<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 DECEMBER 31, 1998
Commission File Number
33-91582
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FTD CORPORATION
---------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3711271
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(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 January 25, 1999, there were outstanding 12,410,606 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
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1998
and June 30, 1998 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended December 31, 1998 and 4
1997
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 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 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FTD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998 JUNE 30,
ASSETS (UNAUDITED) 1998
------ ----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 15,160 $ 13,615
Accounts receivable, less allowance for doubtful accounts
of $1,831 at December 31, 1998 and $1,854 at June 30, 1998 25,350 24,104
Inventories, principally finished goods, net 13,960 13,261
Deferred income taxes 5,216 5,216
Other current assets 2,479 857
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TOTAL CURRENT ASSETS 62,165 57,053
Property and equipment, less accumulated depreciation
of $31,715 at December 31, 1998 and $30,108 at June 30, 1998 16,026 15,693
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $300 at December 31, 1998 and $4,861 at June 30, 1998 1,154 2,711
Deferred income taxes 1,826 --
Other noncurrent assets 6,662 4,244
Goodwill and other intangibles, less accumulated amortization
of $12,127 at December 31, 1998 and $10,599 at June 30, 1998 73,257 74,785
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TOTAL OTHER ASSETS 82,899 81,740
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TOTAL ASSETS $161,090 $154,486
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 39,991 $ 29,863
Customer deposits and accrued customer incentive programs 19,512 24,009
Other accrued liabilities 9,594 7,329
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TOTAL CURRENT LIABILITIES 69,097 61,201
Long-term debt 62,000 58,130
Post-retirement benefits, less current portion 5,572 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 (10,771) (7,812)
Unamortized restricted stock (1,135) (511)
Treasury stock (1,399) (622)
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TOTAL STOCKHOLDERS' EQUITY 23,924 27,924
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $161,090 $154,486
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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FTD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Technology products and services $ 32,442 $ 28,327 $ 58,019 $ 50,510
Marketplace and Other 13,491 14,389 28,344 27,750
-------- -------- -------- --------
Total revenues 45,933 42,716 86,363 78,260
COSTS:
Technology products and services 7,190 10,375 12,335 14,569
Marketplace and Other 8,735 11,397 18,958 20,126
-------- -------- -------- --------
Total costs of goods sold and services
provided 15,925 21,772 31,293 34,695
Selling, general and administrative expenses 24,980 20,370 49,503 39,677
-------- -------- -------- --------
Income from operations 5,028 574 5,567 3,888
OTHER INCOME AND EXPENSES:
Interest income 141 279 316 606
Interest expense (2,162) (2,784) (4,540) (5,787)
Foreign exchange gain (loss) (127) 293 (127) 293
Other income 200 0 200 0
-------- -------- -------- --------
Total other income and expenses (1,948) (2,212) (4,151) (4,888)
Income (loss) before income tax expense (benefit)
and extraordinary item 3,080 (1,638) 1,416 (1,000)
Income tax expense (benefit) 1,444 (330) 625 128
-------- -------- -------- --------
Net income (loss) before extraordinary item 1,636 (1,308) 791 (1,128)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt (net of income tax benefit) (3,714) (835) (3,714) (835)
-------- -------- -------- --------
Net loss ($ 2,078) ($ 2,143) ($ 2,923) ($ 1,963)
======== ======== ======== ========
INCOME (LOSS) PER SHARE:
Basic and Diluted before extraordinary item $ 0.11 ($ 0.09) $ 0.05 ($ 0.08)
Extraordinary item ($ 0.24) ($ 0.05) ($ 0.24) ($ 0.05)
-------- -------- -------- --------
Basic and Diluted ($ 0.13) ($ 0.14) ($ 0.19) ($ 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>
SIX MONTHS
ENDED
DECEMBER 31,
1998 1997
-------------------- ---------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 4,730 $ 9,033
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (5,357) (273)
-------- ---------
Net cash used in investing activities (5,357) (273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) of long-term debt, net 3,249 (16,004)
Issuance (repurchase) of common stock, net (1,041) 268
Issuance of stockholder notes receivable - (263)
-------- ---------
Net cash provided by (used in) financing activities 2,208 (15,999)
Effect of exchange rate changes on cash (36) (32)
-------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,545 (7,271)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 13,615 28,294
-------- ---------
END OF PERIOD $15,160 $ 21,023
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 4,200 $ 5,205
======== =========
Income taxes paid $ 0 $ 108
======== =========
</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 six month periods ended December 31, 1998, 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 six month periods ended December 31, 1998 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 six month periods ended
December 31, 1998. In evaluating the costs associated with the two 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 six months ended December 31, 1997 have been reclassified to conform to the
current year presentation as selling, general and administrative expenses.
