<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, 2000
Commission File Number
000-21277
---------
IOS BRANDS CORPORATION
----------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3711271
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3113 WOODCREEK DRIVE
DOWNERS GROVE, IL 60515-5420
----------------------------
(Address of Principal Executive Offices) (Zip Code)
(630) 719-7800
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
As of April 1, 2000, there were 12,380,370 outstanding shares of the
Registrant's Class A Common Stock, par value $.01 per share, and 2,948,750
outstanding shares of the Registrant's Class B Common Stock, par value $.0005
per share.
<PAGE> 2
IOS BRANDS CORPORATION
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets......................... 3
Condensed Consolidated Statements of Operations and Comprehensive
Income........................................................ 4
Condensed Consolidated Statements of Cash Flows............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 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
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
ASSETS (UNAUDITED) (AUDITED)
------ ----------- ---------
(In thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $27,911 $2,468
Accounts receivable, less allowance for doubtful accounts
of $2,008 at March 31, 2000 and $1,681 at June 30, 1999 29,648 22,813
Inventories 14,444 13,641
Deferred income taxes 3,052 3,045
Prepaid expenses 3,533 5,795
--------- ---------
TOTAL CURRENT ASSETS 78,588 47,762
Property and equipment, less accumulated depreciation
of $36,177 at March 31, 2000 and $33,504 at June 30, 1999 17,971 15,984
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $655 at March 31, 2000 and $445 at June 30, 1999 899 1,059
Deferred income taxes 8,538 1,440
Other noncurrent assets 14,237 6,722
Goodwill and other intangibles, less accumulated amortization
of $15,945 at March 31, 2000 and $13,654 at June 30, 1999 69,439 71,730
--------- ---------
TOTAL OTHER ASSETS 93,113 80,951
TOTAL ASSETS $189,672 $144,697
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $47,501 $32,425
Customer deposits and accrued customer incentive programs 15,650 15,751
Other accrued liabilities 8,631 6,164
--------- ---------
TOTAL CURRENT LIABILITIES 71,782 54,340
Long-term debt 60,250 51,750
Pension and other post-retirement benefits 5,493 5,755
Preferred stockholders' equity in a subsidiary company - 9,074
Minority interest in subsidiary 42,473 -
STOCKHOLDERS' EQUITY:
Common stock:
Class A 123 123
Class B 2 2
Paid-in capital 37,170 37,018
Accumulated deficit (24,970) (10,648)
Cumulative translation adjustments (74) (96)
Unamortized restricted stock (717) (913)
Treasury stock (1,860) (1,708)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 9,674 23,778
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $189,672 $144,697
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
REVENUES:
Technology Products and Services $31,486 $29,960 $92,605 $83,313
Marketplace and Other 14,578 16,979 41,042 45,323
Direct to Consumer 23,870 11,380 55,593 28,587
------- ------- -------- --------
Total revenues $69,934 $58,319 $189,240 $157,223
------- ------- -------- --------
COSTS OF GOODS SOLD AND SERVICES PROVIDED:
Technology Products and Services 7,230 5,947 21,078 16,080
Marketplace and Other 9,222 11,983 29,174 30,941
Direct to Consumer 18,458 9,048 43,722 22,674
------- ------- -------- --------
Total costs of goods sold and services
provided 34,910 26,978 93,974 69,695
------- ------- -------- --------
OPERATING EXPENSES:
Advertising and selling 30,321 17,770 84,462 50,358
General and administrative 10,361 10,676 31,010 28,707
------- ------- -------- --------
Total operating expenses 40,682 28,446 115,472 79,065
Income (loss) from operations (5,658) 2,895 (20,206) 8,463
------- ------- -------- --------
OTHER INCOME AND EXPENSES:
Interest income (579) (102) (1,409) (418)
Interest expense 1,415 1,048 4,142 5,588
Foreign exchange (gain) loss and other income (13) (155) 83 (227)
------- ------- -------- --------
Total other income and expenses 823 791 2,816 4,943
------- ------- -------- --------
Income (loss) before income tax, minority interest and
extraordinary item (6,481) 2,104 (23,022) 3,520
------- ------- -------- --------
Income tax expense (benefit) (1,952) 1,135 (6,917) 1,760
Minority interest in loss of subsidiary (773) - (1,784) -
------- ------- -------- --------
Net income (loss) before extraordinary item (3,756) 969 (14,321) 1,760
------- ------- -------- --------
Extraordinary item:
Loss on early extinguishment of debt, net of income tax benefit
of $3,428 - - - (3,714)
------- ------- -------- --------
Net income (loss) ($3,756) $969 $14,321) ($1,954)
------- ------- -------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments (5) 10 22 (26)
------- ------- -------- --------
Comprehensive income (loss) ($3,761) $979 ($14,299) ($1,980)
======= ======= ======== ========
EARNINGS (LOSS) PER SHARE:
Basic and diluted before extraordinary item ($0.24) $0.06 ($0.93) $0.11
======= ======= ======== ========
Extraordinary item - - - ($0.24)
======= ======= ======== ========
Basic and diluted ($0.24) $0.06 ($0.93) ($0.13)
======= ======= ======== ========
Common shares used in the calculation of basic and diluted earnings
(loss) per share 15,345 15,347 15,345 15,358
======= ======= ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended
March 31,
2000 1999
---- ----
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($14,321) ($1,954)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 6,903 7,530
Minority interest in loss of subsidiary (1,784) -
Accounts receivable (6,835) (3,904)
Deferred income taxes (7,105) (1,998)
Other assets 103 1,838
Accounts payable 15,076 3,699
Customer deposits and accrued customer incentive programs (101) (7,256)
Other accrued liabilities 2,843 1,276
---------- ---------
Net cash used in operating activities ($5,221) ($769)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (13,414) (6,314)
---------- ---------
