<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File Number
000-21277
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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 October 31, 2000, there were 12,372,388 outstanding shares of the
Registrant's Class A Common Stock, par value $.01 per share, and 2,198,750
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... 14
Part II. Other Information
Item 1. Legal Proceedings............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
Signatures............................................................ 16
Exhibit Index......................................................... 17
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
ASSETS (UNAUDITED) (AUDITED)
--------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 17,787 $ 20,825
Accounts receivable, less allowance for doubtful accounts
of $4,259 at September 30, 2000 and $3,596 at June 30, 2000 31,411 22,893
Inventories, net 15,211 14,201
Deferred income taxes 3,526 2,901
Prepaid expenses 3,558 2,302
--------- ---------
TOTAL CURRENT ASSETS 71,493 63,122
Property and equipment, less accumulated depreciation
of $37,861 at September 30, 2000 and $37,013 at June 30, 2000 17,196 17,467
OTHER ASSETS:
Deferred financing costs, less accumulated amortization
of $795 at September 30, 2000 and $725 at June 30, 2000 759 829
Deferred income taxes 5,636 9,359
Other noncurrent assets 11,560 11,913
Goodwill and other intangibles, less accumulated amortization
of $17,361 at September 30, 2000 and $16,608 at June 30, 2000 68,023 68,776
--------- ---------
TOTAL OTHER ASSETS 85,978 90,877
TOTAL ASSETS $ 174,667 $ 171,466
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 39,243 $ 41,706
Customer deposits and accrued customer incentive programs 12,688 11,953
Other accrued liabilities 8,341 8,685
--------- ---------
TOTAL CURRENT LIABILITIES 60,272 62,344
Long-term debt 61,000 54,750
Pension and other post-retirement benefits 5,429 5,517
Minority interest in subsidiary 45,204 45,224
STOCKHOLDERS' EQUITY:
Common stock:
Class A 123 123
Class B 2 2
Paid-in capital 37,170 37,170
Accumulated deficit (15,125) (25,711)
Cumulative translation adjustments (126) (106)
Unamortized restricted stock (5,337) (5,902)
Treasury stock (13,945) (1,945)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,762 3,631
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 174,667 $ 171,466
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
2000 1999
------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
REVENUES:
Technology Products and Services $ 30,757 $ 28,610
Marketplace and Other 17,325 12,302
Direct to Consumer 16,242 10,776
------------ ------------
Total revenues 64,324 51,688
------------ ------------
COSTS OF GOODS SOLD AND SERVICES PROVIDED:
Technology Products and Services 5,725 7,082
Marketplace and Other 13,036 9,445
Direct to Consumer 12,486 8,746
------------ ------------
Total costs of goods sold and services
provided 31,247 25,273
------------ ------------
OPERATING EXPENSES:
Advertising and selling 16,765 19,243
General and administrative 13,338 11,365
------------ ------------
Total operating expenses 30,103 30,608
Income (loss) from operations 2,974 (4,193)
------------ ------------
OTHER INCOME AND EXPENSES:
Interest income (307) (182)
Interest expense 1,563 1,253
Settlement gain (12,000) --
Foreign exchange (gain) loss and other income (66) 137
------------ ------------
Total other income and expenses (10,810) 1,208
------------ ------------
Income (loss) before income tax and minority interest 13,784 (5,401)
------------ ------------
Income tax expense (benefit) 3,162 (1,619)
Minority interest 36 (8)
------------ ------------
Net income (loss) 10,586 (3,774)
------------ ------------
Other comprehensive income (loss):
Foreign currency translation adjustment (20) 5
------------ ------------
Comprehensive income (loss) $ 10,566 $ (3,769)
============ ============
INCOME (LOSS) PER SHARE:
Basic $ 0.70 $ (0.25)
============ ============
Diluted $ 0.69 $ (0.25)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 15,200 15,345
============ ============
Diluted 15,445 15,345
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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IOS BRANDS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
2000 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,586 $ (3,774)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Settlement gain (12,000) --
Depreciation and amortization 2,489 2,042
Deferred compensation expense 509 --
Minority interest 36 (8)
Accounts receivable (8,518) (7,766)
Deferred income taxes 3,097 (1,695)
Other assets (2,224) 454
Accounts payable (2,463) 4,527
Other accrued liabilities 304 921
----------- -----------
Net cash used in operating activities (8,184) (5,299)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,084) (2,192)
----------- -----------
Net cash used in investing activities (1,084) (2,192)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds of revolving credit borrowings 6,250 14,250
----------- -----------
Net cash provided by financing activities 6,250 14,250
Effect of foreign exchange rate changes on cash (20) 5
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,038) 6,764