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 six month periods ended December 31, 1998,
revenue from such FSG sales totaled $0.1 million and $2.6 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 six month periods ended December 31, 1997, was $0.2 million and $0.4
million, respectively.
Note 3. Capital Transactions
FTD repurchased into treasury 28,419 Class A shares during the three
month period ended December 31, 1998. Also, during the three month period ended
December 31, 1998, pursuant to the terms of FTD's 1994 Stock Award and Incentive
Plan, options to purchase 10,000 Class A shares were granted and 9,500 options
previously granted were canceled. During the six month period ended December 31,
1998 11,000 options previously granted were canceled and 70,000 Class A shares
were issued to officers as restricted stock.
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 earnings per common share before extraordinary item and basic
and diluted loss per common share for extraordinary item and net loss for the
three
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and six month periods ended December 31, 1998 has been computed based on the
weighted average number of common shares outstanding of 15,367,086 and
15,365,836, respectively. Diluted earnings per common share before extraordinary
item for the three and six month periods ended December 31, 1998 has been
computed based on the weighted average number of common and common equivalent
shares outstanding of 15,514,211 and 15,512,961, respectively. Basic and diluted
loss per common share before extraordinary item and basic and diluted loss per
common share for extraordinary item and net loss for the three and six month
periods ended December 31, 1997 has been computed based on the weighted average
number of common shares outstanding of 15,238,757 and 15,250,173, 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 six month periods ended December 31, 1998 and
1997, the Company engaged in transactions involving foreign currency which did
not have a material effect in the calculation of comprehensive income (loss).
Accordingly, other accumulated comprehensive income (loss) is not included on
the balance sheet. Accumulated comprehensive loss for the three and six month
periods ended December 31, 1998 was $2.1 million and $2.9 million respectively.
Accumulated comprehensive loss for the three and six month periods ended
December 31, 1997 was $2.2 million and $2.0 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 two
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 and Marketplace and Other.
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, Direct Access (1-800-SEND-FTD), Flowers After Hours, FTD
Florists' Online Internet site (www.ftd.com), 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.
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.
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 herein after defined, as well as
cash on hand to provide funds for the reacquisition of the Notes. These new
borrowings consist of $50.0 million from the Multiple Draw Term Loan Facility
and $12.0
7
<PAGE> 8
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 will be required to adopt this SOP beginning in the third quarter of
fiscal 1999 as the Company begins to recognize revenue related to the new
Mercury Wings (TM)systems. The Company does not expect the adoption of SOP 97-2
to have 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
<PAGE> 9
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 two principal areas of operation. These
areas have been identified as Technology products and services and Marketplace
and Other.
Technology products and services consists primarily of:
- Mercury equipment, 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.
- Direct Access revenue which is derived from the 1-800-SEND-FTD
direct marketing business.
- 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.
- FTD Florists' Online Internet site (www.ftd.com) which generates
revenue from consumer orders as well as the set-up and maintenance
of florists' web sites.
- Publications which consists of the FTD Directory published on a
quarterly basis on CD ROM as well as paper book.