Net cash used in investing activities (13,414) (6,314)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of revolving credit borrowings 8,449 (4,051)
Repurchase of common stock, net - (1,439)
Issuance of subsidiary common stock, net 35,607 -
---------- ---------
Net cash provided by (used in) financing activities 44,056 (5,490)
Effect of foreign exchange rate changes on cash 22 (26)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,443 (12,599)
Cash and cash equivalents at beginning of period 2,468 13,615
---------- ---------
Cash and cash equivalents at end of period $27,911 $1,016
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $3,404 $5,243
========== =========
Income taxes paid $114 $0
========== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
IOS BRANDS CORPORATION
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
At the Annual Meeting of Stockholders held on November 17, 1999, a
majority of the stockholders voted in favor on the proposal to amend the
Company's Restated Certificate of Incorporation to change the name of the
Company from FTD Corporation to IOS BRANDS CORPORATION. The unaudited condensed
consolidated financial statements as of and for the three and nine month periods
ended March 31, 2000, include the accounts of IOS BRANDS CORPORATION and its
wholly-owned subsidiaries, Florists' Transworld Delivery, Inc. ("FTD") Value
Network Service, Inc. ("VNS") and FTD International Corporation (collectively,
"the Company" or "IOS"). FTD, the principal operating subsidiary of the Company,
includes its wholly owned subsidiaries Renaissance Greeting Cards, Inc. and FTD
Canada, Inc., as well as those of its majority owned subsidiary FTD.COM INC.
("FTD.COM"). These statements have been prepared in accordance with generally
accepted accounting principles for interim financial information pursuant to the
rules and regulations of the Securities and Exchange Commission and do not
contain all information included in the audited consolidated financial
statements and notes for the year ended June 30, 1999. The interim statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-K. In the opinion of
management, all adjustments necessary for a fair presentation of the financial
position, results of operations and cash flows have been included (and any such
adjustments are of a normal, recurring nature).
Certain amounts in the condensed consolidated balance sheets,
statements of operations and comprehensive income and cash flows as of and for
the three and nine month periods ended March 31, 1999 have been reclassified to
conform to the current period presentation. This includes the reclassification
of certain revenues generated from Direct to Consumer activities, which were
previously reported net of costs relating to processing and fulfillment and are
now recorded on a gross basis. The corresponding costs representing the amounts
paid for processing and fulfillment have been reclassified as Direct to Consumer
costs of goods sold and services provided. The Company has also made other
reclassifications of costs of goods sold and services provided and selling,
general and administrative expenses in order to conform to the current period
presentation.
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 were required to purchase a FSG and related workbook. The
purchase of such FSG entitles the FTD florist to a non-exclusive,
non-transferable right for on premises use of the FSG for as long as the
purchaser remains an FTD florist in good standing. FTD will revise this FSG for
new FTD products every other fiscal year and recognize the related revenue at
the time of shipment to all FTD florists. In the nine month period ended March
31, 1999 revenue from such FSG sales totaled $2.7 million.
Note 3. Capital Transactions
During the nine month period ended March 31, 2000, pursuant to the
terms of the Company's stock award and incentive plan, options to purchase
88,400 Class A shares were granted and options to purchase 43,600 Class A shares
previously granted were canceled. The Company did not repurchase into treasury
any shares of outstanding common stock during the nine month period ended March
31, 2000.
During the nine month period ended March 31, 1999, the Company granted
options to purchase 162,100 Class A shares and 70,000 Class A shares were issued
to officers as restricted stock. In addition, options to purchase 19,000 Class A
shares were exercised, options to purchase 75,450 Class A shares previously
granted were canceled and 86,202 and 51,250 Class A and B shares, respectively,
were repurchased into treasury.
6
<PAGE> 7
Note 4. Earnings Per Share
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", basic earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding
and excludes the dilutive effect of unexercised common stock equivalents.
Diluted earnings (loss) per share is calculated by dividing net income by the
weighted average number of common shares outstanding and includes the dilutive
effect of unexercised common stock equivalents to the extent that they are not
anti-dilutive. Basic and diluted earnings per common share for the three and
nine month periods ended March 31, 2000 were computed based on the weighted
average number of common shares outstanding of 15,344,870. For the three and
nine month periods ended March 31, 1999, basic and diluted earnings per common
share were computed based on the weighted average number of common shares
outstanding of 15,346,940 and 15,358,126, respectively.
Shares associated with stock options which were not included in the
calculation of diluted earnings per share because their effect was anti-dilutive
consisted of approximately 291,000 shares and 218,000 shares in the three and
nine month periods ended March 31, 2000, respectively and approximately 97,000
and 102,000 in the three and nine month periods ended March 31, 1999,
respectively.
Note 5. Segment Information
In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", the Company has identified three reportable
business segments based on the nature of its products and services and financial
reports.