Cash and cash equivalents at beginning of period 20,825 2,468
----------- -----------
Cash and cash equivalents at end of period $ 17,787 $ 9,232
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,381 $ 873
=========== ===========
Income taxes paid $ 39 $ 69
=========== ===========
Non-cash activities:
Settlement gain $ 12,000 $ --
=========== ===========
Receivable from underwriters of subsidiary stock offering $ -- $ 33,480
=========== ===========
</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
The unaudited condensed consolidated financial statements as of and for
the three month period ended September 30, 2000 and 1999, include the accounts
of IOS BRANDS Corporation and its wholly-owned subsidiaries, including Florists'
Transworld Delivery, Inc. ("FTD") (collectively, "the Company" or "IOS"). The
accounts of FTD, the principal operating subsidiary of the Company, include its
wholly owned subsidiaries Renaissance Greeting Cards, Inc. and FTD Canada, Inc.,
as well as its majority-owned subsidiary FTD.COM INC. ("FTD.COM"). FTD.COM's
Class A common stock, $.01 par value is quoted on the NASDAQ National Market
under the symbol "EFTD" and FTD owns approximately 83% of FTD.COM's outstanding
shares at September 30, 2000. Substantially all the operations of IOS have been
conducted through FTD and its subsidiaries.
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 thereto for the fiscal year ended June 30, 2000. 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 (consisting only of normal,
recurring adjustments) necessary for a fair presentation of the financial
position, results of operations and cash flows have been included herein.
Certain amounts in the condensed consolidated balance sheets,
statements of operations and comprehensive income and cash flows as of and for
the three-month period ended September 30, 1999 have been reclassified to
conform to the current period presentation.
Note 2. Revenues from Sale of the Floral Selections Guide ("FSG")
As a condition of FTD affiliation, all FTD florists must purchase a FSG
and related workbook. The Company recognizes revenue related to the FSG at the
time of shipment to the florist. The purchase of such FSG entitles the FTD
florist to a non-exclusive, non-transferable right for on premise use of the FSG
for as long as the purchaser remains an FTD florist in good standing. This FSG
is currently published on a two-year cycle. In the three month period ended
September 30, 2000, revenue from such FSG sales totaled $3.9 million, compared
to negligible revenue in the three month period ended September 30, 1999.
Note 3. Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, which was amended by SFAS No. 137 and SFAS
No. 138, and is effective for all fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes a comprehensive standard for the recognition and
measurement of derivative instruments and hedging activities. The Company
adopted SFAS No. 133 in the first quarter of this year and the effect of which
did not have a significant impact on the Company's financial position or results
of operations.
6
<PAGE> 7
Note 4. Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic earnings
(loss) per share is calculated by dividing net income (loss) by the weighted
average number of common shares outstanding. Dilutive earnings (loss) per share
includes the effect of the assumed exercise of dilutive stock options under the
treasury stock method and unvested restricted stock to the extent that they are
dilutive. Common stock equivalents associated with stock options and unvested
restricted shares, which were not included in the calculation of diluted
earnings (loss) per share because their effect was anti-dilutive, consisted of
141,059 equivalent shares in the three month period ended September 30, 1999.
The following table presents information necessary to calculate basic and
diluted earnings per common share for the periods ended September 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
2000 1999
---- ----
(in thousands, except per share data)
<S> <C> <C>
Net income (loss) $10,586 $(3,774)
======= =======
Weighted average basic common shares outstanding 15,200 15,345
Effect of dilutive securities - unvested restricted shares 85 --
Effect of dilutive securities - stock options 160
------- -------
Weighted average diluted common shares outstanding 15,445 15,345
======= =======
Basic net income (loss) per share of common stock $ 0.70 $ (0.25)
======= =======
Diluted net income (loss) per share of common stock $ 0.69 $ (0.25)
======= =======
</TABLE>
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. These
business segments include Technology Products and Services, Marketplace and
Other and Direct to Consumer. Technology Products and Services consists of
technology based products and services offered to the Company's customers. This
includes the Company's Mercury equipment, Mercury Advantage systems, Mercury
Wings TM systems, Mercury Network, Clearinghouse, Flowers After Hours,
Publications, Credit Card processing and Interflora, Inc. Marketplace and Other
consists of floral related products, specialty gift products and greeting cards
offered to our customers for resale as well as other miscellaneous income items.