- 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.
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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.
THREE MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO THE THREE MONTH PERIOD
ENDED DECEMBER 31, 1997.
During the three month period ended December 31, 1998, the Company made
significant changes in the classification of accounts amongst 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 December
31, 1998, compared with the three month period ended December 31, 1997.
Revenue increased by $3.2 million, or 7.5%, to $45.9 million for the
three month period ended December 31, 1998 compared to $42.7 million for the
three month period ended December 31, 1997. This increase in revenue was
primarily the result of an increase in Technology products and services offset
by a decrease in Marketplace and Other revenue.
Technology products and services segment revenue increased by $4.1
million, or 14.5%, to $32.4 million for the three months ended December 31, 1998
compared to $28.3 million for the three months ended December 31, 1997. This
increase is primarily due to increases in Clearinghouse, Direct Access and
Advantage systems sales.
Marketplace and Other segment revenue decreased by $0.9 million, or
6.3%, to $13.5 million for the three month period ended December 31, 1998
compared to $14.4 million for the three month period ended December 31, 1997.
The decrease from the prior year is primarily a result of a decrease in the sale
of Marketplace products. Marketplace and Other revenue was 29.4% and 33.7% of
total revenue for the three months ended December 31, 1998 and 1997,
respectively.
The costs associated with Technology products and services decreased
$3.2 million, or 30.8%, to $7.2 million for the three month period ended
December 31, 1998 compared to $10.4 million for the three month period ended
December 31, 1997. This decrease is primarily due to a decrease in depreciation
expense relating to fully depreciated equipment.
The costs associated with Marketplace and Other decreased $2.7 million,
or 23.7%, to $8.7 million for the three month period ended December 31, 1998
compared to $11.4 million for the three month period ended December 31, 1997.
This decrease is primarily associated with the decrease in the sale of
Marketplace products.
As a percent of revenue, cost of goods sold and services provided
decreased to 34.6% for the three month period ended December 31, 1998 from 51.1%
for the three month period ended December 31, 1997. This is primarily due to
increased gross margins associated with Technology products and services and
Marketplace and Other.
Selling, general and administrative expenses increased $4.6 million, or
22.5%, to $25.0 million for the three month period ended December 31, 1998 from
$20.4 million for the three month period ended December 31, 1997. This is
primarily due to FTD's increased costs associated with customer incentive
programs and other general and administrative expenses in comparison to the
previous three months ended December 31, 1997.
Net interest expense for the three month period ended December 31, 1998
was $2.1 million as compared to $2.5 million for the three month period ended
December 31, 1997. The decrease of $0.4 million resulted from lower average debt
outstanding as of December 31, 1998.
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Income taxes for the three month period ended December 31, 1998 were a
benefit of $2.0 million compared to a benefit of $0.8 million for the comparable
three month period ended December 31, 1997. The income tax benefits 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, the income tax benefits for the three month periods
ended December 31, 1998 and 1997 include $1.4 million of income tax expense and
$0.3 million of income tax benefit respectively relating to the amount of
taxable income (loss) in the respective periods.
Net loss for the three month periods ended December 31, 1998 and 1997
were each $2.1 million. The net loss for each of the three month periods ended
December 31, 1998 and 1997 is attributable to the factors previously discussed.
SIX MONTH PERIOD ENDED DECEMBER 31, 1998 COMPARED TO THE SIX MONTH PERIOD ENDED
DECEMBER 31, 1997.
During the six month period ended December 31, 1998, the Company made
significant changes in the classification of accounts amongst 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 six month period ended December 31,
1998, compared with the six month period ended December 31, 1997.
Revenue increased by $8.1 million, or 10.3%, to $86.4 million for the
six month period ended December 31, 1998 compared to $78.3 million for the six
month period ended December 31, 1997. This increase in revenue was primarily the
result of increases in both of the Company's business segments.