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 FTD's Mercury equipment, Mercury Advantage systems,
Mercury Wings TM systems, Mercury Network, Clearinghouse, Flowers After Hours,
Publications, Credit Card processing, Interflora, Inc. and VNS. Marketplace and
Other consists of FTD's floral related products, specialty gift products and
greeting cards offered to FTD's customers for resale as well as the FSG and
other miscellaneous income items. Direct to Consumer includes FTD.COM's floral
and specialty gift order capabilities offered directly to consumers through the
1-800-SEND-FTD toll-free telephone number and the www.FTD.COM Internet site.
These segments are evaluated regularly by management in deciding how to
allocate resources and assess performance. For purposes of managing the Company,
the chief operating decision maker reviews segment financial performance to the
operating income level for the Direct to Consumer business segment (FTD.COM) and
to the gross margin level for the Company's remaining business segments. Of the
Company's assets totaling $189.7 million as of March 31, 2000, the assets of
FTD.COM totaled $32.4 million, of which $26.5 million was cash and cash
equivalents. Financial resources utilized by FTD.COM are currently generated
from its own sources of liquidity. The assets of the Company's other two
operating business segments share the majority of the remaining assets of $157.3
million. Resource allocating decisions are not made on the basis of the
reportable segment's assets.
The Company's accounting policies for segments are the same as those on
a consolidated basis described in Note 1, Basis of Presentation. In connection
with the Initial Public Offering (IPO) of FTD.COM's Class A common stock, FTD
and FTD.COM entered into certain intercompany agreements governing various
interim and ongoing relationships, including a commission agreement,
indemnification agreement, trademark license agreement, a registration rights
agreement, a tax sharing agreement and a web site hosting agreement.
7
<PAGE> 8
The following tables detail the Company's operating results by
reportable business segment for the three and nine month periods ended March 31,
2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED MARCH 31,
2000 1999
---- ----
------------- ---------------- ---------------- ---------------- ------------------------------
GROSS GROSS
SEGMENT ELIMINATIONS CONSOLIDATED SEGMENT ELIMINATIONS CONSOLIDATED
------------- ---------------- ---------------- ---------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Technology Products and Services $31,919 $ (433) $31,486 $30,134 $(174) $29,960
Marketplace and Other 14,578 - 14,578 16,979 - 16,979
Direct to Consumer 26,550 (2,680) 23,870 12,390 (1,010) 11,380
------ ------- ------ ------ ------- ------
TOTAL REVENUES 73,047 (3,113) 69,934 59,503 (1,184) 58,319
------ ------- ------ ------ ------- ------
COSTS OF GOODS SOLD AND SERVICES
PROVIDED:
Technology Products and Services 7,723 (493) 7,230 5,947 - 5,947
Marketplace and Other 9,222 - 9,222 11,983 - 11,983
Direct to Consumer 18,891 (433) 18,458 9,789 (741) 9,048
------ ----- ------ ----- ----- -----
Total costs of goods sold and
services provided 35,836 (926) 34,910 27,719 (741) 26,978
------ ----- ------ ------ ----- ------
OPERATING EXPENSES:
Technology and Marketplace 26,242 (2,881) 23,361 23,929 (2,494) 21,435
Direct to Consumer 16,627 694 17,321 4,960 2,051 7,011
------ --- ------ ----- ----- -----
Total operating expenses 42,869 (2,187) 40,682 28,889 (443) 28,446
------ ------- ------ ------ ----- ------
OPERATING INCOME (LOSS) (5,658) $ - $(5,658) $2,895 $ - $2,895
======= ====== ======== ======== ====== =======
GROSS MARGIN BY SEGMENT:
Technology Products and Services $24,196 $60 $24,256 $24,187 $(174) $24,013
Marketplace and Other 5,356 - 5,356 4,996 - 4,996
Direct to Consumer 7,659 (2,247) 5,412 2,601 (269) 2,332
----- ------- ----- ----- ----- -----
Total $37,211 $(2,187) $35,024 $31,784 $(443) $31,341
======= ======== ======= ======= ====== =======
NINE MONTH PERIOD ENDED MARCH 31,
2000 1999
---- ----
------------ ---------------- ----------------- ---------------- ------------------------------
GROSS GROSS
SEGMENT ELIMINATIONS CONSOLIDATED SEGMENT ELIMINATIONS CONSOLIDATED
------------ ---------------- ----------------- ---------------- ------------------------------
REVENUES:
Technology Products and Services $93,689 $ (1,084) $92,605 $83,717 $(404) $83,313
Marketplace and Other 41,042 - 41,042 45,323 - 45,323
Direct to Consumer 62,581 (6,988) 55,593 31,183 (2,596) 28,587
------ ------- ------ ------ ------- ------
Total revenues 197,312 (8,072) 189,240 $160,223 $(3,000) 157,223
------- ------- ------- -------- -------- -------
COSTS OF GOODS SOLD AND SERVICES
PROVIDED:
Technology Products and Services 22,834 (1,756) 21,078 16,080 - 16,080
Marketplace and Other 29,174 - 29,174 30,941 - 30,941
Direct to Consumer 44,806 (1,084) 43,722 24,519 (1,845) 22,674
------ ------- ------ ------ ------- ------
Total costs of goods sold and
services provided 96,814 (2,840) 93,974 71,540 (1,845) 69,695
------ ------- ------ ------ ------- ------
OPERATING EXPENSES:
Technology and Marketplace 78,194 (7,973) 70,221 67,801 (6,294) 61,507
Direct to Consumer 42,510 2,741 45,251 12,419 5,139 17,558
------ ----- ------ ------ ----- ------
Total operating expenses 120,704 (5,232) 115,472 80,220 (1,155) 79,065
------- ------- ------- ------ ------- ------
OPERATING INCOME (LOSS) $(20,206) $ - $ (20,206) $8,463 $ - $8,463
========= ==== ========== ======== ===== ======
GROSS MARGIN BY SEGMENT:
Technology Products and Services $70,855 $672 $71,527 $67,637 $(404) $67,233
Marketplace and Other 11,868 - 11,868 14,382 - 14,382
Direct to Consumer 17,775 (5,904) 11,871 6,664 (751) 5,913
------ ------- ------ ----- ----- -----
Total $100,498 $(5,232) $95,266 $88,683 $(1,155) $87,528
======== ======== ======= ======= ======== =======
</TABLE>
8
<PAGE> 9
Note 6. Initial Public Offering of FTD.COM
On September 28, 1999, FTD's subsidiary FTD.COM agreed to issue and
sell 4,500,000 shares of its Class A common stock to the public in an IPO
transaction at a price of $8.00 per share, resulting in gross proceeds from the
offering of $36.0 million. The IPO closed on October 4, 1999, at which time
FTD.COM collected the gross proceeds of $36.0 million less underwriting
discounts of $2.5 million. In addition, the $33.5 million net cash received from
the underwriters was reduced by other offering expenses of $2.0 million. The net
proceeds of $31.5 million were recorded as minority interest in subsidiary.