Direct to Consumer includes floral and specialty gift order capabilities offered
directly to the consumer through the 1-800-SEND-FTD toll-free telephone number
and the www.ftd.com Web 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, which is
solely FTD.COM, and to the gross margin level for the Company's remaining
business segments. Of the Company's assets totaling $174.7 million as of
September 30, 2000, the assets of FTD.COM totaled $17.6 million, of which $16.0
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 $157.1 million. Resource allocation 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, Summary of Significant Accounting
Policies, of the Company's 2000 Annual Report on Form 10-K. The
7
<PAGE> 8
Operating Company and FTD.COM have 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.
The following tables detail the Company's operating results by
reportable business segment for the three month periods ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SEPTEMBER 30,
2000 1999
---- ----
---------- -------------- ------------- ------------- ------------- --------------
GROSS GROSS
SEGMENT ELIMINATIONS CONSOLIDATED SEGMENT ELIMINATIONS CONSOLIDATED
---------- -------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Technology Products and Services $ 31,016 $ (259) $ 30,757 $ 28,824 $ (214) $ 28,610
Marketplace and Other 17,325 -- 17,325 12,302 -- 12,302
Direct to Consumer 18,244 (2,002) 16,242 12,443 (1,667) 10,776
-------- -------- -------- -------- --------- --------
TOTAL REVENUES 66,585 (2,261) 64,324 53,569 (1,881) 51,688
-------- -------- -------- -------- --------- --------
COSTS OF GOODS SOLD AND SERVICES
PROVIDED:
Technology Products and Services 6,229 (504) 5,725 7,641 (559) 7,082
Marketplace and Other 11,706 -- 11,706 9,445 -- 9,445
Direct to Consumer 12,745 (259) 12,486 8,960 (214) 8,746
-------- -------- -------- -------- --------- --------
Total costs of goods sold and
services provided 30,680 (763) 29,917 26,046 (773) 25,273
-------- -------- -------- -------- --------- --------
OPERATING EXPENSES:
Technology and Marketplace 27,406 (746) 26,660 24,285 (80) 24,205
Direct to Consumer 5,525 (752) 4,773 7,431 (1,028) 6,403
-------- -------- -------- -------- --------- --------
Total operating expenses 32,931 (1,498) 31,433 31,716 (1,108) 30,608
-------- -------- -------- -------- --------- --------
OPERATING INCOME (LOSS) $ 2,974 $ -- $ 2,974 $ (4,193) $ -- $ (4,193)
======== ======== ======== ======== ========= ========
GROSS MARGIN BY SEGMENT:
Technology Products and Services $ 24,787 $ 245 $ 25,032 $ 21,183 $ 345 $ 21,528
Marketplace and Other 5,619 -- 5,619 2,857 -- 2,857
Direct to Consumer 5,499 (1,743) 3,756 3,483 (1,453) 2,030
-------- -------- -------- -------- --------- --------
Total $ 35,905 $ (1,498) $ 34,407 $ 27,523 $ (1,108) $ 26,415
======== ======== ======== ======== ========= ========
</TABLE>
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's 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.
8
<PAGE> 9
Note 7. Minority Interest in Subsidiary
The Company's condensed consolidated financial statements as of and for
the three month period ended September 30, 2000 and 1999, reflect the minority
interest in FTD's subsidiary, FTD.COM. The minority interest in subsidiary was
17% and 10% as of September 30, 2000 and 1999 respectively.
The minority interest gain was $36,000 for the three months ended
September 30, 2000. The $8,000 minority interest loss, for the three months
ended September 30, 1999, reflects the loss attributable to the shareholders
from the IPO date of September 28, 1999 to September 30, 1999.