Technology products and services segment revenue increased by $7.5
million, or 14.9%, to $58.0 million for the six months ended December 31, 1998
compared to $50.5 million for the six months ended December 31, 1997. This
increase is primarily due to increases in Clearinghouse, Direct Access and
Advantage systems sales.
Marketplace and Other segment revenue increased by $0.5 million, or
1.8%, to $28.3 million for the six month period ended December 31, 1998 compared
to $27.8 million for the six month period ended December 31, 1997. The increase
from the prior year was the net result of an increase in the sale of a newly
published Floral Selections Guide to all FTD Florists (see Note 2. Revenues from
Sale of the Floral Selections Guide ("FSG")) offset in part by a decrease in the
sale of Marketplace products. Marketplace and Other revenue was 32.8% and 35.5%
of total revenue for the six months ended December 31, 1998 and 1997,
respectively.
The costs associated with Technology products and services decreased
$2.3 million, or 15.8%, to $12.3 million for the six month period ended December
31, 1998 compared to $14.6 million for the six month period ended December 31,
1997. This decrease is primarily due to decreased costs associated with fully
depreciated equipment partially offset by an increase in costs associated with
Direct Access and Advantage systems sales.
The costs associated with Marketplace and Other decreased $1.1 million,
or 5.5%, to $19.0 million for the six month period ended December 31, 1998
compared to $20.1 million for the six month period ended December 31, 1997. 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 in comparison to the six month period ended December 31,
1997.
As a percent of revenue, cost of goods sold and services provided
decreased to 36.2% for the six month period ended December 31, 1998 from 44.3%
for the six month period ended December 31, 1997. This is primarily due to
increased gross margins associated with Technology products and services and
Marketplace and Other.
Selling, general and administrative expenses increased $9.8 million, or
24.7%, to $49.5 million for the six month period ended December 31, 1998 from
$39.7 million for the six month period ended December 31, 1997.
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This is primarily due to FTD's increased costs associated with customer
incentive programs as well as increases in other general and administrative
expenses in comparison to the six month period ended December 31, 1997.
Net interest expense for the six month period ended December 31, 1998
was $4.2 million as compared to $5.2 million for the six month period ended
December 31, 1997. The decrease of $1.0 million resulted from lower average debt
outstanding as of December 31, 1998.
Income taxes for the six month period ended December 31, 1998 were a
benefit of $2.8 million compared to a benefit of $0.4 million for the six month
period ended December 31, 1997. The income tax benefits 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, the income tax benefits for the six month periods ended December 31,
1998 and 1997 include income tax expense of $0.6 million and $0.1 million,
respectively relating to the amount of taxable income (loss) in the respective
periods.
Net loss for the six month period ended December 31, 1998 was $2.9
million, an increase of $0.9 million compared to net loss of $2.0 million for
the six month period ended December 31, 1997. The change 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. The $50.0 million outstanding under the Multiple
Draw Term Loan Facility is scheduled to be permanently reduced, in twenty
consecutive unequal quarterly installments, commencing on March 31, 1999, and
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 $25.0
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 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 December 31, 1998, 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 $6.5 to $7.5 million and will primarily be used for new computer software and
related information technology purchases. For the six month period ended
December 31, 1998, FTD's net capital expenditures were
12
<PAGE> 13
$5.4 million, of which $2.0 million was for depreciable fixed assets such as
furniture and equipment, and $3.4 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 six month period ended December 31, 1998, FTD experienced an
increase in cash and cash equivalents of $1.5 million as compared to a decrease
in cash and cash equivalents of $7.3 million for the previous six month period
ended December 31, 1997.
Cash provided by operating activities was $4.7 million for the six
month period ended December 31, 1998, compared to cash provided of $9.0 million
for the six month period ended December 31, 1997. Depreciation and amortization
was $3.5 million for the six month period ended December 31, 1998 and $6.7
million for the six month period ended December 31, 1997. The decrease in cash
provided by operating activities is primarily due to the decrease in the balance
of accrued customer incentive programs in comparison to the six month period
ended December 31, 1997.