Prior to the IPO, FTD owned 100% of the outstanding common stock of FTD.COM.
There was no gain recorded by the Company upon the sale of FTD.COM's stock. The
Company's accounting policy is to account for a subsidiary direct sale of
unissued shares as a capital transaction.
Upon the closing of the IPO of FTD.COM on October 4, 1999, the 90,000
shares of FTD.COM's Series A 8% Cumulative Redeemable Convertible Preferred
Stock were automatically converted into 1,384,614 shares of FTD.COM Class A
common stock. Upon conversion, the Company reclassified the preferred
stockholders' equity in a subsidiary of $9.0 million to minority interest in
subsidiary and the accrued dividends of $74,301 were offset against the retained
earnings of FTD.COM.
On October 6, 1999, the underwriters of the IPO exercised their one
time option to purchase 495,000 additional shares of FTD.COM Class A common
stock at the IPO price of $8.00 per share, representing a portion of the
over-allotment option granted to the underwriters in connection with the IPO.
The net proceeds to FTD.COM from this issuance and sale of 495,000 shares of
Class A common stock were $3.7 million after deducting underwriting discounts
and commissions and were recorded as minority interest in subsidiary.
Upon completion of the above events, FTD owns approximately 87% of the
outstanding common stock of FTD.COM through its ownership of 40,920,000 shares
of Class B common stock (as adjusted for the 12-for-1 stock split on July 30,
1999). In addition, the minority interest of 13% is represented by the 4,500,000
shares of Class A common stock sold to the public, the 1,384,614 shares from the
conversion of the Series A preferred stock into shares of Class A common stock
and the issuance and sale of 495,000 shares of Class A common stock to the
underwriters pursuant to the underwriters' exercise of their over-allotment
option.
Note 7. Minority Interest in Subsidiary
The Company's condensed consolidated financial statements as of and for
the three and nine month periods ended March 31, 2000, reflect the minority
interest in FTD's subsidiary FTD.COM
The minority interest in loss of subsidiary of $0.8 million and $1.8
million for the three and nine months ended March 31, 2000, respectively
reflected on the condensed consolidated statements of operations and
comprehensive income represents the net loss attributable to the 13% minority
shareholders for the period.
The $42.4 million minority interest in subsidiary reflected on the
condensed consolidated balance sheets as of March 31, 2000 consists of the $31.5
million net proceeds from the closing of the IPO, the $9.0 million from the
reclassification of the preferred stockholders' equity in a subsidiary and the
$3.7 million net proceeds from the underwriters exercise of their over-allotment
option, offset by the minority interest in loss of subsidiary of $1.8 million.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Effective November 18, 1999, FTD Corporation changed its name to IOS
Brands Corporation, which will allow the Company to build on the multi-brand
name recognition and distinguish it from the operating subsidiary Florists'
Transworld Delivery, Inc.
Except for the historical information contained in this report, certain
statements made herein are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that reflect the Company's
expectations regarding its future growth, results of operations, performance and
business prospects and opportunities. Words such as "anticipates," "believes,"
"plans," "expects," "estimates," and similar expressions have been used to
identify these forward looking statements, but are not the exclusive means of
identifying these statements. These statements reflect the Company's current
beliefs and are based on information currently available to the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by, these statements. These risks, uncertainties,
and other factors include the Company's ability to develop and market existing
and acquired products, the Company's ability to maintain its advertising
presence, the Company's ability to adjust to changes in technology, customer
preferences, enhanced competition and new competitors in the floral services
industry, current exchange rate and interest rate fluctuations, collection of
receivables 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.
The Company generates its revenue from three principal areas of
operation. These areas have been identified as Technology Products and Services,
Marketplace and Other and Direct to Consumer.
Technology Products and Services consists primarily of:
- Mercury equipment, Mercury Advantage systems and Mercury Wings TM
systems sales, which includes both sales and leases of hardware
and software to FTD florists.