Note 8. Settlement Gain
On July 26, 2000, the Company settled an ongoing lawsuit whereby one of
the Company's shareholders, and former warrantholder, returned 750,000 of the
Company's Class B common shares, which the Company subsequently recorded as
treasury stock. The warrants, underlying the ownership of these shares of stock,
were issued in conjunction with the acquisition of Florist Transworld Delivery
Association, by the Company in 1994. As a result of this settlement, the Company
recognized other income of $12.0 million, on a pretax basis, in the quarter
ended September 30, 2000.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Except for the historical information contained in this report, certain
statements made herein are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that reflect the Company's
expectations regarding its future growth, results of operations, performance and
business prospects and opportunities. Words such as "anticipates," "believes,"
"plans," "expects," "estimates," and similar expressions have been used to
identify these forward looking statements, but are not the exclusive means of
identifying these statements. These statements reflect the Company's current
beliefs and are based on information currently available to the Company.
Accordingly, these statements are subject to known and unknown risks,
uncertainties, and other factors that could cause the Company's actual growth,
results, performance and business prospects and opportunities to differ from
those expressed in, or implied by, these statements. These risks, uncertainties,
and other factors include the Company's ability to develop and market existing
and acquired products, the Company's ability to 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 leasing of hardware
and software to FTD florists.
- Mercury Network, which is FTD's proprietary telecommunications
network used by florists to transmit orders through FTD or through
competing clearinghouses.
- Clearinghouse, which provides order billing and collection
services to both the sending and receiving florists 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
florist's 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 include revenues attributable to the set up and
maintenance of florists' Web sites for FTD Florists' Online hosted
through FTD.COM's Web site, www.ftd.com.
- Credit Card processing, which is a service offered to
participating florists whereby FTD pools their credit card
transactions to secure more favorable terms on credit card
transactions than the FTD florists could secure individually.
- Interflora, Inc., which is a joint venture between the Company,
Fleurop-Interflora, and the Interflora British Unit. The joint
venture provides a floral service organization with non-FTD member
florists to enable florists to transmit and receive orders outside
North America.
The Marketplace and Other business 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 business segment represents FTD's majority owned
subsidiary, FTD.COM.
10
<PAGE> 11
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 records order
revenue and costs for fulfillment and processing services when an order is
fulfilled. In addition, FTD.COM charges the customer a service fee for all
floral orders.
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. These fluctuations
are 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. In addition, this seasonality is attributable to
increased revenues in the quarter ended March 31 relating to the pre-holiday
delivery of products to florists for the Mother's Day holiday.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1999.
Total revenues increased by $12.6 million, or 24.4%, to $64.3 million
for the quarter ended September 30, 2000 compared to $51.7 million for the
quarter ended September 30, 1999, for the reasons discussed below.
Technology Products and Services segment revenue increased by $2.2
million, or 7.5%, to $30.8 million for the quarter ended September 30, 2000
compared to $28.6 million for the quarter ended September 30, 1999. This
increase was primarily due to increased Clearinghouse revenues resulting from
increased monthly access fees charged to florists offset in part by a decrease
in Advantage System sales.
Marketplace and Other segment revenue increased by $5.0 million, or
40.8%, to $17.3 million for the quarter ended September 30, 2000 compared to
$12.3 million for the quarter ended September 30, 1999. The increase was
primarily the result of the increase in the revenue attributable to the FSG.
(See Note 2. Revenues from Sale of the Floral Selections Guide ("FSG") of the
condensed consolidated financial statements)
Direct to Consumer segment revenue increased by $5.4 million, or 50.7%,
to $16.2 million for the quarter ended September 30, 2000 compared to $10.8
million for the quarter ended September 30, 1999. The increase over the prior
year was primarily due to an increase in the number of orders and average order
value placed by consumers through the www.ftd.com Web site and the
1-800-SEND-FTD toll free telephone number.
Total cost of goods sold and services provided increased by $6.0
million, or 23.6%, to $31.3 million for the quarter ended September 30, 2000
compared to $25.3 million for the quarter ended September 30, 1999. This
increase was primarily attributable to increases in sales volume in the Direct
to Consumer and Marketplace and Other segments. As a percent of revenue, total
costs of goods sold and services provided decreased to 48.6% for the quarter
ended September 30, 2000 from 48.9% for the quarter ended September 30, 1999.
This decrease was primarily attributable to lower cost ratio in the Technology
Products and Services segment.
Costs of goods sold and services provided associated with Technology
Products and Services decreased $1.4 million, or 19.2% to $5.7 million for the
quarter ended September 30, 2000 compared to $7.1 million for the quarter ended
September 30, 1999. This decrease was primarily the result of fewer unit sales
of Advantage systems. As a percent of revenue, costs of goods sold and services
provided decreased to 18.6% for the quarter ended September 30, 2000 from 24.8%
for the quarter ended September 30, 1999, primarily as a result of higher
revenues from increased monthly access fees charged to florists.