Cash used in investing activities, consisting of capital expenditures
net of disposal of assets, was $5.4 million for the six month period ended
December 31, 1998 compared to $0.3 million for the six month period ended
December 31, 1997.
Cash provided by financing activities was $2.2 million for the six
month period ended December 31, 1998 compared to cash used in financing
activities of $16.0 million for the six month period ended December 31, 1997.
The change in cash from financing activities is primarily a result of an
increase in borrowings of long-term debt during the six month period ended
December 31, 1998 as compared to the six month period ended December 31, 1997.
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 December 31, 1998, 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 December 31, 1998, phase 1 has been completed and tested and phase 2 is in
the implementation process and is expected to be completed and tested by April
1999. The Company expects phase 3 of the project to be completed and tested by
June 30, 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
13
<PAGE> 14
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 December 31, 1998, the Company does not
have any reason to believe that these third parties 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 Box, 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 Box
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 6 to 12 months is
expected to range between $7.0 and $9.0 million of which approximately $3.0 to
$7.0 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 December 31, 1998, all scheduled implementation dates have
been met, and the Company continues to anticipate the implementation to be
completed by June 30, 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 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
14
<PAGE> 15
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
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 financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
- - ----------- -----------
11 Computation of Earnings Per Share.
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
December 31, 1998.
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 1st day of February, 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
Paper (P)
Exhibit or
Number Description Electronic (E)
------ ----------- --------------
11 Computation of Earnings Per Share E
27 Financial Data Schedule E
18
<PAGE> 1
EXHIBIT 11
FTD CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE*:
Net earnings (loss) applicable to common stock before extraordinary item $ 1,636 ($1,308) $ 791 ($1,128)
Extraordinary item (3,714) (835) (3,714) (835)
-------- ------- -------- -------
Net loss ($2,078) ($2,143) ($2,923) ($1,963)
======== ======= ======== =======
Weighted average number of common shares outstanding 15,367 15,239 15,366 15,250
Common stock equivalents due to dilutive affect
of stock options and warrants 147 0 147 0
-------- ------- -------- -------
Total weighted average number of common shares and equivalents outstanding 15,514 15,239 15,513 15,250
Income (loss) before extraordinary item $ 0.11 ($0.09) $ 0.05 ($ 0.08)
Extraordinary item ($ 0.24) ($0.05) ($ 0.24) ($ 0.05)
-------- ------- -------- -------
Basic and diluted loss per share ($ 0.13) ($0.14) ($ 0.19) ($ 0.13)
======== ======= ======== =======
</TABLE>
* Basic and diluted earnings (loss) per share is shown as one amount due to the
immaterial effect of dilutive common stock equivalents in the calculation of
diluted earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FTD
CORPORATION THREE MONTHS ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 15,160
<SECURITIES> 0
<RECEIVABLES> 27,181
<ALLOWANCES> 1,831
<INVENTORY> 13,960
<CURRENT-ASSETS> 62,165
<PP&E> 47,741
<DEPRECIATION> 31,715
<TOTAL-ASSETS> 161,090
<CURRENT-LIABILITIES> 69,097
<BONDS> 62,000
0
0
<COMMON> 125
<OTHER-SE> 23,799
<TOTAL-LIABILITY-AND-EQUITY> 161,090
<SALES> 13,491
<TOTAL-REVENUES> 45,933
<CGS> 8,735
<TOTAL-COSTS> 15,925
<OTHER-EXPENSES> 24,980
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,162)
<INCOME-PRETAX> 3,080
<INCOME-TAX> 1,444
<INCOME-CONTINUING> 1,636
<DISCONTINUED> 0
<EXTRAORDINARY> (3,714)
<CHANGES> 0
<NET-INCOME> (2,078)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