- Mercury Network, which is FTD's proprietary telecommunications
network used by florists to transmit orders through FTD or through
competing clearinghouses.
- Clearinghouse, which provides order billing and collection
services to both the sending and receiving florists and for which
FTD receives a percentage of the sales price for the service.
- Flowers After Hours, which is FTD's call forwarding service
whereby FTD receives orders for participating florists when that
florists' shop is closed or otherwise unavailable. FTD charges a
fee for each transaction processed.
- Publications, which consists of the FTD Directory published on a
quarterly basis on CD ROM as well as in paper book form.
Publications also includes revenues attributable to the set up and
maintenance of florists' Web sites for FTD Florists' Online
through FTD.COM's Internet site www.FTD.COM.
- Credit Card processing, which is a service offered to
participating florists whereby FTD pools the credit card
transactions of such florists to secure more favorable terms on
credit card transactions than the FTD florists could secure
individually.
- Interflora, Inc. is a joint venture between the Company,
Fleurop-Interflora and the Interflora British Unit. The joint
venture provides a floral services organization with non-FTD
member florists to enable florists to transmit and receive orders
outside North America.
- VNS is another telecommunications network, which provides non-FTD
florists the capability of transmitting and receiving orders.
10
<PAGE> 11
The Marketplace and Other segment primarily represents FTD's wholesale
distribution of floral related products to florists. This includes both
FTD-branded and non-branded holiday and everyday floral arrangement containers
and products, as well as packaging, promotional products and a wide variety of
other floral-related supplies. It also includes greeting cards, specialty gifts
and the FSG in addition to other miscellaneous income items.
The Direct to Consumer segment represents revenue derived from FTD's
majority owned subsidiary, FTD.COM. FTD.COM is an Internet and telephone
marketer of flowers and specialty gifts. This business segment includes consumer
orders generated by the 1-800-SEND-FTD toll-free telephone number and the
www.FTD.COM Web site. FTD.COM's revenue includes the sales price of flowers and
specialty gifts as well as a service fee charged to the consumer.
In view of the rapidly changing nature of the Company's Direct to
Consumer business and seasonal variations of the Company's other business
segments, the Company believes that comparisons of its operating results for any
period with those of the preceding period are not necessarily meaningful and
should not be relied upon as an indication of future performance. The Company's
revenues and operating results may vary from quarter to quarter due to a number
of factors, some of which are beyond the Company's control. This fluctuation is
primarily attributable to increased sales and advertising expenditures during
popular floral holiday seasons in the fiscal quarters ended March 31, June 30
and December 31. As a result of increased brand development costs, marketing
costs and systems and technology development costs in the Direct to Consumer
business segment, the Company expects to record significantly greater losses, or
reduced profits, as compared to the preceding periods for the remainder of the
year ended June 30, 2000 and into the foreseeable future.
THREE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTH PERIOD ENDED
MARCH 31, 1999.
Total revenues increased by $11.6 million, or 19.9%, to $69.9 million
for the quarter ended March 31, 2000 compared to $58.3 million for the quarter
ended March 31, 1999. This increase in revenue was primarily the result of
increases in the Direct to Consumer and Technology Products and Services
business segments, offset in part by a decrease in the Marketplace and Other
business segment.
Technology Products and Services segment revenue increased by $1.5
million, or 5.0%, to $31.5 million for the quarter ended March 31, 2000 compared
to $30.0 million last year. This increase was primarily due to increases in
Clearinghouse, Publications and Mercury Wings System sales and support offset in
part by a decrease in Advantage Systems sales.
Marketplace and Other segment revenue decreased by $2.4 million, or
14.1%, to $14.6 million for the quarter ended March 31, 2000 from $17.0 million
last year. The decrease was primarily the result of a shift in the Easter
holiday which occurred three weeks later into the fourth quarter of the current
year.
Direct to Consumer segment revenue increased by $12.5 million, or
109.6%, to $23.9 million for the quarter ended March 31, 2000 compared to $11.4
million a year ago. The increase over the prior year was primarily due to an
increase in the number of orders placed by consumers through the www.FTD.COM
Internet site.
Total cost of goods sold and services provided increased by $7.9
million, or 29.3%, to $34.9 million for the quarter ended March 31, 2000
compared to $27.0 million a year earlier. This increase was primarily
attributable to increased costs associated with increased revenues in the Direct
to Consumer and Technology Products and Services business segments offset in
part by a decrease in costs associated with the Marketplace and Other business
segment. As a percent of revenue, total costs of goods sold and services
provided increased to 49.9% for the quarter ended March 31, 2000 from 46.3% a
year earlier. This was primarily due to the significant increase in sales volume
in the Direct to Consumer business segment, which has a higher relative cost of
sales percentage compared to other business segments.
Costs of goods sold and services provided associated with Technology
Products and Services increased $1.3 million, or 22.0% to $7.2 million for the
quarter ended March 31, 2000 compared to $5.9 million in the prior
11
<PAGE> 12
year. This increase was primarily due to increased costs associated with Mercury
Wings System sales and support, publications and credit cards offset in part by
decreased costs associated with decreased sales of Advantage systems.
Costs of goods sold and services provided associated with Marketplace
and Other decreased by $2.8 million, or 23.3%, to $9.2 million for the quarter
ended March 31, 2000 compared to $12.0 million a year ago. This decrease is
primarily a result of the decrease in shipments due to the later Easter holiday.