Costs of goods sold and services provided associated with Marketplace
and Other increased by $3.6 million, or 38.0%, to $13.0 million for the quarter
ended September 30, 2000 compared to $9.4 million for the quarter ended
September 30, 1999. The increase was primarily due to the costs of producing the
FSG. As a percent of revenue, costs of goods sold and services provided
decreased to 75.2% for the quarter ended September 30, 2000 from 76.8% for the
quarter ended September 30, 1999, primarily as a result of sales mix from the
FSG.
11
<PAGE> 12
Costs of goods sold and services provided associated with Direct to
Consumer increased by $3.8 million, or 42.8%, to $12.5 million for the quarter
ended September 30, 2000 compared to $8.7 million for the quarter ended
September 30, 1999. The increase was primarily attributable to costs associated
with processing and fulfilling more consumer orders. As a percent of revenue,
costs of goods sold and services provided decreased to 76.9% for the quarter
ended September 30, 2000 from 81.2% for the quarter ended September 30, 1999,
primarily as a result of improvements in order processing.
Advertising and selling costs decreased by $2.4 million, or 12.9%, to
$16.8 million for the quarter ended September 30, 2000, compared to $19.2
million for the quarter ended September 30, 1999. This decrease was primarily
due to a decrease in FTD.COM's marketing and promotion costs. In fiscal year
2001, the Company intends to reduce its marketing and promotions expenditures
related to the Direct to Consumer business segment, with a shift from a
marketing program primarily focused on customer acquisition to a more balanced
program of customer acquisition and retention.
General and administrative costs increased by $1.9 million, or 17.4%,
to $13.3 million for the year ended September 30, 2000, compared to $11.4
million for the quarter ended September 30, 1999. This was primarily due to an
increase in depreciation and amortization costs as well as increased payroll and
administrative costs to support the growth of the Company.
The provision for income taxes and the effective tax rates for the
quarters ended September 30, 2000 and 1999, were an expense of $3.2 million and
23.0% and a benefit of $1.6 million and 30.0%, respectively. The change in
effective tax rates was primarily due to the effect of non-deductible goodwill
amortization, which reduces the Company's tax benefit when operating in a
pre-tax loss position and increases its effective tax rate when operating in a
pre-tax profit position, offset by the tax-free portion of the lawsuit
settlement gain recorded in the quarter ended September 30, 2000.
Net income was $10.6 million for the quarter ended September 30, 2000,
compared to a net loss of $3.8 million for the quarter ended September 30, 1999,
a $14.4 million increase from the prior year. The increase was primarily the
result of the lawsuit settlement that resulted in a $12.0 million pre-tax gain
as well as decreased advertising, selling, and marketing expenses associated
with the advertising campaign for the Company's majority owned subsidiary,
FTD.COM.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $3.0 million to $17.8 million as
of September 30, 2000 from $20.8 million as of June 30, 2000. Cash and cash
equivalents increased by $6.7 million to $9.2 million as of September 30, 1999
from $2.5 million as of June 30, 1999.
Cash used in operating activities was $8.2 million for the quarter
ended September 30, 2000 compared to cash used in operating activities of $5.3
million for the quarter ended September 30, 1999. The increase in cash used in
operating activities is primarily attributable to an increase in other assets
and a decrease in accounts payable offset in part by the increase in net income
in comparison to the quarter ended September 30, 1999.
Cash used in investing activities was $1.1 million for the quarter
ended September 30, 2000 compared to cash used in investing activities of $2.2
million for the quarter ended September 30, 1999. Expenditures for depreciable
fixed assets such as furniture and equipment were $0.6 million for the quarter
ended September 30, 2000 compared to $0.7 million for the quarter ended
September 30, 1999. Expenditures for amortizable intangibles such as costs
relating to the development and implementation of internal use software and
other information technology costs were $0.5 million and $1.4 million,
respectively, for the quarters ended September 30, 2000 and September 30, 1999.
The Company's anticipated capital expenditures for fiscal 2001 are estimated to
be $5.0 to $7.0 million and will primarily be used for developing new software
and information technology purchases.
