, 1998. The increase from
the prior year was primarily due to the increase in consumer orders placed
through the www.ftd.com Internet site. Additionally, certain revenues from
Direct to Consumer activities which were previously reported net of costs
relating to processing and fulfillment have been recorded on a gross basis for
the nine month periods ended March 31, 1998 and 1999. The corresponding costs
representing the amounts paid for processing and fulfillment have been
reclassified as Direct to Consumer cost of goods sold for the nine month periods
ended March 31, 1999 and 1998.
The costs associated with Technology products and services decreased
$1.8 million, or 10.1%, to $16.1 million for the nine month period ended March
31, 1999 compared to $17.9 million for the nine month period ended March 31,
1998. This decrease is primarily due to a decrease in depreciation expense
relating to fully depreciated equipment offset in part by increased costs
associated with Advantage system sales.
The costs associated with Marketplace and Other decreased $0.6 million,
or 1.9%, to $30.9 million for the nine month period ended March 31, 1999
compared to $31.5 million for the nine month period ended March 31, 1998. This
decrease is primarily due to a decrease in costs associated with the sale of
Marketplace products partially offset by the increase in production costs
associated the new FSG.
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The costs associated with Direct to Consumer increased $8.1 million, or
47.6%, to $25.1 million for the nine month period ended March 31, 1999 compared
to $17.0 million for the nine month period ended March 31, 1998. This increase
is primarily due to the increased costs relating to the www.ftd.com Internet
site.
As a percent of revenue, cost of goods sold and services provided
decreased to 45.7% for the nine month period ended March 31, 1999 from 49.2% for
the nine month period ended March 31, 1998. This is primarily due to increased
gross margins associated with Technology products and services, Marketplace and
Other and Direct to Consumer.
Selling, general and administrative expenses increased $14.9 million,
or 24.0%, to $77.0 million for the nine month period ended March 31, 1999 from
$62.1 million for the nine month period ended March 31, 1998. This is due to
FTD's increased costs associated with customer incentive programs, Direct to
Consumer, national advertising, public relations and other general and
administrative expenses.
Net interest expense for the nine month period ended March 31, 1999 was
$5.2 million as compared to $7.4 million for the nine month period ended March
31, 1998. The decrease of $2.2 million resulted from lower average debt
outstanding as well as the lower interest rate for the nine month period ended
March 31, 1999.
Income taxes for the nine month period ended March 31, 1999 were an
expense of $1.8 million compared to an expense of $0.3 million for the nine
month period ended March 31, 1998. The income tax expense for the nine month
periods ended March 31, 1999 and 1998 include income tax benefits of $3.4
million and $0.5 million, respectively, relating to the early extinguishment of
long-term debt (see Liquidity and Capital Resources). In addition, for the nine
month periods ended March 31, 1999 and 1998 $1.6 million and $0.2 million of
income tax benefit is a result of the change in taxable income (loss) in the
respective periods.
Net loss for the nine month periods ended March 31, 1999 and 1998 were
each $2.0 million. The net loss for each of the nine month periods ended March
31, 1999 and 1998 is attributable to the factors previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Interest payments under the Company's $100 million Credit Agreement
dated November 20, 1997 with First Chicago Capital Markets Inc. (the "Bank
Credit Facilities") represent significant liquidity requirements for FTD. 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.
On December 15, 1998 the Company repaid the $60.0 million aggregate
principal amount of 14% Senior Subordinated Notes due December 15, 2001 (the
"Notes"), registered under the Securities Act of 1933. The Company used the Bank
Credit Facilities as well as cash on hand to provide funds for the reacquisition
of the Notes. The reacquisition price totaled $64.2 million and consisted of the
$60.0 million principle on the Notes and a $4.2 million pre-payment penalty
premium. The funds for the reacquisition of the Notes were generated in part
from the $50.0 million Multiple Draw Term Loan Facility and $12.0 million from
the Revolving Credit Facility. As of March 31, 1999, $48.8 million is
outstanding under the Multiple Draw Term Loan Facility and is scheduled to be
permanently reduced, over a period of nineteen consecutive unequal quarterly
installments continuing thereafter until the termination date of December 31,
2003 through the use of the Revolving Credit Facility. The loan(s) outstanding
under the Revolving Credit Facility will mature on December 31, 2003.
Borrowings under both the Multiple Draw Term Loan Facility and the
Revolving Credit Facility are subject to variable interest rates. The Company
has entered into an interest rate swap agreement for a notional amount of $24.4
million at a fixed rate for specified period of time in order to limit its
exposure to interest rate fluctuations. The Company monitors changing economic
conditions to limit its exposure to increasing interest rates which may have a
material adverse effect on the Company's financial condition. The Company
believes, based on current circumstances, that its cash flow from operations,
together with borrowings under the Revolving Credit
12
<PAGE> 13
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.
As of March 31, 1999, the Company is in compliance with the covenants
under the Bank Credit Facilities.