Costs of goods sold and services provided associated with Direct to
Consumer increased $9.5 million, or 105.6%, to $18.5 million for the quarter
ended March 31, 2000 compared to $9.0 million last year. The increase was
primarily attributable to costs associated with processing and fulfilling more
consumer orders.
Advertising and selling expenses increased by $12.5 million, or 70.2%,
to $30.3 million for the quarter ended March 31, 2000 from $17.8 million a year
earlier. This was primarily due to increased costs associated with Internet
marketing, national advertising, public relations and other increased selling
expenses. General and administrative expenses decreased $0.3 million, or 2.8%,
to $10.4 million from $10.7 million in the prior year.
Interest income increased by $0.5 million over the prior year, to $0.6
million for the quarter ended March 31, 2000, resulting from interest earned on
the unused proceeds of the IPO of FTD.COM. Interest expense increased by $0.4
million from the prior year, to $1.4 million for the quarter ended March 31,
2000. The increase is primarily due to increased borrowings in comparison to the
same period a year earlier.
The provision for income taxes and the effective tax rates for the
quarters ended March 31, 2000 and 1999 were a benefit of $2.0 million and 30.8%
and an expense of $1.1 million and 52.4%, respectively. The change in effective
tax rates was primarily due to the effect of non-deductible goodwill
amortization and other items, which reduces the Company's tax rate when
operating in a pre-tax loss position and increases its effective tax rate when
operating in a pre-tax profit position.
The net loss for the quarter ended March 31, 2000 includes $0.8 million
of minority interest in the loss of the Company's subsidiary FTD.COM. The net
income/loss before extraordinary item, was a loss of $3.8 million for the
quarter ended March 31, 2000 compared to income of $1.0 million a year earlier,
a $4.8 million decrease year on year. The decrease was primarily the result of
increased advertising, marketing and selling expenses associated with the
Company's recently launched national advertising campaign.
NINE MONTH PERIOD ENDED MARCH 31, 2000 COMPARED TO THE NINE MONTH PERIOD ENDED
MARCH 31, 1999.
Total revenues increased by $32.0 million, or 20.4%, to $189.2 million
for the nine months ended March 31, 2000 compared to $157.2 million a year
earlier. This increase was primarily the result of an increase in revenues in
the Direct to Consumer and Technology Products and Services business segments,
offset in part by a decrease in revenues in the Marketplace and Other business
segment.
Technology Products and Services segment revenue increased by $9.3
million, or 11.2%, to $92.6 million in the nine months ended March 31, 2000
compared to $83.3 million last year. This increase was due in part to increases
in clearinghouse, publications, credit cards and Mercury Wings System sales. The
increase was partially offset by decreases in Mercury equipment rental revenues
and Mercury network transmissions.
Marketplace and Other segment revenue decreased by $4.3 million, or
9.5%, to $41.0 million for the nine months ended March 31, 2000 from $45.3
million a year ago. The decrease was primarily the result of $2.7 million in
revenues for the Floral Selections Guide "FSG," (see Note 2. Revenues from Sale
of Floral Selections Guide), recorded in the previous years nine month period
versus no FSG revenues recorded in the current nine month period. In addition,
marketplace product sales decreased by $1.6 million primarily as a result of the
timing of the Easter holiday.
Direct to Consumer segment revenue increased by $27.0 million, or
94.4%, to $55.6 million for the nine months ended March 31, 2000 compared to
$28.6 million a year earlier. The increase over the prior year was primarily due
to an increase in the number of orders placed by consumers through the
www.FTD.COM Internet site.
12
<PAGE> 13
Total cost of goods sold and services provided increased by $24.3
million, or 34.9%, to $94.0 million for the nine months ended March 31, 2000
compared to $69.7 million a year earlier. This increase was primarily
attributable to the costs associated with increases in revenues in the Direct to
Consumer and Technology Products and Services business segments. As a percent of
revenue, total costs of goods sold and services provided increased to 49.7% for
the nine months ended March 31, 2000 from 44.3% a year earlier. This was
primarily due to the significant increase in sales volume in the Direct to
Consumer business segment, which has a higher relative cost of sales percentage
compared to other business segments.
Costs of goods sold and services provided associated with Technology
Products and Services increased $5.0 million, or 31.1% to $21.1 million for the
nine months ended March 31, 2000 compared to $16.1 million in the prior year.
This increase was primarily due to higher equipment and support costs associated
with increased sales of Mercury Advantage and Mercury Wings TM Systems as well
as increased costs associated with publications and credit cards.
Costs of goods sold and services provided associated with Marketplace
and Other decreased by $1.7 million, or 5.5%, to $29.2 million for the nine
months ended March 31, 2000, compared to $30.9 million a year ago. Cost of goods
sold in the previous nine months ended included $1.7 million of costs related to
the FSG versus no FSG costs in the nine months ended March 31, 2000.
Costs of goods sold and services provided associated with Direct to
Consumer increased $21.0 million, or 92.5%, to $43.7 million for the nine months
ended March 31, 2000 compared to $22.7 million a year ago. The increase was
primarily attributable to costs associated with processing and fulfilling more
consumer orders.
Advertising and selling expenses increased by $34.1 million, or 67.7%,
to $84.5 million for the nine months ended March 31, 2000 from $50.4 million a
year earlier. This was primarily due to increased costs associated with Internet
marketing and national advertising.