Cash provided by financing activities was $6.3 million for the quarter
ended September 30, 2000, compared to cash provided by financing activities of
$14.3 million for the quarter ended September 30, 1999. The decrease is the
result of a decrease in borrowings under the bank credit facilities.
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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 $38.8 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 September 30, 2000, the Company had $38.8 million
outstanding under the Multiple Draw Term Loan Facility, $22.2 million
outstanding under the Revolving Credit Facility and $1.8 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 13
consecutive quarterly installments continuing until the termination date of
December 31, 2003, through the use of 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 September 30, 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, software development
costs, 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 also 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 could be required to
significantly alter its operating plan, which could have a material effect on
the results of operations and financial condition of FTD.COM and the Company.
On July 26, 2000, the Company settled an ongoing lawsuit whereby one of
IOS's shareholders, and former warrant holder, returned 750,000 shares of IOS's
Class B common stock, which IOS subsequently recorded as treasury stock. The
warrants, underlying the ownership of these shares of stock, were issued in
conjunction with the acquisition of Florist Transworld Delivery Association, by
the Company in 1994. As a result of this settlement, the Company recognized
other income of $12.0 million, on a pretax basis, in the quarter ended September
30, 2000.
DEFERRED TAX ASSET
As of September 30, 2000, the current and long-term deferred tax assets
were $3.5 million and $5.6 million, respectively. The long-term deferred tax
asset includes a $2.5 million valuation allowance that has not changed during
the quarter. Tax expense of $3.2 million, as a result of the pre-tax income of
$13.8 million for the three month period ended September 30, 2000, is netted
against the long-term deferred tax asset. Management believes that based on
their estimation of taxable income in future years, coupled with tax planning
strategies, a $2.5 million valuation allowance is appropriate as of September
30, 2000.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, which primarily includes
interest rate risk. The Company's policy is to enter into certain derivative
instruments in an effort to hedge its underlying economic exposure and to manage
these instruments with the objective to reduce its exposure to changes in
interest rates. The Company currently does not use derivative instruments for
trading purposes.
The Company's exposure to interest rate risk is primarily the result of
borrowings under the Bank Credit Facilities, which were subject to interest
rates ranging from 8.38% to 9.75% at September 30, 2000. 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 September 30, 2000, the variable spread was 1.04% and the
notional amount was $19.7 million. The Company believes that its exposure to
interest rate fluctuations will also be limited due to the Company's philosophy
of maintaining minimal cash balances in an effort to effectively use any excess
cash flows to reduce outstanding debt. The Company believes that the continued
decrease in the balance of outstanding debt in addition to the terms of the
interest rate swap agreement are sufficient precautions to limit the Company's
exposure to changing interest rates.
At September 30, 2000, $61.0 million of debt was outstanding under the
Bank Credit Facilities. Since the interest rate for the portion of the debt that
is covered by the interest rate swap agreement is effectively fixed, changes in
interest rates would have no impact on future interest expense for that portion
of the debt. Therefore, there is no earnings or liquidity risk associated with
either the interest rate swap agreement or that portion of the debt to which the
swap agreement relates. The fair market value of the interest rate swap at
September 30, 2000 was an unrealized gain of approximately $52,000 and was
calculated based on future quarterly interest payments using the interest rate
effective at September 30, 2000. At September 30, 2000, a 100 basis point
decrease in interest rates would result in an approximate gain of $2,000 upon
termination of this swap agreement.
A portion of the Company's outstanding variable rate debt, which
totaled $41.3 million as of September 30, 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 borrowing agreement, a 100 basis point
increase in LIBOR during the quarter ended September 30, 2000 would result in an
increase of $413,000 in 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 comprehensive income and did
not have a material effect on other comprehensive income for the three months
ended September 30, 2000 and 1999. The Company does not expect to be materially
affected by foreign currency exchange rate fluctuations in the future, as the
transactions denominated in Canadian dollars are not material to the
consolidated financial statements. The Company therefore does not currently
enter into derivative financial instruments as hedges against foreign currency
fluctuations of the Canadian dollar.
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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 September 30, 2000.
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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 31st day of October 2000.
IOS BRANDS CORPORATION
By: /s/ Randall L. Twyman
----------------------------------------------
Randall L. Twyman
Vice President of Finance
(Principal financial officer and officer duly
authorized to sign on behalf of registrant)
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
17