In addition to its debt service obligations, FTD's remaining liquidity
demands are primarily for capital expenditures and working capital needs. FTD's
expected capital expenditures for fiscal 1999 are estimated to be in the range
of $7.0 to $9.5 million and will primarily be used for new computer software and
related information technology purchases. For the nine month period ended March
31, 1999, FTD's net capital expenditures were $6.3 million, of which $2.2
million was for depreciable fixed assets such as furniture and equipment, and
$4.1 million was for amortizable intangibles such as costs relating to the
development and implementation of a new software package and Mercury Wings (TM)
computer software.
For the nine month period ended March 31, 1999, FTD experienced a
decrease in cash and cash equivalents of $12.6 million as compared to a decrease
in cash and cash equivalents of $23.7 million for the previous nine month period
ended March 31, 1998. These decreases in cash and cash equivalents are in part a
result of the Company's philosophy of maintaining a minimal cash balance in an
effort to effectively use any excess cash to reduce outstanding debt.
Cash used in operating activities was $0.9 million for the nine month
period ended March 31, 1999, compared to cash provided by operating activities
of $5.5 million for the nine month period ended March 31, 1998. Depreciation and
amortization was $5.1 million for the nine month period ended March 31, 1999 and
$8.5 million for the nine month period ended March 31, 1998. The increase in
cash used in operating activities is primarily due to the decrease in the
balance of accrued customer incentive programs in comparison to the nine month
period ended March 31, 1998.
Cash used in investing activities, consisting of capital expenditures
net of disposal of assets, was $6.3 million for the nine month period ended
March 31, 1999 compared to $3.2 million for the nine month period ended March
31, 1998.
Cash used in financing activities was $5.3 million for the nine month
period ended March 31, 1999 compared to $26.1 million for the nine month period
ended March 31, 1998. The decrease in cash used in financing activities is
primarily a result of a decrease in payments of long-term debt during the nine
month period ended March 31, 1999 as compared to the nine month period ended
March 31, 1998.
YEAR 2000 COMPLIANCE
The Company has conducted a review of its computer systems and has
identified the systems (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.
As of March 31, 1999, 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 and
floral order processing. Phase 3 consists of the software implementation for
accounts receivable, credit card processing and directory publications. As of
March 31, 1999, phase 1 has been tested and implemented. Phase 2 was also
13
<PAGE> 14
tested and implemented as of April 5, 1999. The Company expects phase 3 of the
project to be tested and implemented by August 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 20,000 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 begun contacting 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 one vendor or supplier is of
significant dependence to the Company's merchandise and supply purchases. As of
March 31, 1999, the Company has received appropriate representation of Year 2000
compliance from 44% 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 Advantage (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 and Mercury Wings are already Year 2000 compliant. The Advantage (Solaris
and SCO) systems are in testing and necessary changes are expected to be in
release 7.0, which is scheduled to be available in May, 1999.
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 is in the process of implementing a remediation
program with respect to such systems. The Company's non-IT systems consist
primarily of those systems relating to the building and facilities and are not
expected to have a material effect on the operations of the Company. The Company
is in the process of replacing any of these systems which are not Year 2000
compliant and expects to be completed with this process by June 30, 1999.
During the implementation of the new enterprise software package, the
Company will incur internal staff costs as well as consulting and other costs.
The total estimated cost to complete the project over the next 3 to 9 months is
expected to range between $4.0 and $6.0 million of which approximately $1.0 to
$3.0 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 March 31, 1999, all scheduled implementation dates have
been met, and the Company continues to anticipate the implementation to be
completed by August 1999. The Company intends to develop 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
14
<PAGE> 15
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
See Liquidity and Capital Resources
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 financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
FTD did not file any reports on Form 8-K during the three month period ended
March 31, 1999.
15
<PAGE> 16
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 14th day of May, 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)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
Paper (P)
Exhibit or
Number Description Electronic (E)
- - ------ ----------- --------------
<S> <C> <C>
27 Financial Data Schedule E
</TABLE>
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FTD
CORPORATION FOR THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,016
<SECURITIES> 0
<RECEIVABLES> 29,927
<ALLOWANCES> 2,169
<INVENTORY> 11,126
<CURRENT-ASSETS> 47,311
<PP&E> 47,985
<DEPRECIATION> 32,465
<TOTAL-ASSETS> 144,417
<CURRENT-LIABILITIES> 59,180
<BONDS> 54,750
0
0
<COMMON> 125
<OTHER-SE> 24,555
<TOTAL-LIABILITY-AND-EQUITY> 144,417
<SALES> 16,979
<TOTAL-REVENUES> 58,493
<CGS> 11,957
<TOTAL-COSTS> 55,598
<OTHER-EXPENSES> 155
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 946
<INCOME-PRETAX> 2,104
<INCOME-TAX> 1,135
<INCOME-CONTINUING> 969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 969
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