General and administrative expenses increased $2.2 million, or 7.6%, to
$31.0 million for the nine months ended March 31, 2000 from $28.7 million for
the same period a year earlier. This increase was primarily due to increased
payroll and administrative costs to support the growth of the Company.
Interest income increased by $1.0 million over the prior year, to $1.4
million for the nine months ended March 31, 2000, resulting primarily from
interest earned on unused proceeds from the IPO of FTD.COM. Interest expense
decreased by $1.5 million from the prior year, to $4.1 million for the nine
months ended March 31, 2000. The decrease was primarily attributable to a lower
borrowing rate year on year as a result of extinguishing $60.0 million of 14%
Senior Subordinated Notes on December 15, 1998 and utilizing existing bank
credit facilities having a lower average borrowing rate.
The provision for income taxes and the effective tax rates for the nine
months ended March 31, 2000 and 1999 were a benefit of $6.9 million and 30% and
a provision of $1.8 million and 51.4%, respectively. The change in effective tax
rates was primarily due to the effect of non-deductible goodwill amortization
and other items, which reduces the Company's tax rate when operating in a
pre-tax loss position and increases its effective tax rate when operating in a
pre-tax profit position.
The net loss for the nine months ended March 31, 2000 includes the
minority interest in the loss of the Company's subsidiary FTD.COM from the date
of the IPO. The net income/loss before extraordinary item was a loss of $14.3
million for the nine months ended March 31, 2000 compared to income of $1.8
million for the same period a year earlier, a $16.1 million decrease year on
year. The decrease was primarily the result of increased advertising, selling
and marketing expenses associated with the Company's recently launched national
advertising campaign. The net loss for the nine months ended March 31, 1999
includes an after-tax extraordinary loss of $3.7 million as a result of the
extinguishment of debt as noted above.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $25.4 million to $27.9 million
as of March 31, 2000 from $2.5 million as of June 30, 1999. For the nine months
ended March 31, 1999, cash and cash equivalents decreased by $12.6 million to
$1.0 million from $13.6 million as of June 30, 1998.
Cash used in operating activities was $5.2 million for the nine months
ended March 31, 2000 compared to cash used in operating activities of $0.8
million in the previous nine month period. The increase in cash used in
operating activities is primarily attributable to the increase in net losses
offset in part by an increase in accounts payable in comparison to the prior
year period.
Cash used in investing activities was $13.4 million for the nine months
ended March 31, 2000 compared to $6.3 million for the same period a year ago.
Expenditures for depreciable fixed assets such as furniture and equipment were
$4.7 million and $2.2 million, respectively. Expenditures for amortizable
intangibles such as costs relating to the development and implementation of a
new software package and other information technology costs were $8.7 million
and $4.1 million, respectively. Current year expenditures included $3.2 million
of amortizable intangibles relating to the internet site development for the
Direct to Consumer business. The Company's anticipated capital expenditures for
fiscal 2000 are estimated to be approximately $15.0 to $18.0 million, of which
$9.0 million to $11.0 million will primarily be used for information technology
purchases.
Cash provided by financing activities was $44.1 million for the nine
months ended March 31, 2000, compared to cash used in financing activities of
$5.5 million for the same period a year earlier. The net proceeds from FTD.COM's
IPO generated $35.6 million of the increase and the remainder came from an
increase in borrowings under the bank credit facilities. The Company is using
the net proceeds from the IPO of FTD.COM to fund FTD.COM's working capital needs
and anticipated capital expenditures.
The Company's principal sources of liquidity are cash from operations
and funds available for borrowing under the Company's Bank Credit Agreement
dated November 20, 1997 (the "Bank Credit Facilities"). The Bank Credit
Facilities consist of a $40.6 million Multiple Draw Term Loan Facility and a
$50.0 million Revolving Credit Facility and are used to finance working capital,
acquisitions, certain expenses associated with the Bank Credit Facilities and
letter of credit needs. As of March 31, 2000, the Company had $40.6 million
outstanding under the Multiple Draw Term Loan Facility, $19.6 million
outstanding under the Revolving Credit Facility and $2.7 million outstanding
under various letters of credit. The amount outstanding under the Multiple Draw
Term Loan Facility is scheduled to be permanently reduced, over a period of
fifteen consecutive quarterly installments continuing until the termination date
of December 31, 2003, through cash flow from operations and the use of the
Revolving Credit Facility. The amounts outstanding under the Revolving Credit
Facility will mature on December 31, 2003. The Company's Bank Credit Facilities
include covenants, which, among other things require the Company to maintain
certain financial ratios and a minimum level of consolidated net worth. As of
March 31, 2000, the Company was in compliance with the covenants contained in
the Bank Credit Facilities.
In addition to its debt service obligations, the Company's remaining
liquidity requirements are primarily for capital expenditures, software
development costs and working capital needs. The Company believes, based on
current circumstances, that its existing and future cash flows from operations,
together with borrowings under the Revolving Credit Facility, will be sufficient
to fund its working capital needs, capital expenditures, potential acquisitions
and to make interest and principal payments as they become due under the terms
of the Bank Credit Facilities. The Company's Direct to Consumer business
segment, FTD.COM, may have long-term liquidity needs that may require it to
raise additional capital. If FTD.COM needed to raise additional capital and was
not able to do so, FTD.COM would have to alter its operating plan significantly,
which could have a material effect on the results of operations and financial
condition of FTD.COM and the Company.
DEFERRED TAX ASSET
As of March 31, 2000 and June 30, 1999, the current and long-term
deferred tax assets were $3.1 million and $8.5 million and $3.0 million and $1.4
million, respectively. The long-term deferred tax asset for both periods
includes a $1.5 million valuation allowance. The Company's net operating loss
carryforwards at June 30, 1999 are approximately $17.3 million, the tax benefits
of which are included as noncurrent tax assets and will expire if
14
<PAGE> 15
unused as follows: $2.4 million in 2007, $2.3 million in 2008, $0.8 million in
2009, $5.2 million in 2010 and $6.6 million in 2019. In addition, a tax benefit
of $8.5 million as a result of the pre-tax loss of $23.0 million for the
nine-month period ended March 31, 2000 is also included in the long-term
deferred tax asset. The Company expects to incur significant losses, or reduced
profits, as compared to prior periods for the foreseeable future. However,
management believes that based on their evaluation of taxable income in future
years coupled with tax planning strategies that a $1.5 million valuation
allowance is appropriate as of March 31, 2000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, which primarily relates to
interest rate risk. The Company's policy is to enter into certain derivative
instruments in an effort to hedge its underlying economic exposure and to manage
these instruments with the objective to reduce its exposure to changes in
interest rates. The Company currently does not use derivative instruments for
trading purposes.
The Company's exposure to interest rate risk is primarily a result of
borrowings under the Bank Credit Facilities, which are subject to interest rates
ranging from 7.44% to 9.00% as of March 31, 2000. On December 15, 1998, the
Company entered into an interest rate swap agreement at a fixed rate of 5.74%
plus a variable spread until December 31, 2000 in order to limit its exposure to
interest rate fluctuations. At March 31, 2000, the notional amount of the
interest rate swap agreement was $21.6 million and the variable spread was
1.75%. The Company believes the terms of the interest rate swap agreement are
sufficient precautions to limit the Company's exposure to changing interest
rates.
At March 31, 2000, $60.2 million of debt was outstanding under the Bank
Credit Facilities. Because the interest rate for the portion of the debt that is
covered by the interest rate swap agreement is effectively fixed, changes in
interest rates would have no impact on actual future interest expense for that
portion of the debt. Therefore, there is no earnings or liquidity risk
associated with either the interest rate swap agreement or that portion of the
debt to which the swap agreement relates. The fair market value of the interest
rate swap at March 31, 2000 was a gain of approximately $70 thousand and was
calculated based on future quarterly interest payments using the interest rate
effective at March 31, 2000. At March 31, 2000, a 100 basis point decrease in
interest rates would result in an approximate loss and payment to the
counterparty of $88 thousand on the interest rate swap agreement.
A portion of the Company's outstanding variable rate debt, which
totaled $38.6 million as of March 31, 2000, is not covered by an interest rate
swap agreement. An adverse change in interest rates during the time that this
portion of the debt is outstanding would cause an increase in the amount of
interest paid. The Company may pay down the loan prior to expiration in December
2003. However, if this portion of the Company's borrowings were to remain
outstanding for the remaining term of the agreement, a 100 basis point increase
in LIBOR would result in an increase of $386 thousand to the amount of
annualized interest paid on this portion of the debt and annualized interest
expense recognized in the consolidated financial statements.
The Company will continue to monitor changing economic conditions and
based on current circumstances, does not expect to incur a substantial loss in
future earnings or cash flows as a result of changing interest rates.
The Company is also exposed to foreign currency exchange rate risk with
respect to the Canadian dollar. The resulting Canadian exchange adjustments are
included in the accumulated other comprehensive income component on the
condensed consolidated statements of operations and did not have a material
effect on other comprehensive income for the three and nine month periods ended
March 31, 2000 and 1999, respectively. The Company does not expect to be
materially affected by foreign currency exchange rate fluctuations in the future
based on historical foreign currency exchange rate fluctuations. The Company
therefore does not currently enter into derivative financial instruments as
hedges against foreign currency fluctuations of the Canadian dollar.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in various lawsuits and matters arising in the
normal course of business. In the opinion of the Company's management, although
the outcomes of these claims and suits are uncertain, they should not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three-month
period ended March 31, 2000.
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 8th day of May, 2000.
IOS BRANDS CORPORATION
By: /s/ Francis C. Piccirillo
---------------------------------------------
Francis C. Piccirillo
Treasurer
(Principal financial officer and officer duly
authorized to sign on behalf of registrant)
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) IOS
BRANDS CORPORATION THREE MONTHS ENDED MARCH 31, 2000 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-30-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 27,911
<SECURITIES> 0
<RECEIVABLES> 31,656
<ALLOWANCES> 2,008
<INVENTORY> 14,444
<CURRENT-ASSETS> 78,588
<PP&E> 54,148
<DEPRECIATION> 36,177
<TOTAL-ASSETS> 189,672
<CURRENT-LIABILITIES> 71,782
<BONDS> 60,250
0
0
<COMMON> 125
<OTHER-SE> 9,549
<TOTAL-LIABILITY-AND-EQUITY> 189,672
<SALES> 14,578
<TOTAL-REVENUES> 69,934
<CGS> 9,222
<TOTAL-COSTS> 34,910
<OTHER-EXPENSES> 40,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,415
<INCOME-PRETAX> (6,481)
<INCOME-TAX> (1,952)
<INCOME-CONTINUING> (3,756)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,756)
<EPS-BASIC> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
